<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________________ TO ___________________
COMMISSION FILE NUMBER 0-17901.
BAY VIEW CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3078031
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2121 SOUTH EL CAMINO REAL 94403
SAN MATEO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 573-7300
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 $.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
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 19, 1996, there were issued and outstanding 6,899,290 shares of
the registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the closing
price of such stock as of March 19, 1996, was $212,498,132. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the registrant that such person is an affiliate of the
registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of Proxy Statement for 1996 Annual Meeting
of Stockholders.
================================================================================
<PAGE>
The purpose of this amendment on Form 10-K/A to the Annual Report on Form
10-K for the fiscal year ended December 31, 1995 (the "Form 10-K") of Bay View
Capital Corporation (the "Company") is to amend the Independent Auditors'
Report filed as part of Item 8, to revise the date of such Independent
Auditors' Report to January 26, 1996 (February 5, 1996 as to Note 21) which
reflects matters subsequent to the original date of such Independent Auditors'
Report. The Company hereby amends Item 8 to the Form 10-K in its entirety and
replaces such Item 8 with the following:
2
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------- -------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 24,144 $ 21,750
Interest-bearing deposits and federal funds sold 18,616 4,442
- ----------------------------------------------------------------------------------------------------
42,760 26,192
Loans and securities available for sale:
Loans receivable --- 704
Mortgage-backed securities 149,778 108,856
Investment securities 8,035 980
Securities held to maturity:
Mortgage-backed securities, net of allowance for losses:
1995, $930; 1994, $1,574 581,600 812,824
Investment securities 39,928 31,861
Loans receivable held for investment, net of allowance for losses:
1995, $30,014; 1994, $29,115 2,062,268 2,053,859
Investment in stock of the Federal Home Loan Bank of San Francisco 39,450 49,646
Real estate owned, net of allowance for losses: 1995, none; 1994, $726 24,476 13,529
Premises and equipment, net 16,184 23,208
Core deposit premiums and goodwill (intangibles assets) 5,835 9,779
Other assets 34,182 35,091
- ----------------------------------------------------------------------------------------------------
Total Assets $3,004,496 $3,166,529
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits $1,819,840 $1,707,376
Advances from the Federal Home Loan Bank of San Francisco 766,790 956,310
Securities sold under agreements to repurchase 166,738 255,106
Other borrowings 7,937 8,542
Other liabilities 35,214 21,880
- ----------------------------------------------------------------------------------------------------
Total Liabilities 2,796,519 2,949,214
Commitments and Contingencies (Note 16)
Stockholders' equity:
Serial preferred stock: authorized, 7,000,000 shares;
outstanding: none --- ---
Common stock ($.01 par value) authorized, 20,000,000 shares;
outstanding: 1995, 7,101,590 shares; 1994, 7,167,974 shares 71 72
Additional paid-in capital 97,646 92,630
Retained earnings (substantially restricted) 115,966 133,624
Unrealized gain (loss) on securities available for sale (net of tax) (683) (3,634)
Debt of Employee Stock Ownership Plan (5,023) (5,377)
- ----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 207,977 217,315
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $3,004,496 $3,166,529
====================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
44
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans receivable $155,853 $131,783 $145,361
Interest on mortgage-backed securities 54,236 61,111 43,038
Interest and dividends on investments 6,374 4,432 3,127
- ----------------------------------------------------------------------------------------------
216,463 197,326 191,526
- ----------------------------------------------------------------------------------------------
Interest expense:
Interest on customer deposits 93,398 66,424 68,075
Interest on borrowings 67,149 63,977 53,775
- ----------------------------------------------------------------------------------------------
160,547 130,401 121,850
- ----------------------------------------------------------------------------------------------
Net interest income 55,916 66,925 69,676
Provision for losses on loans and securities 4,600 3,407 7,031
- ----------------------------------------------------------------------------------------------
Net interest income after provision for losses 51,316 63,518 62,645
- ----------------------------------------------------------------------------------------------
Noninterest income:
Loan fees and charges 3,691 4,537 5,044
Gain (loss) on sale of assets (2,194) (41) 1,091
Rental income from premises 781 809 835
Other, net 4,180 3,273 2,586
- ----------------------------------------------------------------------------------------------
6,458 8,578 9,556
- ----------------------------------------------------------------------------------------------
Noninterest expense:
General and administrative:
Compensation and employee benefits 25,148 25,268 23,660
Office occupancy and equipment 8,658 8,436 7,696
Deposit insurance premiums and regulatory fees 4,473 4,813 3,674
Data processing service bureau 1,683 1,701 2,373
Other, net 9,954 7,069 9,468
- ----------------------------------------------------------------------------------------------
49,916 47,287 46,871
Writedown of corporate office complex 7,100 --- ---
Real estate owned operations, net (1,081) (95) 1
Provision for losses on real estate 749 145 819
Writedown of intangible assets 1,612 --- ---
Amortization of intangible assets 2,332 2,418 2,104
- ----------------------------------------------------------------------------------------------
60,628 49,755 49,795
- ----------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit)
and extraordinary items (2,854) 22,341 22,406
Income tax expense (benefit) (708) 7,828 9,765
- ----------------------------------------------------------------------------------------------
Income (loss) before extraordinary items (2,146) 14,513 12,641
Extraordinary items - penalties for prepayment of debt,
net of tax: 1995, $1,878; 1993, $97 (2,544) --- (132)
- ----------------------------------------------------------------------------------------------
Net income (loss) $ (4,690) $ 14,513 $ 12,509
==============================================================================================
Primary earnings per share:
Income (loss) before extraordinary items $(0.29) $2.02 $1.80
Extraordinary items (0.35) --- (0.02)
- ----------------------------------------------------------------------------------------------
Net income (loss) $(0.64) $2.02 $1.78
==============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
45
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON DEBT OF
SECURITIES EMPLOYEE
NUMBER ADDITIONAL AVAILABLE STOCK TOTAL
(DOLLARS IN THOUSANDS EXCEPT OF COMMON PAID-IN RETAINED FOR SALE OWNERSHIP STOCKHOLDERS'
PER SHARE AMOUNTS) SHARES STOCK CAPITAL EARNINGS* (NET OF TAX) PLAN EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 6,870 $ 69 $87,722 $115,078 --- $(6,000) $196,869
Common stock issued:
Exercise of stock options 185 2 3,003 --- --- --- 3,005
Cash dividends declared
($.60 per share) --- --- --- (4,193) --- --- (4,193)
Unrealized gain (net of tax) --- --- --- --- $ 2,488 --- 2,488
Repayment of debt --- --- --- --- --- 298 298
Net income for 1993 --- --- --- 12,509 --- --- 12,509
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 7,055 71 90,725 123,394 2,488 (5,702) 210,976
Common stock issued:
Exercise of stock options 113 1 1,905 --- --- --- 1,906
Cash dividends declared
($.60 per share) --- --- --- (4,283) --- --- (4,283)
Change in unrealized loss
(net of tax) --- --- --- --- (6,122) --- (6,122)
Repayment of debt --- --- --- --- --- 325 325
Net income for 1994 --- --- --- 14,513 --- --- 14,513
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 7,168 72 92,630 133,624 (3,634) (5,377) 217,315
Repurchase of common stock (305) (3) --- (8,574) --- --- (8,577)
Common stock issued:
Exercise of stock options,
including tax benefits 239 2 5,016 --- --- --- 5,018
Cash dividends declared
($.60 per share) --- --- --- (4,394) --- --- (4,394)
Change in unrealized loss
(net of tax) --- --- --- --- 2,951 --- 2,951
Repayment of debt --- --- --- --- --- 354 354
Net loss for 1995 --- --- --- (4,690) --- --- (4,690)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 7,102 $ 71 $97,646 $115,966 $(683) $(5,023) $207,977
===================================================================================================================================
</TABLE>
* Substantially restricted
See accompanying Notes to Consolidated Financial Statements.
