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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended December 31, 1998
Commission File No.: 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 I.D. No.)
incorporation or organization)
567 Auto Center Drive, Watsonville, California
95076 (Address of principal executive offices)
Registrant's telephone number, including area code: (831) 768-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, i.e., persons other than the directors and executive officers
of the registrant, was $39,557,394, based upon the last sales price as quoted on
the Nasdaq Stock Market for March 25, 1999.
The number of shares of Common Stock outstanding as of March 25, 1999:
3,528,886
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
Portions of the Annual Report to Stockholders for the year ended December 31,
1998 are incorporated by reference into Part II of this Form 10-K.
INDEX
PAGE
PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 34
Item 3. Legal Proceedings............................................... 35
Item 4. Submission of Matters to a Vote of Security Holders............. 35
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 35
Item 6. Selected Financial Data......................................... 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 36
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...... 36
Item 8. Financial Statements and Supplementary Data..................... 36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 36
Item 11. Executive Compensation.......................................... 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 37
Item 13. Certain Relationships and Related Transactions.................. 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..................................................... 37
PART I
Item 1. Business.
General
Monterey Bay Bancorp, Inc. (the "Company") is a unitary savings and
loan holding company incorporated in 1994 under the laws of the state of
Delaware. The significant operating subsidiary of the Company is Monterey Bay
Bank ("the Bank"), formerly Watsonville Federal Savings and Loan Association.
The Company 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. The
Company's primary business is providing conveniently located deposit facilities
to attract checking, money market, savings and certificate of deposit accounts,
and investing such deposits and other available funds in mortgage loans secured
by one-to-four family residences, construction, commercial real estate, and
business loans. As part of its ongoing operating strategy, the Company has been
diversifying its loan portfolio by increasing the amount of its construction,
commercial real estate, and business lending activities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
largest source of the Company's revenue is interest income from loans,
mortgage-backed securities, and investment securities. The Company's primary
sources of funds are customer deposits, principal and interest payments on loans
and mortgage-backed securities, advances from the Federal Home Loan Bank
("FHLB") and, to a lesser extent, proceeds from the sales of securities and
loans. Through its wholly-owned subsidiary, Portola Investment Corporation
("Portola"), the Bank engages in the sale of noninsured insurance and investment
products on an agency basis and acts as trustee on the Bank's deeds of trust.
See "Subsidiary Activities."
Market Area and Competition
The Bank is a community-oriented financial institution, which
originates one-to-four family residential mortgage loans, construction,
commercial real estate, and business loans within its market area. The Bank's
deposit gathering and lending markets are concentrated primarily in the
communities surrounding its full service offices in Santa Cruz, Monterey and
portions of Santa Clara County in Central California. The economy in the
Company's primary market area is predominantly agricultural, with some light
manufacturing and tourism industry in the coastal communities on Monterey Bay.
The Company believes that the economies in which it operates have experienced
strong growth and favorable economic activity in the past two years, as
reflected in sustained loan demand and deposit growth. The economic performance
in the Company's primary market area typically mirrors the national economy and
shows seasonal economic fluctuations.
The Company faces significant competition both in originating loans and
in attracting deposits. The Company's competitors are the financial institutions
operating in its primary market area, many of which are significantly larger and
have greater financial resources than the Company. The Company's competition for
loans comes principally from commercial banks, savings and loan associations,
mortgage banking companies, credit unions, and insurance companies. Its most
direct competition for deposits has historically come from savings and loan
associations and commercial banks. In addition, the Company faces increasing
competition for deposits from nonbank institutions such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate
and government securities funds, mutual funds, and annuities.
The Company serves its market area with a variety of mortgage loan
products and other retail financial services. Management considers the Company's
reputation for financial strength and competitive deposit and loan products as
its major competitive advantage in attracting and retaining customers within its
primary market area.
1
Lending Activities
General. The Company originates permanent and construction mortgage
loans collateralized by residential and commercial real estate, business loans,
and consumer loans. The following table sets forth information on the Company's
loan originations, purchases, sales and principal repayments for the periods
indicated.
For the Years Ended December 31,
----------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(In thousands)
Gross loans(1):
Beginning balance............................. $265,934 $234,649 $229,841
Loans originated:
One-to-four family......................... 47,440 22,423 27,768
Multi-family............................... 11,240 1,686 1,944
Commercial real estate..................... 18,024 13,177 3,363
Construction............................... 32,870 34,724 3,790
Land....................................... 6,137 2,169 -
Business................................... 6,563 1,213 -
-------- -------- --------
-
Total loans originated.................. 122,274 75,392 36,865
Loans purchased............................ 79,902 14,661 -
-------- -------- --------
-
Total gross loans....................... 468,110 324,702 266,706
Less:
Transfers to real estate owned............. 299 610 369
Principal repayments(2).................... 98,727 33,696 27,238
Sales of loans............................. 14,223 3,020 2,628
Securitized loans.......................... 48,370 - -
Loans in process........................... 2,759 21,442 1,822
-------- -------- --------
Total loans............................. 303,732 265,934 234,649
Less loans held for sale...................... 2,177 514 130
-------- -------- --------
Ending balance held for investment............ $301,555 $265,420 $234,519
======== ======== ========
- -----------------------
(1) Gross loans includes loans receivable held for investment and loans held
for sale, net of deferred loan fees and unamortized premiums and
discounts.
(2) Principal repayments include amortization of premiums, net of discounts;
amortization of deferred loan fees; net changes in nonmortgage loans
receivable; and other adjustments.
Loans originated by the Company are subject to federal and state law
and regulations. Interest rates charged by the Company on loans are affected by
the demand for such loans and the supply of money available for lending purposes
and the rates offered by competitors. These factors are, in turn, affected by,
among other things, economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, and legislative tax policies.
One-to-Four Family Mortgage Lending. The Company originates both fixed
rate and adjustable rate mortgage loans secured by one-to-four family
residential properties. Adjustable rate mortgage loans have interest rates that
adjust monthly or semiannually and are indexed to either the 11th FHLB District
Cost of Funds Index ("11th District Cost of Funds") or to current market
indices. The majority of loan originations are to existing or past customers and
members of the local communities. The Company also originates one-to-four family
residential construction loans.
2
The Company had total outstanding loans including commitments of $325.7
million at December 31, 1998, of which $185.0 million, or 56.8%, were
one-to-four family residential mortgage loans. The majority of the loans were
secured by properties located within the state of California. At December 31,
1998, 9% of the Company's one-to-four family mortgage loans had fixed terms and
91% had adjustable rates indexed to the 11th FHLB District Cost of Funds or to
current market indices. The Company offers a number of adjustable rate loan
products, including an "easy qualifier" loan and a 30-year adjustable rate
one-to-four family residential loan with initial three-to seven-year fixed rate
terms. The Company began originating loans subject to negative amortization in
1996. Negative amortization involves a greater risk to the Company because
during a period of high interest rates the loan principal may increase above the
amount originally advanced. However, the Company believes that the risk of
default on these loans is mitigated by negative amortization caps, underwriting
criteria, relatively low loan to value ratios, and the stability provided by
payment schedules. At December 31, 1998, the Company's loan portfolio included
$14.5 million of mortgage loans subject to negative amortization, which
represented 4.8% of total loans outstanding.
The Company originated $47.5 million of permanent one-to-four family
mortgage loans in 1998, compared to $22.4 million and $27.8 million,
respectively, in 1997 and 1996. The increase in loan volume during 1998 was
partly due to a decline in interest rates, which resulted in an increase in
purchase and refinance activity of one-to-four family mortgage loans. From time
to time, based on its asset and liability strategy, the Company purchases
mortgage loans originated by other institutions. In 1998, the Company purchased
$79.9 million of primarily one-to-four family adjustable rate mortgage loans
secured by properties located largely within the State of California. See
"Origination, Purchase, Sale and Servicing of Loans."
The Company originates one-to-four family residential mortgage loans in
amounts up to 80% of the lower of the appraised value or the selling price of
the property securing the loan, and up to 97% of the appraised value or selling
price if private mortgage insurance is obtained. Mortgage loans originated by
the Company generally include due-on-sale clauses which provide the Company with
the contractual right to deem the loan immediately due and payable in the event
the borrower transfers ownership of the property without the Company's consent.
Due-on-sale clauses are an important means of adjusting the rates on the
Company's fixed rate mortgage loan portfolio and the Company has generally
exercised its rights under these clauses.
Multi-family Lending. The Company offers adjustable rate multi-family
residential real estate loans secured by real property in California. Permanent
loans on multi-family properties typically have maturities of 30 years and are
secured by five or more unit apartment buildings. Factors considered by the
Company in reaching a lending decision on such properties include the net
operating income of the mortgaged premises before debt service and depreciation,
the debt service ratio (the ratio of net earnings to debt service), and the
ratio of the loan amount to appraised value. Pursuant to the Company's
underwriting policies, multi-family adjustable rate mortgage loans are only
originated in amounts up to 70% of the appraised value of the underlying
properties. The Company generally requires a debt service ratio of 1.10.
Properties securing loans are appraised by an independent appraiser. Title
insurance is required on all loans. When evaluating the qualifications of the
borrower for a multi-family loan, the Company considers the financial resources
and income level of the borrower, the borrower's experience in owning or
managing similar property and the Company's lending experience with the
borrower. The Company's underwriting policies require that the borrower provide
evidence of ability to repay the mortgage on a timely basis and maintain the
property from current rental income. In evaluating the creditworthiness of the
borrower, the Company generally reviews the borrower's financial statements,
employment, and credit history, as well as other related documentation.
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than
one-to-four family residential mortgage loans. Because payments on loans secured
by multi-family properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate
3
market or the economy. The Company seeks to minimize these risks through its
underwriting policies, which require such loans to be qualified at origination
on the basis of the property's income and debt coverage ratio. The Company also
attempts to limit its risk exposure by requiring operating annual statements on
the properties and by acquiring personal guarantees from the borrowers.
