UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission File Number: 0-24802
MONTEREY BAY BANCORP, INC.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 77-0381362
(State Or Other Jurisdiction Of (I.R.S. Employer Identification Number)
Incorporation Or Organization)
567 Auto Center Drive, Watsonville, California 95076
(Address Of Principal Executive Offices)(Zip Code)
(831) 768 - 4800
(Registrant's Telephone Number, Including Area Code)
WWW.MONTEREYBAYBANK.COM
(Registrant's Internet Site)
INFO@MONTEREYBAYBANK.COM
(Registrant's Electronic Mail Address)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 3,419,764 shares of common
stock, par value $0.01 per share, were outstanding as of May 10, 2001.
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements Of Financial Condition As Of
March 31, 2001 (unaudited) And December 31, 2000 3-4
Consolidated Statements Of Operations (unaudited) For The Three
Months Ended March 31, 2001 5-6
Consolidated Statement Of Stockholders' Equity (unaudited) For The
Three Months Ended March 31, 2001 7
Consolidated Statements Of Cash Flows (unaudited) For The Three
Months Ended March 31, 2001 And March 31, 2000 8-9
Notes To Consolidated Financial Statements (unaudited) 10-15
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 16-41
Item 3. Quantitative And Qualitative Disclosure About Market Risk 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 42
Item 2. Changes In Securities 42
Item 3. Defaults Upon Senior Securities 42
Item 4. Submission Of Matters To A Vote Of Security Holders 42
Item 5. Other Information 43
Item 6. Exhibits And Reports On Form 8-K 43
(a) Exhibits
(10.18) Employment Agreement With C. Edward Holden
(10.19) Employment Agreement With Mark R. Andino
(b) Reports On Form 8-K
Signature Page 44
2
Item 1. Financial Statements
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000
---------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Amounts)
March 31, December 31,
2001 2000
-------- --------
ASSETS
Cash and cash equivalents $ 15,781 $ 25,159
Securities available for sale, at estimated fair value:
Investment securities (amortized cost of $7,699 and $7,696 at
March 31, 2001 and December 31, 2000, respectively) 7,300 7,360
Mortgage backed securities (amortized cost of $47,564 and $43,675
at March 31, 2001 and December 31, 2000, respectively) 47,343 42,950
Loans held for sale 877 --
Loans receivable held for investment (net of allowances for loan losses of
$5,839 at March 31, 2001 and $5,364 at December 31, 2000) 414,435 391,820
Investment in capital stock of the Federal Home Loan Bank, at cost 2,932 2,884
Accrued interest receivable 3,042 2,901
Premises and equipment, net 8,043 7,375
Core deposit premiums, net 2,025 2,195
Real estate acquired via foreclosure, net -- --
Other assets 3,801 3,546
-------- --------
TOTAL ASSETS $505,579 $486,190
See Notes to Consolidated Financial Statements
3
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000
----------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Amounts)
March 31, December 31,
2001 2000
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non-interest bearing demand deposits $ 17,814 $ 17,065
Interest bearing NOW checking accounts 42,180 41,859
Savings deposits 21,173 16,503
Money market deposits 88,850 87,651
Certificates of deposit 245,495 244,710
-------- --------
Total deposits 415,512 407,788
-------- --------
FHLB advances and other borrowings 42,608 32,582
Accounts payable and other liabilities 1,677 1,983
-------- --------
Total liabilities 459,797 442,353
-------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued -- --
Common stock, $0.01 par value, 9,000,000 shares authorized;
4,492,085 issued at March 31, 2001 and December 31, 2000;
3,419,764 outstanding at March 31, 2001 and
3,321,210 outstanding at December 31, 2000 45 45
Additional paid-in capital 28,300 28,278
Retained earnings, substantially restricted 33,324 32,722
Unallocated ESOP shares (863) (920)
Treasury shares designated for compensation plans, at cost (31,082 shares
at March 31, 2001 and 35,079 shares at December 31, 2000) (299) (338)
Treasury stock, at cost (1,072,321 shares at March 31, 2001 and
1,170,875 shares at December 31, 2000) (14,360) (15,326)
Accumulated other comprehensive loss, net of taxes (365) (624)
-------- --------
Total stockholders' equity 45,782 43,837
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $505,579 $486,190
======== ========
See Notes to Consolidated Financial Statements
4
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(Dollars In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2001 2000
------- -------
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 8,890 $ 7,736
Mortgage backed securities 808 959
Investment securities and cash equivalents 297 355
------- -------
Total interest income 9,995 9,050
------- -------
INTEREST EXPENSE:
Deposit accounts 4,684 3,839
FHLB advances and other borrowings 559 718
------- -------
Total interest expense 5,243 4,557
------- -------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 4,752 4,493
PROVISION FOR LOAN LOSSES 500 250
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,252 4,243
------- -------
NON-INTEREST INCOME:
Gain (loss) on sale of mortgage backed securities
and investment securities, net 34 (79)
Commissions from sales of noninsured products 117 207
Customer service charges 408 280
Income from loan servicing 2 37
Other income 82 56
------- -------
Total non-interest income 643 501
------- -------
See Notes to Consolidated Financial Statements
5
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(Dollars In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2001 2000
------ ------
NON-INTEREST EXPENSE:
Compensation and employee benefits 1,658 1,460
Occupancy and equipment 350 312
Deposit insurance premiums 49 47
Data processing fees 442 289
Legal and accounting expenses 184 209
Supplies, postage, telephone, and office expenses 190 189
Advertising and promotion 31 101
Amortization of intangible assets 170 175
Consulting 242 168
Other expense 526 387
------ ------
Total non-interest expense 3,842 3,337
------ ------
INCOME BEFORE INCOME TAXES 1,053 1,407
PROVISION FOR INCOME TAXES 451 608
------ ------
NET INCOME $ 602 $ 799
------ ------
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.19 $ 0.25
------ ------
DILUTED EARNINGS PER SHARE $ 0.18 $ 0.25
------ ------
See Notes to Consolidated Financial Statements
6
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001
(Dollars And Shares In Thousands)
-------------------------------------------------------------------------------------------------------------------------
Treasury
Shares
Desig- Accum-
nated ulated
For Other
Addi- Unal- Com- Compre-
Common Stock tional Re- located pen- hensive
-------------- Paid-In tained ESOP sation Treasury Income
Shares Amount Capital Earnings Shares Plans Stock (Loss) Total
------ ------ ------- -------- ------ ----- ----- ------ -----
Balance At December 31, 2000 3,321 $45 $ 28,278 $ 32,722 $ (920) $ (338) $(15,326) $ (624) $ 43,837
Exercise of stock options 92 (28) 897 869
Director fees paid using treasury stock 7 8 69 77
Amortization of stock
compensation 42 57 39 138
Comprehensive income:
Net income 602 602
Other comprehensive income:
Change in net unrealized loss
on securities available for
sale, net of taxes of $195 279 279
Reclassification adjustment for
gains on securities available
for sale included in income,
net of taxes of ($14) (20) (20)
--------
Other comprehensive income, net 259
--------
Total comprehensive income 861
--------
------ ----- -------- -------- -------- --------- --------- -------- --------
Balance at March 31, 2001 3,420 $ 45 $ 28,300 $ 33,324 $ (863) $ (299) $(14,360) $(365) $ 45,782
====== ===== ======== ======== ======== ========= ========= ======== ========
See Notes to Consolidated Financial Statements
7
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
-----------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 602 $ 799
------- ------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization of premises and equipment 114 111
Amortization of intangible assets 170 175
Accretion of purchase (discounts), net of amortization of purchase premiums (8) 13
Amortization of deferred loan fees and costs, net (78) (76)
Provision for loan losses 500 250
Federal Home Loan Bank stock dividends (48) (44)
Gross ESOP expense before dividends received on unallocated shares 57 86
Compensation expense associated with stock compensation plans 30 47
(Gain) loss on sale of mortgage-backed and investment securities (34) 79
Gain on sale of loans (5) --
Origination of loans held for sale (1,920) (864)
Proceeds from sales of loans held for sale 1,048 521
Increase in accrued interest receivable (141) (77)
(Increase) decrease in other assets (255) 270
(Decrease) increase in accounts payable and other liabilities (306) 742
Other, net (433) (151)
------- ------
Net cash (used in) provided by operating activities (707) 1,881
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans held for investment (22,615) (8,047)
Purchases of mortgage backed securities available for sale (14,424) (6,032)
Principal repayments on mortgage backed securities 7,660 1,463
Proceeds from sales of mortgage backed securities available for sale 2,907 3,702
Purchases of premises and equipment (782) (48)
------- ------
Net cash used in investing activities (27,254) (8,962)
------- ------
See Notes to Consolidated Financial Statements
8
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(Dollars In Thousands)
---------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 7,724 14,595
Proceeds (repayments) from FHLB advances, net 10,000 --
(Repayments) proceeds of securities sold under agreements to repurchase, net -- (2,410)
Proceeds of other borrowings, net 26 --
Cash dividends paid to stockholders -- (274)
Purchases of treasury stock -- (1,251)
Sales of treasury stock 833 79
Sales of treasury stock for stock compensation plans -- 216
------- -------
Net cash provided by financing activities 18,583 10,955
------- -------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (9,378) 3,874
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,159 12,833
------- -------
CASH & CASH EQUIVALENTS AT END OF PERIOD $15,781 $16,707
------- -------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest on deposits and borrowings $ 5,204 $ 4,381
Income taxes 200 550
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES
Real estate acquired in settlement of loans -- --
See Notes to Consolidated Financial Statements
9
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1: Basis Of Presentation
The accompanying consolidated unaudited financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by GAAP for annual
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation have been included. The results of operations for the three month
period ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim period.
Monterey Bay Bancorp, Inc. ("MBBC") is the holding company for Monterey
Bay Bank ("Bank"). The Bank maintains a subsidiary, Portola Investment
Corporation ("Portola"). These three companies are referred to herein on a
consolidated basis as the "Company". The Company's headquarters are in
Watsonville, California. The Company offers a broad range of financial services
to both consumers and small businesses. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior year's consolidated financial statements to conform to the
current presentation.
These unaudited consolidated financial statements and the information
under the heading "Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations" and the information under the heading "Item
3. Quantitative And Qualitative Disclosure About Market Risk" have been prepared
with presumption that users of this interim financial information have read, or
have access to, the most recent audited consolidated financial statements and
notes thereto of Monterey Bay Bancorp, Inc. for the fiscal year ended December
31, 2000 included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
The preparation of the consolidated financial statements of Monterey
Bay Bancorp, Inc. and subsidiary requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported revenues and expenses for the periods covered. These estimates are
based on information available as of the date of the financial statements.
Therefore, actual results could significantly differ from those estimates.
10
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 2. Computation Of Earnings Per Share
All of the Company's net income has been available to common
stockholders during the periods covered in this Form 10-Q.
Basic earnings per share ("EPS") are computed by dividing net income by
the weighted average common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
There was no difference in the numerator, net income, used in the
calculation of basic earnings per share and diluted earnings per share. The
denominator used in the calculation of basic earnings per share and diluted
earnings per share for the three month periods ended March 31, 2001 and 2000 is
reconciled in the following table. The following table also reconciles the
calculation of the Company's Basic EPS and Diluted EPS for the periods
indicated.
