UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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: 3,485,864 shares of common
stock, par value $0.01 per share, were outstanding as of August 7, 2002.
1
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements Of Financial Condition (unaudited)
As Of June 30, 2002 And December 31, 2001 3-4
Condensed Consolidated Statements Of Income (unaudited) For The
Three And Six Months Ended June 30, 2002 And June 30, 2001 5-6
Condensed Consolidated Statement Of Stockholders' Equity (unaudited)
For The Six Months Ended June 30, 2002 7
Condensed Consolidated Statements Of Cash Flows (unaudited) For The
Six Months Ended June 30, 2002 And June 30, 2001 8-9
Notes To Condensed Consolidated Financial Statements (unaudited) 10-15
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 16-52
Item 3. Quantitative And Qualitative Disclosure About Market Risk 52
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 52
Item 2. Changes In Securities 52
Item 3. Defaults Upon Senior Securities 52
Item 4. Submission Of Matters To A Vote Of Security Holders 53
Item 5. Other Information 53
Item 6. Exhibits And Reports On Form 8-K 53
(a) Exhibits
(b) Reports On Form 8-K
Signature Page 54
2
Item 1. Financial Statements
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
JUNE 30, 2002 AND DECEMBER 31, 2001
(Dollars In Thousands)
------------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
-------- --------
ASSETS
Cash and cash equivalents $ 10,423 $ 13,079
Securities available for sale, at estimated fair value:
Investment securities (amortized cost of $7,713 and $7,707 at
June 30, 2002 and December 31, 2001, respectively) 7,240 7,300
Mortgage backed securities (amortized cost of $42,112 and $30,358 at
June 30, 2002 and December 31, 2001, respectively) 42,553 30,644
Loans held for sale, at lower of cost or market 480 713
Loans receivable held for investment (net of allowances for loan losses of
$7,343 at June 30, 2002 and $6,665 at December 31, 2001) 482,790 465,887
Investment in capital stock of the Federal Home Loan Bank, at cost 3,302 2,998
Accrued interest receivable 2,955 2,915
Premises and equipment, net 7,387 7,618
Core deposit intangibles, net 1,174 1,514
Other assets 4,451 4,723
-------- --------
TOTAL ASSETS $562,755 $537,391
======== ========
See Notes to Condensed Consolidated Financial Statements
3
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (Continued)
JUNE 30, 2002 AND DECEMBER 31, 2001
(Dollars In Thousands)
-------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non-interest bearing demand deposits $ 21,897 $ 21,062
Interest bearing NOW checking accounts 46,514 42,557
Savings deposits 18,301 19,127
Money market deposits 109,871 105,828
Certificates of deposit 257,687 243,765
--------- ---------
Total deposits 454,270 432,339
--------- ---------
Advances from the Federal Home Loan Bank and other borrowings 53,775 53,800
Accounts payable and other liabilities 1,164 1,090
--------- ---------
Total liabilities 509,209 487,229
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued -- --
Common stock, $0.01 par value, 9,000,000 shares authorized;
4,492,085 issued at June 30, 2002 and December 31, 2001;
3,491,031 outstanding at June 30, 2002 and
3,456,097 outstanding at December 31, 2001 45 45
Additional paid-in capital 28,922 28,584
Retained earnings, substantially restricted 39,026 36,473
Unallocated ESOP shares (575) (690)
Treasury shares designated for compensation plans, at cost (15,436 shares
at June 30, 2002 and 17,969 shares at December 31, 2001) (148) (173)
Treasury stock, at cost (1,001,054 shares at June 30, 2002 and
1,035,988 shares at December 31, 2001) (13,705) (14,006)
Accumulated other comprehensive loss, net of taxes (19) (71)
--------- ---------
Total stockholders' equity 53,546 50,162
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 562,755 $ 537,391
========= =========
See Notes to Condensed Consolidated Financial Statements
4
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Dollars In Thousands, Except Per Share Amounts)
------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 8,435 $ 8,779 $16,749 $17,667
Mortgage backed securities 328 675 640 1,483
Investment securities and cash equivalents 128 256 257 555
------- ------- ------- -------
Total interest and dividend income 8,891 9,710 17,646 19,705
------- ------- ------- -------
INTEREST EXPENSE:
Deposit accounts 2,693 4,355 5,506 9,040
Advances from the FHLB and other borrowings 635 582 1,227 1,140
------- ------- ------- -------
Total interest expense 3,328 4,937 6,733 10,180
------- ------- ------- -------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 5,563 4,773 10,913 9,525
PROVISION FOR LOAN LOSSES 385 300 710 800
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,178 4,473 10,203 8,725
------- ------- ------- -------
NON-INTEREST INCOME:
Customer service charges 392 473 742 882
Gain on sale of mortgage backed securities -- -- 43 34
Commissions from sales of noninsured products 34 71 75 188
Gain on sale of loans 21 24 48 29
Income from loan servicing 14 41 29 43
Other income 42 86 78 163
------- ------- ------- -------
Total non-interest income 503 695 1,015 1,339
------- ------- ------- -------
See Notes to Condensed Consolidated Financial Statements
5
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Dollars In Thousands, Except Per Share Amounts)
----------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ -------------------
2002 2001 2002 2001
------ ------ ------ ------
NON-INTEREST EXPENSE:
Compensation and employee benefits 1,832 1,655 3,737 3,313
Occupancy and equipment 410 432 834 782
Deposit insurance premiums 51 49 102 98
Data processing fees 141 170 277 612
Legal and accounting expenses 102 267 221 451
Supplies, postage, telephone, and office expenses 179 162 347 352
Advertising and promotion 69 27 145 57
Amortization of intangible assets 170 170 341 341
Consulting 21 63 43 306
Other expense 429 525 823 1,051
------ ------ ------ ------
Total non-interest expense 3,404 3,520 6,870 7,363
------ ------ ------ ------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,277 1,648 4,348 2,701
PROVISION FOR INCOME TAXES 930 699 1,795 1,150
------ ------ ------ ------
NET INCOME $1,347 $ 949 $2,553 $1,551
====== ====== ====== ======
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.40 $ 0.29 $ 0.76 $ 0.48
====== ====== ====== ======
DILUTED EARNINGS PER SHARE $ 0.38 $ 0.29 $ 0.73 $ 0.47
====== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements
6
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002
(Dollars And Shares In Thousands)
----------------------------------------------------------------------------------------------------------------------------------
Treasury
Shares Accum-
Designated ulated
Unal- for Other
Common Stock Additional located Compen- Compre
--------------- Paid-In Retained ESOP sation Treasury hensive
Shares Amount Capital Earnings Shares Plans Stock Loss Total
------ ------ ------- -------- ------ -------- -------- ---- ------
Balance at December 31, 2001 3,456 $45 $ 28,584 $ 36,473 $ (690) $ (173) $(14,006) $ (71) $ 50,162
Purchase of treasury stock (5) (81) (81)
Exercise of stock options 35 94 331 425
Director fees paid using treasury
stock 5 41 51 92
Amortization of stock compensation 203 115 25 343
Comprehensive income:
Net income 2,553 2,553
Other comprehensive income:
Change in net unrealized
loss on securities
available for sale, net
of taxes of $54 77 77
Reclassification
adjustment for gains on
securities available
for sale included in
income, net of taxes
of ($18) (25) (25)
------
Other comprehensive income,
net 52
------
Total comprehensive income
2,605
------
------ ------ ------- -------- ------ -------- -------- ---- ------
Balance at June 30, 2002 3,491 $ 45 $28,922 $ 39,026 $ (575) $ (148) $(13,705) $ (19) $ 53,546
====== ====== ======= ======== ====== ======== ======== ==== ======
See Notes to Condensed Consolidated Financial Statements
7
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Dollars In Thousands)
---------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,553 $ 1,551
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 359 291
Amortization of intangible assets 341 341
Amortization of purchase premiums, net of accretion of discounts 497 3
Amortization of deferred loan fees and costs, net (115) (113)
Provision for loan losses 710 800
Federal Home Loan Bank stock dividends (88) (97)
Gross ESOP expense before dividends received on unallocated shares 308 194
Compensation expense associated with stock compensation plans 37 60
Director retainer fees paid in stock 92 120
Gain on sale of mortgage backed securities (43) (34)
Gain on sale of loans held for sale (48) (29)
Loss (gain) on sale of fixed assets 11 (9)
Origination of loans held for sale (5,702) (4,388)
Proceeds from sales of loans held for sale 5,983 4,034
Increase in accrued interest receivable (40) (225)
Decrease (increase) in other assets 272 (870)
Increase (decrease) in accounts payable and other liabilities 74 (435)
Other, net (646) (920)
-------- --------
Net cash provided by operating activities 4,555 274
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans held for investment (16,903) (49,308)
Purchases of investment securities available for sale (4,854) --
Proceeds from maturities of investment securities available for sale 4,850 --
Purchases of mortgage backed securities available for sale (32,462) (14,424)
Principal repayments on mortgage backed securities available for sale 17,633 16,712
Proceeds from sales of mortgage backed securities available for sale 2,732 2,907
Purchases of Federal Home Loan Bank stock (216) --
Proceeds from the sale of premises and equipment -- 9
Purchases of premises and equipment (139) (777)
-------- --------
Net cash used in investing activities (29,359) (44,881)
-------- --------
See Notes to Condensed Consolidated Financial Statements
8
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Dollars In Thousands)
-------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
2002 2001
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 21,931 10,551
Proceeds (repayments) of Federal Home Loan Bank advances, net -- 19,000
(Repayments) proceeds of other borrowings, net (25) 184
Purchases of treasury stock (81) --
Sales of treasury stock for exercise of stock options 323 863
-------- --------
Net cash provided by financing activities 22,148 30,598
-------- --------
NET DECREASE IN CASH & CASH EQUIVALENTS (2,656) (14,009)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,079 25,159
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 10,423 $ 11,150
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest on deposits and borrowings $ 6,480 $ 10,131
Income taxes $ 1,500 $ 2,000
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES
Loan transferred to held for investment, at market value -- 85
See Notes to Condensed Consolidated Financial Statements
9
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1: Basis Of Presentation
The accompanying condensed 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 and six month periods ended June 30, 2002 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 incorporated in the State of
Delaware and 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 businesses. All
significant intercompany transactions and balances have been eliminated.
Monterey Bay Bancorp, Inc. operates as a single business segment.
Consequently, no segment information is provided in this Form 10-Q.
These unaudited condensed 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 the 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, 2001 included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
The preparation of the condensed 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 CONDENSED 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 and six month periods ended June 30, 2002 and
2001 is reconciled in the following table. The following table also presents the
calculation of the Company's Basic EPS and Diluted EPS for the periods
indicated.
For The Three Months For The Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
(In Whole Dollars And Whole Shares)
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 1,347,000 $ 949,000 $ 2,553,000 $ 1,551,000
=========== =========== =========== ===========
Average shares issued 4,492,085 4,492,085 4,492,085 4,492,085
Less weighted average:
Uncommitted ESOP shares (94,336) (130,273) (98,828) (134,766)
Non-vested stock award shares (16,474) (30,348) (16,774) (31,981)
Treasury shares (1,005,587) (1,069,461) (1,014,445) (1,080,716)
----------- ----------- ----------- -----------
Sub-total (1,116,397) (1,230,082) (1,130,047) (1,247,463)
----------- ----------- ----------- -----------
Weighted average BASIC shares outstanding 3,375,688 3,262,003 3,362,038 3,244,622
Add dilutive effect of:
Stock options 131,944 38,175 123,739 42,452
Stock awards 1,549 417 1,457 503
----------- ----------- ----------- -----------
Sub-total 133,493 38,592 125,196 42,955
----------- ----------- ----------- -----------
Weighted average DILUTED shares outstanding 3,509,181 3,300,595 3,487,234 3,287,577
=========== =========== =========== ===========
Earnings per share:
BASIC $ 0.40 $ 0.29 $ 0.76 $ 0.48
=========== =========== =========== ===========
DILUTED $ 0.38 $ 0.29 $ 0.73 $ 0.47
=========== =========== =========== ===========
11
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 3: Other Comprehensive Income
The Company's only current 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 included in other
comprehensive income for investment and mortgage backed securities classified as
available for sale for the three and six month periods ended June 30, 2002 and
2001 are summarized as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars In Thousands)
Gross reclassification adjustment $ -- $ -- $ 43 $ 34
Tax expense -- -- (18) (14)
----- ----- ----- -----
Reclassification adjustment, net of tax $ -- $ -- $ 25 $ 20
===== ===== ===== =====
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 Six Months Ended
June 30, June 30,
-------------------- ---------------------
2002 2001 2002 2001
----- ----- ----- -----
(Dollars In Thousands)
Holding gain arising during the period, net of tax $ 136 $ 186 $ 77 $ 465
Reclassification adjustment, net of tax -- -- (25) (20)
----- ----- ----- -----
Net unrealized gain recognized in
other comprehensive income $ 136 $ 186 $ 52 $ 445
===== ===== ===== =====
12
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED 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 in certain instances. 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, 2001 757,929 425,104 255,224 195,761 137,064 $ 10.88
March 31, 2002 757,929 390,999 238,390 225,566 141,364 $ 11.07
June 30, 2002 757,929 386,174 249,915 230,391 141,364 $ 11.06
Activity during the three and six months ended June 30, 2002 included:
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------- -------------
Granted -- 5,500
Canceled -- 9,800
Exercised 4,825 34,630
Vested 16,350 29,321
The exercise price of individual vested stock options ranged from a low
of $8.19 per share to a high of $16.60 per share as of June 30, 2002.