As part of its operating strategy, the Company intends to moderately
increase its multi-family lending within the state of California. At December
31, 1998, the Company's portfolio of multi-family loans totaled $33.3 million,
or 10.2% of the Company's total loans outstanding. Included in this total was
$3.9 million of multi-family loans purchased during 1998, consisting primarily
of newly originated loans secured by apartment buildings in the Southern
California area. These loans were underwritten to standards substantially
similar to those utilized by the Company in originating loans. See
"Originations, Purchases and Sales of Loans."
At December 31, 1998, the Company's largest multi-family loan had an
outstanding balance of $2.0 million. The loan was secured by an apartment
building located in Stockton, California.
Permanent Commercial Real Estate Lending. The Company originates both
permanent and construction commercial real estate loans, collateralized by real
property located in California. Commercial real estate loans are generally
secured by properties used for business purposes. The Company's underwriting
procedures provide that commercial real estate loans may be made in amounts up
to the lesser of 65% of the appraised value of the property or up to the
Company's current loans-to-one borrower limit. Permanent loans may be made with
terms up to 25 years and are typically adjustable to the one-year Constant
Maturity Treasury rate or the 11th District Cost of Funds. Construction loans on
commercial real estate carry adjustable rates and typically have terms of 12 to
18 months. The Company's underwriting standards and procedures on commercial
loans are similar to those applicable to its multi-family loans. The Company
considers the net operating income of the property and the borrower's expertise,
credit history and profitability, and requires that the properties securing
commercial real estate loans have debt service coverage ratios of at least 1.10.
At December 31, 1998, the Company's permanent commercial real estate
loan portfolio totaled $40.0 million, or 12.2% of total loans. The largest
permanent commercial real estate loan in the Company's portfolio at December 31,
1998 was secured by commercial real property located in San Jose, California,
with an outstanding principal balance of $4.5 million.
As part of its operating strategy, the Company has increased the level
of its commercial real estate lending in California. The majority of the
commercial loans are located in Northern and Central California. Loans secured
by commercial real estate properties, like multi-family loans, are generally
larger and involve a greater degree of risk than one-to-four family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on successful operation or management of the
properties, repayment of such loans may be subject to a great extent to adverse
conditions in the real estate market or the economy. The Company seeks to
minimize these risks through strict underwriting standards, which require such
loans to be qualified on the basis of the property's income and debt service
ratio, by requiring annual operating statements on the properties, and by
acquiring personal guarantees from the borrowers.
Construction Lending. The Company originates construction loans for the
acquisition and development of property. Historically, the majority of the
Company's construction loans have been to finance the construction of
one-to-four family, owner-occupied residential properties. During 1998, the
Company increased the amount of its construction lending on commercial real
estate, residential land development projects and in one case a church.
4
Construction financing is generally considered to involve a higher
degree of risk than long-term financing on improved, occupied real estate. The
Company's risk of loss on construction loans depends largely upon the accuracy
of the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If the
estimate of construction costs proves to be inaccurate, the Company may have to
advance funds beyond the amount originally committed to permit completion of the
development and to protect its security position. The Company may also be
confronted, at or prior to maturity of the loan, with a project with
insufficient value to ensure full repayment. The Company's underwriting,
monitoring, and disbursement practices with respect to construction financing
are intended to ensure that sufficient funds are available to complete
construction projects. The Company attempts to limit its risk through its
underwriting procedures, by using only approved, qualified appraisers, and by
dealing with qualified builder/borrowers.
The Company's construction loans typically have adjustable rates and
terms of 12 to 18 months. The Company originates one-to-four family and
multi-family residential construction loans in amounts up to 80% of the
appraised value of the property, subject to loans to one-borrower limitations.
Land development loans are determined on an individual basis, but in general
they do not exceed 70% of the actual cost or current appraised value of the
property, whichever is less. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant.
At December 31, 1998, the Company had gross construction and land
development loans totaling $51.6 million or 15.8% of total loans, on which there
were total undisbursed loan funds of $24.2 million. The largest construction
loan in the Company's portfolio at year-end was a $5.6 million land development
loan secured by real estate located in Castroville, California.
Land Lending. The Company offers loans secured against land in its
immediate marketplace.
At December 31, 1998, the Company had land loans totaling $7.8 million
or 2.4% of total loans. The largest land loan in the Company's portfolio at
year-end was a $1.1 million loan secured by land located in Soledad, California.
Business Lending. The Company offers business loans primarily
collateralized by business assets. Such collateral is typically comprised of
accounts receivable, inventory, and equipment. Business lending is generally
considered to involve a higher degree of risk than the financing of real estate,
primarily because security interests in the collateral are more difficult to
perfect and the collateral may be difficult to obtain or liquidate following an
uncured default. Business banking loans typically offer relatively higher
yields, short maturities, and variable interest rates. The availability of such
loans enables potential depositors to establish a full-service banking
relationship with the Bank. The Company attempts to reduce the risk of loss
associated with business lending by closely monitoring the financial condition
and performance of its customers.
At December 31, 1998, the Company had business loans totaling $7.3
million or 2.2% of total loans. The largest business loan in the Company's
portfolio at year end was a $5.0 million loan to American Home Loan Corp.
(AHLC), which operates primarily as the holding company for Bank USA, a Federal
Savings Bank. Both AHLC. and Bank USA conduct operations in the Phoenix, Arizona
market. The loan is primarily secured by the 97% ownership interest that AHLC
has in Bank USA.
Loan Approval Procedures and Authority. The Board of Directors has
ultimate responsibility for the lending activity of the Company, establishes the
lending policies of the Company, and reviews properties offered as security. The
Board of Directors has authorized the following loan approval authorities:
mortgage loans in amounts of $240,000 and below may be approved by the Company's
staff underwriters; mortgage loans in excess of $240,000 and up to $350,000 may
be approved by the underwriting/processing manager;
5
mortgage loans in excess of $350,000 and up to $400,000 may be approved by the
real estate loan administrator; loans in excess of $400,000 and up to $500,000
require the approval of the Chief Lending Officer; and loans in excess of
$500,000 and up to $750,000 require the approval of the Chief Executive Officer
or the President. Loans in excess of $750,000 and up to $2.0 million require the
approval of the Directors' Loan Committee, which is comprised of members of the
Company's Board of Directors. A resolution of the Board of Directors is required
for mortgage loans in excess of $2.0 million. The President or Chief Loan
Officer may approve non-real estate loans up to $75,000. The Director's Loan
Committee can approve such loans up to $2.0 million. Any loans greater than $2.0
million must be approved by the full Board of Directors.
The loan origination process requires that upon receipt of a completed
loan application, a credit report is obtained and certain information is
verified by an independent credit agency. If necessary, additional financial
information is obtained from the prospective borrower. An appraisal of the
related real estate is performed by an independent appraiser. On an annual
basis, the Company's Board of Directors reviews the list of independent
appraisers used by the Company. The Company uses only those appraisers who have
been approved by the Board of Directors. The Company's policy is to obtain title
and hazard insurance on all real estate loans. If the original loan amount
exceeds 80% on a sale or refinance of a first trust deed loan or private
mortgage insurance is required, the borrower is required to make payments to a
mortgage impound account from which the Company makes disbursements for property
taxes and mortgage insurance.
6
Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio in dollar amounts and as a
percentage of the portfolio at the dates indicated.
At December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Real estate:
Residential:
One-to-four family............. $187,208 57.10% $205,218 71.36% $201,579 85.22%
Multi-family................... 33,110 10.10% 23,355 8.12% 22,455 9.49%
Commercial real estate............... 40,227 12.27% 20,159 7.01% 7,524 3.18%
Construction......................... 51,624 15.75% 35,150 12.23% 4,131 1.75%
Land................................. 7,774 2.37% 1,869 .65% 95 .04%
Business loans....................... 6,679 2.04% 943 .33% .00%
-
Business lines of credit............. 595 .18% 270 .09% .00%
-
Other(1).......................... 658 .20% 598 .21% 763 .32%
--------- --------- --------- --------- --------- ---------
Total loans................. 327,875 100.00% 287,562 100.00% 236,547 100.00%
========= ========= =========
Plus (Less):
Undisbursed loan funds............ (24,201) (21,442) (1,822)
Unamortized premium, net.......... 492 556 452
Deferred loan fees, net........... (434) (742) (528)
Allowance for loan losses......... (2,780) (1,669) (1,311)
--------- --------- ---------
Total loans, net............... 300,952 264,265 233,338
Less:
Loans held for sale:
One-to-four family............. (2,177) (514) (130)
--------- --------- ---------
Total loans held for
investment............... $298,775 $263,751 $233,208
========= ========= =========
------------------------------------------------------
1995 1994
------------------------- -------------------------
Percent Percent
Amount of total Amount of total
----------- ----------- ----------- -----------
Real estate:
Residential:
One-to-four family............. $199,917 86.29% $216,872 88.36%
Multi-family................... 21,503 9.28% 22,231 9.06%
Commercial real estate............... 4,191 1.81% 2,903 1.18%
Construction......................... 5,379 2.32% 2,848 1.16%
Land................................. 97 .04% 99 .04%
Business loans....................... .00% .00%
- -
Business lines of credit............. .00% .00%
- -
Other(1).......................... 605 .36% 503 .20%
---------- ---------- ---------- ----------
Total loans................. 231,692 100.00% 245,456 100.00%
========== ==========
Plus (Less):
Undisbursed loan funds............ (1,895) (1,178)
Unamortized premium, net.......... 651 1,006
Deferred loan fees, net........... (607) (971)
Allowance for loan losses......... (1,362) (808)
---------- ----------
Total loans, net............... 228,479 243,505
Less:
Loans held for sale:
One-to-four family............. (92) (16,082)
---------- ----------
Total loans held for
investment............... $228,387 $227,423
========== ==========
- --------------------------------------
(1) Includes loans secured by savings accounts and unsecured consumer loans.