For The Three Months
Ended March 31,
---------------------------
(In Whole Dollars And Whole Shares)
2001 2000
Net income $ 602,000 $ 799,000
----------- -----------
Average shares issued 4,492,085 4,492,085
Less weighted average:
Uncommitted ESOP shares (139,258) (175,195)
Non-vested stock award shares (33,615) (72,007)
Treasury shares (1,091,971) (1,106,459)
----------- -----------
Sub-total (1,264,844) (1,353,661)
----------- -----------
Weighted average BASIC shares outstanding 3,227,241 3,138,424
Add dilutive effect of:
Stock options 46,729 11,912
Stock awards
589 489
----------- -----------
Sub-total 47,318 12,401
----------- -----------
Weighted average DILUTED shares outstanding 3,274,559 3,150,825
Earnings per share:
BASIC EPS $ 0.19 $ 0.25
=========== ===========
DILUTED EPS $ 0.18 $ 0.25
=========== ===========
11
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 3: Other Comprehensive Income
The Company's only source of other comprehensive income is derived from
unrealized gains and losses on the portfolios of investment and mortgage backed
securities classified as available for sale.
Reclassification adjustments for realized net gains (losses) included
in other comprehensive income for investment and mortgage backed securities
classified as available for sale for the three months ended March 31, 2001 and
2000 are summarized as follows:
Three Months Ended March 31,
----------------------------------
2001 2000
----- ------
(Dollars In Thousands)
Gross reclassification adjustment $ 34 $ (79)
Tax (expense) benefit (14) 33
----- ------
Reclassification adjustment, net of tax $ 20 $ (46)
----- ------
A reconciliation of the net unrealized gain or loss on available for
sale securities recognized in other comprehensive income is as follows:
Three Months Ended
March 31,
--------------------
2001 2000
----- ------
(Dollars In Thousands)
Holding gain (loss) arising during the period, net $ 279 $ (145)
of tax Reclassification adjustment, net of tax (20) 46
----- ------
Net unrealized gain (loss) recognized in
other comprehensive income $ 259 $ (99)
----- ------
12
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 4: Stock Option Plans
The Company maintains the Amended 1995 Incentive Stock Option Plan and
the 1995 Stock Option Plan For Outside Directors. Under these plans, stock
options typically vest over a five year time period, although other vesting
periods are permitted under the Amended 1995 Incentive Stock Option Plan and
have been utilized by the Company from time to time. All outstanding stock
options under both of these plans vest upon a change in control of the Company.
The following tables summarize the combined status of these plans:
Stock Stock Average
Options Stock Options Exercise
Stock Stock Cumulatively Options Available Price Of
Options Options Vested And Cumulatively For Future Vested
Date Authorized Outstanding Outstanding Exercised Grants Options
---- ---------- ----------- ----------- --------- ------ -------
December 31, 2000 757,929 550,236 325,502 80,150 127,543 $9.76
March 31, 2001 757,929 468,687 248,799 171,699 117,543 $10.05
Activity during the three months ended March 31, 2001 included:
Three Months Ended
March 31, 2001
Granted 10,000
Canceled --
Exercised 91,549
Vested 14,846
An additional 500 incentive stock options were approved for issuance at
the April 26, 2001 meeting of the Board of Directors of MBBC. These options were
issued, consistent with the 1995 Incentive Stock Option Plan, as Amended, with a
strike price of 110% of the fair market value of the Company's common stock on
the date of grant.
The exercise price of individual vested stock options ranged from a low
of $9.10 per share to a high of $16.60 per share as of March 31, 2001.
13
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 5: Stock Award Plans
The Company maintains the Performance Equity Program ("PEP") for
Officers and employees. Awards under the PEP typically vest over a five year
time period, although from time to time the Company has utilized unallocated PEP
shares for immediately vested stock grants in lieu of cash incentive
compensation. Awards under the PEP are both time-based and performance-based.
All outstanding stock awards under the PEP vest in the event of a change in
control of the Company. The following table summarizes the status of this plan:
Stock
Stock Awards
Stock Stock Awards Available
Awards Awards Cumulatively For Future
Date Authorized Outstanding Vested Grants
---- ---------- ----------- ------ ------
December 31, 2000 141,677 35,079 106,598 --
March 31, 2001 141,677 31,082 110,595 --
Activity during the three months ended March 31, 2001 included:
Three Months Ended
March 31, 2001
--------------
Granted 1,325
Canceled 1,325
Vested 3,997
During the three months ended March 31, 2001, a total of 1,325 PEP
shares were forfeited. The Company used these shares in lieu of cash incentive
compensation by issuing an identical number of immediately vested PEP stock
grants.
A total of 1,350 PEP shares were forfeited in April 2001. It is the
Company's intention to utilize these shares in lieu of cash compensation during
2001.
14
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 6: Commitments & Contingencies
At March 31, 2001, commitments maintained by the Company included firm
commitments to originate $11.5 million in various types of loans and optional
commitments to sell $877 thousand in fixed rate residential mortgages on a
servicing released basis. The Company maintained no firm commitments to purchase
loans or securities, to assume borrowings, or to sell securities at March 31,
2001.
The Company has an initial arbitration date established in June, 2001
to address claims by the former President and Chief Operating Officer regarding
payments due under his employment contracts. In the third quarter of 2000, the
Company established a $250 thousand reserve for settlement of these claims. At
this time, the Company, after conferring with counsel, believes this reserve to
be adequate to cover its liabilities in this regard.
NOTE 7: Recent Accounting Pronouncements
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133, as amended, established 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 adoption of SFAS
No. 133, as amended, did not have a significant impact upon the Company's
financial condition, results of operations, or cash flows.
NOTE 8: Reclassifications
Certain amounts in the December 31, 2000 and March 31, 2000 financial
statements have been reclassified to conform to the March 31, 2001 financial
statement presentation.
15
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Forward-looking Statements
Discussions of certain matters in this Report on Form 10-Q may
constitute forward-looking statements within the meaning of the Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve
risks and uncertainties. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of words or phrases such as "believe",
"expect", "intend", "anticipate", "estimate", "project", "forecast", "may
increase", "may fluctuate", "may improve" and similar expressions or future or
conditional verbs such as "will", "should", "would", and "could". These
forward-looking statements relate to, among other things, expectations of the
business environment in which Monterey Bay Bancorp, Inc. operates, projections
of future performance, potential future credit experience, perceived
opportunities in the market, and statements regarding the Company's mission and
vision. The Company's actual results, performance, and achievements may differ
materially from the results, performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of factors. These factors
include, but are not limited to, changes in interest rates, general economic
conditions, the demand for the Company's products and services, accounting
principles or guidelines, legislative and regulatory changes, monetary and
fiscal policies of the US Government, US Treasury, and Federal Reserve, real
estate markets, competition in the financial services industry, and other risks
detailed in the Company's reports filed with the Securities and Exchange
Commission ("SEC") from time to time, including the Annual Report on Form 10-K
for the fiscal year ended December 31, 2000. These factors should be considered
in evaluating the forward-looking statements, and undue reliance should not be
placed on such statements. The Company does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
General
Monterey Bay Bancorp, Inc. (referred to herein on an unconsolidated
basis as "MBBC" and on a consolidated basis as the "Company") is a unitary
savings and loan holding company incorporated in 1994 under the laws of the
state of Delaware. MBBC currently maintains a single subsidiary company,
Monterey Bay Bank (the "Bank"), a federally chartered savings & loan. MBBC was
organized as the holding company for the Bank in connection with the Bank's
conversion from the mutual to stock form of ownership in 1995.
At March 31, 2001, the Company had $505.6 million in total assets,
$415.3 million in net loans receivable, and $415.5 million in total deposits.
The Company is subject to regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"). The principal executive
offices of the Company and the Bank are located at 567 Auto Center Drive,
Watsonville, California, 95076, telephone number (831) 768 - 4800, facsimile
number (831) 722 - 6794. The Company may also be contacted via electronic mail
at: INFO@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, 11 automated
teller machines ("ATM's") including two stand-alone ATM's, and its
administrative facilities. In addition, the Company supports its customers
through bilingual (English / Spanish) 24 hour telephone banking, Internet
banking, electronic bill payment, and ATM access through an array of networks
including STAR, CIRRUS, and PLUS. Through its network of banking offices, the
Bank emphasizes personalized service focused upon two primary markets:
households and small businesses. The Bank offers a wide complement of lending
and deposit products. The Bank also supports its customers by functioning as a
federal tax depository, selling and purchasing foreign banknotes, issuing debit
cards, providing domestic and international collection services, and supplying
various forms of electronic funds transfer. Through its wholly-owned subsidiary,
Portola Investment Corporation ("Portola"), the Bank provides, on an agency
basis, mortgage life insurance, fire insurance, and a large selection of
non-FDIC insured investment products including fixed and variable annuities,
mutual funds, and individual securities.
16
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. During the three months ended March 31, 2001, the Company
incurred non-recurring operating costs associated with the March 2001 conversion
of its primary data processing systems of approximately $408 thousand; in
addition to the approximately $108 thousand of similar costs incurred in the
fourth quarter of 2000.
Recent Developments
Recent regulatory and financial industry developments have included the
following:
o Federal legislation reforming the bankruptcy code remains stalled in
Congress. This legislation, depending upon its final form, if any, could
potentially assist the Bank in collecting on certain credits.
o The potential approval for interest to be paid on business checking
accounts, expanding the number of monthly transactions permitted for FDIC
insured money market accounts, and the payment of interest on reserves held
at Federal Reserve Banks also remains stalled in Congress.
o The OTS in March issued an interim final rule that eliminated the previous
mandated regulatory liquidity calculation with a general requirement that
thrift institutions maintain sufficient liquidity. This rule provides
greater operational flexibility for the Bank, as certain cash equivalent
and investment positions no longer need be maintained solely to ensure
conformity with the requirements under the prior rule.
o The possible revised regulation of or reduced government support for
certain government sponsored enterprises, most notably the Federal Home
Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA") continues to be debated in Congress, led by Louisiana
Congressman Richard Baker.
o New capital and membership rules for the FHLB System continue to be
drafted, with implementation anticipated during 2001. The FHLB-SF is
currently developing its specific capital plan.
o The FHLB-SF became the tenth FHLB to participate in the Mortgage
Partnership Finance ("MPF") Program, whereby the FHLB-SF acquires interests
in conventional conforming and government program qualified fixed rate
mortgages sold by member institutions such as the Bank.
o Financial services firms, including the Bank, are in the process of
implementing new federal regulations governing customer privacy, with the
new procedures required to take effect no later than July 1, 2001. The
State of California legislature has been considering potentially different
and / or more restrictive privacy requirements.
o A possible increase in (e.g. from $100,000 to $200,000 per depositor) or
broadening of (e.g. all public agency deposits) federal deposit insurance
coverage, perhaps combined with a new formula for FDIC insurance premiums,
is under evaluation at the FDIC, where the Bush Administration has
nominated Texas banker Don Powell to succeed Donna Tanoue as Chairman.
Congress also continues to debate the merger of the Bank Insurance Fund
("BIF") and Savings Association Insurance Fund ("SAIF") of the FDIC.
o The OTS has proposed changes to capital regulations with the intent to
eliminate unnecessary capital burdens and to align the OTS capital
regulations more closely to those of the other financial institution
regulators. Depending upon their final content, these new regulations could
provide the Bank with added flexibility in its management of regulatory
capital.