46
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (4,690) $ 14,513 $ 12,509
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Writedown of corporate office complex 7,100 --- ---
Writedown of intangible assets 1,612 --- ---
Loans originated for sale --- (16,401) (63,205)
Proceeds from loans sold 135 11,798 54,657
Proceeds from loans securitized and sold --- 10,034 2,555
Provision for losses 5,349 3,552 7,850
Depreciation and amortization of premises and equipment 3,079 3,128 2,709
Amortization of intangibles 2,332 2,419 2,104
Amortization of deferred loan fees (costs) 452 (1,558) (1,726)
Decrease in capitalized excess servicing fees 853 1,373 2,103
Amortization of premiums, net of discounts 4,343 6,220 6,224
(Gain) loss on sale of assets 2,194 41 (1,091)
Increase in other assets (1,722) (715) (2,238)
Increase (decrease) in other liabilities 6,991 4,923 (265)
Other, net (867) (4,283) (182)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,161 35,044 22,004
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans resulting from originations,
net of principal payments (31,575) (294,592) 183,164
Purchases of loans (12,928) (5,352) (34,844)
Principal payments on mortgage-backed securities 88,580 203,255 279,017
Purchases of mortgage-backed securities --- (411,269) (641,978)
Proceeds from sale of mortgage-backed securities available for sale 101,242 --- 85,636
Proceeds from maturities of investment securities 17,000 5,000 12,005
Purchase of investment securities (32,000) (31,843) ---
Proceeds from sale of investment securities available for sale --- 5,317 ---
Investments in real estate --- --- (94)
Proceeds from sale of real estate 20,435 23,906 17,345
Net additions to premises and equipment (3,155) (5,217) (4,513)
(Increase) decrease in stock of FHLBSF 10,196 (11,509) 293
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 157,795 (522,304) (103,969)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit inflows (outflows) $ 112,464 $ 13,113 $(166,470)
Purchases of deposits --- --- 424,150
Sale of deposits --- --- (51,669)
Proceeds from advances from Federal Home Loan Bank of San Francisco 480,000 519,110 245,100
Repayment of advances from Federal Home Loan Bank of San Francisco (669,520) (282,400) (294,100)
Repurchase of common stock (2,279) --- ---
Repayment of capital market debt --- --- (60,000)
Proceeds from reverse repurchase agreements 166,738 376,960 ---
Repayment of reverse repurchase agreements (255,106) (122,530) ---
Net change in borrowings (605) (12,596) (34,065)
Proceeds from issuance of common stock 4,294 1,906 3,005
Dividends paid to stockholders (4,374) (4,266) (4,166)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (168,388) 489,297 61,785
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 16,568 2,037 (20,180)
Cash and cash equivalents at beginning of year 26,192 24,155 44,335
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 42,760 $ 26,192 $ 24,155
============================================================================================================================
Cash paid during the year for:
Interest $ 80,226 $ 58,806 $ 51,061
Income taxes 4,450 4,584 8,756
============================================================================================================================
Supplemental noncash investing and financing activities:
Loans transferred to real estate owned $ 31,070 $ 19,706 $ 17,166
Transfer of mortgage-backed securities from held to maturity to available for sale 147,661 --- 209,060
Repurchase of common stock 6,298 --- ---
Mortgage-backed securities acquired in exchange for securitized loans --- 10,034 2,555
Loans originated to sell real estate owned 8,905 1,550 2,422
============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company, a holding company incorporated in Delaware, and its
principal subsidiary: Bay View Federal Bank, A Federal Savings Bank (the
"Bank"), operating in California. All significant intercompany accounts and
transactions have been eliminated. As used herein, the "Company" means the
Company and its consolidated subsidiaries unless the context requires otherwise.
NATURE OF OPERATIONS
The Company operates 27 branches in the San Francisco Bay Area. The
Company's primary business is originating single family, multifamily and
nonresidential loans to customers who are predominately small to middle market
businesses and middle income individuals.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
LOANS RECEIVABLE
Loans receivable are recorded at cost, net of discounts, net deferred
loan origination fees and allowance for loan losses. Loans receivable held for
investment are not adjusted to the lower of cost or market because it is
management's intention, and the Company has the ability, to hold these loans to
maturity. Interest on loans is accrued as income only to the extent considered
collectible. Generally, the Company discontinues interest accruals on loans 90
days or more past due.
49
<PAGE>
The Company identifies loans that are expected to be sold or which
foreseeably may be sold prior to maturity. These loans are classified as
available for sale and are recorded at the lower of cost or market. Loans
originated or purchased are identified as either available for sale or held to
maturity at, or soon after, origination or purchase and accounted for
accordingly. Market values for loans available for sale are based on prices for
similar loans in the secondary loan market. Loans available for sale are carried
at the lower of cost or market on an aggregate basis by property type.
The Company charges fees for originating loans. The Company recognizes
loan origination fees, net of certain direct costs, as an adjustment of loan
yield over the life of the related loan using the interest method. Amortization
of net deferred loan origination fees is discontinued on nonperforming loans.
When a loan is sold or paid off, any unamortized net loan origination fees are
included in income.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No 114 ("SFAS 114"), "Accounting by Creditors for
Impairment of a Loan" as amended by Statement of Financial Accounting Standards
No. 118 ("SFAS 118"), "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". SFAS 114 requires that impaired loans be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. SFAS 118 allows a creditor to use existing methods for
recognizing interest income on an impaired loan and also amends disclosure
requirements in SFAS 114. The Company had previously measured loan impairment in
accordance with the methods prescribed in SFAS 114. As a result, the impact of
adopting SFAS 114 was not material.
LOAN SALES AND SERVICING
Gains or losses on sales of loans are recognized at the time of sale.
When a participating interest in loans sold has an average contractual interest
rate, adjusted for normal servicing fee, which differs from the agreed yield to
the purchaser, the sales price is adjusted by an amount equal to the present
value of such differential over the estimated remaining life of such loans. Any
resulting net premium or discount is amortized over the estimated life of the
loan as a charge or credit to interest income using a method approximating the
interest method. The aggregate amount of unamortized premiums arising from loan
sales (capitalized excess servicing fees) is included in other assets. The
Company periodically reviews its estimates relating to the remaining lives of
loans sold. Capitalized excess servicing fees are adjusted for significant
increases in prepayments of such loans and other changed circumstances.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at an amount that
management deems adequate to cover estimated losses and is continually reviewed
and adjusted. The Company adheres to an internal asset review system and loan
loss reserve methodology. In determining charge-offs for specific loans,
management evaluates its loans on an individual basis. Such evaluations include
an analysis of creditworthiness, cash flows and financial status of the
borrower, and current appraisals. In determining overall valuation allowance
levels to be maintained, management evaluates many factors including: prevailing
and anticipated economic conditions; historical loss experience; the composition
of the loan portfolio by property type; the levels and trends of classified
loans and loan delinquencies.
50
<PAGE>
While management uses currently available information to provide for
losses on loans, additions to the allowance may be necessary based on new
information and/or future economic conditions. When the property collateralizing
a delinquent mortgage loan is foreclosed on by the Company and transferred to
real estate acquired through foreclosure in settlement of loans, the difference
between the loan balance and the fair value of the property less estimated
selling costs is charged-off against the allowance for loan losses.
SECURITIES
Statement of Financial Accounting Standards No. 115 ("SFAS
115"),"Accounting for Certain Investments in Debt and Equity Securities"
establishes the classification of investments into three categories: held to
maturity, available for sale and trading. Securities held to maturity are
recorded at amortized cost because it is management's intention, and the Company
has the ability to hold them to maturity. Securities available for sale are
reported at fair value. Fair values for securities are obtained principally from
published information or from quotes by registered securities brokers.
Securities for which quotes are not readily available are valued based on the
present value of discounted estimated future cash flows. The Company does not
have a trading portfolio.
Securities are identified as either available for sale or held to
maturity at, or soon after, purchase and accounted for accordingly. Net
unrealized gains and losses on securities available for sale are excluded from
earnings and reported net of applicable income taxes as a separate component of
stockholders' equity until realized. Gains and losses on sales of securities are
recorded in earnings at the time of sale and are determined by the difference
between the net sale proceeds and the amortized cost of the security, using
specific identification.
Discounts and premiums on securities are amortized using a method
approximating the interest method over the estimated life of the security,
adjusted for actual prepayments. Interest on securities is accrued as income
only to the extent considered collectible.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities -Questions and Answers ("Special
Report")." The Special Report was issued as an aid in understanding and
implementing SFAS 115. For companies that adopted SFAS 115 in financial
statements issued prior to the issuance of this Special Report, if the effects
of initially adopting this implementation guidance resulted in reclassification
of securities between categories, they should be accounted for as transfers in
accordance with SFAS 115. As a result, concurrent with the initial adoption of
this implementation guidance, the Bank reassessed the appropriateness of the
classifications of all securities held at that time and, in December 1995,
reclassified $147.7 million in mortgage-backed securities from held to maturity
to available for sale. The transfer was recorded at fair value of $146.0 million
with $981,000 of unrealized losses (net of tax) recorded as a separate
component of stockholders' equity.
REAL ESTATE OWNED
Real estate owned comprises real estate acquired through foreclosure
and is recorded at the lower of cost or fair value less estimated costs to sell.
51
<PAGE>
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on the
straight-line basis over the appropriate estimated useful lives for each of the
various asset categories.
CORE DEPOSIT PREMIUMS AND GOODWILL (INTANGIBLE ASSETS)
Core deposit premiums arise from the acquisition of deposits and are
amortized on a straight-line basis over the estimated life of the deposit base
acquired, generally eight years. The Company continually evaluates the periods
of amortization to determine whether later events and circumstances warrant
revised estimates of useful lives. In addition, the market value of core deposit
premiums is established on an annual basis to determine its includability as a
component of regulatory capital and to evaluate the recoverability of its
carrying value.