13
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 5: Stock Award Plan
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 in certain instances the Company has utilized unallocated
or forfeited PEP shares for immediately vested stock grants in lieu of cash
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. Compensation expense related to the PEP for the six
months ended June 30, 2002 and 2001 was $37 thousand and $60 thousand. The
following table summarizes the status of this plan:
Stock Stock
Awards Stock Awards
Stock Outstanding Awards Available
Awards And Not Cumulatively For Future
Date Authorized Vested Vested Grants
---- ---------- ------ ------ ------
December 31, 2001 141,677 17,969 123,708 --
March 31, 2002 141,677 16,486 125,191 --
June 30, 2002 141,677 15,436 126,241 --
Activity during the three and six months ended June 30, 2002 included:
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------- -------------
Granted -- --
Canceled -- --
Vested 1,050 2,533
14
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 6: Commitments & Contingencies
At June 30, 2002, commitments maintained by the Company included firm
commitments to originate $31.7 million in various types of loans, and optional
commitments to sell $1.9 million 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 June 30,
2002.
NOTE 7: Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 rescinds and amends these Statements to
eliminate any inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The Company adopted SFAS No. 145 as of April 1, 2002. The
adoption did not have a significant impact on the Company's financial position,
results of operations, or cash flows. SFAS No. 145 confirms that gains or losses
from normal extinguishments of debt, such as prepayments of Federal Home Loan
Bank advances in conjunction with the Company's interest rate risk management
program, need not be classified as extraordinary items.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company
will adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost was recognized at the
date of the Company's commitment to an exit plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at fair value.
Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
NOTE 8: Reclassifications
Certain amounts in the December 31, 2001 and June 30, 2001 financial
statements have been reclassified to conform to the June 30, 2002 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", "plan",
"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, opportunities
and expectations regarding technologies, anticipated performance or
contributions from new and existing employees, projections of future
performance, potential future credit experience, possible changes in laws and
regulations, potential risks and benefits arising from the implementation of the
Company's strategic and tactical plans, perceived opportunities in the market,
potential actions of significant stockholders and investment banking firms, 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, attracting and retaining key personnel,
performance of new employees, regulatory actions, changes in and utilization of
new technologies, consumer and business response to news events or economic
trends, 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, 2001. 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.
Availability Of Information
This Report on Form 10-Q is available at the following Internet sites:
o www.sec.gov
o www.montereybaybank.com
Additional corporate information regarding Monterey Bay Bancorp, Inc. and
Monterey Bay Bank is also available at the www.montereybaybank.com Internet
site. This Internet site is not a part of this Report on Form 10-Q.
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.
16
At June 30, 2002, the Company had $562.8 million in total assets,
$483.3 million in net loans receivable, and $454.3 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 full service branch offices in
its primary market area in Central California, one loan production office in Los
Angeles, 11 automated teller machines ("ATM's") including two stand-alone ATM's,
and its administrative facilities in Watsonville, California. 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 in
assisting individuals, families, community organizations, and businesses in
attaining their financial objectives. 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, term, universal, and whole life insurance and a large selection of
non-FDIC insured investment products including fixed and variable annuities,
mutual funds, and individual securities.
The Company's revenues are primarily derived from interest on its loan
and mortgage backed securities portfolios, interest and dividends on its
investment securities, and fee income associated with the provision of various
customer services. Interest paid on deposits and borrowings typically
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.
Critical Accounting Policies
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The Company's significant accounting policies are presented in Note 1
to the Consolidated Financial Statements contained in the Company's 2001 Annual
Report on Form 10-K. The Company follows accounting policies typical to the
community commercial banking industry and in compliance with various regulations
and guidelines as established by the Financial Accounting Standards Board
("FASB") and the Bank's primary federal regulator, the OTS.
The Company's most significant management accounting estimate is the
appropriate level for the allowance for loan losses. The Company follows a
methodology for calculating the appropriate level for the allowance for loan
losses. However, various factors, many of which are beyond the control of the
Company, could lead to significant revisions in the amount of allowance for loan
losses in future periods, with a corresponding impact upon the results of
operations. In addition, the calculation of the allowance for loan losses is by
nature inexact, as the allowance represents Management's best estimate of the
loan losses inherent in the Company's credit portfolios at the reporting date.
These loan losses will occur in the future, and as such cannot be determined
with absolute certainty at the reporting date. Please see also "Asset Quality /
Credit Profile - Allowance For Loan Losses".
Other estimates that the Company utilizes in its accounting include the
expected useful lives of depreciable assets, such as buildings, building
improvements, equipment, and furniture. The useful lives of various technology
related hardware and software can be subject to change due to advances in
technology and the general adoption of new standards for technology or
interfaces among computer or telecommunication systems.
17
The Company applies Accounting Principles Board ("APB") Opinion No. 25
and related interpretations in accounting for stock options. Under APB No. 25,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock at the date of grant over the amount
the employee or director must pay to acquire the stock. Because the Company's
stock option Plans provide for the issuance of options at a price of no less
than the fair market value at the date of grant, no compensation cost is
required to be recognized for the stock option Plans.
Had compensation costs for the stock option Plans been determined based
upon the fair value at the date of grant consistent with SFAS No. 123,
"Accounting For Stock Based Compensation", the Company's net income and earnings
per share would have been reduced. The amount of the reduction for the fiscal
years 1999 through 2001 is disclosed in Note 18 to the Consolidated Financial
Statements contained in the 2001 Annual Report on Form 10-K, based upon the
assumptions listed therein.
GAAP itself may change over time, impacting the reporting of the
Company's financial activity. Although the economic substance of the Company's
transactions would not change, alterations in GAAP could affect the timing or
manner of accounting or reporting.
Recent Developments
Recent regulatory, financial industry, and other developments have
included the following:
o On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. This new legislation addresses accounting oversight and corporate
governance. The new law creates a five member oversight board appointed by
the Securities & Exchange Commission ("SEC") that will set standards for
accountants and have investigative and disciplinary powers. The new
legislation prohibits accounting firms from providing various types of
consulting services to public attest clients and requires accounting firms
to rotate partners among public client assignments every five years. The
new legislation also increases penalties for financial crimes, requires
expanded disclosure of corporate operations and internal controls, enhances
controls on and reporting of insider trading, expands the SEC's budget, and
places statutory separations between investment bankers and analysts.
Various aspects of the new legislation are dependent upon subsequent
rulemaking by the SEC. Management is currently evaluating what impacts the
new legislation will have upon the Company. The Company currently utilizes
its external attestation auditor only for audit services and assistance
with the preparation of income tax returns.
o Federal legislation reforming the bankruptcy code remains in conference
between the House of Representatives and the Senate. This legislation,
depending upon its final form, if any, could potentially assist the Bank in
collecting on certain credits.
o Congress continues to debate lifting restrictions on the payment of
interest on business checking accounts and easing restrictions on the
number of certain transactions for MMDA accounts at insured depository
institutions. The potential payment of interest on sterile reserves at the
Federal Reserve banks is also being considered. Depending on the nature of
such changes eventually approved, if any, there could be various favorable
and / or unfavorable impacts upon the Company.
18
o The new capital plan of the FHLB-San Francisco has been approved by the
Federal Housing Finance Board. The FHLB-SF has not yet established an
implementation date for the new capital plan, with such implementation
required by June 2005. The Bank will receive at least 240 days' written
notice of the implementation date. The new capital plan incorporates a
single class of stock and requires each member to own stock in amount equal
to the greater of: a) a membership stock requirement, or b) an activity
based stock requirement. The new capital stock is redeemable on five years'
written notice, subject to certain conditions. The Company does not believe
that the initial implementation of the FHLB-SF new capital plan as most
recently communicated by the FHLB-SF will have a material impact upon the
Company's financial condition, cash flows, or results of operations.
However, latitude for the FHLB-SF included within the new capital plan
could result in the Bank's being required to purchase as much as 50%
additional capital stock or sell as much as 50% of its proposed capital
stock requirement at the discretion of the FHLB-SF.
o A possible increase in (e.g. from $100,000 to $130,000 per depositor, or
special limits for retirement accounts) or broadening of (e.g. higher
limits for public agency deposits) federal deposit insurance coverage,
which may be combined with a new formula for FDIC insurance premiums, is
under evaluation at the FDIC and in Congress. Congress also continues to
discuss the potential merger of the Bank Insurance Fund ("BIF") and Savings
Association Insurance Fund ("SAIF") of the FDIC.
o The US House of Representatives is considering a regulatory relief bill for
the financial services industry. Similar legislative action has not
proceeded in the Senate.
o The State of California is facing a significant budget deficit. The
potential imposition of new fees or taxes or higher tax rates by the State
of California could impact the Company's business and earnings. The
possible suspension, curtailment, or elimination of various State programs
could also affect the Company. The State of California legislature and
governor as of late July had not yet adopted a budget for the current State
fiscal year. The Company is unable to predict what, if any, actions might
be taken by the State of California and the possible impact of those
actions upon the Company's consolidated financial condition or results of
operations.
Overview Of Business Activity
During the second quarter and first half of 2002, the Company continued
the implementation of its strategic plan of transforming the Bank from a 77 year
old savings & loan into a community focused commercial bank serving the
financial needs of individuals, families, organizations, and businesses. The
Bank focuses on building longstanding customer relationships, investing the time
and energy to get to know customers well and understand their financial
objectives. Another key aspect of the Company's transformation strategy is a
significant increase in the community involvement and contributions made by the
Bank, its Directors, and its employees. These efforts are facilitated by the
Bank's Director of Community Relations. The Company seeks to differentiate
itself from its competition through various means, particularly by providing a
superior level of customer service.
19
Key accomplishments during the second quarter of 2002 included:
o record quarterly net income of $1.35 million and diluted earnings per share
of $0.38
o the attainment of record levels of total assets, loans, deposits, and
stockholders' equity at June 30, 2002
o progress in shifting the composition of the loan portfolio
o net interest income rose versus the same period during the prior year, due
to both a larger average balance sheet fueled by increased deposits and
loans and due to expanded spreads resulting from the planned change in
balance sheet composition
o a further improvement in the Company's efficiency ratio, to 56.12% for the
three months ended June 30, 2002
o continued maintenance of favorable credit quality as measured by net
charge-offs, although a rise in non-accrual loans (all real estate secured)
was experienced
o increases in local commercial banking business
o a continuation of the Bank's quality customer service program, with
periodic measurement provided by "mystery shoppers" and customer surveys,
and branch staff performance directly integrated into incentive
compensation plans
o significant business generation from the Los Angeles loan production office
which opened during the first quarter of 2002
o concluding the second quarter with a strong loan pipeline
The Company has realized certain operating efficiencies from the new
technology environment implemented and better optimized over the past 15 months.
Additionally, the favorable credit quality experienced during the first half of
2002 allowed the Company to avoid significant operating costs for collections
and foreclosures. The Company's commitment to quality customer service will be
exemplified during the third quarter of 2002, when telecommunications network
upgrades speed transaction processing for both deposits and new account
openings.
The Company continued its focus on stockholder value during the first
half of 2002, increasing its tangible book value per share from $14.08 at
December 31, 2001 to $14.48 at March 31, 2002 to $15.00 at June 30, 2002.
Coverage of the Company by a second equity analyst was obtained during the
second quarter, and Management is pursuing coverage by a third equity analyst to
begin during the third quarter of 2002. The Company has also added additional
market makers in the past year to facilitate the liquidity of its common stock.
The Company's Directors continue to be paid their retainer fees in Company
common stock, and stock-based compensation is a significant component of
Management compensation.
At June 30, 2002, there were 109,035 remaining shares authorized for
repurchase under the Company's current stock repurchase program. The Company
repurchased 10,000 shares in early August 2002 at prices ranging from $17.10 to
$17.25 per share, and intends to continue pursuing opportunities to repurchase
additional shares during the third quarter of 2002.
