<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission file number 0-17901
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, San Mateo, California 94403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 573-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, Par Value $.01 Outstanding at April 30, 1996
(Title of Class) 6,910,306 shares
<PAGE>
INDEX
BAY VIEW CAPITAL CORPORATION
----------------------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page(s)
- - ------- --------------------- -------
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition....... 3
Consolidated Statements of Operations................ 4
Consolidated Statements of Cash Flows................ 5-6
Notes to Consolidated Financial Statements........... 7-9
Selected Financial Data.............................. 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 11-23
PART II. OTHER INFORMATION
- - -------- -----------------
Other Information....................................... 24
Signatures.............................................. 25
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- - -----------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 36,036 $ 24,144
Interest-bearing deposits and federal funds sold 20,704 18,616
- - --------------------------------------------------------------------------------
56,740 42,760
Securities available for sale:
Mortgage-backed securities 120,061 149,778
Investment securities 1,025 8,035
Securities held to maturity:
Mortgage-backed securities, net of allowance
for losses: 1996, $164; 1995, $930 560,147 581,600
Investment securities 15,006 39,928
Loans receivable held for investment, net of allowance
for losses: 1996, $27,615; 1995, $30,014 2,043,266 2,062,268
Investment in stock of the Federal Home Loan Bank of
San Francisco 40,133 39,450
Real estate owned, net 20,085 24,476
Premises and equipment, net 15,876 16,184
Core deposit premiums (intangible assets) 5,109 5,835
Other assets 32,847 34,182
- - --------------------------------------------------------------------------------
Total assets $2,910,295 $3,004,496
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits:
Transaction accounts $ 421,693 $ 387,610
Certificates of deposit 1,387,337 1,432,230
- - --------------------------------------------------------------------------------
1,809,030 1,819,840
Advances from the Federal Home Loan Bank of
San Francisco 727,930 766,790
Securities sold under agreements to repurchase 137,640 166,738
Other borrowings 7,461 7,937
Other liabilities 24,966 35,214
- - --------------------------------------------------------------------------------
Total liabilities 2,707,027 2,796,519
Stockholders' equity:
Serial preferred stock: authorized, 7,000,000
shares; outstanding: none --- ---
Common stock ($.01 par value); authorized,
20,000,000 shares; outstanding: 1996, 6,900,306
shares; 1995, 7,101,590 shares 69 71
Additional paid-in capital 98,621 97,646
Retained earnings (substantially restricted) 111,361 115,966
Unrealized loss on securities available for sale
(net of tax) (2,145) (683)
Debt of Employee Stock Ownership Plan (4,638) (5,023)
- - --------------------------------------------------------------------------------
Total stockholders' equity 203,268 207,977
- - --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,910,295 $3,004,496
================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest on loans receivable $40,387 $36,201
Interest on mortgage-backed securities 11,370 15,567
Interest and dividends on investments 1,652 1,712
- - --------------------------------------------------------------------------------
53,409 53,480
- - --------------------------------------------------------------------------------
Interest expense:
Interest on customer deposits 23,258 20,785
Interest on borrowings 13,937 18,266
- - --------------------------------------------------------------------------------
37,195 39,051
- - --------------------------------------------------------------------------------
Net interest income 16,214 14,429
Provision for losses on loans and securities 600 900
- - --------------------------------------------------------------------------------
Net interest income after provision for losses 15,614 13,529
- - --------------------------------------------------------------------------------
Noninterest income:
Loan fees and charges 908 1,247
Gain (loss) on sale of assets (262) 16
Rental income from premises 197 187
Other, net 980 977
- - --------------------------------------------------------------------------------
1,823 2,427
- - --------------------------------------------------------------------------------
Noninterest expense:
General and administrative expenses 10,737 11,986
Real estate owned operations, net (888) (350)
Recovery of losses on real estate (53) (571)
Writedown of intangible assets 270 ---
Amortization of intangible assets 456 605
- - --------------------------------------------------------------------------------
10,522 11,670
- - --------------------------------------------------------------------------------
Income before income tax expense 6,915 4,286
Income tax expense 2,922 1,843
- - --------------------------------------------------------------------------------
Net income $ 3,993 $ 2,443
================================================================================
Primary earnings per share $0.56 $0.34
================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS) 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,993 $ 2,443
Adjustments to reconcile net income to net cash
provided by operating activities:
Writedown of intangible assets 270 ---
Proceeds from loans sold --- 135
Provision for losses 547 329
Depreciation and amortization of premises
and equipment 545 812
Amortization of intangibles 456 605
Amortization of deferred loan fees costs 333 (217)
Decrease in capitalized excess servicing fees 139 252
Amortization of premiums and discounts 818 762
(Gain) loss on sale of assets 262 (16)
Decrease in other assets 1,553 802
Increase (decrease) in other liabilities (10,258) 11,680
Other, net (368) (303)
- - --------------------------------------------------------------------------------