During the fourth quarter of 1995, core deposit premiums of $854,000
were written-off for the year ended December 31, 1995 resulting from an
impairment in the value of core deposit premiums that was attributable to higher
than expected decay rates in the customer deposits acquired. The balance of core
deposit premiums will be subsequently amortized over its remaining useful life.
There were no core deposit premiums written-off for the years ended December 31,
1994 and 1993. Amortization expense for core deposit premiums was $1.9 million,
$2.0 million and $1.7 million for the years ended December 31, 1995, 1994 and
1993, respectively.
Goodwill represents the excess of cost over fair value of the net
assets acquired. Goodwill is amortized to expense over a period no greater than
the estimated remaining life of the long-term interest-bearing assets acquired.
If the assets acquired do not include a significant amount of long-term
interest-bearing assets, goodwill is amortized over a period that does not
exceed the estimated remaining life of the existing customer deposit base.
Goodwill is amortized on a straight-line basis over a period of 17 years. If it
is probable that the estimated undiscounted future cash flows will be less than
the carrying amount of goodwill, a reduction of the carrying amount is recorded.
Amortization expense for goodwill was $396,000 for each of the years ended
December 31, 1995, 1994 and 1993.
During the fourth quarter of 1995, the Bank decided to sell or
exchange of certain of its acquired branches for which goodwill was recorded in
1981. Based on the offers received and management's estimates of the
undiscounted future cash flows, the remaining unamortized goodwill was written-
off because management believes that the goodwill could no longer be assured of
recovery. Goodwill of $758,000 was written-off for the year ended December 31,
1995. There was no goodwill written-off for the years ended December 31, 1994
and 1993.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to
repurchase (reverse repurchase agreements). Reverse repurchase agreements are
considered financings, and the obligations to repurchase securities are
reflected as liabilities, while the securities underlying the agreements are
included in the Company's securities portfolio and recorded as assets.
52
<PAGE>
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory rates applicable to future years to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
INTEREST RATE EXCHANGE AGREEMENTS
Interest rate exchange agreements are sometimes used by the Company to
manage its interest rate risk by more closely matching the repricing
characteristics of certain assets and liabilities. The net interest differential
resulting from interest rate exchange agreements is recorded as incurred.
EARNINGS (LOSS) PER SHARE
Loss per share for 1995 was calculated using the weighted average
number of common shares outstanding. Earnings per share for 1994 and 1993 were
calculated using weighted average number of common shares outstanding including
common stock equivalents which consist of certain outstanding stock options. The
average number of shares outstanding for 1995 was 7,293,492. The average number
of shares outstanding (including common stock equivalents) for 1994 and 1993
were 7,180,880 and 7,035,991 shares, respectively. The Company has not
separately reported fully diluted earnings per share as it is not materially
different from primary earnings per share.
RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform with current year presentation.
2. CASH AND CASH EQUIVALENTS
The following is a summary of cash and cash equivalents:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Noninterest-earning deposits due
from depository institutions $24,144 $21,750
Interest-earning deposits 2,366 2,042
Federal funds sold 16,250 2,400
------- -------
$42,760 $26,192
======= =======
</TABLE>
Generally, the Company's banking depositories either pay interest on
deposits or apply an imputed interest credit to deposit balances which is used
as an offset to charges for banking services rendered. Cash balances required to
be held at the Federal Reserve Bank totaled approximately $5.7 million and $4.7
million at December 31, 1995 and 1994, respectively. The Company does not
maintain compensating balances or have lines of credit with banks.
53
<PAGE>
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ FAIR
COST GAINS (LOSSES) VALUE
--------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Federal Home Loan Mortgage Corporation and
Student Loan Mortgage Association notes $ 7,000 --- --- $ 7,000
Federal Home Loan Mortgage Corporation
preferred stock 1,000 35 --- 1,035
------- --- ---- -------
$ 8,000 $35 $--- $ 8,035
======= === ==== =======
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ FAIR
COST GAINS (LOSSES) VALUE
--------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY
Federal Home Loan Mortgage
Corporation debentures $ 9,988 --- $ (4) $ 9,984
Federal Home Loan Mortgage Corporation notes 24,940 45 --- 24,985
Federal Farm Credit Bank callable note 5,000 --- --- 5,000
------- --- ---- -------
$39,928 $45 $ (4) $39,969
======= === ==== =======
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ FAIR
COST GAINS (LOSSES) VALUE
--------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Federal Home Loan Mortgage Corporation
preferred stock $ 1,000 --- $(20) $ 980
======= === ==== =======
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ FAIR
COST GAINS (LOSSES) VALUE
--------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY
Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association
notes and debentures $21,938 --- $(1,119) $20,819
Other securities (rated investment grade) 9,923 --- (493) 9,430
------- --- ------- -------
$31,861 $-- $(1,612) $30,249
======= === ======= =======
</TABLE>
54
<PAGE>
The weighted average yield of investment securities available for sale
and held to maturity at December 31, 1995 was 7.19% and 6.58%, respectively. The
weighted average yield of investment securities available for sale and held to
maturity at December 31, 1994 was 7.90% and 6.38%, respectively.
There were no sales of investment securities during 1995 and 1993.
During 1994, proceeds from sales of investment securities available for sale
were $5.3 million. Gross gains of $171,000 were realized on those sales.
The following table sets forth the contractual maturities and
amortized cost of the Company's investment securities as of December 31, 1995.
<TABLE>
<CAPTION>
ONE YEAR THR ONE YEAR THROUGH
WITHIN ONE YEAR FIVE YEARS TOTAL
---------------------- ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------- -------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Federal Home Loan Mortgage Corporation $ --- ---% $ 2,000 7.67% $ 2,000 7.67%
Student Loan Mortgage Association notes --- --- 5,000 7.00 5,000 7.00
------- ----- ------- ----- ------- -----
Total $ --- ---% $ 7,000 7.19% $ 7,000 7.19%
------- ----- ------- ----- ------- -----
HELD TO MATURITY
Federal Home Loan Mortgage Corporation
debentures $ --- ---% $ 9,988 6.15% $ 9,988 6.15%
Federal Home Loan Bank callable note --- --- 24,940 6.79 24,940 6.79
Federal Farm Credit Bank callable note --- --- 5,000 6.40 5,000 6.40
------- ----- ------- ----- ------- -----
Total $ --- ---% $39,928 6.58% $39,928 6.58%
======= ===== ======= ===== ======= =====
</TABLE>
The Company's investment in FHLMC preferred stock has no scheduled maturity
and is redeemable in whole or in part after June 30, 1997 at the option of
FHLMC.
55
<PAGE>
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
COST GAINS (LOSSES) VALUE
----------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Federal Home Loan Mortgage Corporation $ 13,457 $ --- $ (199) $ 13,258
Federal National Mortgage Association 113,543 --- (1,135) 112,408
Government National Mortgage Association 24,000 482 (370) 24,112
-------- ---- ------- --------
$151,000 $482 $(1,704) $149,778
======== ==== ======== ========
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
COST GAINS (LOSSES) VALUE
----------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY
Federal Home Loan Mortgage Corporation $242,839 $173 $(3,224) $239,788
Federal National Mortgage Association 329,090 242 (4,035) 325,297
Government National Mortgage Association 893 31 --- 924
Financial institutions and financial intermediaries 6,128 460 (1) 6,587
Other nonrated, nonresidential real estate 3,580 --- (855) 2,725
-------- ---- ------- --------
$582,530 $906 $(8,115) $575,321
==== ======= ========
Allowance for losses (930)
--------
$581,600
========
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
COST GAINS (LOSSES) VALUE
----------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Federal Home Loan Mortgage Corporation $ 70,301 $240 $(3,999) $ 66,542
Federal National Mortgage Association 40,647 18 (2,968) 37,697
Government National Mortgage Association 3,937 385 --- 4,322
Financial institutions and financial intermediaries 266 29 --- 295
-------- ---- ------- --------
$115,151 $672 $(6,967) $108,856
======== ==== ======= ========
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
COST GAINS (LOSSES) VALUE
------------ ------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY
Federal Home Loan Mortgage Corporation $292,564 $ 38 $(25,064) $267,538
Federal National Mortgage Association 486,883 116 (47,021) 439,978
Government National Mortgage Association 23,446 --- (2,571) 20,875
Financial institutions and financial intermediaries 6,497 338 (39) 6,796
Other nonrated, nonresidential real estate 5,008 --- (2,067) 2,941
-------- ---- -------- --------
$814,398 $492 $(76,762) $738,128
======== ==== ======== ========
Allowance for losses (1,574)
--------
$812,824
========
</TABLE>
The weighted average yield of mortgage-backed securities available for
sale and held to maturity at December 31, 1995 was 6.72% and 6.58%,
respectively. The weighted average yield of mortgage-backed securities available
for sale and held to maturity at December 31, 1994 was 7.62% and 6.69%,
respectively.