The Company's Directors and Officers have continued to be net
purchasers of the Company's common stock during 2002. For example, in late July
and early August 2002, the Company's Chief Executive Officer and Chief Financial
Officer purchased an additional 1,000 and 500 shares, respectively, adding to
their investment in the Company.
20
Similar to its practice in 2001, the Company intends to pursue
opportunities to utilize stock based compensation in lieu of certain cash
compensation in 2002 as a means of aligning employee interests with improvements
in stockholder value. In addition, a significant number of the Bank's employees
have an ownership interest in the Company, through one or more of the following:
o direct stock purchases
o the Employee Stock Ownership Plan ("ESOP")
o incentive stock options
o stock grant awards
o stock purchased with funds contributed by employees to the Bank's 401(k)
Plan
The Board of Directors and Management have targeted the transformation
strategy into a community focused commercial bank based on their belief that
this approach presents the best current opportunity to enhance long term
stockholder value. The Company maintains an active relationship with its
investment banker in monitoring potential opportunities to augment stockholder
value, such as via the cost effective acquisition of additional branches from
other financial institutions.
The Company's strategic plan envisions a greater amount of income
property, construction, and business lending funded with a higher percentage of
transaction deposit accounts. The strategic plan also includes improvements in
the Company's efficiency ratio and return on stockholders' equity, two key
measures of financial performance where the Company has lagged high performing
peer institutions. However, the pace of the Company's conversion from a savings
& loan into a locally focused community bank will be impacted in coming quarters
by multiple factors, many of which are outside the Company's control, including
the strength of the California and national economies, competition, regulatory
and legislative changes, and trends in real estate values. The State of
California budget deficit could also unfavorably impact the Company and / or
slow its strategic transformation. The strategy being pursued by the Company
also presents various types of tactical implementation risks. The Bank is under
no immediate pressure to pursue a change in charter at this time, as its
Qualified Thrift Lender ("QTL") ratio was 73.8% at June 30, 2002, compared to a
minimum requirement of 65.0% to retain its federal thrift charter.
Changes In Financial Condition From December 31, 2001 To June 30, 2002
Total assets increased $25.4 million (4.7%) from $537.4 million at
December 31, 2001 to a record $562.8 million at June 30, 2002.
Cash & cash equivalents decreased from $13.1 million at December 31,
2001 to $10.4 million at June 30, 2002 due to the Company's using cash & cash
equivalents to fund expansions in the security and loan portfolios.
21
Securities
At June 30, 2002, the Company owned no corporate bonds issued by
WorldCom, Enron, or any other companies primarily in the telecommunications,
technology, or energy industries.
Investment securities available for sale were little changed during the
first six months of 2002, totaling $7.3 million at December 31, 2001 and $7.2
million at June 30, 2002. At both these dates, the Company's investment security
portfolio was identically composed of two floating rate corporate trust
preferred bonds rated "A" and "A-" by Standard & Poors at June 30, 2002. These
corporate trust preferred securities are issued by large US financial
institutions. The slight decrease in balance during 2002 resulted from the mark
to market adjustment for available for sale securities, which reflects increased
credit spreads and reduced demand for long term corporate bonds repricing based
upon three month LIBOR.
The average balance of investment securities during the first half of
2002 was increased by the purchase of Agency debentures which had been called
for redemption by the issuer. The Company acquired these bonds, which typically
have a remaining term of ten to fourteen days, as a higher yielding alternative
to federal funds sold, repurchase agreements, and other short term investments.
The Company owned no Agency debentures at June 30, 2002.
Mortgage backed securities available for sale increased from $30.6
million at December 31, 2001 to $42.6 million at June 30, 2002. The Company
purchased relatively low duration Agency and private label, AAA rated
collateralized mortgage obligations ("CMO's") during the first half of 2002 to
serve as collateral for certain deposits and to invest available liquidity. The
low duration was targeted in conjunction with the Company's asset / liability
management program and in order to provide cash flows later in the year to fund
anticipated loan production. Management anticipates a reduction in mortgage
backed securities during the third quarter of 2002, as proceeds from sales,
scheduled amortization, and prepayments are utilized to fund the loan pipeline
maintained by the Company at June 30, 2002.
During the first quarter of 2002, the Company sold a somewhat higher
duration private label CMO with $2.7 million in par value in conjunction with
its interest rate risk management program. In early July 2002, the Company sold
an Agency CMO with $2.0 million in par value to further moderate its net
liability sensitivity (see Interest Rate Risk Management And Exposure). The vast
majority of the Company's mortgage backed securities at June 30, 2002 were
relatively low duration bonds, and all of the Company's mortgage backed
securities at July 31, 2002 passed the Federal Financial Institutions
Examination Council ("FFIEC") test for volatility. Management believes that
allocating asset duration to new loans versus securities facilitates better
community support and derives a higher yield for the same level of exposure to
future increases in general market interest rates.
Loans
Loans held for sale totaled $480 thousand at June 30, 2002, down from
$713 thousand at December 31, 2001. The Company sells most of its long term,
fixed rate residential mortgage production into the secondary market on a
servicing released basis, and purchases more interest rate sensitive loans as
part of its interest rate risk management program. All loans held for sale at
June 30, 2002 were matched with optional commitments to deliver such loans into
the secondary market.
Loans held for investment, net, increased from $465.9 million at
December 31, 2001 to a record $482.8 million at June 30, 2002. The increase
resulted from a combination of strong internal loan originations and from
purchases of, or participations in, individual income property and construction
loans from correspondent banks. The Company follows its customary underwriting
policies in evaluating loan purchases and participations.
22
The Company opened its Los Angeles loan production office during the
first quarter of 2002. This office concentrates on relationship based lending to
local real estate investors and developers, with a particular emphasis on income
property and construction lending. The Los Angeles loan production office ended
the second quarter of 2002 with a significant loan pipeline, fueled by the local
market knowledge of the Company's lending staff and by the relative strength of
the economy and real estate markets in southern California.
Total net loans as a percentage of total assets were 85.9% at June 30,
2002. The Company has targeted increasing this ratio to 90.0% as part of its
strategy of supporting its interest margin, fostering economic activity in its
local communities, and effectively utilizing the Bank's capital.
The loan portfolio product mix shifted during the first half of 2002 in
conformity with the Company's strategic plan. Residential one to four unit loans
declined from 42.3% of gross loans at December 31, 2001 to 38.1% of gross loans
at June 30, 2002. In contrast, construction loans increased from 7.9% to 9.7%,
land loans increased from 2.5% to 3.7%, commercial loans rose from 1.8% to 2.6%,
and consumer loans (primarily home equity lines of credit) increased from 1.4%
to 1.9%. This change in loan mix was facilitated by the commercial business
relationship officers the Company hired last year and by the Los Angeles loan
production office. To the extent economic and competitive conditions permit, the
Company plans to continue decreasing the percentage of its loan portfolio
allocated to residential mortgages in favor of other generally higher yielding
and more interest rate sensitive types of loans.
Management anticipates for the third quarter of 2002:
o a further rise in loans outstanding and total assets, as the Company
intends to continue expanding the balance sheet throughout 2002 to more
extensively meet the credit needs of its customers and local communities
o an increase in the ratio of loans to assets
o residential mortgages comprising a smaller percentage of total gross loans
These expectations could, however, not occur due a wide range of factors,
including, but not limited to, the rate of loan prepayments spurred by the
historically low interest rate environment, with new long term, fixed rate
residential mortgages available to borrowers during July 2002 with interest
rates below 7.00%.
The Company's commercial banking group continued to produce increased
business during the first half of 2002. Commercial business loans outstanding
increased from $8.8 million at December 31, 2001 to $13.3 million at June 30,
2002. This group has also generated applications for commercial real estate
mortgages and construction loans in 2002, in addition to acquiring new deposits.
The commercial lending pipeline at June 30, 2002 pointed toward the continued
expansion of commercial banking customer relationships during the third quarter
of 2002.
23
Additional information regarding loan portfolio composition is
presented in the following table:
(Dollars In Thousands) June 30, December 31,
2002 2001
--------- ---------
Held for investment:
Loans secured by real estate:
Residential one to four unit $ 192,551 $ 204,829
Multifamily five or more units 112,024 103,854
Commercial and industrial 110,276 109,988
Construction 49,117 38,522
Land 18,692 11,924
--------- ---------
Sub-total loans secured by real estate 482,660 469,117
Other loans:
Home equity lines of credit 9,266 6,608
Loans secured by deposits 295 202
Consumer lines of credit, unsecured 150 170
Commercial term loans 4,632 3,163
Commercial lines of credit 8,645 5,680
--------- ---------
Sub-total other loans 22,988 15,823
Sub-total gross loans held for investment 505,648 484,940
(Less) / Plus:
Undisbursed construction loan funds (15,632) (12,621)
Unamortized purchase premiums, net of purchase discounts 596 435
Deferred loan fees and costs, net (479) (202)
Allowance for loan losses (7,343) (6,665)
--------- ---------
Loans receivable held for investment, net $ 482,790 $ 465,887
========= =========
Held for sale:
Residential one to four unit $ 480 $ 713
========= =========
FHLB Stock
The Company's investment in the capital stock of the FHLB-SF increased
from $3.0 million at December 31, 2001 to $3.3 million at June 30, 2002 due to
stock dividends and the required purchase of additional stock as a result of the
growth in the Bank's balance sheet.
Premises and Equipment
Premises and equipment, net, decreased from $7.6 million at December
31, 2001 to $7.4 million at June 30, 2002, as periodic depreciation and
amortization exceeded new purchases. Because the Company acquired significant
new hardware and software during 2001 in support of the new core processing
system, fixed asset acquisitions in 2002 are expected to be moderate. This
expectation could, however, change in the event the Company is successful in
opening a de novo branch or acquiring a branch from another financial
institution. Fixed asset requirements for the new Los Angeles loan production
office were not significant.
24
Core Deposit Intangibles
Core deposit intangibles, net, declined from $1.5 million at December
31, 2001 to $1.2 million at June 30, 2002 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.
Deposits
Deposits increased from $432.3 million at December 31, 2001 to a record
$454.3 million at June 30, 2002. The majority of this increase was associated
with the Bank's issuance of its first brokered certificate of deposit ("CD")
during the second quarter of 2002. The Bank issued the $20.0 million one year CD
on an uncollateralized basis through one of the country's largest investment
banks / securities dealers at an all-in cost of LIBOR plus 12 basis points. The
brokered CD was issued in order to provide funding for anticipated loan
production in the second and third quarters of 2002. Funds not utilized during
the second quarter of 2002 were invested in short term, low duration, high cash
flow CMO's, contributing to a $9.6 million increase in mortgage backed security
balances during the second quarter of 2002. While the Company does not intend to
become a significant issuer of brokered CD's, Management took advantage of the
opportunity due to:
o the Company's projected need for funding
o the efficiency of one relatively large issuance
o the attractiveness of the pricing
o the Company's loan to deposit ratio approaching 110%
o the one year term integrating effectively with the Company's asset /
liability management program
The Company continues to pursue increases in transaction account
balances as a fundamental component of the strategic plan. Excluding the impact
of the $20.0 million brokered CD, transaction accounts increased from 43.6% of
total deposits at December 31, 2001 to 45.3% of total deposits at June 30, 2002.
Key trends and results within the deposit portfolio during the first six months
of 2002 included:
o Non-interest bearing demand deposits increased from $21.1 million at
December 31, 2001 to $21.9 million at June 30, 2002. This rise was
supported by balances maintained by commercial banking customers and the
Company's targeting demand deposit balances as part of its sales management
program.
o Interest bearing NOW checking account balances increased from $42.6 million
at December 31, 2001 to $46.5 million at June 30, 2002. The June 30, 2002
balance was favorably impacted by several large customer deposits made as a
result of recent real estate sales. During the first half of 2002, the
Company experienced particularly aggressive advertising and price
competition for consumer NOW deposits from one large national thrift. This
thrift paid interest rates far above market and significantly in excess of
the federal funds rate. The Company has been reluctant to match these
prices, and has instead focused on competing based upon service,
convenience, flexible access (e.g. bilingual telephone banking, Internet
banking, ATM access, debit card, and in-branch service), and overall
business relationships.
o Savings deposits decreased from $19.1 million at December 31, 2001 to $18.3
million at June 30, 2002. While the Company continues to offer traditional
statement savings products, its sales focus has instead concentrated on
checking and money market accounts due to the greater features and
flexibility offered by those products.