7
Loan Maturity: The following table shows the contractual maturities of the
Company's gross loans at December 31, 1998. The table includes loans held for
sale of $2,177,000. The table does not include principal repayments. Principal
repayments on total loans totaled $99.3 million for the year ended December 31,
1998.
At December 31, 1998
---------------------------------------------------------------------------------
One-to-Four Commercial Construction
Family Multi-Family Real Estate and Land Business
-------------- -------------- --------------- --------------- ---------------
(In thousands)
Amounts due:
One year or less............................ $ 345 $ - $ - $ 40,628 $ 990
-------- -------- -------- -------- -------
After one year:
More than one year to three years........ 270 74 2,097 17,043 5,035
More than three years to five years...... 878 127 7,010 1,429 705
More than five years to 10 years......... 2,546 1,268 380 28 544
More than 10 years to 20
years 6,011 1,581 1,615 271 -
More than 20 years....................... 177,159 30,289 28,895 - -
-------- -------- -------- -------- -------
Total due after December 31, 1999..... 186,864 33,339 39,997 18,771 6,284
-------- -------- -------- -------- -------
Total amount due............................ 187,209 33,339 39,997 59,399 7,274
Less:
Undisbursed loan funds...................... - - - (24,201) -
Unamortized (discounts) premiums............ 519 (28) - - -
Deferred loan fees, net..................... (248) (44) (53) (79) (10)
Allowance for loan losses................... (1,161) (317) (564) (677) (47)
-------- -------- -------- -------- -------
Total loans, net......................... 186,319 32,950 39,380 34,442 7,217
Loans held for sale............................ (2,177) - - - -
-------- -------- -------- -------- -------
Loans receivable held for investment........... $184,142 $ 32,950 $ 39,380 $ 34,442 $ 7,217
======== ======== ======== ======== =======
------------------------------------
Total Loans
Other(1) Receivable
--------------- -----------------
Amounts due:
One year or less............................ $ 658 $ 42,621
----- --------
After one year:
More than one year to three years........ - 24,519
More than three years to five years...... - 10,149
More than five years to 10 years......... - 4,766
More than 10 years to 20
years - 9,478
More than 20 years....................... - 236,343
----- --------
Total due after December 31, 1999..... - 285,255
----- --------
Total amount due............................ 658 327,876
Less:
Undisbursed loan funds...................... - (24,201)
Unamortized (discounts) premiums............ - 491
Deferred loan fees, net..................... (1) (434)
Allowance for loan losses................... (14) (2,780)
----- --------
Total loans, net......................... 644 300,952
Loans held for sale............................ - (2,177)
----- --------
Loans receivable held for investment........... $ 644 $298,775
===== ========
- --------------------------
(1) Includes loans secured by savings accounts and unsecured loans.
8
The following table sets forth at December 31, 1998, the dollar amount
of gross loans receivable contractually due after December 31, 1999, and whether
such loans have fixed or adjustable rates.
Due After December 31, 1999
-------------------------------------------------
Fixed Adjustable Total
-------------- --------------- ---------------
(In thousands)
Real estate loans:
One-to-four family.................... $25,439 $ 165,701 $ 191,141
Multi-family.......................... 806 29,735 30,541
Commercial real estate................ 6,239 39,702 45,940
Construction and land................. 2,457 18,189 20,645
Business loans........................ - 1,803 1,804
------- --------- ---------
Total loans receivable due
after December 31, 1999......... $34,941 $ 255,130 $ 290,071
======= ========= =========
Originations, Purchases and Sales of Loans. The Company's mortgage
lending activities are conducted primarily through its eight branch offices and
approximately 60 wholesale loan brokers who deliver loan applications to the
Company. In addition, the Company has developed correspondent relationships with
a number of financial institutions to facilitate the origination of mortgage
loans on a participation basis. Loans presented to the Company for purchase or
participation are underwritten substantially in accordance with the Company's
established lending standards, which consider the financial condition of the
borrower, the location of the underlying property, and the appraised value of
the property, among other factors. The majority of the Company's purchased loans
and participations are current index, adjustable rate mortgages secured by real
estate located within the state of California. At December 31, 1998, the Company
had entered into participation agreements with other financial institutions to
originate construction, commercial real estate, and land loans, of which the
Company's share was $19.9 million.
As part of its interest rate risk management and investment strategy,
during 1998 the Company purchased $78.8 million of one-to-four family adjustable
rate mortgage loans. As of December 31, 1998, $52.8 million, or 17.7%, of the
Company's net loans receivable had been purchased from other financial
institutions. Of this amount, $45.0 million, or 85.2%, were loans secured by
one-to-four family residences located throughout the United States and $7.8
million, or 14.8%, were multi-family mortgage loans secured by apartment
buildings located in the Greater San Francisco Bay area.
On an ongoing basis, depending on its asset and liability strategy, the
Company originates one-to-four family residential mortgage loans for sale in the
secondary market. Loan sales are dependent on the level of loan originations and
the relative customer demand for mortgage loans, which is affected by the
current and expected future level of interest rates. During the years ended
December 31, 1998 and 1997, the Company sold $15.9 million and $3.4 million,
respectively, of fixed rate mortgage loans. The level and timing of any future
loan sales will depend upon market opportunities and prevailing interest rates
at the time such a decision is made. From time to time, depending on its asset
and liability strategy, the Company converts a portion of its mortgages into
readily marketable FHLMC or FNMA mortgage-backed securities. In 1998, the
Company converted approximately $48.4 million of fixed rate residential loans
into mortgage-backed securities. The securitization was undertaken primarily to
provide greater marketability of the loans and therefore, allow easier sale of
the loans in order to reduce interest rate risk.
The Company recognizes gains or losses on the sale of loans at the time
of sale, based on the difference between the net sale proceeds and the carrying
value of the loans sold. When the right to service the loans is retained, an
excess servicing gain or loss is recognized based upon the net present value of
any difference between the interest rate charged to the borrower and the
interest rate paid to the purchaser after deducting a normal servicing fee. The
excess servicing gain or loss is dependent on prepayment estimates and discount
rate assumptions. Historically, such excess servicing gains or losses have not
had a material impact on the Company's earnings. See "- Loan Servicing."
9
Loan Servicing. The Company services its own loans as well as loans
owned by others. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding escrow funds for the payment of
real estate taxes and insurance premiums, contacting delinquent borrowers, and
supervising foreclosures and property dispositions in the event of unremedied
defaults. Loan servicing income is recorded on an accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees. At December 31, 1998 and 1997, respectively, the Company
was servicing $75.4 million and $52.1 million of loans for others.
Classified Assets and Real Estate Owned. To measure the quality of
assets, the Company has established internal asset classification guidelines as
part of its credit monitoring system for identifying and reporting problem
assets and determining provisions for anticipated loan and real estate owned
("REO") losses. Under these guidelines, an allowance for anticipated loan and
REO losses is established when certain conditions exist. The Internal Asset
Review Committee, comprised primarily of senior managers and Board members,
oversees the administration of the internal asset classification guidelines and
reports results to the Board of Directors.
The Company classifies assets it considers of questionable quality
employing the classification categories of "substandard," "doubtful," and
"loss." An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged. Substandard assets include those characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions, and values, questionable and
there is a high probability of loss. An asset classified as loss is considered
uncollectible and of such little value that it should not be included as an
asset. Total classified assets of the Company increased to $5.1 million at
December 31, 1998 from $2.5 million at December 31, 1997. Classified assets were
1.13% of total assets at December 31, 1998, compared to 0.63% a year earlier.
At December 31, 1998, the Company had $6.4 million of assets classified
as substandard and no assets classified as doubtful or loss. Substandard assets
included $1.5 million of loans past due 90 days or more, $3.6 million of loans
with identified risk characteristics such as a pattern of historical
delinquencies and/or delinquent property tax status and $0.3 million of real
estate owned. The largest substandard loan at December 31, 1998 was a
single-family mortgage with an outstanding principal balance of $311,000.
Assets, which possess weaknesses but do not currently expose the
Company to sufficient risk to warrant classification as substandard, doubtful or
loss are designated as "special mention." At December 31, 1998, the Company had
$6.4 million of assets classified as special mention due to past delinquencies
and other identifiable weaknesses. The largest special mention loan was a
commercial mortgage loan with an outstanding balance of $1.7 million on December
31, 1998.
Assets classified as substandard or doubtful require the establishment
of general valuation allowances in amounts considered by management to be
adequate under generally accepted accounting principles. These amounts represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. Judgments regarding the
adequacy of general valuation allowances are based on continual evaluation of
the nature, volume and quality of the loan portfolio, other assets, and current
economic conditions that may affect the recoverability of recorded amounts.
Assets classified as a loss require either a specific valuation allowance equal
to 100% of the amount classified or a charge-off of such amount.
10
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
Office of Thrift Supervision ("OTS"), which can require the establishment of
additional general or specific loss allowances. The OTS, in conjunction with the
other federal banking agencies, has adopted an interagency policy statement on
allowances for loan and lease losses which provides guidance in determining the
adequacy of general valuation guidelines. The policy statement recommends that
savings institutions establish effective systems and controls to identify,
monitor and address asset quality problems, analyze significant factors that
affect the collectibility of assets, and establish prudent allowance evaluation
processes. Management believes that the Company's allowance for loan losses is
adequate given the composition and risks of the loan portfolio. However, actual
losses are dependent upon future events and, as such, further additions to the
level of specific and general loan loss allowances may become necessary. In
addition, there can be no assurance that at some time in the future the OTS, in
reviewing the Company's loan portfolio, will not request the Company to increase
its allowance for loan losses, thus negatively impacting the Company's earnings
for that time period.