17
At the Company's annual meeting of stockholders on May 24, 2001, Eugene
R. Friend and P. W. Bachan will retire from the Board of Directors after many
decades of service. The intention of the Board is to reduce its size from twelve
to ten members following the two retirements.
In April 2001, the Bank collected in full on two loans that were on
non-accrual status at March 31, 2001. One loan was a commercial real estate
construction loan with an outstanding principal balance of $2.85 million. At
March 31, 2001, the Bank had a $600 thousand specific reserve established for
this loan. The second loan was a commercial real estate mortgage loan with an
outstanding principal balance of $544 thousand. Both loans were located in the
Bank's primary market area. In conjunction with both payoffs, the Bank received
all principal, interest, fees, and expense reimbursements due.
State of California Energy Crisis
The California legislature and Governor Gray Davis continue to debate
possible solutions to the State's energy crisis. The largest utility in the
State, Pacific Gas & Electric Company ("PG&E"), has filed bankruptcy, while the
State is attempting to purchase certain assets, including transmission lines,
from Southern California Edison. Energy suppliers are owed billions of dollars
by PG & E alone, while the State has been losing millions of dollars per day
purchasing wholesale power and then selling it to end users at lower prices.
Standard & Poors recently decreased the State's credit rating, potentially
increasing the State's cost of borrowing in the capital markets.
Officials at the Federal Energy Regulatory Commission ("FERC") and
California's federal congressional representatives have issued a range of
statements and positions, including several regarding the potential regulation
of wholesale energy prices. At this time, the Company cannot predict what the
price and availability of energy might be in California during the traditional
summer peak demand period, and the impact of the energy crisis upon the pace and
nature of economic activity in the State.
The Company's management remains concerned about the potential impact
of the energy crisis upon the Company's operations and the financial condition
of its borrowers and funds availability from its depositors. The Company itself
is not a particularly large user of energy, as it conducts no manufacturing and
operates in a moderate climate. The Company has a natural gas powered backup
generator installed at its administrative headquarters designed to keep its
computer network operational in the event of an electricity brown-out or
black-out. The Company is in the process of acquiring a larger diesel powered
backup generator with sufficient capacity to supply all functions at its
administrative headquarters. The Bank's branches at this time do not have backup
generators, and hence would need to limit their operations in the event of an
electricity brown-out or black-out.
As subsequently discussed in this Report, the uncertain impact of the
California energy crisis upon consumers and businesses and the pace of State
economic activity was one factor in the Company's increasing its allowance for
loan losses during the first quarter of 2001. The Bank is now including an
analysis of borrowers' exposure to energy availability and prices as part of its
underwriting process for new loans, and as part of its asset review process for
existing loans. During the second and third quarters of 2001, the Company plans
to conduct a loan portfolio review with the intent to identify significant
credits that might be particularly and materially unfavorably impacted by the
California energy crisis. Depending upon the results of the review and the
effects of the California energy crisis, the Company might need to increase its
levels of provision for loan losses in future periods above those that would
have been required in the absence of the California energy crisis.
The Company is also exposed to the California energy crisis via the
State's maintenance of $14.0 million in time deposits with the Bank as of March
31, 2001. Should the State need to withdraw such deposits, replacement funding
for the Bank would likely be more expensive.
18
Overview Of Business Activity
During the first quarter of 2001, the Company achieved a number of
milestones in its strategic plan of transforming a 75 year old savings & loan
into a community based financial services firm:
1. In February 2001, a new senior executive with ties to and previous business
experience in the Monterey Bay Area was recruited to manage the Bank's
Retail Banking, Professional Banking, and alternative investment
activities. This executive completed the Bank's new management team,
comprised of seasoned commercial bankers with significant experience across
a range of industry functions.
2. Also in February 2001, Larry A. Daniels was appointed a Director of the
Company and the Bank. Mr. Daniels is President of long-established Daniels
& House Construction Company, headquartered in Monterey, California.
3. During March 2001, the Bank completed the conversion of its primary data
processing system from an external service bureau to an in-house system
built upon client / server and relational database technology. The new
system supports a broader range of financial products and services than the
prior system while also presenting the potential for enhancing customer
service and improving operating efficiency. All of the Bank's loan and
deposit accounts were being serviced on the new system by March 31, 2001.
4. Revamped financial products and a revised fee and service charge schedule
implemented with the new computer system provide a range of account and
service options for customers while more closely correlating the pricing
for the products with the Company's costs of providing them.
5. Capital downstreamed from MBBC to the Bank during the fourth quarter of
2000 was leveraged into increased lending in California, resulting in a
record balance for loans outstanding. Among the new loans generated during
the first quarter of 2001 were a number of lines of credit to local
businesses, as the Company continued to expand its Commercial Banking
operations. New business banking relationships contributed toward a record
level of deposits at March 31, 2001.
The Board of Directors and management have targeted this transformation
strategy based on their belief that this approach presents the best current
opportunity to enhance long term stockholder value. As evidence of the Board's
personal and professional support for the Company and its strategic plan, the
Directors have voted to continue receiving their retainer fees in Company stock.
In addition, the Company has continued to pursue the use of stock based
compensation in lieu of cash compensation as a means of aligning employee
interests with improvements in stockholder value.
During 2001, the Company also achieved progress in addressing two
historical issues that have consumed significant resources:
A. The Special Residential Loan Pool, originally $40.0 million at its purchase
in 1998, (see "Special Residential Loan Pool") comprised of residential
mortgages with a lower credit quality than typically accepted by the Bank,
paid down to $10.1 million by April 20, 2001, compared with $16.5 million
outstanding at December 31, 2000, with the seller / servicer for the pool
continuing to meet its obligation to absorb all credit losses.
B. The Company established an initial arbitration date in June, 2001 to
address claims by the former President and Chief Operating Officer
regarding payments due under his employment contracts. This issue has
required significant management time and generated additional legal costs
over the past six months.
19
Looking forward at the remainder of 2001, the Company plans to complete
the installation of the technology and human infrastructure integral to the
Bank's conversion into a community focused commercial bank. In conjunction with
its strategic plan, the Company also intends to accelerate the transformation of
its balance sheet toward a greater amount of income property and business
lending funded with a higher percentage of transaction accounts. In addition,
the Company has targeted improvements in its efficiency ratio and return on
stockholders' equity, two key measures of financial performance where the
Company has lagged peer institutions. However, the Company cannot provide
assurance regarding its future results in these regards, with such uncertainty
magnified by the economic and energy issues facing California in 2001.
Changes In Financial Condition From December 31, 2000 To March 31, 2001
Total assets increased $19.4 million, or 4.0%, from $486.2 million at
December 31, 2000 to a record $505.6 million at March 31, 2001. This rise in
assets was funded with a combination of greater deposits, increased borrowings,
and an expansion in stockholders' equity.
Cash & cash equivalents decreased from $25.2 million at December 31,
2000 to $15.8 million at March 31, 2001. The Company maintained a higher than
usual balance of cash & cash equivalents at the end of 2000 in part due to loan
prepayments occurring late in the year and the Company's not reinvesting those
proceeds into longer term assets before year end 2000.
Investment securities available for sale decreased slightly from $7.4
million at December 31, 2000 to $7.3 million at March 31, 2001 primarily due to
the change in the fair market value of the securities. At both December 31, 2000
and March 31, 2001, the Company's investment security portfolio was identically
composed of two floating rate corporate trust preferred bonds rated "A-" or
better by Standards & Poors.
Mortgage backed securities available for sale rose from $43.0 million
at December 31, 2000 to $47.3 million at March 31, 2001. The Company purchased
$14.4 million in primarily Agency mortgage backed securities during the first
three months of 2001:
o in anticipation of the lower interest rate environment and a potential
increase in future prepayments on mortgage related assets
o to effectively utilize some of the $2.1 million in capital downstreamed
from MBBC to the Bank during the fourth quarter of 2000
o to add assets to the Bank's balance sheet that qualify under the
Qualified Thrift Lender Test
o to provide collateral for pledging under various secured deposit and
borrowing programs
o in conjunction with the Bank's activities under the Community
Reinvestment Act ("CRA")
During the first quarter of 2001, the Bank purchased a $1.0 million
fixed rate Agency mortgage backed security comprised of loans to low to moderate
income borrowers in the Bank's lending area. The Bank conducts such purchases in
support of its local communities and as part of its proactive efforts under the
CRA.
The mortgage backed securities purchased during the first quarter of
2001 were a mix of fixed and variable rate Agency pass-through securities, and
Agency and non-Agency fixed rate, relatively low duration collateralized
mortgage obligations (CMO's").
20
During the first quarter of 2001, the Bank sold a $2.9 million position
in a long term, fixed rate Agency mortgage backed security in conjunction with
its asset / liability management program. The Company's management believed that
re-allocating the asset duration from the security to new loans would facilitate
better community support and derive a higher yield for the same level of
exposure to future increases in general market interest rates.
Loans held for sale increased from none at December 31, 2000 to $877
thousand at March 31, 2001. The Company's pace of mortgage banking has
accelerated in 2001 in conjunction with the Federal Reserve's interest rate cuts
and declines in mortgage rates from their levels of one year ago, generating
borrower impetus to refinance. The Company sells most of its long term, fixed
rate residential mortgage production into the secondary market on a servicing
released basis. All loans held for sale at March 31, 2001 were matched with
optional commitments to deliver such loans into the secondary market.
Net loans receivable held for investment rose from $391.8 million at
December 31, 2000 to a record $414.4 million at March 31, 2001. The increase
resulted from a combination of loan originations and pool purchases of
residential, multifamily, and commercial real estate loans secured by properties
in California. The Bank conducted the pool purchases to leverage the $2.1
million in capital downstreamed from MBBC during the fourth quarter of 2000. The
Company followed its customary underwriting policies in evaluating these loan
pools.
Net loans as a percentage of total assets increased from 80.6% at
December 31, 2000 to 82.1% at March 31, 2001, in conjunction with the Company's
strategy supporting its interest margin, fostering economic activity in its
local communities, and effectively utilizing the Bank's capital. The Company
slowed its long term loan portfolio diversification away from residential
mortgages during the first quarter of 2001 in part due to management's concerns
about the future status of the California economy. Residential loans comprised
38.5% of gross loans at March 31, 2001, up from 37.8% at December 31, 2000. In
contrast, construction and land loans, combined, decreased from 17.8% of gross
loans at December 31, 2000 to 16.3% of gross loans at March 31, 2001.
During the first quarter of 2001, the Company tightened its credit
criteria for land and construction loans, with a particular focus on requiring
greater borrower equity contribution and liquidity for new construction loans.
This credit tightening did not occur in response to any specific decline in
credit quality in the Company's loan portfolio, but rather as a proactive step
in light of the slowing national economy and the unique issues facing California
stemming from an uncertain supply and price of energy.