25
o Money market deposits increased from $105.8 million at December 31, 2001 to
$109.9 million at June 30, 2002. Money market deposit balances during the
first half of 2002 were positively impacted by Bank advertising and sales
programs, and by certain customers waiting to commit funds to certificates
of deposit given the historically low interest rate environment. In
addition, during the first half of 2002, the Company offered interest rates
on its Money Market Plus product that were in excess of many money market
mutual funds and money market accounts offered through securities firms.
The Bank's sales staff was trained to highlight this differential, and to
explain the many attractive attributes of the Money Market Plus product,
including:
A. access via telephone banking, Internet banking, ATM's, bank by mail,
check writing, and in-branch service
B. extensively tiered interest rates, whereby earnings on the account
increase as each successively higher balance tier is attained
C. FDIC insurance to the maximum amount permitted by law
D. combined statement with other Bank products
E. automatic transfers and direct deposit
o Certificate of deposit balances excluding the $20.0 million brokered
certificate of deposit decreased from $243.8 million at December 31, 2001
to $237.7 million at June 30, 2002. This decline in part resulted from
certain customers delaying committing funds to fixed term, fixed rate
certificates of deposit due to the historically low interest rate
environment and from significant price competition from two large thrifts,
one local credit union, and several non-traditional competitors, including
an insurance company and a supermarket seeking customers for new consumer
banking operations. During the first half of 2002, the Company priced its
longer term (18 to 60 months) certificates of deposit attractively as part
of its asset / liability management program and to encourage the
development of longer term customer relationships. In addition, in the
second quarter of 2002, the Company conducted a print advertising campaign
for 24 to 30 month certificates of deposits that attracted some new
customers. Certificate of deposit balances during the second quarter of
2002 were also favorably affected by the receipt of an additional $3.0
million deposit from the State of California.
Demand deposit and money market deposit balances declined during the
second quarter of 2002 in part due to customers building a seasonally high
balance in these accounts at March 31 in preparation for the payment of income
and property taxes during April.
Increasing the percentage of total deposits comprised of checking,
savings, and money market accounts is integral to the Company's strategic plan,
as transaction accounts provide for a lower cost of funds versus most other
funding sources, generate fee income, furnish opportunities for cross-selling
other products and services to customers, and are typically less interest rate
sensitive than many other funding sources. The Company plans to introduce a new
suite of transaction account products near the conclusion of the third quarter
of 2002. These new products will focus on two key characteristics:
o providing customer choice and options
o promoting relationship banking
For example, the new consumer checking account products will facilitate
the customer's selection of how they wish to avoid periodic service charges and
how to earn more interest based upon their individual financial profile. Many of
the new accounts provide benefits such as free services, eliminated periodic
service charges, or higher rates of interest for building a relationship with
the Bank through multiple deposit products and combined statements. The new
products also further encourage businesses to bank with the Company, as the
principals can obtain preferred personal pricing while the business benefits
from a new business only money market account complemented with Internet
banking. The Company plans to coordinate the introduction of these new deposit
products with local radio advertisements in the third and fourth quarters of
2002.
26
The Company's ratio of loans to deposits was 106.38% at June 30, 2002,
down slightly from December 31, 2001. In light of this ratio, the Company has
implemented the following strategic and tactical actions during the first half
of 2002:
o modified staff incentive programs to more strongly focus on expanding
deposit relationships
o directed a higher percentage of the advertising and promotion budget to
deposit generation
o accepted brokered deposits
o acquired additional deposits through the State of California time deposit
program
In addition, due to the size of the loan pipeline at June 30, 2002, the Company
is exploring various strategic and tactical alternatives for further increasing
its funding base, including:
o pursuing opportunities for additional branch locations, either de novo or
acquisition of existing branches from other financial institutions
o introducing new deposit products and related services (discussed above and
targeted for September 2002)
o increased business lending with associated compensating customer deposit
balances
o relationship loan pricing for income property owners maintaining operating
accounts with the Company
o serving the depository needs of customers at the Los Angeles loan
production office in part through a correspondent banking relationship
During the first half of 2002, the Company has not, however, pursued
the offering of deposit rates substantially above market in order to avoid:
o attracting highly volatile funds
o placing pressure on the net interest margin
o decreasing focus on its relationship banking approach and commitment to
providing superior customer service
Borrowings
Borrowings were $53.8 million at December 31, 2001 and June 30, 2002.
During the second quarter of 2002, the Company prepaid a $5.0 million FHLB
advance originally scheduled to mature in July 2002 and entered into a new $5.0
million FHLB advance with a maturity date in June 2003 in conjunction with its
asset / liability management program. All of the Company's FHLB advances at June
30, 2002 were fixed rate, fixed term borrowings without call or put option
features. The next scheduled maturity of an FHLB advance is $5.0 million in
November 2002.
27
Stockholders' Equity
Total stockholders' equity increased from $50.2 million at December 31,
2001 to a record $53.5 million at June 30, 2002. Factors contributing to the
increase included:
o $2.6 million in 2002 year to date net income
o continued amortization of deferred stock compensation, including both ESOP
and PEP shares
o the ongoing payment of Director retainer fees with Company common stock
o the exercise of 34,630 vested stock options, generating $425 thousand in
additional stockholders' equity
o appreciation in the portfolio of securities classified as available for
sale
The above factors more than offset the impact of the repurchase of
5,000 shares of the Company's common stock at $16.25 per share during the first
quarter of 2002. The Company did not repurchase any shares during the second
quarter of 2002. At June 30, 2002, there were 109,035 remaining shares
authorized for repurchase under the Company's current repurchase program. The
Company repurchased 10,000 shares at prices ranging from $17.10 to $17.25 per
share in early August 2002 and plans to repurchase additional shares during the
third quarter of 2002 should market conditions be conducive. The Company did not
declare or pay any cash dividends during the first half of 2002. The Board of
Directors continues to believe that alternative uses for the Company's capital,
at this time, are more attractive than the payment of a cash dividend.
Tangible book value per share increased from $14.08 at December 31,
2001 to $15.00 at June 30, 2002.
Interest Rate Risk Management And Exposure
The table below presents an overview of the interest rate environment
during the eighteen months ended June 30, 2002. The 12 MTA 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 (1) 12/31/00 3/31/01 6/30/01 9/30/01 12/31/01 3/31/02 6/30/02
---------------- -------- ------- ------- ------- -------- ------- -------
3 month Treasury bill 5.89% 4.28% 3.65% 2.37% 1.72% 1.78% 1.68%
6 month Treasury bill 5.70% 4.13% 3.64% 2.35% 1.79% 2.10% 1.74%
2 year Treasury note 5.09% 4.18% 4.24% 2.85% 3.02% 3.72% 2.81%
5 year Treasury note 4.97% 4.56% 4.95% 3.80% 4.30% 4.84% 4.03%
10 year Treasury note 5.11% 4.92% 5.41% 4.59% 5.05% 5.40% 4.80%
Target federal funds 6.50% 5.00% 3.75% 3.00% 1.75% 1.75% 1.75%
Prime rate 9.50% 8.00% 6.75% 6.00% 4.75% 4.75% 4.75%
3 month LIBOR 6.40% 4.88% 3.84% 2.59% 1.88% 2.03% 1.86%
12 month LIBOR 6.00% 4.67% 4.18% 2.64% 2.44% 3.00% 2.29%
1 Year CMT (2) 5.60% 4.30% 3.58% 2.82% 2.22% 2.57% 2.20%
12 MTA (2) 6.11% 5.71% 5.10% 4.40% 3.48% 2.91% 2.55%
COFI (2) 5.62% 5.20% 4.50% 3.97% 3.07% 2.65% 2.85%
-----------------------------------------------------------------
(1) Indices / rates are spot values unless otherwise noted.
(2) These indices / rates are monthly averages.
28
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.
The Company has recently maintained a relatively balanced, though
slightly net liability sensitive, 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 almost the same, though slightly more,
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, beginning in early 2001, the Federal
Reserve commenced decreasing its benchmark interest rates in response to the
slowing national economy, increases in unemployment, falling equity values, weak
manufacturing activity, and other negative or unfavorable economic trends or
statistics. By the end of 2001, the Federal Reserve had cut interest rates 11
times for a total of 475 basis points, representing one of the largest and
fastest series of rate decreases ever experienced in the United States. The
Federal Reserve continued cutting interest rates throughout 2001 in part in
response to the onset of the first national economic recession in many years. In
addition to cutting interest rates, the Federal Reserve also fostered
significant expansion in the money supply, with a particular increase following
the events of September 11, 2001.
The eleven rate cuts in 2001 led to nominal levels of interest rates
that were the lowest in decades, with the target federal funds rate decreasing
to 1.75%. The Prime Rate followed the target federal funds rate down in 2001,
while the COFI and 12 MTA indices lagged the more responsive Treasury and LIBOR
rates throughout 2001 and into 2002. The low nominal level of interest rates in
effect in the latter part of 2001 and in the first half of 2002 presented a
particular challenge to the Company, as the rates on its NOW and Savings deposit
accounts were already at low levels by mid 2001 and could not be decreased to
the same extent as declines in many capital markets interest rates. The Company
addressed this issue through its asset / liability management program, whereby
decisions regarding pricing, promotion, and incentives are integrated with
tactical transactions to moderate the Company's exposure to changes in interest
rates.
Various interest rates increased in the first quarter of 2002 once the
capital markets assumed that the Federal Reserve would not continue decreasing
its benchmark interest rates. In addition, concerns about the impact of interest
rates staying at such low levels for an extended period of time began to raise
worries about potential future inflation, leading to a rise in longer term
interest rates. At the end of the first quarter of 2002, many economists were
predicting a relatively strong recovery from the US recession and were
forecasting increases of 100 basis points or more in the target federal funds
rate by the end of the year. In March 2002, the Dow Jones Industrial Average had
recovered the losses that occurred in September 2001, with the Index again
closing over 10,500. By the end of the first quarter, the Treasury curve had
become significantly steeper, with the differential between federal funds and
the 2 year Treasury Note at 197 basis points. Steep yield curves are generally
beneficial for financial institutions, including the Bank, as greater income is
derived from short term maturity mismatches and as customer demand often shifts
toward adjustable mortgages due to the rate differential between adjustable and
fixed rate loans.
29
Most interest rates reversed course and declined during the second
quarter of 2002. Among the factors leading to this reduction in interest rates
were:
o the "crisis of confidence" stemming from the restatement of financial
information by Enron, WorldCom, and other large companies
o the broad decline in equity indices during the second quarter of 2002, with
certain investors seeking relative safe harbor in US government and Agency
fixed income investments
o companies being slow to rehire despite growth in gross domestic product
o ongoing tensions in the Middle East and continued discussion of a potential
US invasion of Iraq encouraging "flight to quality" investments by certain
capital markets participants
The Treasury yield curve was flatter at June 30, 2002 than three months earlier,
with the differential between federal funds and the 2 year Treasury Note
declining from 197 basis points to 106 basis points. At mid 2002, many
economists announced their revised estimates that increases in the target
federal funds rate would be postponed until some time in the first quarter of
2003.
The analytical results of the Company's interest rate risk modeling
have been empirically validated over the past several years, as the Company's
interest margin has remained stable or expanded during periods of both rising
and falling general market interest rates. The expansion in interest margin over
the past several years has been significantly impacted by the implementation of
the Company's strategic plan, in addition to being influenced by the interest
rate environment.
The Company plans 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 six months of 2002,
the Company continued to sell the vast majority of its long term, fixed rate
residential loan production into the secondary market on a servicing released
basis. The low interest rate environment contributed to continued prepayments on
the Company's existing portfolios of residential fixed rate mortgages held for
investment and higher duration mortgage backed securities classified as
available for sale.
Mortgage backed security purchases during the first half of 2002 were
primarily low duration CMO's with limited extension risk and above market coupon
rates. The Company also sold one relatively higher duration CMO during the first
quarter of 2001 and its one remaining volatile, support tranche CMO in early
July 2002. Loan purchases during the first half of 2002 were generally either
adjustable rate or fixed rate for a short period of time, then converting to
adjusting rate ("hybrid mortgages"). During the past year, the Company has
periodically prepaid and extended certain FHLB advances in order to increase the
duration of its funding and therefore moderate its net liability sensitivity. By
July 1, 2002, the Company was no longer originating mortgages tied to the 11th
District COFI Index due to concerns regarding the capacity of a small number of
large thrifts to dominate this Index. In addition, in July 2002, the Company
commenced offering two year fixed rate hybrid loans that adjust every six months
thereafter as a means of differentiating itself in the market and increasing the
interest rate sensitivity of its asset portfolio. The Company has also increased
the average remaining term of its certificate of deposit portfolio in 2002
through continued marketing of intermediate to longer term accounts.