Adjustable rate mortgage-backed securities included above totaled
$725,000 at December 31, 1995 and $789,000 at December 31, 1994. The Company
uses mortgage-backed securities as full or partial collateral for borrowings.
The total amount of pledged mortgage-backed securities at December 31, 1995 and
1994 was $551.1 million and $679.5 million, respectively.
Proceeds from sales of mortgage-backed securities available for sale
during 1995 were $101.2 million. Gross gains of $688,000 and gross losses of
$2.90 million were realized on those sales. There were no sales of mortgage-
backed securities in 1994. Proceeds from sales of mortgage-backed securities
available for sale during 1993 were $85.6 million. Gross gains of $2.0 million
and gross losses of $451,000 were realized on those sales.
57
<PAGE>
The following table sets forth the Company's mortgage-backed
securities portfolio as of December 31, 1995 with related remaining contractual
terms to maturity.
<TABLE>
<CAPTION>
OVER OVER
ONE YEAR THROUGH FIVE YEARS THROUGH
WITHIN ONE YEAR FIVE YEARS TEN YEARS OVER TEN YEARS TOTAL
-------------------- -------------------- ------------------- -------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE TOTAL AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- --------- -------- --------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
FHLMC, FNMA and GNMA
Total amortized cost $ --- ----% $ --- ---% $ --- ---% $151,000 6.72% $151,000 6.72%
====== ===== ======= ===== ====== ===== ======== ===== ======== =====
Fair value $ --- $ --- $ --- $149,778 $149,778
====== ======= ====== ======== ========
HELD TO MATURITY
FHLMC, FNMA, GNMA $3,684 6.26% $39,542 6.09% $2,777 9.00% $526,819 6.59% $572,822 6.58%
Financial institutions
and intermediaries --- --- 159 8.88 --- --- 5,969 10.58 6,128 10.54
Other nonrated,
nonresidential
real estate 3,580 --- --- --- --- --- --- --- 3,580 ---
------ ------ ------- ------ ------ ----- -------- ----- -------- -----
Total amortized cost $7,264 3.17% $39,701 6.10% $2,777 9.00% $532,788 6.64% $582,530 6.58%
====== ====== ======= ====== ====== ===== ========= ===== ======== =====
Fair value $6,479 $39,041 $2,869 $526,932 $575,321
====== ======= ====== ======== ========
</TABLE>
58
<PAGE>
5. LOANS RECEIVABLE
The primary lending activity of the Company is the origination of loans for
the purpose of enabling borrowers to purchase or refinance residential real
estate. The Company's loans receivable are primarily secured by real property
located in Northern California with the heaviest concentration in the counties
of San Mateo, San Francisco and Santa Clara. Although the Company has a
diversified loan portfolio, the geographic concentration of its borrowers
implies a dependence on the regional economy and local real estate markets. The
following is a summary of loans receivable including available for sale:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
Residential
Single family (one to four units) $ 731,310 $733,265
Multifamily (five or more units) 995,038 980,849
Nonresidential 333,236 337,483
---------- ----------
2,059,584 2,051,597
Consumer loans 34,849 31,483
---------- ----------
2,094,433 2,083,080
Advances to borrowers 607 1,909
Less:
Net deferred loan origination fees (1,009) (617)
Unearned discounts and premiums (1,749) (694)
Allowance for loan losses (30,014) (29,115)
---------- ----------
(32,772) (30,426)
---------- ----------
$2,062,268 $2,054,563
========== ==========
</TABLE>
The Company's loans receivable include both adjustable and fixed rate
mortgage loans. The following is a summary of adjustable and fixed rate mortgage
loans receivable at December 31, 1995, with related rate adjustment periods for
adjustable rate mortgage loans and remaining terms to maturity adjusted for
estimated prepayments for fixed rate mortgage loans.
<TABLE>
<CAPTION>
ADJUSTABLE FIXED RATE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Within 1 year $1,803,687 $ 28,025
1 year through 5 years --- 100,382
After 5 years --- 127,490
---------- --------
$1,803,687 $255,897
========== ========
</TABLE>
59
<PAGE>
The interest rates on the Company's adjustable rate loans may
periodically rise or fall (generally based on monthly or semi-annual adjustment
periods) in accordance with an independent index. The indices most commonly used
by the Company are the Federal Home Loan Bank's Eleventh District Cost of Funds
Index and the one-year Constant Maturity Treasury Index.
The Company sells mortgage loans to the secondary market and usually
retains responsibility for servicing the loans. At December 31, 1995, 1994 and
1993, the Company serviced participating interests in loans sold of $466.5
million, $541.0 million and $610.5 million, respectively. Capitalized excess
servicing fees included in other assets at December 31, 1995 and 1994, were
$985,000 and $1.8 million, respectively.
The Company has agreed to modifications of certain multifamily and
nonresidential mortgage loans. The modifications have taken the form of interest
rate concessions, and/or payment concessions. Such loan modifications are
considered troubled debt restructurings and are entered into with the objective
of maximizing the Company's long-term recovery of the investment in the loan
when a borrower is experiencing financial difficulties. The Company has no
commitments to lend additional funds to borrowers whose loans were so modified.
In the aggregate, the Company's investment in troubled debt restructurings
(excluding troubled debt restructurings classified as nonaccrual loans) was
$15.6 million and $14.0 million at December 31, 1995 and 1994, respectively.
Interest income with respect to these loans would have been $1.1 million in
1995, $863,000 in 1994, and $971,000 in 1993 under their original terms. Actual
interest recognized by the Company on these modified loans was $1.1 million in
1995, $920,000 in 1994, and $1.0 million in 1993.
At December 31, 1995 and 1994, nonaccrual loans totaled $10.8 million
and $36.3 million, respectively. Interest on nonaccrual loans that was not
recorded in income was $623,000, $2.8 million and $3.5 million for years ended
December 31, 1995, 1994 and 1993, respectively. Actual interest recognized by
the Company on these nonaccrual loans was $1.1 million in 1994 and $2.0 million
in 1993. Actual interest recognized on nonaccrual loans at December 31, 1995 was
insignificant. At December 31, 1995, the Company had no commitments to lend
additional funds to these borrowers.
Impaired loans recorded in accordance with SFAS 114 consist of
nonperforming loans and troubled debt restructurings as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming loans $10,755 $36,321
Troubled debt restructurings 15,641 13,948
------- -------
$26,396 $50,269
======= =======
</TABLE>
The average recorded investments for impaired loans during 1995 and 1994 were
$38.5 million and $66.8 million.
60
<PAGE>
The following table summarizes the changes in the allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
MORTGAGE CONSUMER TOTAL
LOANS LOANS LOANS
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1993 $ 37,435 $ 999 $ 38,434
Provision for losses 6,844 (312) 6,532
Charge-offs (11,380) (149) (11,529)
Recoveries 218 135 353
-------- ----- --------
Balance at December 31, 1993 33,117 673 33,790
Provision for losses 2,534 (167) 2,367
Charge-offs (8,428) (86) (8,514)
Recoveries 1,337 135 1,472
-------- ----- --------
Balance at December 31, 1994 28,560 555 29,115
Provision for losses 4,284 --- 4,284
Charge-offs (4,727) (152) (4,879)
Recoveries 1,424 70 1,494
-------- ----- --------
Balance at December 31, 1995 $ 29,541 $ 473 $ 30,014
======== ===== ========
</TABLE>
Allowance for loan losses was provided for all impaired loans at
December 31, 1995. The portion of the total allowance for loan losses that was
attributable to impaired loans was $5.1 million. Provision for loan losses,
charge-offs and recoveries relating to impaired loans for the year ended
December 31, 1995 were $2.5 million, $4.9 million and $1.5 million,
respectively.
To facilitate the sale of real estate loans, in the past, the Company
occasionally offered a recourse guaranty on loans sold wherein the Company
agreed to repurchase or substitute for loans that became 90 days delinquent. In
addition, the Company on occasion subordinated its retained participation
interest in sold loans. At December 31, 1995 and 1994, the Company had
outstanding recourse and subordination contingencies relating to principal of
$56.0 million and $71.2 million, respectively, on sold mortgage loans.
At December 31, 1995 and 1994, mortgage loans aggregating $1.24
billion and $1.16 billion respectively, were pledged as collateral for advances
from the FHLBSF.
61
<PAGE>
The following table shows the contractual maturities (i.e., remaining
term to maturity) of the Bank's loan portfolio at December 31, 1995.