During the second quarter of 2001, the Company intends to continue
pursuing its long term shift in loan mix toward income property lending, with a
particular focus on mortgages secured by multifamily buildings and various types
of commercial real estate that is other than single-use. Multifamily loans
increased from $76.7 million at December 31, 2000 to $84.4 million at March 31,
2001. Cash flows for apartment buildings in many parts of California have been
bolstered in the past year by a combination of lower debt service due to
declining interest rates and greater revenue due to a combination of lower
vacancy rates and higher rental rates. Construction of new apartments in many
parts of California has lagged demand, resulting in more favorable financial
conditions for apartment building owners.
The Company also intends to pursue increased lending to small to medium
sized businesses during subsequent quarters in 2001, with an initial focus on
lending to local companies, many of which have been depositors at the Bank for
several years. The Company also intends to increase its lending to professionals
(e.g. accountants, doctors, attorneys) in the Greater Monterey Bay Area during
2001. Early in the second quarter of 2001, the Bank hired additional
professional bankers and commercial lenders, consistent with the strategic
transformation of the Bank into a community focused commercial bank.
21
Additional information regarding the composition of the Company's loan
portfolio is presented in the following table:
March 31, December 31,
2001 2000
(Dollars In Thousands)
Held for investment:
Loans secured by real estate:
Residential one to four unit $170,843 $160,155
Multifamily five or more units 84,358 76,727
Commercial and industrial 105,727 102,322
Construction 57,857 59,052
Land 14,668 16,310
Sub-total loans secured by real estate 433,453 414,566
-------- --------
Other loans:
Home equity lines of credit 5,770 5,631
Loans secured by deposits 464 494
Consumer lines of credit, unsecured 190 175
Business term loans 1,694 1,641
Business lines of credit 3,602 1,438
-------- --------
Sub-total other loans 11,720 9,379
Sub-total gross loans held for investment 445,173 423,945
(Less) / Plus:
Undisbursed construction loan funds (24,757) (26,580)
Unamortized purchase premiums, net of
purchase discounts 49 21
Deferred loan fees and costs, net (191) (202)
Allowance for estimated loan losses (5,839) (5,364)
-------- --------
Loans receivable held for investment, net $414,435 $391,820
-------- --------
Held for sale:
Residential one to four unit $ 877 $ --
======== ========
Premises and equipment, net, increased from $7.4 million at December
31, 2000 to $8.0 million at March 31, 2001 primarily due to hardware and
software purchases in support of the new core processing system. In future
periods, third party data processing expenses are expected to decrease due to a
reduction in service bureau charges, while depreciation and amortization
expenses are expected to increase in conjunction with the new fixed assets.
Core deposit premiums, net, declined by $170 thousand during the first
three months of 2001 in conjunction with periodic amortization. Under OTS
regulations, intangible assets, including core deposit premiums, reduce
regulatory capital, resulting in lower regulatory capital ratios than would
otherwise be the case.
22
Total deposits increased from $407.8 million at December 31, 2000 to a
record $415.5 million at March 31, 2001. Key trends within the deposit portfolio
included:
o Non-interest bearing demand deposits increased from $17.1 million at
December 31, 2000 to $17.8 million at March 31, 2001. This rise was
supported by balances maintained by new commercial business customers, as
the Bank often requires a certain amount of compensating balances in
conjunction with a commercial credit facility. This increase was also
supported by the Bank's issuing checks on its own account following the
computer systems conversion. Outstanding checks drawn on the Bank's own
account are accounted for as demand deposits.
o Interest bearing NOW checking account balances increased from $41.9 million
at December 31, 2000 to $42.2 million at March 31, 2001. The Company
revamped its checking products in conjunction with the core processing
system conversion, expanding the use of tiered interest rates as a vehicle
for encouraging customers to increase their balances and concentrate their
accounts with the Bank. In addition, the Bank introduced bilingual (English
and Spanish) telephone banking and continued to market Internet banking and
electronic bill payment.
o Savings deposits increased from $16.5 million at December 31, 2000 to $21.2
million at March 31, 2001. This increase was primarily due to the
re-categorization of approximately $4.2 million in balances from money
market accounts to savings accounts in conjunction with the computer
systems conversion. By the end of the first quarter of 2001, the Company
eliminated its passbook based deposit accounts in favor of statement based
accounts that integrate effectively with global ATM networks, debit cards,
Internet banking, and telephone access. Management also believes that
statement based deposit products present a lower likelihood of operating
losses and provide a more regular opportunity for customer communication
and marketing.
o Money market deposits rose from $87.7 million at December 31, 2000 to $88.9
million at March 31, 2001, with the amount of increase constrained by the
aforementioned re-categorization of certain deposit accounts discussed
above. During the first quarter of 2001, the Company repositioned its
consumer money market accounts to better serve three distinct market
segments, with the accounts designed for each market segment including
tiered interest rates and comprehensive and flexible access.
o Certificate of deposit balances increased slightly from $244.7 million at
December 31, 2000 to $245.5 million at March 31, 2001. The Company also
redesigned its certificate of deposit products during the first quarter of
2001, providing the opportunity for customers to earn higher interest rates
by increasing their balances, expanding their relationship with the Bank,
and / or incrementally extending the term of their accounts. During the
first quarter of 2001, the Company experienced particularly active
competition for certificates of deposit from several financial
institutions, especially one large thrift that regularly offered above
market interest rates on shorter term certificates of deposit.
o The Company's sales and marketing efforts for deposits during the first
three months of 2001 were focused on attracting additional transaction
accounts. Transaction accounts constituted 40.9% of total deposits at March
31, 2001, up from 40.0% at December 31, 2000. Effecting a change in deposit
mix is integral to the Company's strategic plan, as transaction accounts
provide for a lower cost of funds versus most other funding sources,
generate fee income, furnish opportunities for cross-selling other products
and services to customers, and are typically less interest rate sensitive
than many other funding sources.
23
o During the first quarter of 2001, the Company generally targeted its
deposit rates at a higher competitive market percentile (i.e. relatively
higher than usual) due to concerns about potential customer impact stemming
from the computer systems conversion. For example, while the Company worked
to minimize the customer impact of branch staff being allocated to training
on the new computer system in advance of its implementation, branch
staffing was lighter than targeted levels during parts of the first quarter
of 2001.
o Following the computer systems conversion, the Company experienced an
increase in the rate of deposit account closures. The account closures were
concentrated in lower balance accounts that became subject to service
charges because of the new fee and service charge schedule implemented with
the computer systems conversion. Certain operational issues affecting
customers arose following the conversion, also contributing to certain
deposit account closures. However, the majority of these operating issues
were successfully addressed in the weeks following the computer systems
conversion.
o The new fee & service charge schedule implemented with the computer systems
conversion is designed to allow the customer to select the products and
services which best meet their financial needs while aligning the revenue
from the various products with the Company's cost of providing them.
o The Company experienced a seasonal increase in deposit account balances
during March 2001, as customers built up liquidity in advance of April
income tax and property tax payments. Income tax refunds also seasonally
contribute to a rise in deposit balances during the first quarter of each
year.
The Company's ratio of loans to deposits increased from 96.08% at
December 31, 2000 to 99.95% at March 31, 2001, as the strong loan growth
eclipsed the expansion in deposits. In light of this ratio, the Company is
exploring various strategic alternatives for increasing its funding base,
including new sites for traditional stand-alone branches and sites for branches
domiciled within larger retail outlets. Early in the second quarter of 2001, two
branch sales managers with years of experience in the Company's local markets
were hired. The objectives for these new branch sales managers include the
identification of new distribution and sales locations to enhance the Company's
presence in the Greater Monterey Bay Area. No assurance can, however, be
provided that the Company will be successful in obtaining additional
distribution and sales locations.
Borrowings increased from $32.6 million at December 31, 2000 to $42.6
million at March 31, 2001, primarily due to the Bank's acquiring two $5.0
million bullet (non-amortizing) FHLB advances with a term of one year during the
first quarter of 2001. These new advances were acquired to fund the growth in
the loan portfolio and to commence layering in borrowing maturities during 2002
as part of the Bank's cash management and asset / liability management programs.
The new advances are collateralized by assets pledged from the Bank's loan
portfolio.
Total stockholders' equity increased from $43.8 million at December 31,
2000 to $45.8 million at March 31, 2001. Factors contributing to the increase
included:
o $602 thousand in 2001 year to date net income
o continued amortization of deferred stock compensation, including the
issuance of certain compensation plan shares in lieu of cash compensation
o the payment of Directors retainer fees with Company common stock
o the exercise of ninety-two thousand vested stock options by former
employees, generating $869 thousand in additional stockholders' equity
o $259 thousand in other comprehensive income, net, stemming from the
appreciation in the portfolios of securities classified as available for
sale, which in turn resulted from the decline in general market interest
rates during the first quarter of 2001
24
The Company plans to continue utilizing stock compensation in lieu of
cash compensation for certain payments during the second quarter of 2001.
Management believes that compensating employees in stock fosters an alignment of
employee interests with improvements in long term stockholder value. The Company
did not conduct any share repurchases during the first quarter of 2001. The
Company's tangible book value per share increased from $12.54 at December 31,
2000 to $12.80 at March 31, 2001.
Interest Rate Risk Management And Exposure
The table below presents an overview of the interest rate environment
during the fifteen months ended March 31, 2001. The 12MAT and 11th District Cost
Of Funds Index ("COFI") are by nature lagging indices that trail changes in more
responsive interest rate indices such as those associated with the Treasury or
LIBOR markets.
Index/ Rate 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00 3/31/01
3 month Treasury bill 5.31% 5.87% 5.85% 6.20% 5.89% 4.28%
6 month Treasury bill 5.73% 6.14% 6.22% 6.27% 5.70% 4.13%
1 year Treasury bill 5.96% 6.23% 6.05% 6.08% 5.36% 4.11%
2 year Treasury note 6.24% 6.47% 6.36% 5.97% 5.09% 4.18%
5 year Treasury note 6.34% 6.31% 6.18% 5.85% 4.97% 4.56%
10 year Treasury note 6.44% 6.00% 6.03% 5.80% 5.11% 4.92%
30 year Treasury bond 6.48% 5.83% 5.90% 5.88% 5.46% 5.44%
Target federal funds 5.50% 6.00% 6.50% 6.50% 6.50% 5.00%
Prime rate 8.50% 9.00% 9.50% 9.50% 9.50% 8.00%
12MAT 5.08% 5.46% 5.79% 6.04% 6.11% 5.71%
COFI 4.85% 5.00% 5.36% 5.55% 5.62% 5.20%
In an effort to limit the Company's exposure to interest rate changes,
management monitors and evaluates interest rate risk on a regular basis,
including participation in the OTS Net Portfolio Value Model and associated
regulatory reporting. Management believes that interest rate risk and credit
risk compose the two greatest financial exposures faced by the Company in the
normal course of its business. The Company is not directly exposed to risks
associated with commodity prices or fluctuations in foreign currency values.
In recent quarters, the Company has maintained a relatively balanced
exposure to changes in general market interest rates as measured by potential
prospective changes in net portfolio value, also referred to as market value of
portfolio equity. These potential prospective changes in net portfolio value are
calculated based upon immediate, sustained, and parallel shifts in the term
structure of interest rates, often referred to as the "yield curve". In other
words, these calculations highlight that the fair value of the Company's assets
exhibits about the same volatility as does its liabilities. However, in addition
to the overall direction of general market interest rates, changes in relative
rates (i.e. the slope of the term structure of interest rates) and relative
credit spreads also impact net portfolio value and the Company's profitability.