The aforementioned and other tactical and strategic actions were
conducted as part of the interest rate risk management program in general, and
specifically to prepare the Company for what Management believes is a likely
eventual return to an increasing interest rate environment commencing in 2003.
30
The 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.
Serving the financial needs of local businesses is by nature asset sensitive, as
primarily variable rate commercial loans are in part funded with demand deposit
balances. Growth in the Company's business banking thus helps offset some of the
interest rate risk (net liability sensitivity) typically present in mortgage
lending.
Liquidity
Liquidity is actively managed to ensure sufficient funds are available
to meet ongoing needs of both the Company and the Bank. Liquidity management
includes projections of future sources and uses of funds to ensure the
availability of sufficient liquid reserves to provide for unanticipated
circumstances. The 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.
OTS regulations require that the Bank maintain a safe and sound level
of liquidity at all times. Management believes that having a surplus of
available liquidity at all times is prudent and fundamental to effective Bank
management.
At June 30, 2002, the Company had $10.4 million in cash and cash
equivalents, available borrowing capacity in excess of $170.0 million at the
FHLB-SF, $6.2 million in unpledged securities, and a significant volume of
residential mortgages that could be securitized, liquidated, or used in
collateralized borrowings in order to meet future liquidity requirements.
The State of California is the Bank's largest single depositor, with
$22.0 million in certificates of deposit placed in the Bank as of June 30, 2002.
Should the State of California not renew these certificates of deposit upon
maturity, replacement funding would likely be more costly. The maturity dates
for the State of California certificates of deposit are staggered to avoid a
concentration of repricing and funding risk. The Bank's second largest depositor
is the $20.0 million brokered CD that matures in May 2003. The Asset / Liability
Management Committee ("ALCO") of the Bank is planning how to best address the
future maturity of that funding, from both liquidity and repricing perspectives.
MBBC and the Bank have each entered into several Master Repurchase
Agreements to permit securities sold under agreements to repurchase transactions
with a number of counterparties. In addition, at June 30, 2002, 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
lines will be maintained in future periods. The Bank has been recently offered a
$10.0 million unsecured federal funds line of credit by a new correspondent
bank. The Bank is currently evaluating establishing that additional
correspondent relationship.
The Bank is able to issue wholesale "DTC" certificates of deposit
through three investment banking firms as an additional source of liquidity. The
Bank intends to add the ability to issue DTC certificates of deposit through an
additional investment banking firm during the third quarter of 2002 in order to
further increase its available liquidity and to obtain even more competitive
pricing.
At June 30, 2002, MBBC on a stand alone basis had cash & cash
equivalents of $4.7 million. In addition, MBBC had no outstanding balance on a
$3.0 million committed revolving line of credit.
31
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
As of June 30, 2002, the most recent notification from the OTS
categorized the Bank as "well capitalized". There are no conditions or events
since that notification that Management believes have changed the Bank's
category. The following table summarizes the capital ratios required for an
institution to be considered "well capitalized" and the Bank's regulatory
capital at June 30, 2002 as compared to such ratios.
Core Capital Core Capital To Total Capital To
To Adjusted Risk-weighted Risk-weighted
(Dollars In Thousands) Total Assets Assets Assets
------------------- ------------------- --------------------
Balance Percent Balance Percent Balance Percent
------- ------- ------- ------- ------- -------
Bank regulatory capital $47,402 8.45% $47,402 11.79% $52,448 13.04%
Well capitalized requirement 28,065 5.00% 24,128 6.00% 40,214 10.00%
------ ----- ------ ----- ------ ------
Excess $19,337 3.45% $23,274 5.79% $12,234 3.04%
======= ===== ======= ===== ======= =====
Adjusted assets (1) $561,295 $402,138 $402,138
======== ======== ========
------------------------------------------------
(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.
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).
32
The following table summarizes these regulatory capital requirements
for the Bank. As indicated in the table, the Bank's capital levels at June 30,
2002 exceeded all three of the currently applicable minimum regulatory capital
requirements.
Percent Of
Adjusted
(Dollars In Thousands) Total
Amount Assets
------- -------
Tangible Capital
----------------
Regulatory capital $47,402 8.45%
Minimum required 8,419 1.50%
----- -----
Excess $38,983 6.95%
======= =====
Core Capital
------------
Regulatory capital $47,402 8.45%
Minimum required 22,452 4.00%
------ -----
Excess $24,950 4.45%
======= =====
Percent Of
Risk-
weighted
Amount Assets
------- -------
Risk-based Capital
------------------
Regulatory capital $52,448 13.04%
Minimum required 32,171 8.00%
------ -----
Excess $20,277 5.04%
======= =====
At June 30, 2002, 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, 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.
33
Asset Quality / Credit Profile
Non-performing Assets
The following table sets forth information regarding non-performing
assets at the dates indicated.
(Dollars In Thousands) June 30, 2002 December 31, 2001
------------- -----------------
Non-accrual loans $ 4,979 $ 2,252
Loans 90 or more days delinquent and accruing interest -- --
Restructured loans in compliance with modified terms -- --
--------- ---------
Total gross non-performing loans 4,979 2,252
Investment in foreclosed real estate before valuation reserves -- --
Repossessed consumer assets -- --
--------- ---------
Total gross non-performing assets $ 4,979 $ 2,252
========= =========
Gross non-accrual loans to total loans 1.03% 0.48%
Gross non-performing loans to total loans 1.03% 0.48%
Gross non-performing assets to total assets 0.88% 0.42%
Allowance for loan losses $ 7,343 $ 6,665
Allowance for loan losses to non-performing loans 147.48% 295.96%
Valuation allowances for foreclosed real estate $ -- $ --
Non-accrual loans at June 30, 2002 are detailed in the following table:
(Dollars In Thousands) Number Principal Balance
Of Outstanding At
Category Of Loan Loans June 30, 2002
---------------- ----- -------------
Residential mortgage one to four units 5 $ 1,696
Commercial & industrial real estate 2 3,154
Land 1 129
------ -------
Total 8 $ 4,979
====== =======
Non-accrual loans increased from $2.3 million at December 31, 2001 to
$5.0 million at June 30, 2002 primarily due to the placement of a $2.3 million
commercial real estate mortgage on non-accrual status. This credit is a
participation loan where the Bank is not the lead financial institution. The
loan is secured by a first deed of trust on a hotel / resort located within the
Company's primary market area. The borrowers are directly personally indebted.
The hotel is a relatively new development that has experienced limited cash
flow. The hotel was also adversely impacted by the decline in tourism and travel
following the events of September 11, 2001 and the national economic recession.
At June 30, 2002, the Company maintained a $754 thousand specific reserve
for this hotel / resort loan, based upon estimated net proceeds to the Company
following foreclosure and sale. The borrowers executed a forbearance agreement
during the second quarter of 2002. In conjunction with the forbearance
agreement, the borrowers made additional loan payments during the second quarter
of 2002, and a loan payment in early July 2002. The forbearance agreement calls
for additional payments and for the borrowers to provide additional real
property collateral before the end of the third quarter of 2002. The agent bank
has ordered an updated appraisal of the primary collateral, which is scheduled
to be received during the third quarter of 2002. The market value of the hotel /
resort is particularly volatile at this time, given the uncertainty regarding
the economy, the tourism industry, and the outlook for business travel activity.
34
Non-accrual loans at June 30, 2002 also included:
o An $846 thousand residential mortgage secured by a first deed of trust.
There are significant junior mortgages from other lenders secured by the
subject collateral, which is scheduled for foreclosure sale during the
third quarter of 2002.
o Four additional residential mortgages totaling $851 thousand. One of these
loans, with a principal balance of $72 thousand, was fully reinstated in
July 2002.
o An $842 thousand commercial real estate mortgage secured by a first deed of
trust. There is a significant junior mortgage from another lender secured
by the subject collateral. The borrower made several payments during the
second quarter of 2002, but was still delinquent at June 30, 2002.
o A $129 thousand loan secured by a first deed of trust on residential land.
This loan was fully reinstated in July 2002.
Aside from the $2.3 million hotel / resort loan discussed above, the
Company does not anticipate recording a loss on any of the above non-accrual
loans due to the estimated value of the underlying real estate collateral. All
of the Company's non-accrual loans at June 30, 2002 were secured by real estate.
The Company had no foreclosed real estate at June 30, 2002.
Criticized And Classified Assets
The following table presents information concerning the Company's
criticized ("OAEM") and classified ("substandard" and lower) assets. The
category "OAEM" refers to "Other Assets Especially Mentioned", or those assets
that present indications of potential future credit deterioration.
(Dollars In Thousands) OAEM Substandard Doubtful Loss Total
---- ----------- -------- ---- -----
December 31, 2001 $ 6,207 $ 5,098 $ -- $ -- $11,305
March 31, 2002 $ 3,296 $ 4,386 $ -- $ 754 $ 8,436
June 30, 2002 $ 6,230 $ 4,819 $ -- $ 754 $11,803
Classified assets as a percent of stockholders' equity increased
slightly from 10.2% at December 31, 2001 to 10.4% at June 30, 2002.
The $754 thousand asset classified as "Loss" in the above table as of
March 31 and June 30, 2002 is associated with the specific reserve for the $2.3
million commercial real estate mortgage secured by a hotel / resort located in
the Company's primary market area, as described above under "Non-performing
Assets". The remainder of this $2.3 million loan is classified as substandard.
June 30, 2002 substandard assets in the above table also include:
o The Company's other non-accrual loans as described above under
"Non-performing Assets".
o A total of $354 thousand in commercial loans to a corporation whose sole
stockholder has declared personal bankruptcy. These loans were current in
their payments as of June 30, 2002 and the borrower has indicated his
intent to continue making payments per the terms of the loans.
o A $180 thousand commercial loan to a retailer in the Bank's primary market
area.
35
Criticized loans at June 30, 2002 included:
o A $1.7 million residential mortgage in the Company's primary market area
where the borrowers have repeatedly failed to make timely payments.
o A $1.3 million mortgage, current in its payments at June 30, 2002, secured
by a motel located in the Silicon Valley area of the San Francisco Bay
Area. The motel's cash flow has been unfavorably impacted by the economic
difficulties being experienced in the technology industry and by a
reduction in business travel in general.
o A $983 thousand mortgage secured by an apartment complex in the Silicon
Valley area. This loan was current in its payments at June 30, 2002;
however, rents in the subject area have been adversely affected by the
economic difficulties in the technology industry.
o A $561 thousand commercial loan to a business in the Company's primary
market area that participates in the telecommunications industry. This loan
is secured by business assets and a deed of trust on residential real
estate, and was current in its payments at June 30, 2002. The Company is
closely monitoring the condition of this loan due to the general weakness
in the telecommunications industry.
At the present time, the Company does not anticipate recording a loss
on any of the above detailed criticized loans due to borrower cooperation and
the estimated fair value of the associated collateral.
Impaired Loans
At June 30, 2002, the Company had total gross impaired loans, before
specific reserves, of $5.0 million, constituting eight credits. Specific
reserves on these $5.0 million in impaired loans totaled $754 thousand. This
compares to total gross impaired loans of $2.3 million, with no specific
reserves, at December 31, 2001. Interest is accrued on impaired loans on a
monthly basis except for those loans that are 90 or more days delinquent or
those loans which are less than 90 days delinquent but where Management has
identified concerns regarding the collection of the credit. For the six months
ended June 30, 2002, accrued interest on impaired loans was zero and interest of
$133 thousand was received in cash. The average balance of impaired loans during
the three and six months ended June 30, 2002 was $4.7 million and $3.7 million,
respectively. If all non-accrual loans had been performing in accordance with
their original loan terms, the Company would have recorded interest income of
$242 thousand during the six months ended June 30, 2002, instead of interest
income actually recognized, based on cash payments, of $133 thousand.
Hotel / Motel / Resort Loans
At June 30, 2002, the Company had $23.6 million in mortgage loans
secured by hotel / motel / resort properties. This compares to $30.8 million in
hotel / motel / resort mortgages at December 31, 2001. This decrease in part
resulted from the Company's not repricing certain hotel / motel / resort loans
to reflect the decline in general market interest rates over the past year,
thereby leading the borrowers to refinance with other lenders.
Various reports have indicated that travel industry businesses such as
hotels / motels / resorts have been particularly adversely impacted by the
national economic recession in 2001, and by reduced business and pleasure
travel. The Company's recent review of its hotel / motel / resort loans has in
general confirmed reduced occupancy rates and lower effective room rates than
experienced in 1999 and 2000, leading to decreased or in some cases negative net
cash flow from the properties. The Company cannot predict when or to what degree
the hospitality industry will recover, but intends to continue closely
monitoring its hotel / motel / resort loan portfolio. The Company increased its
formula general valuation reserve factors for these loans in the second quarter
of 2002 to reflect the inherent loss in this portfolio. The return of
unfavorable economic trends, the occurrence of additional terrorist activity, or
other factors could lead to additional reserve requirements for these loans and
thus impact the levels of future provisions for loan losses.