Net cash provided by operating activities (1,710) 17,284
- - --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans resulting from
originations, net of principal payments 25,856 (18,980)
Purchases of loans (19,676) (1,593)
Principal payments on mortgage-backed securities 21,517 21,977
Proceeds from sales of mortgage-backed securities 26,807 ---
Proceeds from maturities of investment securities 32,000 ---
Purchase of investment securities --- (2,000)
Proceeds from sale of real estate 7,308 5,474
Proceeds from loans sold 9,667 ---
Net additions to premises and equipment (237) (758)
(Increase) decrease in stock of FHLBSF (683) 1,804
- - --------------------------------------------------------------------------------
Net cash provided by investing activities 102,559 5,924
- - --------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS) 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit inflows (outflows) (10,810) 92,390
Proceeds from Federal Home Loan Bank of
San Francisco advances 305,000 ---
Repayment of Federal Home Loan Bank of
San Francisco advances (343,860) (14,200)
Repurchase of common stock (7,562) ---
Proceeds from reverse repurchase agreements --- 29,098
Repayment of reverse repurchase agreements (29,098) (66,079)
Repayment of other borrowings (476) (418)
Proceeds from issuance of common stock 973 1,141
Dividends paid to stockholders (1,036) (1,086)
- - --------------------------------------------------------------------------------
Net cash provided (used in) by financing
activities (86,869) 40,846
- - --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 13,980 64,054
Cash and cash equivalents at beginning of period 42,760 26,192
- - --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 56,740 $ 90,246
================================================================================
Cash paid during the period for:
Interest $ 14,585 $ 20,406
================================================================================
Supplemental noncash investing activities:
Loans transferred to real estate owned $ 2,413 $ 5,545
Loans originated to sell real estate owned $ 1,230 $ 546
================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of Bay View Capital Corporation (the "Company"), the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the Company's financial condition as of March 31, 1996 and
December 31, 1995 and the results of its operations for the three months ended
March 31, 1996 and 1995.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include all information and footnotes necessary for a fair presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. The following information under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" is written with the presumption that the users of these interim
financial statements have read or have access to the Company's 1995 Annual
Report on Form 10-K (as amended), which contains the latest audited financial
statements and notes thereto, together with Management's Discussion and Analysis
of Financial Condition as of December 31, 1995 and 1994 and Results of
Operations for the years ended December 31, 1995, 1994 and 1993. Therefore,
only certain changes in financial condition and results of operations are
discussed in the remainder of Part I.
When necessary, reclassifications have been made to prior period amounts to
conform to current period presentation.
NOTE 2 - EARNINGS PER SHARE
The earnings per share computation for the three months ended March 31, 1996
and 1995 was determined by dividing net income for each period by the average
number of common shares outstanding. Outstanding shares also include common
stock equivalents which consist of certain outstanding stock options.
The average number of shares outstanding (including common stock equivalents)
for the three months ended March 31, 1996 and 1995 were 7,086,835 shares and
7,217,666 shares, respectively. The Company has not separately reported the
fully diluted earnings per share as it is not materially different than primary
earnings per share.
7
<PAGE>
NOTE 3 - 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 shares of common stock. The stock option plans were approved by
the Company's shareholders. As of March 31, 1996, the number of stock options
available for grant for each of the stock option plans was as follows:
<TABLE>
<CAPTION>
1986 1995 DIRECTOR
STOCK STOCK STOCK
OPTION OPTION OPTION
PLAN PLAN PLAN TOTAL
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Number of stock options
in plan 879,715 250,000 275,000 1,404,715
Granted (1,021,408) (240,000) (198,000) (1,459,408)
Canceled 145,037 10,000 10,000 165,037
---------- -------- -------- ----------
Total available for grant 3,344 20,000 87,000 110,344
---------- -------- -------- ----------
</TABLE>
At March 31, 1996, the Company had outstanding non-qualified options for all
three plans with expiration dates from 1996 to 2006 as follows:.
<TABLE>
<CAPTION>
EXERCISE AVERAGE
NUMBER OF PRICE PRICE
OPTION SHARES RANGE PER SHARE
-------------- -------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1995 488,547 $13.94 - 26.63 $21.02
Granted 118,000 26.94 - 31.25 30.49
Exercised (48,716) 14.56 - 25.00 20.00
Canceled (22,000) 25.00 - 25.63 25.57
------- -------------- ------
Outstanding at March 31, 1996 535,831 $13.94 - 31.25 $23.01
======= ============== ======
</TABLE>
NOTE 4 - DIVIDEND DECLARATION
The Company declared a quarterly dividend on March 28, 1996 of $.15 per share,
payable April 26, 1996 to shareholders of record as of April 12, 1996. The
dividend, totalling approximately $1.1 million, was accrued as of March 31, 1996
and is reflected in "other liabilities" and as a reduction of retained earnings
in the accompanying Consolidated Statement of Financial Condition.
8
<PAGE>
NOTE 5 - REGULATORY CAPITAL REQUIREMENTS
The Company, through its wholly-owned subsidiary Bay View Federal Bank, A
Federal Savings Bank (the "Bank"), is subject to various federal and state
regulations covering financial institutions and their operations. With respect
to capital requirements, several regulations are relevant as discussed below.