<TABLE>
<CAPTION>
ONE YEAR THROUGH OVER TOTAL
WITHIN ONE YEAR FIVE YEARS FIVE YEARS AMOUNT
--------------- ---------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential $25,316 $113,829 $1,587,203 $1,726,348
Nonresidential 8,588 97,966 226,682 333,236
Consumer 13,799 930 20,120 34,849
------- -------- ---------- ----------
$47,703 $212,725 $1,834,005 $2,094,433
======= ======== ========== ==========
</TABLE>
At December 31, 1995, the total amount of mortgage loans due after one year
having fixed interest rates were $227.9 million and those having adjustable
interest rates were $1.80 billion.
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land $ 4,777 $ 4,777
Buildings 10,237 10,870
Capitalized leases 3,979 3,929
Leasehold improvements 5,486 5,798
Furniture and equipment 12,456 11,482
Construction in progress 3,523 2,841
-------- --------
40,458 39,697
Less:
Accumulated depreciation and amortization (17,174) (16,489)
Reserve for write down on corporate office complex (7,100) ---
-------- --------
$ 16,184 $ 23,208
======== ========
</TABLE>
During the fourth quarter of 1995, the Company recorded a charge of
$7.1 million to adjust the carrying amount of the land and building of its
corporate office complex to its estimated fair value less costs to sell as a
result of its decision to pursue a sale of the complex. Depreciation and
amortization expense for the years ended December 31, 1995, 1994 and 1993 was
$3.1 million, $3.1 million and $2.7 million, respectively.
62
<PAGE>
7. CUSTOMER DEPOSITS
Customer deposits comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------
WEIGHTED
% OF AVERAGE
AMOUNT TOTAL RATE
---------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts $ 173,739 9.6% 2.93%
Checking accounts 107,595 5.9 0.80
Money market accounts 106,276 5.8 3.09
Certificates of deposits 1,432,230 78.7 6.02
---------- ----- ----
$1,819,840 100.0% 5.24%
========== ===== ====
<CAPTION>
DECEMBER 31, 1994
------------------------------
WEIGHTED
% OF AVERAGE
AMOUNT TOTAL RATE
---------- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts $ 143,965 8.4% 2.30%
Checking accounts 106,835 6.3 0.98
Money market accounts 128,624 7.5 2.56
Certificates of deposits 1,327,952 77.8 5.25
---------- ----- ----
$1,707,376 100.0% 4.53%
========== ===== ====
</TABLE>
Noninterest bearing deposits were $13.3 million and $10.3 million as
of December 31, 1995 and 1994, respectively. Customer deposits at December 31,
1995 included certificates of deposits scheduled to mature as follows:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1996 $1,197,531
1997 179,802
1998 24,407
1999 17,908
2000 10,897
2001 and thereafter 1,685
----------
$1,432,230
==========
</TABLE>
63
<PAGE>
Interest expense on customer deposits by deposit type is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts $ 3,777 $ 3,673 $ 4,098
Checking and money market accounts 4,468 4,625 5,623
Certificates and jumbo certificates 85,153 57,274 55,109
Brokered retail certificates --- 852 3,245
------- -------- -------
$93,398 $ 66,424 $68,075
======= ======== =======
</TABLE>
8. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF SAN FRANCISCO
At December 31, 1995 and 1994, the Company had the following advances
outstanding with the following maturities and rates:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRINCIPAL AMOUNTS INTEREST RATES
----------------------- --------------
1995 1994 1995 1994
-------- -------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995 $ --- $439,520 ---% 5.35%
1996 486,940 396,940 6.69 6.75
1997 96,580 56,580 5.63 4.97
1998 108,270 43,270 5.88 6.94
1999 35,000 --- 5.84 ---
2000 20,000 --- 5.88 ---
2001 20,000 20,000 8.66 8.66
-------- -------- ---- ----
$766,790 $956,310 6.43% 6.05%
======== ======== ==== ====
</TABLE>
Advances at December 31, 1995 include $123.6 million of borrowings
(with maturities in 1996 through 1998) with interest rates that reset monthly
based on the Eleventh District Cost of Funds Index. The advances were
collateralized by loans and mortgage-backed securities totaling $1.61 billion
and $1.51 billion at December 31, 1995 and 1994, respectively.
The Bank is a member of the Federal Home Loan Bank System. As a
member, the Bank is required to purchase stock in the FHLBSF at an amount equal
to the greater of 1% of the Bank's residential mortgage loans or 5% of
outstanding FHLBSF advances. The stock is purchased at par value ($100 per
share) and shares of stock held in excess of the minimum requirement may be sold
back to the FHLBSF at par value. The Bank records its investment in FHLBSF stock
at cost (par value). At December 31, 1995, the Bank's investment was $39.5
million and its minimum required investment was $38.3 million. The stock is
pledged as collateral for advances from the FHLBSF. The FHLBSF generally
declares quarterly stock dividends. The amount of FHLBSF dividends recorded in
income during the years ended December 31, 1995, 1994 and 1993 was $2.2 million,
$2.3 million and $1.4 million, respectively.
64
<PAGE>
As part of its asset/liability management strategy to reduce interest
rate risk exposure, during the fourth quarter of 1995, the Company prepaid $45.0
million of its advances from the FHLBSF. In addition, the Company has committed
to prepay $145.0 million of its advances from the FHLBSF in February 1996. As a
result, the Company incurred a prepayment charge of $2.5 million (net of
applicable income taxes) in connection with the early retirement of such debt
which is reported as an extraordinary item in the 1995 Consolidated Statement of
Operations. The prepayment penalties were $132,000 (net of applicable income
taxes) in 1993. There were no prepayment penalties incurred in 1994.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are effectively
borrowings secured by mortgage-backed securities. The securities sold under the
terms of these agreements are safekept for the Company by the registered primary
securities dealers who arrange the transactions. Borrowings under reverse
repurchase agreements at December 31, 1995 and 1994 were $166.7 million and
$255.1 million, respectively. The weighted average interest rate on reverse
repurchase agreements at December 31, 1995 and 1994 were 6.13% and 5.84%,
respectively.
These borrowings are collateralized by mortgage-backed securities
aggregating $172.2 million and $289.9 million respectively, at December 31, 1995
and 1994. The contractually required market values of the collateral may range
up to 106% of the borrowings. The market value of the mortgage-backed securities
collateralizing such borrowings at December 31, 1995 and 1994, was $174.8
million and $269.3 million, respectively.
10. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note payable to a commercial bank with interest at 90% of
bank prime (1995, 7.65%; 1994, 7.65%) payable quarterly,
due in 2004 $5,023 $5,377
Capital lease obligation 2,914 3,165
------ --------
$7,937 $8,542
====== ========
Weighted average interest rate 10.43% 10.48%
====== ========
</TABLE>
The note payable to a commercial bank represents funds borrowed by the
Company and in turn lent to the Company's Employee Stock Ownership Plan
("ESOP"). Payments were interest only for the first three years with principal
to be paid in twelve installments beginning in 1993. Mortgage-backed securities
totaling $5.3 million and $5.8 million at December 31, 1995 and 1994,
respectively, were pledged as collateral for the loan.
65
<PAGE>
Maturities of other borrowings subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1996 $ 792
1997 946
1998 1,123
1999 1,333
2000 1,030
2001 and thereafter 2,713
------
$7,937
======
</TABLE>
11. INCOME TAXES
The Company files consolidated federal tax returns with its wholly-
owned subsidiaries. Income tax expense (benefit) before extraordinary items is
summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1995:
Current $(5,652) $(2,482) $(8,134)
Deferred 5,135 2,291 7,426
------- ------- -------
$ (517) $ (191) $ (708)
======= ======= =======
1994:
Current $ 4,237 $ 2,669 $ 6,906
Deferred 883 39 922
------- ------- -------
$ 5,120 $ 2,708 $ 7,828
======= ======= =======
1993:
Current $ 5,092 $ 1,288 $ 6,380
Deferred 2,060 1,325 3,385
------- ------- -------
$ 7,152 $ 2,613 $ 9,765
======= ======= =======
</TABLE>
Following is a summary of current and deferred income taxes included in other
assets:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current liability $ (6,248) $(3,780)
Deferred asset 11,683 6,434
-------- -------
$ 5,435 $ 2,654
======== =======
</TABLE>
66
<PAGE>
The differences between the effective tax rates and the federal statutory rates
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal tax expense, computed at statutory rate
of 1995, 1994 and 1993, 35.0% $ (999) $ 7,819 $7,842
Revision of prior year estimates --- (2,100) ---
State tax expense, net of federal tax benefit (192) 1,587 1,922
Other, net 483 522 1
-------- ------- ------
$ (708) $ 7,828 $9,765
======== ======= ======
Effective tax rate, as a percentage of income before
income tax expense (benefit) and extraordinary items (24.8%) 35.0% 43.6%
======== ======= ======
</TABLE>
The components of the net deferred tax assets as of December 31, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Provision for loan losses $ 12,508 $12,170
Real estate joint ventures 1,090 1,290
Depreciation 1,476 1,226
State income taxes 235 802
Intangible assets 3,505 2,559
Unrealized loss on securities available for sale 504 2,681
Leases 787 694
Prepayment penalties 1,815 ---
Writedown of corporate office complex 2,823 ---
Other 2,579 2,046
-------- --------
Gross deferred tax assets 27,322 23,468
-------- --------
Deferred tax liabilities:
Excess over base year reserve (914) (1,179)
Loan fees (8,411) (8,873)
FHLBSF stock dividends (5,405) (5,798)
Capitalized excess servicing fees (456) (854)
Other (453) (330)
-------- --------
Gross deferred tax liabilities (15,639) (17,034)
-------- --------
Net deferred tax asset $ 11,683 $ 6,434
======== =======
</TABLE>
67
<PAGE>
In accordance with SFAS 109, a deferred tax liability has not been
recognized for the bad debt reserves of the Company which arose in the tax years
which began prior to December 31, 1987. At December 31, 1995 and 1994, the
amount of these reserves was approximately $17.0 million.