36
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, including unused commitments to provide financing. 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 that 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 judgments
different from those of Management.
The allowance for loan losses is comprised of three primary types of
allowances:
1. Formula Allowance
Formula allowances are based upon loan loss factors that reflect Management's
estimate of the inherent loss in various segments of, or pools within, the loan
portfolio. The loss factor is multiplied by the portfolio segment (e.g.
multifamily permanent mortgages) balance (or credit commitment, as applicable)
to derive the formula allowance amount. The loss factors are updated
periodically by the Company to reflect current information that has an effect on
the amount of loss inherent in each segment. The formula allowance at June 30,
2002 was $6.1 million, compared to $6.0 million at December 31, 2001.
2. Specific Allowance
Specific allowances are established in cases where Management has identified
significant conditions or circumstances related to an individually impaired
credit. In other words, these allowances are specific to the loss inherent in a
particular loan. The amount for a specific allowance is calculated in accordance
with SFAS No. 114, "Accounting By Creditors For Impairment Of A Loan". The
Company had $754 thousand in specific allowance at June 30, 2002, compared to
none at December 31, 2001.
3. Unallocated Allowance
The Company maintains an unallocated loan loss allowance that is based upon
Management's evaluation of conditions that are not directly measured in the
determination of the formula and specific allowances. The evaluation of inherent
loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
historical performance of loan portfolio segments. The conditions evaluated in
connection with the unallocated allowance at June 30, 2002 included the
following, which existed at the balance sheet date:
o General business and economic conditions affecting the Company's key
lending areas
o Real estate values in California
o Loan volumes and concentrations
o Seasoning of the loan portfolio
o Status of the current business cycle
o Specific industry or market conditions within portfolio segments
The unallocated allowance at June 30, 2002 was $533 thousand, compared to $668
thousand at December 31, 2001.
37
The following table presents activity in the Company's allowance for
loan losses during the six months ended June 30, 2002 and June 30, 2001:
Six Months Ended June 30,
-----------------------
2002 2001
------- -------
Allowance For Loan Losses (Dollars In Thousands)
Balance at beginning of year $ 6,665 $ 5,364
Charge-offs:
Consumer lines of credit (9) (1)
Commercial term loans (30) --
Commercial lines of credit -- (25)
------- -------
Total charge-offs (39) (26)
Recoveries:
Consumer lines of credit 4 --
Commercial lines of credit 3 --
------- -------
Total recoveries 7 --
Provision for loan losses 710 800
------- -------
Balance at June 30 $ 7,343 $ 6,138
======= =======
Annualized ratio of net charge-offs during the period to average
loans receivable, net, outstanding during the period 0.01% 0.01%
Additional ratios applicable to the allowance for loan losses include:
June 30, 2002 December 31, 2001
------------- -----------------
Allowance for loan losses as a percent of non-performing loans 147.48% 295.96%
Allowance for loan losses as a percent of gross loans receivable net of
undisbursed loan funds and unamortized yield
Adjustments 1.50% 1.41%
Allowance for loan losses as a percent of classified assets 131.76% 130.74%
38
The $533 thousand in unallocated allowance at June 30, 2002 reflected
the Company's consideration of the following factors, as well as the more
general factors listed above in conjunction with the definition of the
unallocated allowance:
o The adverse impacts of the weak technology and telecommunications
industries upon commercial real estate values. The Company's primary
lending area is near the Silicon Valley area of the San Francisco Bay Area,
which has been impacted by the slump in various telecommunications,
technology, and technology related businesses. Recent reports indicate a
rise in office vacancy rates and a decline in rental rates for office space
in multiple markets within the greater San Francisco Bay Area. This impact
could be in the range of $100 thousand to $900 thousand.
o Recent reports of selected areas of soft or declining apartment rents in
Northern California resulting from reduced employment, weakness in the
technology and telecommunications industries, and a strong home purchase
market. The soft or declining rents could lead to decreased multifamily
property values. This impact could be in the range of $100 thousand to $800
thousand.
As subsequently discussed (see "Provision For Loan Losses"), the lower
provision for loan losses recorded during the first six months of 2002 versus
the same period in the prior year resulted from multiple factors, including:
o the Company's concerns in the first half of 2001 regarding the State of
California energy crisis and the increasingly negative trends in national
economic growth and activity present at mid-year 2001
o the allocation of increased reserves during the second quarter of 2001 for
a pool of residential mortgages that presented a less favorable credit
profile than that typically pursued by the Company
The above referenced residential mortgage pool has continued to perform for the
Company and at June 30, 2002 had an outstanding balance of $3.6 million.
Management anticipates that should the Company accomplish its strategic
plan and be successful in:
o generating further growth in loans receivable held for investment
o emphasizing the origination, purchase, and participation of income property
real estate loans
o expanding the construction loan portfolio
o continuing expansion of commercial business lending
future provisions will result and the ratio of the allowance for loan losses to
loans outstanding will increase. Experience across the financial services
industry indicates that commercial business, construction, and income property
loans present greater risks than residential real estate loans, and therefore
should be accompanied by suitably higher levels of reserves.
39
Comparison Of Operating Results For The Three Months And Six Months
Ended June 30, 2002 and June 30, 2001
General
During the second quarter of 2002, the Company reported net income
$1.35 million, equivalent to $0.38 diluted earnings per share, compared to net
income of $949 thousand, or $0.29 diluted earnings per share, for the same
period in 2001. Net income during the quarter ended March 31, 2002 (the
immediately preceding quarter) was $1.21 million, equivalent to $0.35 diluted
earnings per share.
For the six months ended June 30, 2002, net income was $2.55 million,
equivalent to $0.73 diluted earnings per share. This compares to net income of
$1.55 million, or $0.47 diluted earnings per share, for the first six months of
2001. The 64.6% increase in net income for the first half of 2002 compared to
the same period in 2001 primarily resulted from three key factors:
o the continued implementation of the Company's strategic plan to transform
the Bank into a community commercial bank serving the financial needs of
individuals, families, local community organizations, and businesses
o a $1.4 million rise in net interest income resulting from a combination of
increased spreads and larger average balances of interest earning assets
and liabilities
o during the first half of 2001, the Company incurred pre-tax operating costs
of $447 thousand for the conversion of the core data processing system and
$161 thousand for legal expenses associated with the arbitration of claims
by a former executive
The second quarter of 2002 earnings were the highest of any quarter in
the Company's history. Annualized return on average stockholders' equity
improved from 8.14% during the second quarter of 2001 to 10.18% during the
second quarter of 2002.
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 six quarters. Market interest rates have varied considerably during this
time period, generally falling throughout 2001, with certain interest rates
rising in the first quarter of 2002 and then falling in the second quarter of
2002. In addition, the slope of the Treasury curve shifted from inverted at the
beginning of 2001, to flatter by the end of the first quarter of 2001, to
positively sloped by mid 2001. From mid 2001 to March 31, 2002, the Treasury
curve generally became progressively more steeply sloped (i.e. a greater
differential between short term and longer term interest rates). During the
second quarter of 2002, the Treasury curve flattened.
Financial institutions, including the Bank, 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. In addition, steep yield curves often lead to increased customer
demand for adjustable rate mortgages due to the rate differential to long term,
fixed rate mortgages.
As a result of the interest rate environment over the past eighteen
months, yields and rates for most assets and liabilities were substantially
lower in the first half and second quarter of 2002 compared to the same periods
in 2001.
40
Net Interest Income
Net interest income increased from $4.8 million and $9.5 million during
the second quarter and first half of 2001, respectively, to $5.6 million and
$10.9 million during the same periods in 2002 due to both expanded spreads and
greater average balances of interest earning assets and liabilities. The
Company's ratio of net interest income to average total assets was 3.98% for the
second quarter of 2002, up from 3.79% during the same period in 2001. This ratio
similarly increased from 3.81% during the first six months of 2001 to 3.98%
during the same period in 2002. The increased spreads in 2002 in part stemmed
from the Company's continued implementation of its strategic plan.
Margins were hampered during the early part of 2001 by the Company's
offering higher than normal relative retail deposit pricing to facilitate
customer retention following the core systems conversion. 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 additional liquidity was not
utilized.
The spread derived from investing the Company's demand deposit balances
and capital was lower in the first half of 2002 than the same period in 2001 due
to the significantly lower general interest rate environment. However, net
interest income during the first half of 2002 benefited from lifetime rate
floors on certain loans and prepayment penalties received on certain income
property loans that were paid off.
Other factors influencing net interest income during the second quarter
and first half of 2002 compared to the same periods in 2001 included:
o Average net loans as a percentage of average total assets improved from
82.0% and 81.6% during the second quarter and first six months of 2001 to
85.9% and 86.0% during the same periods in 2002. Because loans constitute
the Company's highest yielding type of asset, this change in asset mix
favorably affected net interest income.
o Average transaction account (NOW, savings, and MMDA) deposits as a
percentage of average total assets increased from 29.4% and 29.6% during
the second quarter and first six months of 2001 to 31.1% and 31.2% during
the same periods in 2002. Because transaction accounts represent relatively
low cost funding for the Company, this change in funding mix favorably
impacted net interest income.
o Average demand deposits as a percentage of average total assets increased
from 3.8% and 3.6% during the second quarter and first six months of 2001
to 4.0% and 4.0% during the same periods in 2002. In addition, average
stockholders' equity as a percentage of average total assets increased from
9.3% and 9.1% during the second quarter and first six months of 2001 to
9.5% and 9.5% during the same periods in 2002. Increases in interest free
funding sources favorably impact the Company's spreads.
The Company plans to further increase its net interest margin by
continuing the transformation into a community commercial bank, increasing the
percentage of total assets constituted by loans, decreasing the percentage of
the loan portfolio comprised of residential mortgages, and increasing the
percentage of the deposit portfolio composed of transaction accounts. However,
no assurance can be provided that the Company will be successful in this regard,
as interest rates and new business activity are influenced by many factors
beyond the control of the Company, such as actions by the Federal Reserve and
competition.
41
The following table presents the average annualized rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing liabilities, and the resulting net
interest spread, net interest margin, and average interest margin on total
assets for the three months ended June 30, 2002 and 2001.
Three Months Ended June 30, 2002 Three Months Ended June 30, 2001
------------------------------------- -------------------------------------
(Dollars In Thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets
------
Interest earning assets:
Cash equivalents (1) $ 4,401 $ 20 1.82% $ 9,697 $ 103 4.25%
Investment securities 7,275 53 2.91% 7,302 111 6.08%
Mortgage backed securities (2) 37,078 328 3.54% 43,312 675 6.23%
Loans receivable, net (3) 480,335 8,435 7.02% 413,107 8,779 8.50%
FHLB stock 3,243 55 6.78% 2,967 42 5.66%
------- ------- -------- ------
Total interest earning assets 532,332 8,891 6.68% 476,385 9,710 8.15%
------- ------
Non-interest earnings assets 26,729 27,281
------- --------
Total assets $ 559,061 $ 503,666
======= ========
Liabilities & Equity
--------------------
Interest bearing liabilities:
NOW accounts $ 44,561 44 0.39% $ 40,843 100 0.98%
Savings accounts 18,504 26 0.56% 20,927 63 1.20%
Money market accounts 110,868 599 2.16% 86,283 913 4.23%
Certificates of deposit 250,751 2,024 3.23% 244,056 3,279 5.37%
------- ------- -------- ------
Total interest-bearing deposits 424,684 2,693 2.54% 392,109 4,355 4.44%
FHLB advances 57,606 631 4.38% 43,280 579 5.35%
Other borrowings (4) 377 4 4.24% 115 3 10.43%
------- ------- -------- ------
Total interest-bearing liabilities 482,667 3,328 2.76% 435,504 4,937 4.53%
------- ------
Demand deposit accounts 22,132 19,208
Other non-interest bearing liabilities 1,335 2,302
------- --------
Total liabilities 506,134 457,014
Stockholders' equity 52,927 46,652
------- --------
Total liabilities & equity $ 559,061 $ 503,666
======= ========
Net interest income $ 5,563 $ 4,773
======= =======
Interest rate spread (5) 3.92% 3.62%
Net interest earning assets 49,665 40,881
Net interest margin (6) 4.18% 4.01%
Net interest income /
average total assets 3.98% 3.79%
Interest earnings assets /
Interest bearing liabilities 1.10 1.09
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 and collateralized mortgage
obligations.
(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 $89,000 and
$35,000 in 2002 and 2001, respectively.