As highlighted in the above table, over the past fifteen months,
general market interest rates first increased rapidly in early 2000, reached a
plateau approximately during the third quarter of 2000, and then fell rapidly in
the first quarter of 2001. Throughout this time period, the impact of changing
rates on the Company's interest margin was moderate, providing empirical support
for the financial modeling previously described.
25
During the first quarter of 2001, the Company sought to maintain its
relatively balanced interest rate risk profile by avoiding adding significant
volumes of long term, fixed rate assets to the balance sheet. Long term, fixed
rate assets are relatively more challenging to match fund, and therefore can
expose the Company to interest rate risk in rising interest rate environments.
During the first three months of 2001, the Company continued to sell the
majority of its long term, fixed rate residential loan production into the
secondary market on a servicing released basis. Mortgage backed security
purchases were primarily either short term, fixed rate or longer maturity, but
floating rate.
The Company's strategic plan of transforming the Bank into a community
focused financial services provider by nature presents a lower interest rate
risk profile than historically experienced by the Bank when the balance sheet
was highly concentrated in residential mortgages (including long term, fixed
rate), which present greater embedded optionality than many other types of
loans. However, management is concerned about the possible impact of a
potentially historically low interest rate environment during 2001 if the
Federal Reserve determines to drive interest rates to very low levels in an
effort to support the US economy. If interest rates reach very low levels, the
Company could experience margin compression since rates on various types of
deposit accounts could reach either zero or near-zero, and thus no longer
provide an opportunity to reduce the Company's cost of funding. In addition,
historically low interest rates could spur a sufficiently large refinancing wave
that could present the Company with excess liquidity at a time when reinvestment
options would be relatively unattractive.
Liquidity
Liquidity is actively managed to ensure sufficient funds are available
to meet ongoing needs of both the Company in general and the Bank in particular.
Liquidity management includes projections of future sources and uses of funds to
ensure the availability of sufficient liquid reserves to provide for
unanticipated circumstances. The Company's primary sources of funds are customer
deposits, principal and interest payments on loans and securities, FHLB advances
and other borrowings, and, to a lesser extent, proceeds from sales of loans and
securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and prepayments on mortgage
related assets are significantly influenced by general market interest rates,
economic conditions, and competition.
At March 31, 2001, the Company maintained $15.8 million in cash and
cash equivalents, untapped borrowing capacity in excess of $140 million at the
FHLB-SF, and significant excess collateral in both loans and securities;
collateral which is available for either liquidation or secured borrowings in
order to meet future liquidity requirements. MBBC and the Bank have each entered
into several Master Repurchase Agreements to permit securities sold under
agreements to repurchase transactions with number of counterparties. In
addition, at March 31, 2001, the Bank maintained $25.5 million in unsecured
federal funds lines of credit from four correspondent financial institutions.
However, there can be no assurance that funds from these lines of credit will be
available at all times, or that the line will be maintained in future periods.
The Bank is able to issue wholesale "DTC" certificates of deposit through two
large, national investment banking firms as an additional source of liquidity.
The OTS recently issued an interim final rule that repealed a statutory
liquidity requirement for the Bank. The prior requirement mandated that the Bank
maintain an average daily balance of liquid assets of at least 4.0% of its
liquidity base (as defined). The Bank is, however, still required to maintain a
safe and sound level of liquidity at all times, and will be examined by the OTS
in this regard. Management believes that having a surplus of available liquidity
at all times is prudent. With the capabilities of the new core processing
system, the Bank intends to pursue loan specific (versus blanket lien) pledging
to the FHLB-SF during 2001, thereby allowing the pledging of a broader range of
collateral and fostering increasing borrowing capacity on all types of pledged
collateral. Such loan specific pledging is forecast to materially increase the
Bank's borrowing capacity with the FHLB-SF.
At March 31, 2001, MBBC had cash & cash equivalents of $4.6 million. In
addition, MBBC had no outstanding balance on a $2.0 million revolving line of
credit. The loan agreement for this line of credit contains certain restrictions
on the use of borrowed funds, including a prohibition for such funds to be used
to repurchase Company common stock. Due to additional capital requirements
implemented by the OTS for the Bank, the Bank is currently limited in its
ability to pay dividends to MBBC.
26
Capital Resources And Regulatory Capital Compliance
Federal banking regulatory agencies maintain a system providing for
regulatory sanctions against financial institutions that are not adequately
capitalized. The severity of these sanctions increases to the extent that an
institution's capital falls further below the adequately capitalized thresholds.
OTS Prompt Corrective Action ("PCA") regulations require specific capital ratios
for five separate capital categories as set forth below:
Core Capital Core Capital Total Capital
To Adjusted To To
Total Assets Risk-weighted Risk-weighted
(Leverage Ratio) Assets Assets
---------------- ------ ------
Well capitalized 5% or above 6% or above 10% or above
Adequately capitalized 4% or above 4% or above 8% or above
Undercapitalized Under 4% Under 4% Under 8%
Significantly undercapitalized Under 3% Under 3% Under 6%
Critically undercapitalized Ratio of tangible equity to adjusted total assets of 2% or less
The following table summarizes the capital ratios required for an
institution to be considered well capitalized and the Bank's regulatory capital
at March 31, 2001 as compared to such ratios.
Core Capital Core Capital To Total Capital To
To Adjusted Risk-weighted Risk-weighted
Total Assets Assets Assets
----------------------- ----------------------- -----------------------
Balance Percent Balance Percent Balance Percent
(Dollars In Thousands)
Bank regulatory capital $ 39,619 7.93% $ 39,619 10.98% $ 44,140 12.23%
Well capitalized requirement 24,972 5.00% 21,657 6.00% 36,095 10.00%
-------- ---- -------- ----- -------- ------
Excess $ 14,647 2.93% $ 17,962 4.98% $ 8,045 2.23%
======== ==== ======== ===== ======== ======
Adjusted assets (1) $499,437 $360,947 $360,947
======== ======== ======== ======
------------------------------------- -----------
(1) The above line for "adjusted assets" refers to the term "adjusted total
assets" as defined in 12 C.F.R. Section 567.1(a) for purposes of core capital
requirements, and refers to the term "risk-weighted assets" as defined in C.F.R.
Section 567.1(bb) for purposes of risk-based capital requirements.
The Bank has been informed by the OTS that it is to maintain its
regulatory capital ratios at levels no less than those in effect at December 31,
1999 until further notice (see "Special Residential Loan Pool"). The following
table demonstrates the Bank's compliance with this institution-specific
regulatory capital requirement.
March 31, 2001 December 31, 1999
-------------- -----------------
Core capital to adjusted total assets 7.93% 7.11%
Core capital to risk-weighted assets 10.98% 9.58%
Total capital to risk-weighted assets 12.23% 10.56%
27
Other OTS capital regulations require the Bank to maintain: (a)
tangible capital of at least 1.5% of adjusted total assets (as defined in the
regulations), (b) core capital of at least 4.0% of adjusted total assets (as
defined in the regulations) (unless the Bank has been assigned the highest
composite rating under the Uniform Financial Institutions Rating System, in
which case 3.00%), and (c) total capital of at least 8.0% of risk-weighted
assets (as defined in the regulations).
The following table summarizes these regulatory capital requirements
for the Bank. As indicated in the table, the Bank's capital levels at March 31,
2001 exceeded all three of the currently applicable minimum regulatory capital
requirements.
Percent Of
Adjusted
(Dollars In Thousands) Total
Amount Assets
------- ------
Tangible Capital
Regulatory capital $39,619 7.93%
Minimum required 7,492 1.50%
Excess $32,127 6.43%
------- ------
Core Capital
Regulatory capital $39,619 7.93%
Minimum required 19,977 4.00%
------- ------
Excess $19,642 3.93%
======= ======
Percent Of
Risk-
weighted
Amount Assets
------- ------
Risk-based Capital
Regulatory capital $44,140 12.23%
Minimum required 28,876 8.00%
------- ------
Excess $15,264 4.23%
======= ======
At March 31, 2001, the Bank's regulatory capital levels exceeded the
thresholds required to be classified as a "well capitalized" institution. The
Bank's regulatory capital ratios detailed above do not reflect the additional
capital (and assets) maintained by MBBC. Management believes that, under current
regulations and institution-specific requirements, the Bank will continue to
meet its minimum capital requirements. However, events beyond the control of the
Bank, such as changing interest rates or a downturn in the economy or real
estate markets in the areas where the Bank has most of its loans, could
adversely affect future earnings and, consequently, the ability of the Bank to
meet its future minimum regulatory capital requirements.
28
Asset Quality / Credit Profile
Non-performing Assets
The following table sets forth information regarding non-performing
assets at the dates indicated.
(Dollars In Thousands) March 31, 2001 December 31, 2000
-------------- -----------------
Outstanding Balances Before Valuation Reserves
Non-accrual loans $ 4,653 $ 4,666
Loans 90 or more days delinquent and accruing interest -- --
Restructured loans in compliance with modified terms -- 75
------- -------
Total gross non-performing loans 4,653 4,741
Investment in foreclosed real estate before valuation reserves -- --
Repossessed consumer assets -- --
------- -------
Total gross non-performing assets $ 4,653 $ 4,741
======= =======
Gross non-accrual loans to total loans 1.10% 1.17%
Gross non-performing loans to total loans 1.10% 1.19%
Gross non-performing assets to total assets 0.92% 0.98%
Allowance for loan losses $ 5,839 $ 5,364
Allowance for loan losses to non-performing loans 125.49% 113.14%
Valuation allowances for foreclosed real estate $ -- $ --
Non-accrual loans at March 31, 2001 are detailed in the following
table:
(Dollars In Thousands) Number Principal Balance
Of Outstanding At
Category Of Loan Loans March 31, 2001
Residential mortgage 6 $ 1,196
Commercial & industrial real estate loan 1 544
Commercial real estate construction loan 1 2,852
Business term loan 2 61
Consumer line of credit 1 --
Total 11 $ 4,653
In April 2001, the Bank collected in full on the $544 thousand
commercial & industrial real estate mortgage and the $2.85 million commercial
real estate construction loan listed in the above table. Both loans were located
in the Bank's primary market area. In conjunction with both payoffs, the Bank
received all principal, interest, fees, and expense reimbursements due. Both of
these loans were significantly delinquent and were nearing foreclosure prior to
their payoff.
Several of Company's non-accrual loans at March 31, 2001 were either
fully current in payments or exhibited only minor delinquency. However, the
Company determined to retain these loans on non-accrual status primarily due to
past payment performance issues by the borrowers.
29
Criticized And Classified Assets
The following table presents information concerning the Company's
inventory of criticized ("OAEM") and classified ("substandard" and lower)
assets. The category "OAEM" refers to "Other Assets Especially Mentioned", or
those assets which present indications of potential future credit deterioration.
(Dollars In Thousands) OAEM Substandard Doubtful Loss Total
---- ----------- -------- ---- -----
December 31, 2000 $ 2,283 $ 6,323 $ -- $ 600 $9,206
March 31, 2001 $ 5,182 $ 4,897 $ -- $ 600 $10,679
Classified assets as a percent of stockholders' equity decreased from
15.8% at December 31, 2000 to 12.0% at March 31, 2001.