The amount of unrecognized deferred tax liability at December 31, 1995
and 1994 was approximately $6.1 million and $5.6 million. The deferred tax
liability could be recognized, if in the future, there is a change in Federal
tax law, the savings institution fails to meet the definition of a "qualified
savings institution," certain distributions are made with respect to the stock
of the savings institution, or the bad debt reserves are used for any purpose
other than absorbing bad debt losses.
During 1994, the Company and the Internal Revenue Service ("IRS")
reached a tentative agreement to resolve certain disputed issues related to the
taxable years 1987 through 1989. The principal disputed issues related to
various savings and loan industry tax issues for which the Company had
previously provided deferred taxes.
As a result of such an agreement, the Company reduced its 1994 income
tax expense by approximately $2.1 million. The reduction in 1994 income tax
expense represented an adjustment to the Company's current and deferred income
tax liabilities (including the estimated effect of the IRS agreement on the
Company's California franchise tax returns).
12. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") provides definitions of regulatory capital (tangible capital,
core capital and risk-based capital) and methods of calculating the minimum
requirement for each type of capital. The tangible capital requirement is 1.5%
of tangible assets. The core capital requirement is 3.0% of tangible assets plus
qualifying intangibles. The risk-based capital requirement is 8.0% of risk-
weighted assets. At December 31, 1995, the Bank's regulatory capital exceeds the
requirements of each regulatory capital standard in effect on such date as
follows:
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
-------------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- --------- -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible $154,621 5.16% $ 44,953 1.50% $109,668 3.66%
Core (Leverage) $158,378 5.28% $ 90,018 3.00% $ 68,360 2.28%
Risk-based $179,865 10.51% $136,924 8.00% $ 42,941 2.51%
</TABLE>
68
<PAGE>
The following table is a reconciliation of the Bank's capital (excluding
unrealized loss on securities available for sale, net of tax benefit) under
Generally Accepted Accounting Principles ("GAAP") with its regulatory capital at
December 31, 1995:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
--------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Bank stockholder's equity (GAAP) $161,937 $161,937 $161,937
Increase (decrease):
Core deposit premiums (5,835) (2,078) (2,078)
Non-includable investment in subsidiary (1,481) (1,481) (1,481)
Non-qualifying equity investments --- --- (14)
Qualifying general loan loss allowances --- --- 21,501
-------- -------- --------
Bank regulatory capital $154,621 $158,378 $179,865
======== ======== ========
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required each Federal banking agency to implement prompt corrective actions for
institutions that it regulates. In response to this requirement, the Office of
Thrift Supervision ("OTS") adopted final rules, effective December 19, 1992,
based on FDICIA's five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
The regulations provide that a savings institution is "well capitalized" if
its total risk-based capital ratio is 10% or greater, its tier one risk-based
capital ratio is 6% or greater, its leverage ratio is 5% or greater, and the
institution is not subject to a capital directive. As used herein, total risk-
based capital ratio means the ratio of total risk-based capital to risk-weighted
assets, tier one capital ratio means the ratio of core capital to risk-weighted
assets, and leverage ratio means the ratio of core capital to adjusted total
assets, in each case as calculated in accordance with current OTS capital
regulations. Under these regulations, the Bank is deemed to be "well
capitalized."
At December 31, 1995, the Bank had the following regulatory capital calculated
in accordance with FDICIA's capital standards:
<TABLE>
<CAPTION>
"WELL CAPITALIZED"
ACTUAL REQUIREMENT
------------------- --------------------
AMOUNT RATIO AMOUNT RATIO
--------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Core (Leverage) $158,378 5.28% $150,030 5.00%
Tier one risk-based $158,378 9.25% $102,693 6.00%
Total risk-based $179,865 10.51% $171,155 10.00%
</TABLE>
Currently, the OTS has deferred implementation of the interest rate risk
component for institutions with a greater than "normal" (i.e. greater than 2%)
level of interest rate risk exposure. As of December 31, 1995, if the interest
rate risk component regulation had been implemented, the Bank would not have
been subject to an interest rate risk capital deduction for risk-based capital
purposes.
69
<PAGE>
The Company is a legal entity separate and distinct from the Bank. The
Company's principal source of funds on an unconsolidated basis is expected to be
dividends from the Bank. Dividends declared by the Bank to the Company were
$29.4 million in 1995, $4.4 million in 1994 and $3.3 million in 1993. There are
various statutory and regulatory limitations on the extent to which the Bank can
pay dividends to, make investments in or loans to, or otherwise supply funds to
the Company. Based on the current financial status of the Bank, the Company
believes that such limitations and restrictions will not impair the Company's
ability to continue to pay the current level of dividends.
During 1995, the Company announced its intention to acquire up to 600,000
shares of its common stock. As of December 31, 1995, the Company has
repurchased 305,000 shares in the open market. Subsequent to December 31, 1995,
the Company further increased its planned acquisition of its common stock to up
to 800,000 shares. Management intends to reduce the Company's excess capital
position, including evaluation of all available capital redeployment
opportunities.
13. STOCK OPTIONS
The Company has adopted Stock Option and Incentive Plans (1986 Stock Option
Plan and 1995 Stock Option Plan), which authorize the issuance of up to 879,715
shares and 250,000 shares, respectively of common stock. The Company also has
adopted a Non-Employee Director Stock Option Plan which authorizes the issuance
of up to 275,000 additional shares of common stock. The stock option plans were
approved by the Company's stockholders. As of December 31, 1995, options for
709,824 shares had been exercised and issued under the plans.
At December 31, 1995, the Company had outstanding non-qualified
options for all three plans totaling 488,547 shares to directors and officers of
the Company at exercise prices ranging from $13.94 to $26.63 per share (based on
fair market value as defined on the date granted) with expiration dates from
1996 to 2005.
<TABLE>
<CAPTION>
EXERCISE AVERAGE
NUMBER OF PRICE PRICE
OPTION SHARES RANGE PER SHARE
-------------- -------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1992 717,083 $13.94 - 20.75 $17.04
Granted 89,000 18.50 - 23.75 21.39
Exercised (184,787) 13.94 - 19.63 16.28
Canceled (5,000) 17.50 - 17.50 17.50
-------- -------------- ------
Outstanding at December 31, 1993 616,296 13.94 - 23.75 17.89
Granted 26,000 21.50 - 23.88 21.68
Exercised (112,711) 13.94 - 19.63 16.94
-------- -------------- ------
Outstanding at December 31, 1994 529,585 13.94 - 23.88 18.28
Granted 217,000 18.75 - 26.63 24.56
Exercised (238,616) 13.94 - 22.13 18.01
Canceled (19,422) 17.50 - 25.00 22.92
-------- -------------- ------
Outstanding at December 31, 1995 488,547 $13.94 - 26.63 $21.02
======== ============== ======
</TABLE>
70
<PAGE>
14. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) thrift plan under which an employee with one or
more years of service may contribute from 2% to 15% of base salary to the plan.
The Company will match an employee's contribution up to 100% of the first 6% of
the employee's base salary, depending on the employee's length of service. The
Company's contributions for the years ended December 31, 1995, 1994 and 1993
were $483,000, $526,000 and $506,000, respectively.
The Company had a non-qualified defined benefit retirement plan for non-
employee members of its Board of Directors and a non-qualified supplemental
retirement plan for executive officers (collectively the "Plans"). The Company
intends to terminate the Plans as of December 31, 1995 and the pension
liability was adjusted accordingly. The pension liability in the Consolidated
Statements of Financial Condition at December 31, 1995 was $4.5 million, which
represented the expected payout to participants upon termination of the plans.
The benefits are based on years of service and the participant's
compensation. During 1995, an amount of $637,000 was charged to income for
pension benefits relating to the Plans. This amount includes the adjustments
required to reflect the termination of the plans.