REO is recorded at the lower of the recorded investment in the loan or
the fair value of the related asset on the date of foreclosure, less costs to
sell. Fair value is defined as the amount in cash or cash-equivalent value of
other consideration that a real estate asset would yield in a current sale
between a willing buyer and a willing seller. Development and improvement costs
relating to the property are capitalized to the extent they are deemed to be
recovered upon disposal. The carrying value of acquired property is continuously
evaluated and, if necessary, an allowance is established to reduce the carrying
value to net realizable value (which considers, among other things, estimated
direct holding costs and selling expenses). At December 31, 1998, the Company
had REO of $281,000, representing three one-to-four family residential
properties acquired through foreclosure in 1998.
The Company obtains appraisals on all real estate acquired through
foreclosure at the time of foreclosure. Appraisals on REO are updated annually.
The Company generally conducts external inspections on foreclosed properties and
properties deemed in-substance foreclosures on a quarterly basis.
Delinquent Loan Procedures. Specific delinquency procedures vary
depending on the loan type and period of delinquency. However, the Company's
policies generally provide that loans be reviewed monthly for delinquencies, and
that if a borrower fails to make a required payment when due, the Company
institutes internal collection procedures. For mortgage loans, written late
charge notices are mailed no later than the 15th day of delinquency. At 25 days
past due, the borrower is contacted by telephone and the Company makes a verbal
request for payment. In most cases, deficiencies are cured promptly. At 30 days
past due, the Company begins tracking the loan as a delinquency, and at 45 days
past due a notice of intent to foreclose is mailed. When contact is made with
the borrower prior to foreclosure, the Company generally attempts to obtain full
payment or work out a repayment schedule with the borrower to avoid foreclosure.
It is the Company's policy to accrue interest on all loans up to 90 days past
due, unless it is determined that the collection of interest and/or principal is
not probable under the contractual terms of the agreement.
11
The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:
At December 31, 1998
-----------------------------------------------------------
60-89 Days 90 Days or More
---------------------------- ---------------------------
Principal Principal
Number balance Number balance
of loans of loans of loans of loans
------------ ------------ ----------- -----------
(Dollars in thousands)
One-to-four family........... $ - 9 $ 1.479
Multi-family................. - - - -
Commercial................... - - - -
Construction and land........ 1 145 - -
Other........................ 1 3 - -
--------- --------- -------- --------
Total..................... 2 $148 $ 1,479
========= ========= ======== ========
Delinquent loans to total
gross loans............... .10% .05% .43% .45%
At December 31, 1997
-----------------------------------------------------------
60-89 Days 90 Days or More
--------------------------- ---------------------------
Principal Principal
Number balance Number balance
of loans of loans of loans of loans
----------- ----------- ----------- ------------
(Dollars in thousands)
One-to-four family........... 2 $413 5 $781
Multi-family................. - - 1 817
Commercial................... - - - -
Construction and land........ - - - -
Other........................ - - - -
-------- -------- -------- ---------
Total..................... 2 $413 6 $1,598
======== ======== ======== =========
Delinquent loans to total
gross loans............... .09% .16% .35% .60%
At December 31, 1996
-----------------------------------------------------------
60-89 Days 90 Days or More
---------------------------- ---------------------------
Principal Principal
Number balance Number balance
of loans of loans of loans of loans
------------ ------------ ----------- -----------
(Dollars in thousands)
One-to-four family........... 3 $455 11 $ 1,392
Multi-family................. - - - -
Commercial................... - - - -
Construction and land........ - - - -
Other........................ 3 1 2 1
--------- --------- -------- -------
- - - -
Total..................... 6 $456 13 $ 1,393
========= ========= ======== =======
Delinquent loans to total
gross loans............... .14% .19% .06% .59%
12
Non-accrual and Past Due Loans. Loans are generally placed on
nonaccrual status when the payment of interest is 90 days or more delinquent, or
the collection of interest and/or principal is not probable under the
contractual terms of the loan agreement. Loans on which the Company has ceased
the accrual of interest constitute the primary component of the portfolio of
nonperforming loans. Nonperforming loans consist of all nonaccrual loans and
restructured loans not performing in accordance with their restructured terms.
Nonperforming assets include all nonperforming loans and REO.
At December 31, 1998, loans on nonaccrual totaled $1.5 million. For the
year ended December 31, 1998, interest income which would have been earned had
loans on non-accrual been performing in accordance with contractual terms was
$126,000. At December 31, 1998, the Company had $1,437,000 of loans that met the
definition of a troubled debt restructuring, of which $17,000 were 0-30 days
delinquent and $1,420,000 were current and paying according to the terms of
their contractually restructured agreements. The Company had $281,000 in REO at
December 31, 1998, $321,000 at year-end 1997, and no REO at year-end 1996, 1995,
and 1994.
The following table sets forth information regarding nonperforming
assets. The Company does not accrue interest on loans past due 90 days or more,
and accordingly, there were no accruing loans past due 90 days or more at any of
the dates presented below.
At December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Nonaccrual loans 90 days or more past due: (Dollars in thousands)
Residential real estate:
One-to-four family........................ $ 1,479 $781 $ 1,393 $ 1,544 $711
Multi-family.............................. - 817 - 830 -
Construction and land........................ - - - 825 -
Non-mortgage.................................
------- ------- ------- ------- ----
- - - 1 -
- - - - -
Total loans on nonaccrual.............. 1,479 1,598 1,393 3,200 711
Restructured loans not performing............ 17 300
- - -
Real estate owned............................ 281 321
------- ------- ------- ------- ----
- - -
Total nonperforming assets(1).......... $ 1,777 $ 2,219 $ 1,393 $ 3,200 $711
======= ======= ======= ======= ====
Allowance for loan losses as a percent
of gross loans receivable(2).............. .87% .63% .56% .59% .33%
Allowance for loan losses as a percent
of total nonperforming loans(1) 175.85% 87.98% 94.10% 42.56% 113.64%
Nonperforming loans as a percent
of gross loans receivable(1)(2)........... .49% .71% .59% 1.39% .29%
Nonperforming assets as a percent
of total assets(1)........................ .39% .54% .33% .97% .24%
- --------------------
(1) Nonperforming assets consist of nonperforming loans (nonaccrual loans and
restructured loans not performing in accordance with their restructured
terms) and REO. REO consists of real estate acquired through foreclosure
and real estate acquired by acceptance of a deed-in-lieu of foreclosure.
(2) Gross loans receivable includes loans receivable held for investment and
loans held for sale, and unamortized discounts and premiums.
13
Impaired Loans. A loan is designated as impaired when the Company
determines it may be unable to collect all amounts due according to the
contractual terms of the loan agreement, whether or not the loan is 90 days past
due. Excluded from the definition of impairment are smaller balance homogenous
loans that are collectively evaluated for impairment. In addition, any loans
which meet the definition of a troubled debt restructuring, or are partially or
completely classified as Doubtful or Loss, are considered impaired.
The Company has established a monitoring system for its loans in order
to identify impaired loans and potential problem loans, and to permit periodic
evaluation of the adequacy of allowances for losses in a timely manner. In
analyzing its loans, the Company has established specific monitoring policies
and procedures suitable for the relative risk profile and other characteristics
of loans by type. The Company's smaller-balance residential one-to-four family,
multi-family and non-mortgage loans are considered to be relatively homogeneous
and no single loan is individually significant in terms of its size or potential
risk of loss. Therefore, the Company generally reviews these loans by analyzing
their performance and composition of their collateral for the portfolio as a
whole. For non-homogenous loans the Company conducts a periodic review of each
loan. The frequency and type of review is dependent upon the inherent risk
attributed to each loan and the adversity of the loan grade. The Company
evaluates the risk of loss and default for each loan subject to individual
monitoring.
Factors considered as part of the periodic loan review process to
determine whether a loan is impaired address both the amount the Company
believes is probable that it will collect and the timing of such collection. As
part of the Company's loan review process the Company considers such factors as
the ability of the borrower to continue meeting the debt service requirements,
assessments of other sources of repayment, and the fair value of any collateral.
Insignificant delays or shortfalls in payment amounts, in the absence of other
facts and circumstances, would not alone lead to the conclusion that a loan is
impaired.
When a loan is designated as impaired, the Company measures impairment
based on the fair value of the collateral of the collateral-dependent loan. The
amount by which the recorded investment of the loan exceeds the measure of the
impaired loan is recognized by recording a valuation allowance with a
corresponding charge to earnings. The Company charges off a portion of an
impaired loan against the valuation allowance when it is probable that there is
no possibility of recovering the full amount of the impaired loan.
The following table identifies the Company's total recorded investment
in impaired loans by type at December 31, 1998 and 1997 (in thousands).
December 31,
---------------------
1998 1997
------ ------
Residential one-to-four family
non-homogenous loans .......................... $2,961 $ 985
Multi-family loans ............................... 648 817
Land ............................................. 145 -
------ ------
Total impaired loans ....................... $3,754 $1,802
====== ======
For the years ended December 31, 1998 and 1997, the Company recognized
interest on impaired loans of $166,000 and $49,000, respectively. $1.5 million
of impaired loans were on nonaccrual status at December 31, 1998, and $76,000 of
interest was uncollected on impaired loans. During the years ended December 31,
1998 and 1997, the Company's average investment in impaired loans was $3.1
million and $1.3 million, respectively. Valuation allowances on impaired loans
were $409,000 at December 31, 1998.