The March 31, 2001 Substandard assets in the above table include the
two non-accrual loans totaling $3.4 million that paid off in full during April
2001. The $600 thousand specific reserve in the above table presented under
"Loss" is associated with the commercial real estate construction loan that paid
off in full during April 2001.
The largest loan to become newly criticized during the first quarter of
2001 is a $2.3 million "mini-perm" mortgage loan participation maturing in 2004
secured by a beach resort in the Company's primary business area. The resort has
experienced lower occupancy than forecast, contributing to a reduced cash flow
and inadequate debt service coverage. The borrowers have continued to timely
make all loan payments, however, and no delinquency was experienced through
March 31, 2001. The Company rated this loan OAEM because of the cash flow
inadequacy and concerns that higher prices for gasoline and a potential
additional slowdown in economic activity might further reduce occupancy or
realized average room rates. The Company intends to continue closely monitoring
this loan.
At March 31, 2001, the Company was in the process of working with
borrowers to improve the credit profile of a number of criticized and classified
loans in addition to the two non-accrual loans which paid off in April 2001. The
Company's efforts in this regard have been bolstered by the addition of two
senior executives with extensive credit experience over the past year. However,
there can be no assurances that the Company will be successful in this regard.
Impaired Loans
At March 31, 2001, the Company had total gross impaired loans, before
specific reserves, of $4.7 million, constituting 11 credits. This compares to
gross impaired loans of $5.3 million at December 31, 2000. Interest is accrued
on impaired loans on a monthly basis except for those loans that are 90 or more
days delinquent or those loans which are less than 90 days delinquent but where
management has identified concerns regarding the collection of the credit. For
the three months ended March 31, 2001, accrued interest on impaired loans was
zero and interest of $22 thousand was received in cash. If all non-accrual loans
had been performing in accordance with their original loan terms, the Company
would have recorded interest income of $134 thousand during the three months
ended March 31, 2001, instead of interest income actually recognized on cash
payments of $22 thousand.
30
Special Residential Loan Pool
During 1998, the Bank purchased a $40.0 million residential mortgage
pool comprised of loans secured by homes throughout the nation (but with a
concentration in California) that presented a borrower credit profile and / or a
loan to value ratio outside of (less favorable than) the Bank's normal
underwriting criteria. To mitigate its credit risk for this portfolio, the Bank
obtained at purchase 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, which, by virtue of its size, violated the
OTS' "Loans To One Borrower" regulation. The Bank continues to report to the OTS
in this regard on a monthly basis.
At March 31, 2001, the outstanding principal balance of this mortgage
loan pool was $10.9 million, with $0.8 million received during April, 2001
(normal monthly remittance cycle) based upon prepayments and scheduled principal
for March, 2001. At December 31, 2000, the outstanding principal balance of this
mortgage loan pool was $16.5 million. The loans in this mortgage pool bear
interest rates significantly in excess of current market rates for similar new
loans extended to borrowers with moderate or better credit profiles. This rate
differential contributed to the prepayments realized on the portfolio during the
first quarter of 2001.
Through the April 20, 2001 regularly scheduled remittance date, the
seller performed per the loan servicing agreement, making scheduled principal
and interest payments to the Bank while also absorbing all credit losses on the
loan portfolio. At March 31, 2001, the Company categorized all loans within this
mortgage pool as performing based upon the continued payment performance of the
seller.
Despite the performance of the seller, however, the Company has
allocated certain reserves to this mortgage pool at March 31, 2001 due to
concerns regarding the potential losses by the seller in honoring the guaranty,
the present delinquency profile of the pool, and the differential between loan
principal balances and current appraisals for foreclosed loans and loans in the
process of foreclosure.
The Company continues to monitor the financial performance and
condition of the seller on a monthly basis. The earnings and capital of the
seller experienced favorable results during the first quarter of 2001, supported
by the strong mortgage refinance market. In addition, the Company analyzes the
payment performance and credit profile of the remaining outstanding loans on a
monthly basis.
During the first quarter of 2000, the Bank was informed by the OTS
that:
1. all loans associated with this loan pool would be required to be assigned
to the 100% risk based capital category in calculating regulatory capital
ratios that incorporate risk weighted assets
2. the Bank's regulatory capital position at December 31, 1999 and thereafter
was mandated to reflect the above requirement
3. until further notice, the Bank's regulatory capital ratios were required to
be maintained at levels no lower than the levels at December 31, 1999
Because remaining a "well capitalized" financial institution is
integral to the Bank's business strategy and due to the planned generation of
additional regulatory capital in 2001 through a combination of net income,
amortization of deferred stock compensation, issuance of stock in lieu of cash
Director retainer fees, and amortization of intangible assets, management does
not foresee that the aforementioned requirements will have a material adverse
impact upon the Company in 2001. However, depending upon the tenure of and any
potential modification of the additional requirements, as determined by the OTS,
such requirements could present an unfavorable impact upon MBBC's liquidity and
ability to pay cash dividends to stockholders and conduct share repurchases, as
a result of potential restrictions upon the Bank's ability to pay dividends to
MBBC.
31
Allowance For Loan Losses
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in the loan
portfolio. In determining levels of risk, management considers a variety of
factors, including, but not limited to, asset classifications, economic trends,
industry experience and trends, geographic concentrations, estimated collateral
values, historical loan loss experience, and the Company's underwriting
policies. The allowance for loan losses is maintained at an amount management
considers adequate to cover losses in loans receivable which are deemed probable
and estimable. While management uses the best information available to make
these estimates, future adjustments to allowances may be necessary due to
economic, operating, regulatory, and other conditions that may be beyond the
Company's control. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgements different from those of management.
The following table presents activity in the Company's allowance for
loan losses during the three months ended March 31, 2001 and March 31, 2000:
Three Months Ended March 31,
-----------------------------------
2001 2000
---- ----
Allowance For Loan Losses (Dollars In Thousands)
Balance at beginning of year $ 5,364 $ 3,502
Charge-offs:
Business lines of credit (25) --
Total charge-offs (25) --
Recoveries -- --
Provision for loan losses 500 250
Balance at March 31 $ 5,839 $ 3,752
Annualized ratio of net charge-offs during the period to average
loans receivable, net, outstanding during the period 0.02% 0.00%
Additional ratios applicable to the allowance for loan losses include:
March 31, 2001 December 31, 2000
-------------- -----------------
Allowance for loan losses as a percent of non-performing loans 125.49% 113.14%
Allowance for loan losses as a percent of gross loans receivable
net of undisbursed loan funds 1.39% 1.35%
Allowance for loan losses as a percent of classified assets 106.22% 77.48%
32
As subsequently discussed (see "Provision For Loan Losses"), the higher
provision for loan losses recorded during the first three months of 2001 versus
the same period in the prior year resulted from multiple factors, including
factors specific to the Company and its loan portfolio and certain other factors
impacting the California economy in general.
Management anticipates that further growth in loans receivable, ongoing
emphasis on the origination and purchase of income property real estate loans,
and the continuing expansion of commercial business lending will result in
future provisions and in an increase in the ratio of the allowance for loan
losses to loans outstanding. Experience across the financial services industry
indicates that commercial business and income property loans present greater
risks than residential real estate loans, and therefore should be accompanied by
suitably higher levels of reserves.
Comparison Of Operating Results For The Three Months Ended March 31, 2001 and
March 31, 2000
General
During the first quarter of 2001, the Company reported net income of
$602 thousand, equivalent to $0.18 diluted earnings per share. This compares to
net income of $799 thousand, or $0.25 diluted earnings per share, for the first
quarter of 2000. Net income during the quarter ended December 31, 2000 was $709
thousand, equivalent to $0.22 diluted earnings per share.
As discussed below, earnings for the first quarter of 2001 were
unfavorably impacted by $408 thousand in operating costs for the Bank's core
systems conversion and a higher provision for loan losses during the first
quarter of 2001 than during the first quarter of 2000. These factors more than
offset greater net interest income largely stemming from a bigger average
balance sheet, more favorable results on the sales of securities, a significant
expansion in customer service charge income, and other financial benefits
arising from the Company's transformation into a community focused commercial
bank.
Interest Rate Environment
The table presented above under "Interest Rate Risk Management And
Exposure" furnishes an overview of the interest rate environment during the most
recent five quarters. Market interest rates have varied considerably during this
time period. In early 2000, the Federal Reserve continued increasing its target
federal funds rate (commenced in 1999), expressing concern about the rapid pace
of economic expansion, the booming equity markets (particularly NASDAQ), and the
combination of very low unemployment, spot labor shortages, and increased
compensation costs which presented the potential for a rise in inflation. During
the second half of 2000, many capital markets interest rates (e.g. LIBOR and
Treasuries) began declining in response to falling equity markets and slowing
economic growth. The Federal Reserve did not commence cutting its benchmark
interest rates until the first week of 2001. The Federal Reserve then cut the
target federal funds rate 50 basis points on three separate occasions during the
first quarter of 2001, taking the target federal funds rate from 6.50% on
January 2, 2001 to 5.00% on March 30, 2001. A fourth 50 basis point cut in the
target federal funds rate was then implemented between Federal Open Market
Committee meetings in mid April, 2001.
33
The year 2001 began with an inverted Treasury curve, highlighting a
traditionally difficult interest rate environment for financial institutions,
including the Bank. Financial institutions generally benefit from a positively
sloped term structure of interest rates, whereby higher duration assets may be
funded at a favorable spread with shorter term liabilities, and whereby fixed
rate assets appreciate in market price as they move nearer to maturity. By the
end of the first quarter, the Treasury curve out through two years was
relatively flat, with a defined steepening occurring after the April 2001
interest rate cut. The Treasury curve was generally traditionally positively
sloped during the first quarter of 2000.
Net Interest Income
Net interest income increased from $4.5 million during the first
quarter of 2000 to $4.8 million during the first quarter of 2001 primarily due
to greater average balances of interest earning assets and liabilities. The
Company's ratio of net interest income to average total assets during the first
quarter of 2001 was 3.83%. This figure represented a decrease from 3.88% during
the first quarter of 2000, but an increase from 3.76% during the fourth quarter
of 2000.
Factors influencing net interest income during the first three months
of 2001 compared to the first three months of 2000 included:
o During the first quarter of 2000, the Company benefited from locking in a
significant volume of funding during the fourth quarter of 1999 and early
2000 in a rising interest rate environment.
o The Company increased the size of its balance sheet early in 2001 in
anticipation of a declining interest rate environment, funding new short to
intermediate term assets with low duration borrowings. This favorably
impacted net interest income.
o Average net loans as a percentage of average total assets improved from
79.2% during the first quarter of 2000 to 81.2% during the first three
months of 2001. Because loans constitute by far the Company's highest
yielding type of asset, this change in asset mix favorably affected net
interest income.
o Average non-interest bearing liabilities (including demand deposit
accounts) declined from 4.2% of average total assets during the first
quarter of 2000 to 3.7% during the first three months of 2001. This
reduction in average interest-free funding negatively impacted the
Company's net interest income.
o The Company maintained its deposit rates at relatively higher levels than
normal during the first quarter of 2001 in conjunction with concerns
regarding potential customer issues stemming from the computer systems
conversion, including a temporary reduction in branch staffing coverage and
the elimination of passbook based deposit products.
o The Company also maintained higher levels of non-interest earning
correspondent bank account balances than usual during March 2001 as a
liquidity cushion to address any potential operational or financial
settlement issues arising following the implementation of the new computer
system. This excess liquidity was not required.