(4) Includes federal funds purchased, securities sold under agreements to
repurchase, and borrowings drawn on MBBC's line of credit.
(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.
42
The following table presents the average annualized rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing liabilities, and the resulting net
interest spread, net interest margin, and average interest margin on total
assets for the six months ended June 30, 2002 and 2001.
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001
------------------------------------- -------------------------------------
(Dollars In Thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets
------
Interest earning assets:
Cash equivalents (1) $ 5,077 $ 45 1.77% $ 9,184 $ 227 4.94%
Investment securities 7,530 110 2.92% 7,332 245 6.68%
Mortgage backed securities (2) 34,241 640 3.74% 46,097 1,483 6.43%
Loans receivable, net (3) 471,457 16,749 7.11% 407,924 17,667 8.66%
FHLB stock 3,132 102 6.51% 2,945 83 5.64%
------- ------- -------- ------
Total interest earning assets 521,437 17,646 6.77% 473,482 19,705 8.33%
------- ------
Non-interest earnings assets 26,840 26,423
------- --------
Total assets $ 548,277 $ 499,905
======= ========
Liabilities & Equity
--------------------
Interest bearing liabilities:
NOW accounts $ 43,130 84 0.39% $ 40,746 240 1.18%
Savings accounts 18,762 52 0.55% 19,126 136 1.42%
Money market accounts 109,263 1,192 2.18% 88,185 1,957 4.44%
Certificates of deposit 245,624 4,178 3.40% 244,264 6,707 5.49%
------- ------- -------- ------
Total interest-bearing deposits 416,779 5,506 2.64% 392,321 9,040 4.61%
FHLB advances 55,655 1,220 4.38% 42,052 1,126 5.36%
Other borrowings (4) 295 7 4.75% 142 14 19.72%
------- ------- -------- ------
Total interest-bearing liabilities 472,729 6,733 2.85% 434,515 10,180 4.69%
------- ------
Demand deposit accounts 21,698 17,795
Other non-interest bearing liabilities 1,660 2,262
------- --------
Total liabilities 496,087 454,572
Stockholders' equity 52,190 45,333
------- --------
Total liabilities & equity $ 548,277 $ 499,905
======= ========
Net interest income $10,913 $ 9,525
======= =======
Interest rate spread (5) 3.92% 3.64%
Net interest earning assets 48,708 38,967
Net interest margin (6) 4.19% 4.02%
Net interest income /
average total assets 3.98% 3.81%
Interest earnings assets /
Interest bearing liabilities 1.10 1.09
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 and collateralized mortgage
obligations.
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 $115,000 and
$113,000 in 2002 and 2001, respectively.
4) Includes federal funds purchased, securities sold under agreements to
repurchase, and borrowings drawn on MBBC's line of credit.
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.
43
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 June 30, 2002
Compared To
Three Months Ended June 30, 2001
--------------------------------------------------
Volume
(Dollars In Thousands) Volume Rate / Rate Net
------- ------- ------- -------
Interest-earning assets
-----------------------
Cash equivalents $ (56) $ (59) $ 32 $ (83)
Investment securities 0 (58) 0 (58)
Mortgage backed securities (97) (292) 42 (347)
Loans receivable, net 1,429 (1,525) (248) (344)
FHLB Stock 4 8 1 13
------- ------- ------- -------
Total interest-earning assets 1,280 (1,926) (173) (819)
------- ------- ------- -------
Interest-bearing liabilities
----------------------------
NOW Accounts 9 (60) (5) (56)
Savings accounts (7) (34) 4 (37)
Money market accounts 260 (447) (127) (314)
Certificates of deposit 90 (1,309) (36) (1,255)
------- ------- ------- -------
Total interest-bearing deposits 352 (1,850) (164) (1,662)
FHLB advances 192 (105) (35) 52
Other borrowings 7 (2) (4) 1
------- ------- ------- -------
Total interest-bearing liabilities 551 (1,957) (203) (1,609)
------- ------- ------- -------
Increase in net interest income $ 729 $ 31 $ 30 $ 790
======= ======= ======= =======
44
Six Months Ended June 30, 2002
Compared To
Six Months Ended June 30, 2001
--------------------------------------------------
Volume
(Dollars In Thousands) Volume Rate / Rate Net
------- ------- ------- -------
Interest-earning assets
-----------------------
Cash equivalents $ (102) $ (146) $ 66 $ (182)
Investment securities 7 (138) (4) (135)
Mortgage backed securities (381) (621) 159 (843)
Loans receivable, net 2,752 (3,175) (495) (918)
FHLB Stock 5 13 1 19
------- ------- ------- -------
Total interest-earning assets 2,281 (4,067) (273) (2,059)
------- ------- ------- -------
Interest-bearing liabilities
----------------------------
NOW Accounts 14 (161) (9) (156)
Savings accounts (3) (83) 2 (84)
Money market accounts 468 (995) (238) (765)
Certificates of deposit 37 (2,552) (14) (2,529)
------- ------- ------- -------
Total interest-bearing deposits 516 (3,791) (259) (3,534)
FHLB advances 364 (204) (66) 94
Other borrowings 15 (11) (11) (7)
------- ------- ------- -------
Total interest-bearing liabilities 895 (4,006) (336) (3,447)
------- ------- ------- -------
Increase in net interest income $ 1,386 $ (61) $ 63 $ 1,388
======= ======= ======= =======
Interest Income
Interest income decreased from $9.7 million and $19.7 million during
the three and six months ended June 30, 2001 to $8.9 million and $17.6 million
during the same periods in 2002. This decrease was primarily due to the much
lower interest rate environment present in 2002. The effect of lower general
market interest rates more than offset the impact of an 11.7% rise in average
interest earning assets from the second quarter of 2001 to the second quarter of
2002 and a shift in asset mix towards loans, coincident with the Company's
strategic plan of better supporting its local communities with the delivery of
credit.
Interest income on loans decreased from $8.8 million and $17.7 million
during the three and six months ended June 30, 2001 to $8.4 million and $16.7
million during the same periods in 2002. The effect of lower interest rates more
than offset the impact of 16.3% and 15.6% rises in average net loan balances
outstanding from the three and six months ended June 30, 2001 to the three and
six months ended June 30, 2002. 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 purchases from correspondent banks,
and loan participations; with the latter primarily sourced through other
California community banks. The Company plans to increase total loans to
approximately 90.0% of total assets over time. Management believes stockholder
value is maximized through the extension and effective management of credit.
45
Interest income on cash equivalents decreased from $103 thousand and
$227 thousand for the three and six months ended June 30, 2001 to $20 thousand
and $45 thousand for the same period in 2002. This decline was due to:
o lower average rates resulting from the interest rate cuts implemented by
the Federal Reserve in 2001
o lower average volumes stemming from:
A. the Company's redeploying funds from cash equivalents into loans as a
result of the demand for credit
B. the Company's purchasing short term investment securities (called
Agency debentures) during the first quarter of 2002 in lieu of
investing in cash equivalents
Interest income on investment securities declined from $111 thousand
and $245 thousand during the three and six months ended June 30, 2001 to $53
thousand and $110 thousand during the same periods in 2002. The reduced interest
income resulted from lower yields on variable rate corporate trust preferred
securities that reprice quarterly based upon 3 month LIBOR, which was
significantly lower in the first six months of 2002 than during the same period
in 2001. This impact was only partially offset by interest income earned on
short term Agency debentures purchased during the first quarter of 2002 as a
vehicle for investing short term excess liquidity.
Interest income on mortgage backed securities fell from $675 thousand
and $1.5 million during the three and six months ended June 30, 2001 to $328
thousand and $640 thousand during the same periods in 2002. These decreases were
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 two years, 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. The Company also
purchased additional adjustable rate mortgage backed securities during 2001,
which adjusted downward in rate in conjunction with the decline in interest
rates during 2001.
Interest income on FHLB stock increased from $42 thousand and $83
thousand during the three and six months ended June 30, 2001 to $55 thousand and
$102 thousand during the same periods in 2002. Greater average balances of FHLB
stock stemming from the expansion in the Bank's balance sheet contributed to
these increases. In addition, the FHLB-SF declared a particularly high fourth
quarter 2001 dividend rate of 5.99% during the first quarter of 2002. This rate
was above that accrued by the Company in 2001, and therefore increased the
Company's reported yield on FHLB stock during the first half of 2002.
Interest Expense
Interest expense decreased from $4.9 million and $10.2 million during
the three and six months ended June 30, 2001 to $3.3 million and $6.7 million
during the same periods in 2002, as the effect of the lower interest rate
environment more than offset the impact of increases in average interest bearing
liabilities.
46
Interest expense on deposits decreased from $4.4 million and $9.0
million during the three and six months ended June 30, 2001 to $2.7 million and
$5.5 million during the same periods in 2002. This decline was due to the effect
of a significant decrease in average interest rate more than offsetting the
impact of a rise in average balances. The large decrease in average rates
resulted from the lower interest rate environment and a shift in the composition
of the deposit portfolio. Relatively higher cost certificates of deposit
decreased from 59.3% of average total deposits during the second quarter of 2001
to 56.1% during the second quarter of 2002 despite the Company's issuing a $20.0
million brokered certificate of deposit during May 2002. Relatively lower cost
transaction deposit accounts experienced a complementary increase, with money
market deposits experiencing a significant rise from 21.0% to 24.8% of average
total deposits during the same time periods. This change in deposit mix is a
fundamental component of the Company's strategic plan.
At June 30, 2002, the Company's weighted average nominal cost of
deposits was 2.36%, down from 2.87% at December 31, 2001. The Company paid an
average rate of just 0.39% on its NOW deposits and 0.56% on its savings deposits
during the second quarter of 2002, highlighting the limited ability of the
Company to further reduce the cost of this funding should general market
interest rates decline in future periods. At June 30, 2002, $80.6 million in
certificates of deposit with a weighted average nominal rate of 3.14% were
scheduled to mature in the next quarter. This figure included $16.0 million in
State of California deposits. At June 30, 2002, the longest term permitted by
the State under its time deposit program was six months.
The Company has worked to more uniformly distribute its certificate of
deposit maturities by month in order to facilitate cash management and avoid
concentrated exposure to capital market events at any one point in time. This
objective has been accomplished through the use of "odd term" certificates of
deposit such as 7, 8, and 19 months, augmented by ongoing sales and periodic
print advertising of longer term certificates of deposit. For example, the
Company conducted two rounds of print advertising throughout its primary market
area in the second quarter of 2002 promoting 24 month and 30 month certificates
of deposit. At June 30, 2002, the weighted average cost of the certificate of
deposit portfolio was 3.14%, down from 3.43% at March 31, 2002.
During the third quarter of 2002, the Company plans to continue
promoting money market accounts, including new consumer and business MMDA
products, Direct Deposit Checking account (no-fee consumer checking),
intermediate to longer term certificates of deposit, and business checking
accounts. The Company's deposit products are highly tiered, encouraging greater
account balances in order to earn higher rates of interest. Customer accounts
are accessible via bilingual telephone banking, Internet banking, global ATM
networks, mail, and in-branch service. The Company also intends to continue
pursuing compensating balances, typically demand deposit balances, for
commercial credit facilities.
Interest expense on total borrowings increased from $582 thousand and
$1.1 million during the three and six months ended June 30, 2001 to $635
thousand and $1.2 million during the same periods in 2002 due to the effect of
greater average balances more than offsetting the impact of lower average rates.
The Company had higher levels of borrowings outstanding in the first half of
2002 than the same period in 2001 due to borrowings being utilized to fund some
of the growth in the loan portfolio.
The Company's average interest rate on other borrowings was inflated
during 2001 and 2002 as a result of the amortization of loan fees (discount on a
liability) on MBBC's $3.0 million revolving line of credit combined with a lack
of draws (outstanding balances) on the line.
47
Provision For Loan Losses
The Company recorded provisions for loan losses totaling $385 thousand
and $710 thousand during the three and six months ended June 30, 2002, compared
to $300 thousand and $800 thousand during the same periods in 2001. The Company
determines its periodic provision for loan losses based upon its analysis of
loan loss reserve adequacy. Net charge-offs during the first six months of 2002
were $32 thousand, versus $26 thousand during the first six months of 2001. The
Company's ratio of loan loss reserves to loans outstanding increased from 1.41%
at December 31, 2001 to 1.50% at June 30, 2002, while the nominal amount of the
loan loss reserve rose from $6.7 million at December 31, 2001 to $7.3 million at
June 30, 2002.
The primary factor contributing to the provision for loan losses during
the first quarter of 2002 was the need to augment existing reserves to establish
a specific reserve of $754 thousand associated with a $2.3 million commercial
real estate mortgage secured by a hotel / resort described above under
"Non-performing Assets". Because this loan was already classified as substandard
at December 31, 2001, the incremental loan loss reserves associated with this
loan at March 31, 2002 were less than the $754 thousand specific reserve.