14
Allowance for Estimated 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 its loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience,
and the Company's underwriting policies. At December 31, 1998, the Company's
allowance for loan losses was .92% of total loans, compared to .63% at December
31, 1997. The Company will continue to monitor and modify its allowance for loan
losses as conditions dictate. Various regulatory agencies, as an integral part
of their examination process, periodically review the Company's allowance for
loan losses. These agencies may require the Company to make additional
provisions for loan losses, based on their judgments of the information
available at the time of the examination.
Activity in the Company's allowance for loan losses for the periods
indicated are set forth in the table below (in thousands).
At or for the Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ----------- ----------
Balance at beginning of year.............. $1,669 $1,311 $1,362 $808 $387
Provision for loan losses................. 692 375 28 663 421
Allowance related to acquired loans 416 - - - -
Charge-offs, net.......................... 3 (17) (79) (109) -
------ ------ ------ ------ ----
Balance at end of period.................. $2,780 $1,669 $1,311 $1,362 $808
====== ====== ====== ====== ====
15
The following table sets forth the Company's allowance for loan losses
as a percentage of the total allowance, and the percentage of loans to total
loans in each of the categories listed at the dates indicated.
At December 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------- ----------------------------------------
Percent Percent Percent
of of of
loans in loans in loans in
Percent each Percent each Percent each
of category of category of category
allowance to allowance to allowance to
to total total to total total to total total
Amount allowance loans Amount allowance loans Amount allowance loans Amount
-------- ---------- -------- --------- --------- -------- ------- ----------- ------ ---------
(Dollars in thousands)
One-to-four
family..... $ 966 36.72% 57.32% $ 846 50.69% 69.79% $ 911 69.49% 85.22% $ 1,080
Multi-family.. 280 10.64% 9.82% 278 16.66% 7.85% 171 13.04% 9.49% 143
Commercial
real estate 517 19.66% 12.49% 241 14.44% 6.79% 174 13.27% 3.18% 58
Construction
and land.. 605 23.02% 17.21% 229 13.72% 13.64% 20 1.53% 1.79% 77
Other........ 262 9.96% 3.15% 75 4.49% 1.93% 35 2.67% .32% 4
------- ------ ------- ------- ------ ------- ------- ------ ------- -------
Total
valuation
allowances... $ 2,630 100.00% $ 1,669 100.00% $ 1,311 100.00% $ 1,362
======= ======= ======= ======= ======= ======= =======
------------------------------------------------------
1995 1994
------------------------------------------------------
Percent Percent
of of
loans in loans in
Percent each Percent each
of category of category
allowance to allowance to
to total total to total total
allowance loans Amount allowance loans
---------- --------- -------- ---------- ---------
One-to-four
family..... 79.30% 86.29% $ 676 83.66% 88.36%
Multi-family.. 10.50% 9.28% 91 11.26% 9.06%
Commercial
real estate 4.26% 1.81% 31 3.84% 1.18%
Construction
and land.. 5.65% 2.36% 7 .87% 1.20%
Other........ .29% .26% 3 .37% .20%
----- ------- ----- ----- -------
Total
valuation
allowances... 100.00% $ 808 100.00%
======= ===== =======
16
Investment Activities
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Company must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations. See
"Regulation - Federal Savings Institution Regulation - Liquidity." Historically,
the Company has maintained liquid assets above the minimum OTS requirements and
at a level considered to be adequate to meet its normal daily activities.
The Company's investment activities described herein include
transactions related to short-term investments, investment securities and
mortgage-backed securities held by the Company. The investment policies of the
Company as established by the Board of Directors attempt to provide and maintain
liquidity, generate a favorable return on investments without incurring undue
interest rate and credit risk, and complement the Company's lending activities.
Specifically, the Company's policies generally limit investments to government
and federal agency-backed securities and other non-government guaranteed
securities, including corporate debt obligations, that are investment grade. The
Company's policies provide the authority to invest in marketable equity
securities meeting the Company's guidelines and in mortgage-backed securities
guaranteed by the U.S. government and agencies thereof and other financial
institutions. At December 31, 1998, the Company had federal funds sold and other
short-term investments, investment securities (including certificates of
deposit) and mortgage-backed securities with an aggregate amortized cost of
$120.8 million and a market value of $122.1 million.
At December 31, 1998, the Company had a total of $98.1 million of
mortgage-backed securities of which $98.0 million were designated as available
for sale, $64.3 million of the mortgage-backed securities were insured or
guaranteed by the FNMA GNMA, and FHLMC and $47.6 million of the securities held
were collateralized mortgage obligations, CMOs are multi-class mortgage-backed
securities. A pool of mortgages is used to pay interest and principal on several
classes at obligations, which can be fixed, or adjusting, and can have different
lengths of maturity. The Company's mortgage-backed and mortgage-related
securities portfolio consists primarily of seasoned fixed rate and adjustable
rate mortgage-backed and mortgage-related securities. Investments in
mortgage-backed securities involve a risk that actual prepayments will exceed
prepayments estimated over the life of the security, which may result in a loss
of any premium paid for such instruments, thereby reducing the net yield on the
securities. At December 31, 1998, the Company had $19.2 million in corporate
trust preferred securities. Corporate trust preferred securities are corporate
debt issued by financial institutions for the purpose of augmenting capital. The
corporate trust preferred securities held by the Company have been most recently
rated not less than BBB by Standard & Poor. At December 31, 1998, the Company
had a $256,000 investment in a FNMA note. If interest rates increase, the market
value of these securities may be adversely affected.
17
At December 31, 1998, the Company held mortgage-backed securities, and
investment securities, including corporate trust preferred securities, issued by
the following entities as to which, the aggregate total amortized cost of such
securities exceeded 10% of the Company's equity.
Amortized Market
Cost Value
-------- -------
(In thousands)
Issuer:
Chase Mortgage Finance Corporation ................................. $ 9,376 $ 9,383
Federal Home Loan Mortgage Corporation ............................. 9,067 9,002
Federal National Mortgage Company .................................. 42,832 43,701
Countywide Home Loans .............................................. 4,306 4,273
Government National Mortgage Association ........................... 11,927 11,946
Residential Asset Securitization Trust ............................. 13,494 13,564
Residential Funding Mortgage Series I .............................. 6,504 6,491
BankAmerica Capital ................................................ 3,812 3,825
Chase Capital ...................................................... 3,763 3,827
Bankers Trust Capital .............................................. 3,634 3,800
State Street Capital Trust ......................................... 3,861 3,872
Bank Boston Capital Trust .......................................... 3,588 3,830
18
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
total portfolio at the dates indicated. Available for sale securities are
reflected at fair market value and held to maturity securities are reflected at
amortized cost pursuant to Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS No.
115").
At December 31,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ -------------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
------------ ----------- ------------ ----------- ------------ -----------
(Dollars in thousands)
Mortgage-backed securities:
FNMA.................................. $ 33,880 34.73% $ 24,983 36.20% $ 45,243 39.62%
FHLMC................................. 4,658 4.78% 27,389 39.68% 38,206 33.46%
GNMA.................................. 11,549 11.84% 16,650 24.12% 15,158 13.27%
CMO Floaters(1)....................... - - - - 15,590 13.65%
CMOs(2)............................... 47,462 48.65% - - - -
-------- -------- -------- ------- ------- -------
Total mortgage-backed securities......... 97,549 100.00% 69,022 100.00% 114,197 100.00%
======== ======= =======
Plus:
Unamortized premium, net.............. 554 1,585 2,586
------- ------- --------
Total mortgage-backed
securities, net....................... 98,103 70,607 116,783
Less:
Mortgage-backed securities
available for sale................. (98,006) (70,465) (116,610)
------- ------- --------
Total mortgage-backed securities
held to maturity...................... $ 97 $ 142 $ 173
======= ======= ========
- -------------------------------------------------
(1) The CMOs consisted primarily of mortgage-backed securities tied to single
current index securities.
(2) Includes CMO's issued by FNMA and FHLMC.
The following table sets forth, certain information regarding the
amortized cost and market values of the Company's mortgage-backed securities at
the dates indicated.
At December 31,
--------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- -------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ------------ ------------ ------------- ------------ -----------
Mortgage-backed securities: (In thousands)
Available for sale:
GNMA........................ $ 11,927 $ 11,946 $ 17,184 $ 17,217 $ 15,786 $ 15,696
FHLMC....................... 4,735 4,763 27,908 28,046 39,110 38,988
FNMA........................ 32,870 33,751 25,142 25,202 46,410 46,221
CMO Floaters(1) - - - - 15,788 15,705
CMOs(2)..................... 47,626 47,546 - - - -
-------- -------- -------- -------- -------- --------
Total available for sale. 97,158 98,006 70,234 70,465 117,094 116,610
-------- -------- -------- -------- -------- --------
Held to maturity:
FNMA........................... 97 96 142 138 173 169
-------- -------- -------- -------- -------- --------
Total held to maturity...... 97 96 142 138 173 169
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities............... $ 97,255 $ 98,102 $ 70,376 $ 70,603 $117,267 $116,779
======== ======== ======== ======== ======== ========
- ------------------------------------
(1) The CMOs consisted primarily of mortgage-backed securities tied to single
current index securities.
(2) Includes CMOs issued by FNMA and FHLMC.
19
The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Company's,
investment securities, corporate trust preferred's and mortgage-backed
securities as of December 31, 1998.