34
The following table presents the average annualized rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing liabilities, and the resulting net
interest spread, net interest margin, and average interest margin on total
assets for the three months ended March 31, 2001 and 2000.
Three Months Ended March 31, 2001 Three Months Ended March 31, 2000
---------------------------------------- ----------------------------------------
(Dollars In Thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ------- ------- -------- -------
Assets
Interest earning assets:
Cash equivalents (1) $ 8,642 $ 124 5.74% $ 6,959 $ 99 5.75%
Investment securities 7,363 133 7.23% 11,465 210 7.31%
Mortgage backed securities (2) 48,956 808 6.60% 54,358 959 7.06%
Loans receivable, net (3) 402,656 8,890 8.83% 366,511 7,736 8.44%
FHLB stock 2,922 40 5.48% 3,248 46 5.70%
-------- -------- ------- -------- ------
Total interest earning assets 470,539 9,995 8.50% 442,541 9,050 8.18%
Non-interest earnings assets 25,551 -------- 20,150 ------
-------- --------
Total assets $496,090 $462,691
======== ========
Liabilities & Equity
Interest bearing liabilities:
NOW accounts $ 40,658 141 1.39% $ 31,377 121 1.55%
Savings accounts 17,279 73 1.69% 15,205 68 1.80%
Money market accounts 90,144 1,044 4.63% 82,220 873 4.27%
Certificates of deposit 244,493 3,426 5.61% 224,585 2,777 4.97%
-------- -------- -------- ------
Total interest-bearing deposits 392,574 4,684 4.77% 353,387 3,839 4.37%
FHLB advances 40,799 547 5.36% 49,614 708 5.74%
Other borrowings (4) 170 12 28.24% 622 10 6.47%
-------- -------- -------- ------
Total interest-bearing liabilities 433,543 5,243 4.84% 403,623 4,557 4.54%
Demand deposit accounts 16,341 16,304
Other non-interest bearing 2,226 3,090
liabilities -------- --------
Total liabilities 452,110 423,017
Stockholders' equity 43,980 39,674
-------- --------
Total liabilities & equity $496,090 $462,691
Net interest income $4,752 $4,493
======== =======
Interest rate spread (5) 3.66% 3.64%
Net interest earning assets 36,996 38,918
Net interest margin (6) 4.04% 4.06%
Net interest income /
average total assets 3.83% 3.88%
Interest earnings assets /
interest bearing liabilities 1.09 1.10
Average balances in the above table were calculated using average daily figures.
-------------------------------------
(1) Includes federal funds sold, money market fund investments, banker's
acceptances, commercial paper, interest earning deposit accounts, and
securities purchased under agreements to resell.
(2) Includes mortgage backed securities, including CMO's, both available for
sale and held to maturity.
(3) In computing the average balance of loans receivable, non-accrual loans and
loans held for sale have been included. Amount is net of deferred loan
fees, premiums and discounts, and undisbursed loan funds. Interest income
on loans includes amortized loan fees and costs, net, of $78,000 and
$76,000 in 2001 and 2000, respectively.
(4) Includes federal funds purchased and securities sold under agreements to
repurchase.
(5) Interest rate spread represents the difference between the average rate on
interest earning assets and the average rate on interest bearing
liabilities.
(6) Net interest margin equals net interest income before provision for loan
losses divided by average interest earning assets.
35
Rate / Volume Analysis
The most significant impact upon 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 periods indicated. Changes in
interest income or interest expense attributable to volume changes are
calculated by multiplying the change in volume by the prior period average
interest rate. The changes in interest income or interest expense attributable
to interest rate changes are calculated by multiplying the change in interest
rate by the prior year period volume. The changes in interest income or interest
expense attributable to the combined impact of changes in volume and changes in
interest rate are calculated by multiplying the change in rate by the change in
volume.
Three Months Ended March 31, 2001
Compared To
Three Months Ended March 31, 2000
-------------------------------------
Volume
(Dollars In Thousands) Volume Rate / Rate Net
Interest-earning assets
Cash equivalents $ 24 $ 0 $ 1 $ 25
Investment securities (75) (2) 0 (77)
Mortgage backed securities (95) (62) 6 (151)
Loans receivable, net 763 356 35 1,154
FHLB Stock (5) (2) 1 (6)
Total interest-earning assets 612 290 43 945
Interest-bearing liabilities
NOW Accounts 36 (13) (3) 20
Savings accounts 9 (4) -- 5
Money market accounts 85 74 12 171
Certificates of deposit 248 355 46 649
Total interest-bearing deposits 378 412 55 845
FHLB advances (127) (47) 13 (161)
Other borrowings (7) 34 (25) 2
Total interest-bearing liabilities 244 399 43 686
Increase in net interest income $ 368 $ (109) $ 0 $ 259
36
Interest Income
Interest income increased from $9.1 million during the three months
ended March 31, 2000 to $10.0 million during the three months ended March 31,
2001. This increase was primarily due to:
o a 6.3% increase in average interest earning assets
o a shift in asset mix towards relatively higher yielding loans versus
securities, coincident with the Company's strategic plan of better
supporting its local communities with the delivery of credit
Interest income on loans rose from $7.7 million during the quarter
ended March 31, 2000 to $8.9 million during the most recent quarter. This
expansion in interest income was due to a combination of greater average volumes
and higher average rates. The greater volume stemmed from the Company's
strategic plan of increasing the percentage of the balance sheet comprised of
loans through internal originations, loan pool purchases on the secondary
market, and loan participations; with the latter primarily through other
California community banks. The higher rates on loans was favorably impacted by
a loan mix which has become less concentrated in lower yielding residential
mortgages, in favor of higher yielding income property and other non-residential
loans. Residential loans constituted 38.5% of gross loans at March 31, 2001
versus 42.6% at March 31, 2000.
Interest income on cash equivalents rose from $99 thousand for the
three months ended March 31, 2000 to $124 thousand for the same period in 2001.
This increase was due to higher average balances, as the average rates during
the periods were almost identical. The increase in average balances primarily
stemmed from MBBC's maintaining a higher average balance of cash equivalents in
the first quarter of 2001 than during the similar period in the prior year.
Interest income on investment securities declined from $210 thousand
during the three months ended March 31, 2000 to $133 thousand during the same
period in 2001. The reduced interest income primarily resulted from lower
average balances, as the Company maintained a smaller portfolio of variable rate
corporate trust preferred securities during the first quarter of 2001 than
during the similar period in 2000.
Interest income on mortgage backed securities fell from $959 thousand
during the three months ended March 31, 2000 to $808 thousand during the same
period in 2001. This decrease was caused by reductions in average volume and
average rates. Over the past year, the Company has reduced the percentage of its
balance sheet allocated to securities in favor of increased lending. In
addition, the mix of the Company's mortgage backed securities has changed over
the past year, with an increase in lower duration, high cash flow instruments
and a reduction in higher duration, lower cash flow securities in order to
better support greater funding requirements stemming from the Company's
increased lending.
Interest income on FHLB stock decreased from $46 thousand during the
three months ended March 31, 2000 to $40 thousand during the quarter ended March
31, 2001. This reduction in interest income stemmed from a combination of
reduced average balances and lower effective earnings rates. The Bank was
required by the FHLB-SF to sell some its capital stock in the FHLB during 2000
under the FHLB's mandatory capital redemption program.
Interest Expense
Interest expense increased from $4.6 million during the three months
ended March 31, 2000 to $5.2 million during the most recent quarter. This
increase was caused by a combination of a greater average balance of interest
bearing liabilities and a higher average cost of interest bearing funding.
37
Interest expense on deposits increased 22.0% from $3.8 million during
the three months ended March 31, 2000 to $4.7 million during the first quarter
of 2001. Average interest bearing deposits were 11.1% greater in the first
quarter of 2001 versus the first quarter of 2000. The average rate paid
increased from 4.37% during the first quarter of 2000 to 4.77% during the first
quarter of 2001 despite a favorable shift in average deposit mix. Certificates
of deposit declined from 63.6% of average interest bearing deposits during the
first quarter of 2000 to 62.3% during the first quarter of 2001, with an
offsetting increase in average transaction account balances. While the Company
was able to achieve lower average costs for NOW checking accounts and savings
accounts during the first quarter of 2001 compared to the same period the prior
year, higher average costs for money market accounts and certificates of
deposits led to the rise in average interest bearing deposit cost.
The rapidly declining interest rate environment experienced during the
first quarter of 2001 contributed to "sticker shock" for certificate of deposit
account holders with maturing deposits. With interest rates down from 100 to 200
basis points below their levels of just six months earlier, many maturing CD
holders, particularly those dependent upon their interest income for day to day
living expenses, aggressively shopped for interest rates, causing the Bank to
selectively match high rate competitors in order to maintain customer
relationships and continue growing the deposit portfolio. In contrast, during
the first quarter of 2000, interest rates were generally increasing, presenting
less impetus for maturing certificate of deposit holders to extensively shop for
peak interest rates.
The Company's strategic plan incorporates a greater reliance upon
transaction accounts, including those maintained by business as compensating
balances for their credit facilities, and therefore anticipates a reduced
sensitivity to marginal consumer interest rates, particularly for certificates
of deposit.
During 2001, the Company plans to continue promoting its Money Market
Plus account, Interest Checking Plus account, "40+" NOW checking account, and
business checking accounts. The consumer products present attractive benefits to
both customers and the Company. For example, all three consumer transaction
accounts are highly tiered, encouraging greater account balances in order to
earn higher rates of interest. These three products are also accessible via
bilingual telephone banking, Internet banking, global ATM networks, mail, and
in-branch service.
At March 31, 2001, the Bank's weighted average nominal cost of deposits
was 4.48%, or 72 basis points below the COFI Index for the same date. The
Company utilizes a comparison of its cost of deposits and cost of funds to COFI
as one measure of relative performance. The Company's weighted average nominal
cost of deposits was 4.72% at December 31, 2000, or 90 basis points below the
COFI Index for the same date. Should short term Treasury rates remain stable or
continue to decline, the Company's weighted average cost of deposits will
benefit from the significant downward repricing in June and July 2001 of $14.0
million in certificates of deposit maintained under the State of California time
deposit program, whereby the State places time deposits in banks as a means of
encouraging lending in support of local economic development.
Interest expense on total borrowings decreased from $718 thousand
during the three months ended March 31, 2000 to $559 thousand during the same
period in 2001. This decrease was caused by smaller average balances and lower
average rates. The Company maintained a lower cost portfolio of FHLB advances
during the first quarter of 2001 than during the prior year, as several higher
cost advances matured or were prepaid during the final three quarters of 2000.
In addition, the Company borrowed $10.0 million in new one year FHLB advances
during the first quarter of 2001 with a weighted average rate of 5.13%. The
Company's average interest rate on other borrowings was inflated during the
first quarter as a result of the amortization of loan fees (discount on a
liability) on MBBC's $2.0 million revolving line of credit combined with a lack
of draws (outstanding balances) on the line during the quarter.