Other factors contributing to the provision for loan losses during the
first half of 2002 included:
o the expansion in the loan portfolio
o the addition of a large volume of new credits to the loan portfolio
o the origination of relatively larger loans by the Los Angeles loan
production office
o the stage of the economic and credit cycles, with Management's belief that
California typically lags national economic trends
o the change in loan portfolio mix, particularly the reduced concentration of
relatively lower risk residential mortgages
o the Company's updating its formula general reserve factors during the
second quarter of 2002 to reflect current information regarding real estate
valuations, business conditions, rental and vacancy rates for various types
of income property, and other factors in estimating the amount of loss
inherent in the loan portfolio at June 30, 2002
Commercial & industrial and multifamily 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. Commercial lines of credit
and term loans to businesses also typically present a greater level of credit
risk than residential mortgages.
A reduction in the portfolio of hotel / motel / resort loans during the
first half of 2002 moderated the amount of provision for loan losses.
The Company anticipates that its ratio of loan loss reserves to loans
outstanding 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,
construction, and commercial business lending. This change in portfolio mix is
anticipated to be accelerated by the Los Angeles loan production office, which
concentrates on construction and income property lending. The Los Angeles loan
production office presents the Company with the opportunity to better
geographically diversify its real estate loan portfolio, such that the Company
becomes less exposed to a downturn in real estate values, economic weakness, or
a natural disaster in any one local real estate market. The Company does not,
however, pursue lending outside the State of California, but does occasionally
make real estate loans secured by property in other states as an accommodation
to existing customers.
48
Non-interest Income
Non-interest income totaled $503 thousand and $1.0 million during the
three and six months ended June 30, 2002, down from $695 thousand and $1.3
million during the same periods in 2001.
Customer service charge income was $392 thousand and $742 thousand
during the three and six months ended June 30, 2002, down from $473 thousand and
$882 thousand during the same periods in 2001. In conjunction with the
conversion to the new core data processing system in March 2001, the Company
implemented a revamped consumer checking product line and an associated revised
fee and service charge schedule. These changes contributed to the closing of
certain lower balance, recurring overdraft, and / or higher transaction volume
consumer checking accounts beginning in the second quarter of 2001, as such
accounts began incurring increased service charges. In addition, certain
uncollected funds fees charged in the first half of 2001 were eliminated by the
beginning of 2002 due to competitive factors.
Commissions from the sale of non-FDIC insured investment products were
$34 thousand and $75 thousand during the three and six months ended June 30,
2002, down from $71 thousand and $188 thousand during the same periods in 2001.
This decrease was primarily due to vacancies in positions for licensed
investment sales representatives and the general state of the equity markets in
the first six months of 2002. The Company expects revenue from these operations
to remain constrained during the third quarter of 2002.
Loan servicing income totaled $14 thousand and $29 thousand during the
three and six months ended June 30, 2002, compared to $41 thousand and $43
thousand during the same periods in 2001. The Company continues to sell the vast
majority of its long term, fixed rate residential loan production into the
secondary market on a servicing released basis, and purchases more interest rate
sensitive loans as part of its interest rate risk management program. As a
result, the portfolio of loans serviced for others is declining as loans pay
off. At June 30, 2002, the Company serviced $34.9 million in various types of
loans for other investors, compared to $42.6 million at December 31, 2001. The
Company maintained loan servicing assets of $46 thousand at June 30, 2002, and
is thus limited in the exposure of its loan servicing income to a potential
further acceleration in loan prepayment rates.
Gains on the sale of loans held for sale were $21 thousand during the
second quarter of 2002, down from $24 thousand during the second quarter of
2001. For the first six months of 2002, gains on the sale of loans totaled $48
thousand, a 65.5% increase from the $29 thousand recorded during the first half
of 2001. The Company anticipates favorable results from its mortgage banking
operations during the third quarter of 2002, spurred by the availability of
thirty year fixed rate residential mortgages at rates below 7.00% at the start
of the quarter and by recent reports indicating strong demand for residential
real estate in most areas of California.
There were no sales of mortgage backed or investment securities during
the second quarter of either 2002 or 2001. Gains on sale of mortgage backed
securities were $43 thousand during the first half of 2002, compared to $34
thousand during the same period in 2001. Although many of the Company's
securities appreciated during the second quarter of 2002 due to the decline in
most capital markets interest rates, the Company decided to retain the
securities as a means of generating net interest income.
Other income declined from $86 thousand and $163 thousand during the
three and six months ended June 30, 2001 to $42 thousand and $78 thousand during
the same periods in 2002. Various factors contributed to this decline,
including:
o the collection of a $25 thousand fee in the second quarter of 2001 in
conjunction with the workout of a troubled loan
o the Company's earning $36 thousand more in fees in the first half of 2001
versus the first half of 2002 associated with the (discontinued) issuance
of Bank official checks drawn on a third party
49
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 periods through:
o seeking additional remote ATM sites and increasing certain ATM fees
commencing in the fourth quarter of 2002
o further increases in the portfolio of deposit transaction accounts
o the continued sale of consumer Internet banking with electronic bill
payment
o the expanded sale of Internet banking and cash management services for
businesses
o the continued marketing of debit cards
However, no assurance can be provided regarding the amount of or trends in the
Company's future levels and composition of non-interest income.
Non-interest Expense
Non-interest expense totaled $3.4 million and $6.9 million during the
three and six months ended June 30, 2002, comparing favorably to $3.5 million
and $7.4 million during the same periods in 2001. Factors contributing to the
lower expenses included the Company's incurring significant costs in the first
half of 2001 associated with its data processing conversion ($447 thousand) and
the arbitration of claims by a former executive ($161 thousand). The data
processing conversion costs included de-conversion charges from the Company's
external service bureau, travel and training costs for employees to assist with
the implementation of the new system, printing and postage for additional
customer mailings, and consultant fees.
Compensation and employee benefits costs were higher in the three and six
months ended June 30, 2002 than during the same periods the prior year due to:
o compensation costs associated with the Los Angeles loan production office
which opened during the first quarter of 2002
o other staff additions and / or changes in support of the Company's
strategic plan, particularly in the Company's commercial banking and
information technology functions
o higher costs for the Bank's Employee Stock Ownership Plan ("ESOP") due to
the greater average market price of the Company's common stock; associated
expenses were $308 thousand for the first six months of 2002 compared to
$194 thousand for the first six months of 2001
o higher costs for payroll taxes on a greater compensation base
The change in the Company's systems environment also impacted various
other operating expenses. For example, data processing fees were lower in 2002
versus 2001 due to the conversion to in-house data processing in March 2001;
however, equipment expense was higher due to the added depreciation costs for
the new system.
While deposit insurance premiums increased slightly from the three and
six months ended June 30, 2001 to the same periods in 2002 due to expansion in
the deposit portfolio, the Company anticipates a significant percentage decline
in these costs during the latter half of 2002 due to an adjustment in its
premium rate.
50
Legal and accounting expenses declined from $267 thousand and $451
thousand during the three and six months ended June 30, 2001 to $102 thousand
and $221 thousand during the same periods in 2002 primarily due to the
aforementioned arbitration in 2001 and due to the Company's utilizing more cost
effective providers for certain professional services in 2002.
Advertising and promotion costs totaled $69 thousand and $145 thousand
during the three and six months ended June 30, 2002, up from $27 thousand and
$57 thousand during the same periods in 2001. These costs were unusually low in
the first half of 2001, as the Company postponed certain advertising and
promotional activities due to the implementation of the new computer systems
environment. Advertising during the second quarter of 2002 included newspaper
ads for deposit products and continued radio advertising in the Company's
primary market areas. The radio messages were targeted at attracting local
businesses through the Bank's relationship focused approach to providing
financial services. The Company's visibility was also enhanced during the first
half of 2002 by the extensive participation of employees and Directors in a
significant number of community events and organizations. As just one example,
more than twenty Bank employees actively participated in a fund raising event
for local non-profit organizations.
Consulting expenses declined from $63 thousand and $306 thousand during
the three and six months ended June 30, 2001 to $21 thousand and $43 thousand
during the same periods in 2002. In 2001, the Company hired several consultants
to assist with the core systems conversion and the implementation of
complementary technology following the conversion.
The Company's efficiency ratio during the second quarter of 2002 was
56.12%, comparing favorably to 64.37% during the second quarter of 2001 and
improving from 59.13% during the first quarter of 2002 (the immediately
preceding quarter). Despite this progress, the Company's efficiency ratio is
still above those of high performing peer financial institutions. The expansion
in the Company's interest margin has been a significant factor in the
improvement in the efficiency ratio during the past year.
The Company continues to restructure its operations both to better
utilize new technology and improve efficiency. The Company also continues to
evaluate new vendors for various products and services, seeking more cost
effective business relationships. In 2002, the Company altered the manner in
which its facilities management is conducted to provide for better expense
control. By mid 2002, the Company implemented revised practices for check
ordering and printing, leading to cost savings. In the second half of 2002, the
Company plans to complete the transition to a higher quality and lower cost
cellular phone service and obtain better pricing for certain correspondent
banking services. Through these and other initiatives, the Company continues to
target progress in improving its efficiency ratio.
However, the Company's progress in improving its efficiency ratio in
the next two quarters may be slowed by the up front costs associated with the
hiring of additional experienced commercial bankers in order to speed the
implementation of the strategic plan. In addition, should the Company open a de
novo branch in order to improve its coverage of its local market area, attract
additional deposits and new customers, build franchise value, and reduce the
loan to deposit ratio, such would likely unfavorably impact the efficiency
ratio, as new branches typically generate negative incremental contributions in
the first year of operation. Moreover, the Company is subject to certain third
party pricing increases such as higher postage rates, greater expenses for
health insurance, and the increasing cost of worker's compensation insurance for
many businesses in the State of California.
In light of the above and because of the uncertain impacts of
competition, the regulatory environment, and other factors over which the
Company has no control, Management cannot predict the Company's efficiency ratio
in future periods.
51
Income Taxes
Income tax expense increased in 2002 versus 2001 due to greater pre-tax
income. The Company's effective book income tax rate was 41.3% for the first
half of 2002, down from 42.6% for the first half of 2001 due to:
o certain non-deductible expenses and other adjustments to taxable income
representing a smaller percentage of the increased amount of book pre-tax
income
o the Company's filing for additional State income tax credits in 2002 under
the Enterprise Zone program
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, 2001. 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.
Item 2. Changes In Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
52
Item 4. Submission Of Matters To A Vote Of Security Holders
a) The Company's Annual Meeting of Stockholders was held on May 23, 2002.
b) Not applicable.
c) At the Company's Annual Meeting of Stockholders held on May 23, 2002,
the Company's stockholders approved the following:
1.) The election of the following individuals as Directors for the
terms indicated:
Votes Votes Term
Individual For Withheld Expires
---------------------------- ------------ ----------- ---------
Mr. Larry A. Daniels 2,570,223 105,892 2004
Mr. Steven Franich 2,564,961 111,154 2005
Mr. Stephen G. Hoffmann 2,570,223 105,892 2005
Mr. Gary L. Manfre 2,570,223 106,092 2005
In addition to the above four individuals, the following
Directors were in office as of July 25, 2002:
Mr. Josiah T. Austin
Mr. Edward K. Banks
Ms. Diane S. Bordoni
Mr. C. Edward Holden, Vice Chairman Of The Board
Mr. McKenzie Moss, Chairman Of The Board
2.) The ratification of the appointment of Deloitte & Touche LLP as
the independent auditors of the Company for the fiscal year
ending December 31, 2002 was approved as follows:
For Against Abstain
----------------- ----------------- ----------------
2,665,768 6,897 3,450
d) Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
A. Exhibits
99.1 Chief Executive Officer Certification Pursuant To 18
U.S.C. Section 1350
99.2 Chief Financial Officer Certification Pursuant To 18
U.S.C. Section 1350
B. Reports On Form 8-K
The Company has recently filed the following Current Reports
on Form 8-K:
1. Form 8-K dated July 22, 2002. This Current Report
reported the Company's operational and financial
results for the three and six month periods ending
June 30, 2002.
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act Of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONTEREY BAY BANCORP, INC.
(Registrant)
Date: August 9, 2002 By: /s/ C. Edward Holden
--------------------
C. Edward Holden
Chief Executive Officer
President
Vice Chairman Of The
Board Of Directors
Date: August 9, 2002 By: /s/ Mark R. Andino
------------------
Mark R. Andino
Chief Financial Officer
Treasurer
(Principal Financial &
Accounting Officer)
54