At December 31, 1998
-----------------------------------------------------------------------------
More than one year More than five years
One year or less to five years to ten years
----------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Amortized average Amortized average Amortized average
cost yield cost yield cost yield
----------- ---------- ----------- --------- ----------- -----------
(Dollars in thousands)
Investment securities:
Available for sale:
U.S. government and
federal agency obligations...... $ - $ - $ 252 6.68%
----- ----- ------
Total available for sale..... - - 252 6.68%
----- ----- ------ -
Total investment securities.. $ - $ - $ 252 6.68%
----- ----- ------
Corporate trust preferreds:
Available for sale:
Corporate trust preferreds......... $ - $ - $ -
---- ----- -----
Total available for sale..... - - -
----- ----- ------
Total investment securities.. $ - $ - $ -
==== ===== =====
Mortgage-backed securities:
Held to maturity:
FNMA............................... - 97 4.67% -
----- ----- ------
Total held for investment....... $ - $ 97 4.67% $ -
----- ----- ------
Available for sale:
FHLMC.............................. $ 72 7.00% $ - $ -
GNMA............................... - - -
FNMA............................... - - 4,837 6.00%
CMOs............................... - - -
----- ----- ------
Total available for sale........ 72 7.00% - 4,837 6.00%
----- ----- ------
Total mortgage-backed
securities $ 72 7.00% $ 97 4.67% $4,837 6.00%
===== ===== ======
x ----------------------------------------------------
More than ten years Total
------------------------ --------------------------
Weighted Weighted
Amortized average Amortized average
cost yield cost yield
----------- ----------- ------------ -------------
Investment securities:
Available for sale:
U.S. government and
federal agency obligations...... $ - $ 252 6.68%
-------- --------
Total available for sale..... - 6.68%
-------- --------
Total investment securities.. $ - $ 252 6.68%
-------- --------
Corporate trust preferreds:
Available for sale:
Corporate trust preferreds......... $ 18,658 6.71% $ 18,658 6.71%
-------- --------
Total available for sale..... 18,658 6.71% 18,658 6.71%
-------- --------
Total investment securities.. $ 18,658 6.71% $ 18,658 6.71%
======== ========
Mortgage-backed securities:
Held to maturity:
FNMA............................... - 97 4.67%
-------- --------
Total held for investment....... $ - $ 97 4.67%
-------- --------
Available for sale:
FHLMC.............................. $4,663 6.10% $4,735 6.11%
GNMA............................... 11,927 6.25% 11,927 6.25%
FNMA............................... 28,033 7.38% 32,870 7.17%
CMOs............................... 47,626 6.31% 47,626 6.31%
-------- --------
Total available for sale........ 92,249 6.62% 97,158 6.59%
-------- --------
Total mortgage-backed
securities $ 92,249 6.62% $ 97,255 6.59%
======== ========
20
Sources of Funds
General. The Company's primary sources of funds are customer deposits,
principal, and interest payments on loans and mortgage-backed securities, FHLB
advances and other borrowings and, to a lesser extent, proceeds from sales of
securities and loans. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, and competition.
Deposits. The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposits consist of passbook savings,
checking accounts, money market accounts and certificates of deposit. For the
year ended December 31, 1998, certificates of deposit constituted 69.3% of total
average deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. The Company's deposits are obtained predominantly from the
areas in which its branch offices are located. The Company relies primarily on
customer service and long standing relationships with customers to attract and
retain these deposits; however, market interest rates and rates offered by
competing financial institutions significantly affect the Company's ability to
attract and retain deposits. Certificate accounts in excess of $100,000 are not
actively solicited by the Company, nor does the Company use brokers to obtain
deposits.
In April 1998, the Company assumed $29.7 million of deposit liabilities
in exchange for an almost equal amount of loans.
The Company offers a "multi-flex" certificate account with interest
rates which, may be adjusted to prevailing market rates according to the terms
of the account. The multi-flex account is available to customers for terms of
either seven months or 17 months. The depositor may increase the interest rate
once during the term to the current quoted rate, and may also withdraw all or a
portion of the deposited funds once during the term of the account without
penalty. The seven-month multi-flex certificate account allows the depositor to
increase the deposit amount in the account. Management continually monitors the
level of certificate accounts. Based on historical experience, management
believes it will retain a large portion of such accounts upon maturity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The following table presents the deposit activity of the Company for
the periods indicated).
For the Year Ended December 31,
----------------------------------------------
1998 1997 1996
(In thousands)
Deposits.................................. $ 988,794 $ 695,432 $ 509,649
Purchased deposits........................ 29,651 - 102,063
Withdrawals............................... (984,895) (708,545) (519,800)
--------- --------- ---------
Net deposits (withdrawals)................ 33,550 (13,113) 91,912
Interest credited on deposits............. 16,568 15,527 10,949
--------- --------- ---------
Total increase in deposits................ $50,118 $ 2,414 $ 102,861
========= ========= =========
At December 31, 1998, the Company had $62.5 million in certificate
accounts in amounts of $100,000 or more ("jumbo certificate accounts") maturing
as indicated in the following table. At December 31, 1997, the Company had $59.0
million of jumbo certificate accounts, with a weighted average rate of 5.41% at
year-end. The Company does not offer premium rates on jumbo certificate
accounts.
Weighted
Maturity Period Amount Average Rate
---------------------------------------------------- ---------------- --------------
(In thousands)
Three months or less............................... $ 14,003 5.36%
Over three through six months...................... 20,226 5.24%
Over six through 12 months......................... 19,484 5.24%
Over 12 months..................................... 8,744 4.98%
--------
Total.............................. $ 62,457 5.23%
========
21
The following table sets forth the distribution of the Company's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented.
For the Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997
------------------------------------- --------------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in thousands)
Money market deposits............. $42,603 12.04% 4.03% $34,612 10.89% 3.88%
Passbook deposits................. 15,204 4.30% 1.83% 13,396 4.22% 1.89%
Checking accounts................. 29,935 8.46% .76% 17,925 5.64% .49%
-------- ------- -------- -------
Total....................... 87,742 24.80% 65,933 20.75%
-------- ------- -------- -------
Certificate accounts:
Three months or less........... 59,307 16.76% 5.40% 53,470 16.83% 5.34%
Over three through six months.. 54,655 15.44% 5.34% 48,621 15.29% 5.35%
Over six through 12 months..... 93,413 26.39% 5.43% 83,101 26.15% 5.57%
Over one to three years........ 54,481 15.38% 5.42% 64,251 20.22% 5.62%
Over three to five years....... 4,369 1.23% 5.98% 2,267 .71% 6.14%
Over five to ten years......... - - 145 .05% 6.98%
-------- ------- -------- -------
Total certificates.......... 266,225 75.20 5.41% 251,855 79.25% 5.50%
-------- ------- -------- -------
Total average deposits...... $353,967 100.00% 4.80% $317,788 100.00% 4.89%
======== ======= ======== =======
--------------------------------------
1996
-------------------------------------
Percent
of total Weighted
Average average average
balance deposits rate
---------- ----------- -----------
Money market deposits............. $ 19,387 8.65% 3.58%
Passbook deposits................. 13,381 5.97% 1.90%
Checking accounts................. 13,485 6.01% .58%
-------- -------
Total....................... 46,253 20.63%
-------- -------
Certificate accounts:
Three months or less........... 35,720 15.93% 5.57%
Over three through six months.. 37,366 16.67% 5.61%
Over six through 12 months..... 58,924 26.28% 5.61%
Over one to three years........ 44,584 19.88% 5.71%
Over three to five years....... 1,166 .52% 6.65%
Over five to ten years......... 204 .09% 7.23%
-------- -------
Total certificates.......... 177,964 79.37% 5.58%
-------- -------
Total average deposits...... $224,217 100.00% 4.88%
======== =======
22
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1998 (in
thousands).
Period to Maturity from December 31, 1998
----------------------------------------------------------------------------------
Over Two
One Over One to Three Four Over
Year or to Two Three to Four to Five Five
Less Years Years Years Years Years
----------- ----------- ----------- ------------ ------------ ------------
Certificate accounts:
0 to 4.00%................$ 981 $ 3 $ - $ - $ - $ -
4.01 to 5.00%............. 69,037 19,032 163 - 143 -
5.01 to 6.00%............. 143,851 13,948 1,158 773 1,976 -
6.01 to 7.00%............. 2,439 449 484 1,257 90 -
7.01 to 8.00%............. 500 128 155 - - -
8.01 to 9.00%............. 415 19 - - - -
Over 9.01%................ 105 2 - - - -
-------- ------- ------- ------ ------- -----
Total.................. $217,328 $33,581 $ 1,960 $2,048 $ 2,209 $ -
======== ======= ======= ====== ======= =====
At December 31,
----------------------------------------
1998 1997 1996
------------ ----------- -----------
Certificate accounts:
0 to 4.00%................ $ 984 $ 26 $ 1,431
4.01 to 5.00%............. 88,375 4,444 31,457
5.01 to 6.00%............. 161,706 232,318 194,505
6.01 to 7.00%............. 4,719 15,195 21,753
7.01 to 8.00%............. 783 1,432 3,311
8.01 to 9.00%............. 434 485 511
Over 9.01%................ 125 176
-------- -------- --------
Total.................. $257,126 $254,076 $253,244
======== ======== ========
23
Borrowings
From time to time the Company obtains borrowed funds through FHLB
advances and reverse repurchase agreements as an alternative to retail deposit
funds, and may do so in the future as part of its operating strategy. Borrowings
are also utilized to acquire certain other assets as deemed appropriate by
management for investment purposes.
FHLB advances are collateralized by the Company's mortgage loans,
mortgage-backed securities, and investment in the capital stock of the FHLB. See
"Regulation - Federal Home Loan Bank System." FHLB advances are made pursuant to
several different credit programs with varying interest rate and maturity terms.
The maximum amount that the FHLB will advance to member institutions, including
the Bank, fluctuates from time to time in accordance with the policies of the
OTS and the FHLB. At December 31, 1998, the Company had $35.2 million of
outstanding borrowings from the FHLB.
Reverse repurchase agreements are collateralized by mortgage-backed
securities. At December 31, 1998 the Company had $4.5 million of securities sold
under agreements to repurchase.
The following table sets forth information regarding the Company's
borrowed funds at or for the indicated years.