Net pension cost for these Plans included the following components for 1994 and
1993:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service cost-benefits earned during the year $ 285 $ 544
Interest cost on projected benefit obligation 492 301
Net amortization and deferral 83 88
----- -----
Net periodic pension cost $ 860 $ 933
===== =====
</TABLE>
The following table sets forth the Plans' funded status and amounts
recognized in the Company's Consolidated Statements of Financial Condition at
December 31, 1994:
<TABLE>
<CAPTION>
AMOUNT
-------
(DOLLARS IN THOUSANDS)
<S> <C>
Accumulated benefit obligation $3,108
Projected benefit obligation for services rendered to date $3,917
Items not yet recognized in earnings:
Unrecognized net gain 903
Unrecognized net transition obligation (690)
------
Pension liability recognized in the Consolidated Statements
of Financial Condition $4,130
======
</TABLE>
The weighted average discount rate and rate of increase in compensation
levels used in determining the actuarial present value of the projected benefit
obligation for 1994 were 8.3% and 4.7%, respectively. The Company has purchased
life insurance policies on certain directors and officers (with the Company as
beneficiary) to fund in part the payment of pension liability.
71
<PAGE>
On January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106 ("SFAS 106"), "Accounting for Post-retirement Benefits Other
than Pensions". It requires that covered benefits be accounted for on an accrual
basis rather than the cash payment method previously used by the Company for
financial statement purposes. Prior to 1989, the Company sponsored a Retiree
Health Program under which then qualifying employees could continue their group
medical coverage after retirement. In 1989, the Company modified the terms of
the program to limit coverage to existing retirees and certain employees who met
specific requirements as of December 31, 1988. Based on an assumed 10% annual
increase in health care costs, historical employee retirement age elections and
estimated actuarial life expectancy rates, the Company projects approximately
$2.5 million as the total undiscounted cost of its post-retirement benefits
obligations. The Company recognizes this obligation on a straight line basis
over the average remaining life expectancy of plan participants. The impact on
earnings for the program was $140,000, $191,000 and $126,000, respectively, for
1995, 1994 and 1993.
The Company has an ESOP covering all regular full-time and part-time
employees who have completed one year of employment. The Company borrowed $6.0
million from a financial institution which it in turn lent to the ESOP to
purchase shares of the Company's common stock in the open market. At December
31, 1995 and 1994, the ESOP held 176,589 and 196,359 shares, respectively, of
the Company's common stock. The interest rate paid by the Company on the ESOP
debt is based on 90% of the prime rate. Total interest expense incurred on the
ESOP debt was $407,000, $352,000 and $314,000, respectively, for the years ended
December 31, 1995, 1994 and 1993. The interest expense recorded by the Company
was $254,000, $199,000 and $169,000, for the years ended December 31, 1995, 1994
and 1993, respectively. The Company makes periodic contributions to the ESOP
primarily to enable the ESOP to pay interest expense and administrative costs
not covered by cash dividends received by the ESOP on its shares of the
Company's common stock. Contributions from the Company to the ESOP on a cash
basis totaled $609,000 for 1995, $508,000 for 1994 and $471,000 for 1993.
15. INTEREST RATE SWAPS
The Company considers various strategies to minimize interest rate risk,
including interest rate exchange agreements (swaps, caps and collars). Interest
rate swap agreements may be used to reduce the interest rate fluctuation risk
related to certain assets and liabilities and involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying notional amounts. Net interest income (expense) resulting from the
differential between exchanging floating and fixed rate interest payments is
recorded on a current basis. Notional principal amounts are often used to
express the volume of interest rate swap transactions, but the amounts
potentially subject to loss are much smaller. The Company is exposed to loss of
future interest differential payments (credit risk) in the event of
nonperformance by the counter parties to the interest rate exchange agreements.
The Company manages the credit risk of its interest rate exchange agreements by
maintaining exposure limits and adhering to a strict counter party selection
process.
72
<PAGE>
At December 31, 1995, the Company was party to interest rate swap
agreements with notional principal amounts of $150.0 million. There were no
interest rate swap agreements outstanding at December 31, 1994. In addition, the
Company has entered into interest rate swap agreements for which the start is
contractually delayed until February 1996 (forward starting swaps) with notional
principal amounts of $150.0 million. Interest rate swap agreements with notional
principal amounts of $50.0 million and the forward starting swaps with notional
principal amounts of $150.0 million were entered into as part of the prepayment
of $45.0 million of advances from the FHLBSF in the fourth quarter of 1995 and
the commitment to prepay $145.0 million of advances from FHLBSF in February 1996
(see Note 8). The interest rate swap agreements were used to manage interest
rate risk on short-term borrowings used to replace the prepaid borrowings by
matching interest rate characteristics and lengthening maturities.
The information presented below is based on interest rates at December 31,
1995. To the extent that rates change, variable interest rate information will
change. The following schedule represents the maturities and weighted average
rates of interest rate exchange agreement outstanding as of December 31, 1995.
<TABLE>
<CAPTION>
MATURITIES OF DERIVATIVE INSTRUMENTS
--------------------------------------
2000 2001+ TOTAL
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PAY FIXED GENERIC SWAPS
Notional amount $100,000 $ 50,000 $150,000
Weighted average receive rate (3-month LIBOR) 5.89% 5.68% 5.82%
Weighted average pay rate 6.10 6.03 6.08
FORWARD STARTING SWAPS
Notional amount $ --- $150,000 $150,000
Weighted average receive rate (3-month LIBOR) --- 5.63% 5.63%
Weighted average pay rate --- 6.35 6.35
</TABLE>
The interest rate swaps at December 31, 1995 were collateralized by loans
and mortgage-backed securities totaling $14.6 million.
During 1994, one interest rate swap agreement expired with a notional
principal amount of $10.0 million. Under this agreement, the Company agreed to
pay a fixed rate of 5.77% and receive a floating rate (based on 3-month LIBOR).
The effect of interest rate swap agreements for the years ended December 31,
1995, 1994 and 1993 was to increase interest expense by $40,000, $80,000 and
$161,000, respectively.
73
<PAGE>
16. COMMITMENTS AND CONTINGENCIES
BANKING CENTER PREMISES
In 1980, the Company sold a building which formerly housed its headquarters
for $3.45 million, and, concurrent with the sale, leased back the entire
building under a twenty-year lease. The Company occupies a minor portion of this
building and receives sublease rental income from the major portion, and is
responsible for all operating and maintenance expenses associated with the
building. Sublease rentals which totaled $385,000, $389,000 and $397,000 during
the years ended December 31, 1995, 1994 and 1993, respectively. The lease is
accounted for as a capital lease. During the years ended December 31, 1995, 1994
and 1993, depreciation on the capital lease was $303,000 for each year.
Accumulated depreciation at December 31, 1995 and 1994 was $2.6 million and $2.3
million, respectively.
Certain banking center locations are leased by the Company under operating
type leases expiring at various dates through 2005. Lease rental expense for the
years ended December 31, 1995, 1994 and 1993 totaled $2.4 million, $2.5 million,
and $2.6 million, respectively.
Future minimum payments under lease obligations at December 31, 1995 are
included in the following table.
<TABLE>
<CAPTION>
CAPITAL LEASE OPERATING LEASE
PAYMENTS PAYMENTS
-------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1996 $ 824 $ 2,246
1997 873 2,213
1998 924 2,132
1999 978 1,920
2000 507 1,435
2001 and thereafter --- 3,129
------- -------
4,106 $13,075
=======
Less amount representing interest (1,192)
-------
Net capital lease obligation $ 2,914
=======
</TABLE>
MORTGAGE LOANS
At December 31, 1995 the Company had outstanding commitments to originate
$2.2 million of single family, $2.6 million of multifamily and $1.4 million of
nonresidential mortgage loans. The Company has outstanding recourse and
subordination contingencies relating to $56.0 million of sold loans at December
31, 1995 (see Note 5).
ADVANCES FROM FHLBSF
The Company has a commitment to prepay $145.0 million of its short-term
high cost borrowings from the FHLBSF in February 1996.
74
<PAGE>
LITIGATION
The Company and the Bank are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. In the opinion of
management, after consultation with counsel, the resolution of these legal
actions will not have a material adverse effect on the Company's or the Bank's
financial condition or results of operations.
SAIF ASSESSMENT
Proposed Federal legislation to recapitalize the SAIF would entail the Bank
paying a one-time special assessment of approximately $14.5 million to $16.0
million. This assessment will be accrued in the period in which legislation is
enacted. Prior to the enactment date of the legislation, the Bank's deposit
insurance premiums in 1996 will be 26 cents per $100 of deposits.
17. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been determined
by the Company using market information and valuation methodologies considered
appropriate. However, considerable judgment is required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The fair value estimates presented herein are based on pertinent
information available to the Company as of December 31, 1995 and 1994. Although
the Company is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
75
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 42,760 $ 42,760 $ 26,192 $ 26,192
Investment securities 47,963 48,004 32,841 31,229
Mortgage-backed securities/(1)/ 731,378 725,099 921,680 845,410
Loans receivable/(1)/ 2,062,268 2,079,818 2,054,563 2,000,064
Investment in stock of the FHLBSF 39,450 39,450 49,646 49,646
Capitalized excess servicing 985 6,520 1,838 6,661
Liabilities
Transaction accounts 387,610 387,610 379,424 379,424
Fixed maturity deposits 1,432,230 1,439,214 1,327,952 1,309,869
Advances from the FHLBSF 766,790 775,567 956,310 938,864
Securities sold under agreements
to repurchase 166,738 166,854 255,106 257,057
Other borrowings 7,937 8,189 8,542 9,230
Off-balance sheet financial instruments
<CAPTION>
CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT LOSS AMOUNT LOSS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commitments to originate mortgage loans $ --- $ (29) $ --- $ (364)
Interest rate swaps 15 (4,353) --- ---
</TABLE>
/(1)/ Carrying amounts have been reduced by allowances for losses.
The Company believes the carrying amounts of cash and cash equivalents
and investment in stock of the FHLBSF are reasonable estimates of their fair
values. The fair values of investment securities and mortgage-backed securities
were based on published market prices or quotes obtained from independent
registered securities brokers.
The estimated fair value of loans receivable held for investment was
determined by discounting the projected cash flows using current interest rates
at which similar loans would be made to borrowers of similar credit risk.
Prepayment estimates were based on historical experience and published data for
similar loans. Fair values for loans available for sale are based on prices for
similar loans in the secondary loan market. The estimated fair value of
capitalized excess servicing represents the present value of the discounted cash
flows on the sold loans less the Company's cost to service such loans.
The fair value of demand deposits, savings accounts and money market
accounts is the amount payable on demand and is assumed to equal the carrying
amount. The fair value of fixed maturity deposits was estimated using the rates
currently offered for certificates of deposit with similar remaining maturities.
Rates currently available to the Company for debt with similar terms
and remaining maturities were used to estimate the fair value of existing debt,
including advances from the FHLBSF, securities sold under agreements to
repurchase and other borrowings.
The unrealized loss on the Company's outstanding commitments is based
on the difference between the current level of interest rates and the committed
interest rates. The unrealized loss on interest swaps is the estimated amount
that the Company would receive or pay to terminate the swap agreements at the
reporting date, taking into account current interest rates and the current
creditworthiness of the swap counterparties.
76
<PAGE>
18. PARENT COMPANY FINANCIAL INFORMATION
The Company and its subsidiaries file consolidated Federal income tax
returns in which the taxable income or loss of the Company is combined with that
of its subsidiaries. The Company's share of income tax expense is based on the
amount which would be payable if separate returns were filed. Accordingly, the
Company's equity in the net income of its subsidiaries (distributed and
undistributed) is excluded from the computation of the provision for income
taxes for financial statement purposes.
The Parent Company's statements of financial condition and related
statements of operations and cash flows follow:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994
<S> <C> <C>
ASSETS
Cash in Bank $ 2,047 $ 1,136
Demand note due from the Bank (interest at prime rate) 24,361 22,700
Securities available for sale 1,035 980
Investment in and advances to subsidiary (the Bank) 161,301 192,707
Dividend receivable from subsidiary (the Bank) 25,000 ---
Investment in subsidiary (Regent Financial Corporation) 828 818
Other assets 823 127
- ---------------------------------------------------------------------------------
Total Assets $215,395 $218,468
=================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 7,415 $ 1,153
Stockholders' Equity 207,980 217,315
- ---------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $215,395 $218,468
=================================================================================
</TABLE>
77
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from the Bank $ 29,400 $ 4,400 $ 3,300
Interest income 1,529 1,135 1,080
Other income --- 13 ---
- ------------------------------------------------------------------------------------------------
30,929 5,548 4,380
- ------------------------------------------------------------------------------------------------
Expense:
General and administrative expense 582 502 473
Income taxes 383 158 233
- ------------------------------------------------------------------------------------------------
965 660 706
- ------------------------------------------------------------------------------------------------
Income before undistributed net income (loss) of subsidiaries 29,964 4,888 3,674
Undistributed net income (loss) of subsidiaries (34,654) 9,625 8,835
- ------------------------------------------------------------------------------------------------
Net income (loss) $ (4,690) $14,513 $12,509
================================================================================================
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,690) $14,513 $12,509
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Undistributed net (income) loss of subsidiaries 34,654 (9,625) (8,835)
Dividends receivable (25,000) --- ---
Other (48) 1,098 150
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,916 5,986 3,824
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in advances to the Bank 15 4 (1,090)
Return of investment from subsidiary
(Regent Financial Corporation) --- --- 2,100
Demand note due from the Bank (1,661) (3,700) (4,100)
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (1,646) (3,696) (3,090)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid to stockholders (4,374) (4,266) (4,166)
Repurchase of common stock (2,279) --- ---
Proceeds from issuance of common stock 4,294 1,906 3,005
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (2,359) (2,360) (1,161)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash 911 (70) (427)
Cash at beginning of year 1,136 1,206 1,633
- ------------------------------------------------------------------------------------------
Cash at end of year $ 2,047 $ 1,136 $ 1,206
==========================================================================================
</TABLE>
78
<PAGE>
19. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1995
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income $53,480 $54,266 $54,481 $ 54,236
Net interest income 14,429 13,567 13,746 14,174
Provision for losses:
Loans and mortgage-backed securities 900 900 900 1,900
Real estate (571) 335 (81) 1,066
Income (loss) before extraordinary items 2,443 (749) 2,276 (6,116)/(1)/
Extraordinary items, net of tax --- --- --- (2,544)
Net income (loss) 2,443 (749) 2,276 (8,660)
Primary earnings per share:
Income before extraordinary items 0.34 (0.10) 0.31 (0.83)
Net income (loss) 0.34 (0.10) 0.31 (1.18)
</TABLE>
/(1)/ See Note 20 for description of significant fourth quarter adjustments.
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1994
--------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income $45,312 $49,320 $49,767 $52,927
Net interest income 16,402 17,641 16,573 16,309
Provision for losses:
Loans and mortgage-backed securities 860 1,731 566 250
Real estate 110 (217) 80 172
Net income 3,173 3,480 3,675 4,185
Primary earnings per share 0.45 0.49 0.51 0.58
</TABLE>
79
<PAGE>
20. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
The following significant fourth quarter adjustments were recorded in the
1995 Consolidated Statement of Operations:
<TABLE>
<CAPTION>
AMOUNT
--------
(DOLLARS IN THOUSANDS)
<S> <C>
Write down of corporate office complex (see Note 6) $ 7,100
Prepayment penalties on FHLBSF advances, pretax (see Note 8) 4,422
Severance payments related to workforce reductions and pension plans 1,449
Core deposit premiums written-off (see Note 1) 854
Goodwill written-off (see Note 1) 758
-------
$14,583
=======
</TABLE>
21. SUBSEQUENT EVENTS
In February 1996, the Company and CTL Credit, Inc. ("CTLC") signed a
definitive agreement under which the Company will acquire CTLC. Under the terms
of the definitive agreement, CTLC shareholders will receive $18.00 per share in
cash for each share of common stock held or an aggregate price of approximately
$65.0 million including acquisition costs. The acquisition of CTLC will be
accounted for as a purchase and is expected to be completed by June 30, 1996.
The transaction is subject to the approval of CTLC shareholders and all
applicable regulatory authorities.
80
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Bay View Capital Corporation:
We have audited the accompanying consolidated statements of financial
condition of Bay View Capital Corporation and subsidiaries (the "Company") as
of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Bay View Capital
Corporation and subsidiaries at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
January 26, 1996
(February 5, 1996 as to Note 21)
81
<PAGE>
SIGNATURES
Pursuant to the requirements of this Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
Date: April 29, 1996
By: /s/ Edward H. Sondker
-------------------------------
Edward H. Sondker
President and Chief Executive
Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description Sequential Page No.
-------------- ----------------------------- -------------------
<C> <S> <C>
23 Independent Auditors' Consent 43
</TABLE>
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements of
Bay View Capital Corporation listed below of our report dated January 26, 1996
(February 5, 1996 as to Note 21), appearing in this Annual Report on Form 10-
K/A of Bay View Capital Corporation for the year ended December 31, 1995:
Registration Statement No. 33-30602 on Form S-8
Registration Statement No. 33-30603 on Form S-8
Post-effective Amendment No. 1 to Registration
Statement No. 33-35483 on Form S-3
Post-effective Amendment No. 2 to Registration
Statement No. 33-32416 on Form S-3
Registration Statement No. 33-36161 on Form S-8
Registration Statement No. 33-41924 on Form S-8
Registration Statement No. 33-95724 on Form S-8
Registration Statement No. 33-95726 on Form S-8
/s/ Deloitte & Touche LLP
April 29, 1996