38
Provision For Loan Losses
The Company recorded a $500 thousand provision for loan losses during
the first quarter of 2001, up from $250 thousand during the first quarter of
2000 and the same as the provision for the fourth quarter of 2000. No recoveries
were realized during the first quarter of 2001, and charge-offs during the
period totaled $25 thousand - for a single business line of credit. The
Company's management remains concerned about the negative impacts upon the
amount of loss inherent in the loan portfolio at March 31, 2001 arising from the
following factors:
o the California energy crisis, with effects 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 the effects
on the demand and pricing for real estate in the Bank's primary market
areas
o the increasing number of layoffs announced during the first quarter of 2001
by California companies, including those in more mature industries that
have historically been profitable
o the general reduction in national economic growth
Other factors contributing to the higher provision for loan losses
recorded during 2001 included:
o the increasing concentration of the portfolio in relatively less seasoned
credits, because of the Company's growth rate in recent periods
o higher concentrations of credit exposure as a result of increased income
property lending, as these loans generally are larger than residential
mortgages
o the increase in the size of the loan portfolio
Commercial & industrial real estate loans typically present greater
credit, concentration, and event risks than home mortgages, thereby requiring
proportionately greater reserve levels. Newer loans typically present more
credit exposure than seasoned loans with many years of prompt payment experience
and amortized principal balances.
During the second and third quarters of 2001, the Company intends to
conduct an expanded credit review of its larger loans, and substantially all
construction loans, with such review to be performed by both internal credit
management staff and external credit consultants. The extent of this expanded
credit review exceeds the scope of the Company's normal, ongoing credit review
process and has been initiated by management in response to the issues described
above which present the potential to negatively impact the California economy,
rather than due to any specific deterioration in the Company's credit portfolio.
The Company's ratio of loan loss reserves to loans outstanding
increased from 1.35% at December 31, 2000 to 1.39% at March 31, 2001. The
Company anticipates that this ratio will continue to increase in future periods
to the extent that the Company is successful in its strategic plan of increasing
total loans while expanding the proportion of the loan portfolio represented by
income property and commercial business lending. The Company's strategic plan
also incorporates expanded construction lending, although the Company has
tightened its credit requirements for such lending during 2001 in light of the
trends within the California economy.
39
Non-interest Income
Non-interest income totaled $643 thousand during the first quarter of
2001, comparing favorably to $501 thousand during the first quarter of 2000.
Service charge income rose from $280 thousand during the first quarter
of 2000 to $408 thousand during the first three months of 2001 in part because
of the revised fee and service charge schedule implemented with the new computer
system. Following the computer systems conversion, the Company commenced
charging for checks drawn against uncollected funds ("UCF Fees") and increased
its fee for checks drawn against insufficient funds ("NSF Fees") from $17 to $20
per check. The Company also stopped providing lifetime free checks for certain
deposit accounts, thereby not only reducing non-interest expenses for check
printing but also increasing fee income from "upcharges" for check orders
initiated and paid for by customers. In addition, the revised fee and service
charge schedule established certain minimum balance requirements and maximum
free usage limits for certain deposit accounts. The Company anticipates improved
profitability as a result of the revised fee and service charge schedule, but
also expects a short term decrease in the number of deposit accounts as certain
customers (primarily lower balance, high volume accounts) respond to the changes
by taking their business elsewhere.
Sales of mortgage backed and investment securities generated a pre-tax
gain of $34 thousand during the first quarter of 2001, versus a pre-tax loss of
$79 thousand during the first quarter of 2000. The $34 thousand gain during the
first quarter of 2001 resulted from the sale of a single long term, fixed rate,
Agency mortgage backed security.
Loan servicing income declined from $37 thousand during the first
quarter of 2000 to $2 thousand during the first quarter of 2001 due to the
continued reduction in the size of the portfolio of loans serviced for others
and greater amortization of originated mortgage servicing rights during the
first quarter of 2001 because of faster prepayments. Because the Company has
been conducting its mortgage banking on a servicing released basis, income from
loan servicing is anticipated to constitute a progressively smaller percentage
of total revenue in the future.
Less favorable capital market conditions contributed to a decline in
commissions from sales of non-insured investment products, which fell from $207
thousand during the first quarter of 2000 to $117 thousand during the first
quarter of 2001. A new non-insured investment program manager was hired by the
Bank in February 2001 with the objective of improving the program's
profitability. The Company is currently seeking additional licensed sales
representatives to augment the coverage of its customer base and the Company's
outreach into its local communities.
Other non-interest income increased from $56 thousand during the first
quarter of 2000 to $82 thousand during the most recent three months in part due
to increased rental income, which in turn derived from the Bank's leasing the
second floor of one of its branches in late 2000 following an extensive
remodeling.
The Company's strategic plan incorporates non-interest income
representing a greater percentage of total revenue. The Company intends to
pursue increased non-interest income in future quarters through:
o seeking additional remote ATM sites
o further increases in the portfolio of transaction accounts
o the continued sale of Internet banking with electronic bill payment
o the continued marketing of debit cards and the possible introduction of
corporate credit cards for the Company's commercial customers
However, no assurance can be provided regarding the amount of or trends in the
Company's future levels and composition of non-interest income.
40
Non-interest Expense
Non-interest expense increased from $3.3 million during the first
quarter of 2000 to $3.8 million during the first quarter of 2001 primarily due
to $408 thousand in operating costs during the first quarter of 2001 associated
with the computer systems conversion. These operating costs included
deconversion charges from the service bureau, travel and training costs for Bank
employees, printing and postage for additional customer mailings, and consultant
fees. The Company anticipates a lower level of similar expenses during the
second quarter of 2001, as the new primary computer system is complemented with
other new technologies.
The Company's efficiency ratio during the first quarter of 2001 was
71.22%, comparing unfavorably to 66.82% during the first quarter of 2000.
Without the operating costs associated with the computer systems conversion, the
first quarter 2001 efficiency ratio would have been 63.65%.
Compensation and employee benefits expense increased from $1.5 million
during the quarter ended March 31, 2000 to $1.7 million during the three months
ended March 31, 2001. During the past year, the Company has replaced the
majority of its management team, with greater compensation costs, including
relocation expenses, required to attract and retain the veteran commercial
bankers viewed an integral to the Company's transformation into a community
commercial bank. The Company has also attracted additional lending, credit
management, and financial professionals over the past year. Compensation and
employee benefits expense during the first quarter of 2001 also reflects
employee incentive payments for accomplishing a timely and successful computer
conversion and for additional overtime payments necessitated by the conversion.
Legal and accounting expenses during the first quarter of 2001 were
impacted by significant legal costs associated with the pending arbitration of
claims by the former President & Chief Operating Officer regarding payments due
under his employment contracts. The Company anticipates incurring additional
legal costs in this regard during the second quarter of 2001. The Company has
unsuccessfully attempted to settle this matter. Accounting expenses are
projected to decline during the second half of 2001, as the Company has retained
a new, more cost effective, but also highly experienced firm to perform selected
internal audit services.
The Company spent a historically small sum on advertising and promotion
during the first quarter of 2001, as management determined to minimize such
expenses in light of the significant changes in financial products and pricing
implemented with the new core processing system in March, 2001. The Company
anticipates higher levels of advertising and promotion expenses during the
remainder of 2001.
In conjunction with the computer systems conversion, the Company
implemented a series of operational changes designed to improve future
efficiency ratios. For example, the generation of periodic statements for
certificates of deposit was curtailed after being identified as an expense with
comparatively little value to customers in an age of instant telephone and
Internet access to account balances. However, consistent with its desire to be
regarded as a high service community financial institution supporting
relationship banking, the Company continues to offer monthly statements for
certificates of deposit in conjunction with its "combined statement" facility
for transaction account customers.
Director expenses are projected to decline in the latter half of 2001
due to a smaller number of Board members and the final expense recognition for
the Directors Emeritus Plan during the second quarter. During the first quarter
of 2001, the Company commenced Internet based supplies ordering with a lower
cost, more efficient vendor. Despite these and other initiatives in reducing
operating costs, no assurance can be provided that the Company's efficiency
ratio will improve in future quarters or that the Company's level of
non-interest expenses will decrease in the future on a nominal or relative basis
(e.g. as a percentage of average total assets).
Income Taxes
Income tax expense declined in 2001 versus 2000 primarily due to
reduced pre-tax income. The Company's effective book tax rate during the first
three months of 2001 was slightly lower than for the comparable period in 2000.
41
Item 3. Quantitative And Qualitative Disclosures About Market Risk
For a current discussion of the nature of market risk exposures, see
"Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - Interest Rate Risk Management And Exposure". Readers should also
refer to the quantitative and qualitative disclosures (consisting primarily of
interest rate risk) in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000. There has been no significant change in these
disclosures since the filing of that document.
PART II - OTHER INFORMATION
Item 1. 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.
The Company has an initial arbitration date established in June, 2001
to address claims by the former President and Chief Operating Officer
regarding payments due under his employment contracts. In the third
quarter of 2000, the Company established a $250 thousand reserve for
the settlement of these claims. At this time, the Company, following
consultation with counsel, believes this reserve to be adequate to
cover its liabilities in this regard.
Item 2. Changes In Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission Of Matters To A Vote Of Security Holders
On April 16, 2001, the Company issued its 2001 annual Proxy Statement.
Matters submitted to a vote of security holders via that Proxy
Statement included:
1.) the proposed election of five individuals as Directors of the Company:
Proposed Term
Individual To Expire
--------------------------------- ----------------------
Josiah T. Austin 2003
Edward K. Banks 2004
Nicholas C. Biase 2004
Larry A. Daniels 2002
C. Edward Holden 2004
2.) the proposed ratification of the appointment of Deloitte & Touche LLP
as the independent auditors of the Company for the fiscal year ending
December 31, 2001
The Company's annual meeting is scheduled for Thursday, May 24, 2001 at
9:00 AM Pacific Time at the Watsonville Women's Club, 12 Brennan
Street, Watsonville, CA. 95076.
42
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
A. Exhibits
10.18 Employment Agreement With C. Edward Holden
10.19 Employment Agreement With Mark R. Andino
B. Reports On Form 8-K
The Company has recently filed the following Current Reports
on Form 8-K:
1. Form 8-K dated February 8, 2001. This Current Report
reported the Company's results for the fourth quarter
and the fiscal year 2000, the addition of a new
member of the senior management team for the
Company's subsidiary, Monterey Bay Bank, the
appointment of Larry A. Daniels to the Company's
Board of Directors, the date for the 2001 annual
meeting of stockholders, and the record date for
voting at the 2001 annual meeting of stockholders.
2. Form 8-K dated May 2, 2001. This Current Report
reported the Company's results for the first quarter
of fiscal year 2001, the completion of a computer
systems conversion, the collection in full in April
2001 of two significant non-accrual loans, and the
pending arbitration of claims by a former executive.
3. Form 8-K / A dated May 3, 2001. This Current Report
contained one minor correction to the Form 8-K dated
May 2, 2001.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act Of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONTEREY BAY BANCORP, INC.
(Registrant)
Date: May 14, 2001 By: /s/ C. Edward Holden
C. Edward Holden
Chief Executive Officer
President
Vice Chairman
Date: May 14, 2001 By: /s/ Mark R. Andino
Mark R. Andino
Chief Financial Officer
(Principal Financial & Accounting
Officer)
44