At or For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
(Dollars in thousands)
FHLB advances:
Average balance outstanding..................... $28,059 $40,520 $43,619
Maximum amount outstanding at any
month end during the year.................... 73,787 46,432 99,607
Balance outstanding at year end................. 35,182 32,282 46,807
Weighted average interest rate during
the year..................................... 5.93% 5.92% 5.75%
Weighted average interest rate at
year end..................................... 5.54% 6.09% 5.72%
At or For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
(Dollars in thousands)
Securities sold under agreements to repurchase:
Average balance outstanding..................... $ 5,007 $ 8,234 $14,644
Maximum amount outstanding at any
month end during the year.................... 5,200 13,000 16,648
Balance outstanding at year end................. 4,490 5,200 13,000
Weighted average interest rate during
the year..................................... 5.92% 5.91% 5.98%
Weighted average interest rate at
Year-end..................................... 5.69% 5.95% 5.94%
24
Subsidiary Activities
Portola, a California corporation, is engaged on an agency basis in the
sale of insurance and investment products to the Company's customers and members
of the local community. At December 31, 1998, Portola had $458,500 in total
assets. Portola recorded a net loss of $3,677 for the year ended December 31,
1998.
Personnel
As of December 31, 1998, the Company had 110 full-time employees and 5
part-time employees. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees to
be good.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Bank and their
operations. Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally will not be restricted under existing laws as to
the types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a
25
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to
the prior approval of the OTS, and activities authorized by OTS regulation.
The HOLA prohibits a savings and loan holding company directly, or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3.0% leverage (core) capital ratio, and an 8.0% risk-based capital
ratio. Core capital is defined as common stockholder's equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
surplus, and minority interests in equity accounts of consolidated subsidiaries,
less intangibles other than certain purchased mortgage servicing rights and
credit card relationships. The OTS regulations also require that, in meeting the
tangible, core and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank. The holding company is not subject to the
minimum capital requirements that the Bank is subject to.
The risk-based capital standard for savings institutions requires the
maintenance of tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of core (tier 1) capital are
equivalent to those discussed above. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
26
Under the OTS prompt corrective action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution is considered "well capitalized" if its ratio
of total capital to risk-weighted assets is at least 10%, its ratio of core
(tier 1) capital to risk-weighted assets is at least 6%, its ratio of core
capital to total assets is at least 5%, and it is not subject to any order or
directive by the OTS to meet a specific capital level. A savings institution
generally is considered "adequately capitalized" if its ratio of total capital
to risk-weighted assets is at least 8%, its ratio of core (tier 1) capital to
risk-weighted assets is at least 4%, and its ratio of core capital to total
assets is at least 4% (3% if the institution receives the highest CAMEL rating).
A savings institution that has a ratio of total capital to weighted assets of
less of than 8%, a ratio of core (tier 1) capital to risk-weighted assets of
less than 4% or a ratio of core capital to total assets of less than 4% (3% or
less for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a tier 1 risk-based capital ratio of less than 3% or a
leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
The following table sets forth the amounts and ratios regarding actual
and minimum tangible, core, and risk-based capital requirements, together with
the amounts and ratios required in order to meet the definition of a "well
capitalized" institution.
Minimum Capital Well Capitalized
Requirements Requirements Actual
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- --------- -------- -------- ---------
As of December 31, 1998:
Total capital
(to risk-weighted assets) $21,980 8.00% $27,475 10.00% $31,882 11.60%
Tier 1 capital
(to risk-weighted assets) N/A N/A 16,334 6.00% 29,319 10.77%
Tier 1 capital
(to adjusted assets) 17,522 4.00% 21,902 5.00% 29,319 6.69%
Tangible capital
(to tangible assets) 6,571 1.50% N/A N/A 29,319 6.69%
Insurance of Deposit Accounts. The deposits of the Bank are presently
insured by the SAIF, except for certain acquired deposits which are insured by
the BIF. The SAIF and the BIF are administered by the FDIC. The FDIC uses a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums on a sliding
scale based upon their respective levels of capital and results of supervisory
evaluations. Institutions classified as well-capitalized (as defined by the
FDIC) and not considered to otherwise be of supervisory concern pay the lowest
premium. For the year ended December 31, 1998, regular SAIF assessments ranged
from 0 to 27 basis points. The Bank's assessment rate for the year ended
December 31, 1998 was 0 basis points and the total deposit insurance premium
paid by the Bank in fiscal 1998 was $139,000.
27
In addition, pursuant to the Deposit Insurance Funds Act of 1996,
effective January 1, 1997, all SAIF-insured deposits and all BIF-insured
deposits are subject to special assessments to make payments on bonds issued by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
The FDIC reviews the FICO assessment rate quarterly. For fiscal 1998, the rate
was 6.1 basis points for SAIF-insured deposits and 1.22 basis points for
BIF-insured deposits. Beginning on the earlier of January 1, 2000 or the date
that the BIF and SAIF are merged, SAIF and BIF-insured deposits will share the
cost of paying interest on the FICO bonds on a pro rata basis.
Under the FDI act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to the termination of deposit insurance.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee
on every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision, which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
Pending Legislation. Various proposals to eliminate the federal savings
association charter, create a uniform financial institutions charter, and
abolish the OTS to restrict savings and loan holding company activities have
been introduced in Congress. The Company is unable to predict whether any of
this legislation will be enacted or the extent to which laws enacted may
restrict or otherwise adversely affect its operations.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily marketable collateral,
which is defined to include certain financial instruments and bullion. At
December 31, 1998, the Bank's limit on loans to one borrower was $4.8 million.
At December 31, 1998, the Bank's largest aggregate outstanding balance of loans
to one borrower totaled $5.0 million. This loan complied with the Bank's loans
to one borrower limit at the time the loan was made.
QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender ("QTL") test. A savings institution is permitted to meet the QTL
test in one of two alternative ways. Under the first method, the savings
institution is required to maintain at least 65% of its "portfolio assets,"
defined as total assets less (i) specified liquid assets up to 20% of total
assets, (ii) intangibles, including goodwill and (iii) the value of property
used to conduct business, in certain "qualified thrift investments." Assets
constituting qualified thrift investments and includable without limit in
measuring compliance with the QTL include residential mortgage loans, certain
mortgage-backed securities and education, small business, credit card and credit
card account loans. Alternatively, savings institutions are permitted to meet
the QTL test by qualifying as a "domestic building and loan association" under
the Internal Revenue Code.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. At
December 31, 1998, the Bank maintained 82.24% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against
28
capital. The rule establishes three tiers of institutions, which are based
primarily on an institution's capital level. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Institution") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without obtaining approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year or (ii) 75% of its net
income for the previous four quarters. Any additional capital distributions
would require prior regulatory approval. In the event the Bank's capital fell
below its regulatory requirements or the OTS notified it that it was in need of
more than normal supervision, the Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. In January 1999, the OTS adopted amendments to its
capital distribution regulation, effective April 1999, that would generally
authorize the payment of capital distributions without OTS approval if the
institution met the requirement of the OTS for expedited treatment of
applications, and the total capital distributions for calendar year did not
require certain limits. However, institutions in a holding company structure
would still have a prior notice requirement. At December 31, 1998, the Bank was
a Tier 1 Bank.
Liquidity. The Bank is required by OTS regulations to maintain an
average daily balance of liquid assets in each calendar quarter of not less than
4% of either the amount of its liquidity base at the end of the preceding
calendar quarter or the average daily balance of its liquidity base during the
preceding calendar quarter. In addition to this minimum requirement, the Bank is
required to maintain sufficient liquidity to ensure its safe and sound
operations. The minimum liquidity requirement may be changed by the OTS to any
amount within the range of 4% to 10%, depending upon economic conditions and the
savings deposit flows of savings institutions. Monetary penalties may be imposed
for failure to meet these liquidity requirements. The Bank's average liquidity
ratio for the quarter ended December 31, 1998 was 5.2%. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended December 31, 1998 totaled $112,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in
29
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and an
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
Federal Reserve System
Federal Reserve System ("FRB") regulations require savings institutions
to maintain non-interest-earning reserves against their transactional accounts
(primarily checking accounts). During the year ended December 31, 1998, the
regulations generally required that reserves be maintained against transaction
accounts as follows: for accounts aggregating $47.8 million or less, the
requirement is 3%; and for accounts greater than $47.8 million, the requirement
is $1.293 million plus 10% of that portion of total transaction accounts in
excess of $47.8 million. The first $4.7 million of otherwise reservable balances
are exempted from the reserve requirements. The Bank is in compliance with the
foregoing requirements. The balances maintained to meet the reserve requirements
of the FRB may be used to satisfy OTS liquidity requirements.
30
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Bank and the Company report their income on a consolidated
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS during the last
five years. For its 1998 taxable year, the Bank is subject to a maximum federal
income tax rate of 35%.
Bad Debt Reserve. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code of 1986 (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally
secured by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in method of
accounting, initiated by the taxpayer, and having been made with the consent of
the IRS. Any Section 481 (a) adjustment required to be taken into income with
respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture
required by the 1996 Act will be suspended for each of two successive taxable
years, beginning with the Bank's current taxable year, in which the Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank
is permitted to make additions to its tax bad debt reserves. In addition, the
Bank is required to recapture (i. e., take into income) over a six year period
the excess of the balance of its tax bad debt reserves as of December 31, 1995
over the balance of such reserves as of December 31, 1987.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or
31
complete liquidation. Dividends paid out of the Bank's current or accumulated
earnings and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by an non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion its bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). In addition, for taxable years beginning
after December 31, 1986 and before January 1, 1996, an environmental tax of .12%
of the excess of AMTI (with certain modifications) over $2.0 million is imposed
on corporations, including the Company, whether or not an Alternative Minimum
Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT, but may
be subject to the environmental tax liability.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
32
State and Local Taxation
State of California. The California franchise tax rate applicable to
the Bank equals the franchise tax rate applicable to corporations generally,
plus an "in lieu" rate approximately equal to personal property taxes and
business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Bank); however, the total tax rate
cannot exceed 11.7%. Under California regulations, bad debt deductions are
available in computing California franchise taxes using a three or six year
weighted average loss experience method. The Bank and its California subsidiary
file California State franchise tax returns on a combined basis. The Company, as
a savings and loan holding company commercially domiciled in California, is
treated as a financial corporation and subject to the general corporate tax rate
plus the "in lieu" rate as discussed previously for the Bank.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Additional Item. Executive Officers of the Registrant
The following table sets forth certain information regarding the
executive officers of the Company who are not also directors.
Name Age(1) Position Held With Company
- ------------------------------- ----------- --------------------------
Carlene F. Anderson 46 Corporate Secretary
- ---------------------------------------
(1) At December 31, 1998
33
Item 2. Properties.
The Company conducts business through an administrative office located
in Watsonville and eight branch offices. During 1998 the Company purchased and
remodeled an existing office building located at 567 Auto Center Drive,
Watsonville, California to serve as its centralized administrative building.
Personnel of the Bank moved into the building in September 1998. As a result of
the move, the Company sold its previous office facility located at 36 Brennan
Street, Watsonville, California in September 1998. Management believes that with
the newly acquired office building, its facilities will be adequate to meet the
needs of the Company in the foreseeable future.
Net Book Value
of Property or
Original Leasehold
Lease Year Date of Improvements at
or Leased or Lease December 31,
Location Owned Acquired Expiration 1998
----------------------------------- ------------- -------------- ---------- ---------------
Administrative Offices:
15 Brennan Street
Watsonville, California 95076 Owned 12-31-65 N/A $ 18,396
567 Auto Center Drive
Watsonville, California 95076 Owned 03-23-98 N/A 1,612,408
Branch Offices:
35 East Lake Avenue
Watsonville, California 95076 Owned 12-31-65 N/A 322,879
805 First Street
Gilroy, California 95020 Owned 12-01-76 N/A 242,846
1400 Munras Avenue
Monterey, California 93940 Owned(1) 07-07-93 Monthly 934,556
1890 North Main Street
Salinas, California 93906 Owned 07-07-93 N/A 1,154,000
1127 South Main Street
Salinas, California 93901 Leased 08-08-93 07-31-98(2) 37,181
8071 San Miguel Canyon Road
Prunedale, California 93907 Leased 12-24-93 12-24-03(3) 72,718
60 Bay Avenue
Capitola, California 95020 Owned 12-10-96 N/A 1,125,518
6265 Highway 9
Felton, California 95018 Leased 04-07-98 04-07-03(2) 13,241
- --------------------------------------------
(1) Majority owned, portion of property leased.
(2) The Company has options to extend the lease term for two consecutive five-year periods.
(3) The Company has options to extend the lease term for three consecutive ten-year periods.
34
Item 3. Legal Proceedings.
The Company is not involved in any pending legal proceeding other than
routine legal proceedings occurring in the ordinary course of business. Such
other routine legal proceedings in the aggregate are believed by management to
be immaterial to the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of Monterey Bay Bancorp, Inc. is traded
over-the-counter on the Nasdaq Stock Market under the symbol "MBBC." The stock
began trading on February 15, 1995. As of March 24, 1999, there were 3,525,280
shares outstanding of the Company's common stock. As of February 26, 1999, there
were 292 stockholders of record, not including persons or entities who hold
their stock in nominee or "street" name.
The following table sets forth the high and low bid prices per share
for the Company's common stock for the periods indicated.
High Bid(1) Low Bid(1)
----------- ----------
Year ended December 31, 1998:
Fourth quarter $14.875 $10.750
Third quarter $17.000 $13.200
Second quarter $21.100 $14.800
First quarter $21.600 $14.800
Year ended December 31, 1997:
Fourth quarter $16.400 $14.600
Third quarter $16.600 $12.800
Second quarter $13.800 $12.300
First quarter $15.000 $11.650
Year ended December 31, 1996:
Fourth quarter $12.700 $10.700
Third quarter $10.900 $ 9.100
Second quarter $10.200 $ 9.400
First quarter $10.200 $ 8.800
- ------------------------------------------
(1) Per share prices for periods ended prior to July 31, 1998, have been
adjusted to reflect the 5 for 4 stock split effected on that date.
The Board of Directors declared, and the Company paid, cash dividends
of $0.12 and $0.09 per share during the years ended 1998 and 1997, respectively.
35
Item 6. Selected Financial Data.
Selected consolidated financial data for each of the five years in the
period ended December 31, 1998, consisting of data captioned "Selected
Consolidated Financial and Other Data" appears on page three of the Company's
1998 Annual Report to Stockholders and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" appears on pages 5 to 21 of the Company's 1998 Annual
Report to Stockholders and is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosure of Market Risk.
"Quantitative and Qualitative Disclosure of Market Risk" appears on
pages 6 to 8 of the Company's 1998 Annual Report to Stockholders and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Statements of Financial Condition of Monterey Bay
Bancorp, Inc. and Subsidiary as of December 31, 1998 and 1997 and the related
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
each of the years in the three-year period ended December 31, 1998, together
with the related notes and the report of Deloitte and Touche LLP, independent
auditors, appears on pages 22 to 58 of the Company's 1998 Annual Report to
Stockholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on June 11, 1999,
which will be filed no later than 120 days following the Registrant's Fiscal
Year end. Information concerning executive officers who are not directors is
contained in Part I of this report in reliance on Instruction G of Form 10-K.
Item 11. Executive Compensation.
The information relating to director and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on June 11, 1999, excluding the
Compensation Committee Report on Executive Compensation and the Stock
Performance Graph, which will be filed no later than 120 days following the
Registrant's Fiscal Year end.
36
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information relating to director and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on June 11, 1999, which will be filed
no later than 120 days following the Registrant's Fiscal Year end.
Item 13. Certain Relationships and Related Transactions.
The information relating to director and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on June 11, 1999, which will be filed
no later than 120 days following the Registrant's Fiscal Year end.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of the registrants and
its subsidiaries are filed as a part of this document under Item 8. Financial
Statements and Supplementary Data.
Consolidated Statements of Financial Condition at December 31, 1998
and 1997.
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1998.
Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three-year period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(a)(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificates of Incorporation of Monterey Bay Bancorp, Inc.*
3.2 Bylaws of Monterey Bay Bancorp, Inc.
4.0 Stock Certificate of Monterey Bay Bancorp, Inc.*
10.1 Form of Employment Agreement between Monterey Bay Bank
and certain executive officers.*
37
10.2 Form of Employment Agreement between Monterey Bay Bancorp, Inc.
and certain executive officers.*
10.3 Form of Change in Control Agreement between Monterey Bay Bank
and certain executive officers.*
10.4 Form of Change in Control Agreement between Monterey Bay Bancorp, Inc.
and certain executive officers.*
10.5 Form of Monterey Bay Bank of Employee Severance Compensation Plan.*
10.6 Monterey Bay Bank 401(k) Plan.*
10.7 Monterey Bay Bank 1995 Retirement Plan for Executive Officers and
Directors.*
10.8 Form of Monterey Bay Bank Performance Equity Program for Executives.**
10.9 Form of Monterey Bay Bank Recognition and Retention Plan for Outside
Directors.**
10.10 Form of Monterey Bay Bancorp, Inc. 1995 Incentive Stock Option Plan.**
10.11 Form of Monterey Bay Bancorp, Inc. 1995 Stock Option Plan for Outside
Directors.**
11 Computation of Per Share Earnings.
13 Portions of the Monterey Bay Bancorp, Inc. 1998 Annual Report to
Shareholders.
21 Subsidiary information is incorporated herein by reference to "Part I
- Subsidiaries."
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
(b) Report on Form 8-K
The Registrant did not file any reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 1998.
* Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on September 21, 1994,
Registration No. 33-84272.
** Incorporated herein by reference from the Proxy Statement for the
Annual Meeting of Stockholders' filed on July 26, 1995.
38
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MONTEREY BAY BANCORP, INC.
Date: March 30, 1999 By: /s/ Marshall G. Delk
- --------------------- --------------------
Marshall G. Delk
President, Chief Operating Officer,
Director and Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.
Name Title Date
---- ----- ----
/s/ Gene R. Friend Chairman of the Board of Directors March 30, 1999
- ----------------------------------- and Chief Executive Officer --------------
Gene R. Friend
/s/ Marshall G. Delk President, Chief Operating Officer, Director March 30, 1999
- ----------------------------------- and Chief Financial Officer --------------
Marshall G. Delk
/s/ P. W. Bachan Director March 30, 1999
- ----------------------------------- --------------
P. W. Bachan
/s/ Edward K. Banks Director March 30, 1999
- ----------------------------------- --------------
Edward K. Banks
/s/ Nicholas C. Biase Director March 30, 1999
- ----------------------------------- --------------
Nicholas C. Biase
/s/ Diane S. Bordoni Director March 30, 1999
- ----------------------------------- --------------
Diane S. Bordoni
/s/ Steven Franich Director March 30, 1999
- ----------------------------------- --------------
Steven Franich
/s/ Donald K. Henrichsen Director March 30, 1999
- ----------------------------------- --------------
Donald K. Henrichsen
/s/ Stephen G. Hoffmann Director March 30, 1999
- ----------------------------------- --------------
Stephen G. Hoffmann
/s/ Gary L. Manfre Director March 30, 1999
- ----------------------------------- --------------
Gary L. Manfre
/s/ McKenzie Moss Director March 30, 1999
- ----------------------------------- --------------
McKenzie Moss
/s/ Louis Resetar, Jr. Director March 30, 1999
- ----------------------------------- --------------
Louis Resetar, Jr.
39