The Office of Thrift Supervision ("OTS") regulations provide definitions of
and minimum requirements for regulatory capital (tangible capital, core capital
and risk-based capital) and methods of calculating each type of capital. At
March 31, 1996, the Bank's regulatory capital exceeded the requirements of each
regulatory capital standard in effect on such date as indicated in the table
that follows:
<TABLE>
<CAPTION>
ACTUAL REQUIREMENT EXCESS
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible $159,527 5.49% $ 43,586 1.50% $115,941 3.99%
Core $162,985 5.60% $ 87,276 3.00% $ 75,709 2.60%
Risk-based $184,283 10.85% $135,879 8.00% $ 48,404 2.85%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each Federal banking agency to implement prompt corrective action rules
as needed for institutions that it regulates. In response to this requirement,
the OTS adopted final rules based on FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. These rules define a savings
institution as "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 risk-based capital
ratio means the ratio of core capital to risk-weighted assets, and leverage
capital ratio means the ratio of core capital to adjusted total assets, in each
case as calculated in accordance with relevant OTS capital regulations. Under
these regulations, the Bank is deemed to be "well capitalized" at March 31, 1996
as shown in the table below:
<TABLE>
<CAPTION>
"WELL CAPITALIZED"
ACTUAL REQUIREMENT
----------------- ------------------
CAPITAL RATIO CAPITAL RATIO
-------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Core (leverage) $162,985 5.60% $145,460 5.00%
Tier 1 risk-based $162,985 9.60% $101,909 6.00%
Total risk-based $184,283 10.85% $169,849 10.00%
</TABLE>
9
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
- - --------------------------------------------------------------------------------------
<S> <C> <C>
Book value per share $ 29.46 $ 29.29
Tangible book value per share 28.72 28.46
Ratio of stockholders' equity to total assets 6.98% 6.92%
Loans delinquent 60 days or more $17,755 $20,166
Ratio to gross loans 0.86% 0.96%
Nonperforming assets (a) $29,150 $38,811
Ratio to total assets 1.00% 1.29%
GVA to nonperforming assets 95.30% 79.73%
Loan GVA to nonperforming assets 304.63% 279.07%
Troubled debt restructurings (b) $ 3,623 $15,641
Ratio to total assets 0.12% 0.52%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1996 1995
- - --------------------------------------------------------------------------------------
<S> <C> <C>
Loans:
Originated $43,358 $71,292
Purchased/repurchased 19,676 1,593
Sold 11,978 119
Mortgage-backed securities:
Purchased --- ---
Sold 27,745 ---
Net interest spread (for the period) (c) 1.91% 1.55%
Net interest margin (for the period) (c) (d) 2.21% 1.80%
Return on average assets (e) 0.54% 0.31%
Return on average equity (e) 7.75% 4.44%
Ratio of general and administrative
expenses
to average assets (e) 1.45% 1.51%
</TABLE>
(a) Loans 90 days or more delinquent (excluding accruing loans delinquent 90
days or more), loans designated as nonperforming, nonperforming securities and
real estate owned.
(b) Real estate loans which have been modified (due to borrower financial
difficulties) with a stated interest rate and/or a monthly payment rate lower
than the prevailing market rate. At March 31, 1996 and December 31, 1995, all
such loans were current according to their modified terms.
(c) Net interest spread and margin are calculated excluding nonperforming
assets.
(d) Net interest margin represents net interest spread after including a factor
for the excess of interest-earning assets over interest-bearing liabilities.
(e) Annualized.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- - ---------------------
RESULTS OF OPERATIONS
The Company's net income for the three months ended March 31, 1996 was $4.0
million, or $.56 per share. This compares with net income of $2.4 million, or
$.34 per share, for the first quarter of 1995. The increase in net income was
primarily due to higher net interest income and lower general and administrative
expenses. Net income for the first quarter of 1996 included several items which
deserve special mention:
- - -$800,000 gain from the sale of and income received from certain real estate
owned properties.
- - -$262,000 loss resulting from the sale of $24.2 million of mortgage-backed
securities from the available for sale portfolio.
- - -$350,000 write-off of core deposit intangibles and fixed assets in connection
with a decision to close one of the Bank's branches.
The net impact of these items resulted in an increase in the Company's first
quarter net income of $109,000 ($0.01 per share).
NET INTEREST INCOME
Net interest income for the first quarter of 1996 increased to $16.2 million
from $14.4 million for the same period in 1995 as the net interest margin
improved by 41 basis points from 1.80% to 2.21%. The increase in the net
interest income was primarily attributable to higher loan yields and lower
borrowing costs.
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Company's consolidated statements of financial condition and
reflects the average yields on interest-earning assets and average rates paid on
interest-bearing liabilities for the periods indicated. Such yields and rates
are derived by dividing interest income or expense by the average balances of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods shown. Average balances of interest-earning assets and interest-bearing
liabilities were derived from daily average balances. The yields for the
periods indicated include the amortization of deferred loan origination fees,
net of costs, which are considered adjustments to yield. Net interest spread
and margin are calculated excluding nonperforming assets.
11
<PAGE>
AVERAGE BALANCES, YIELDS AND RATES PAID
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------------------------------- --------------------------------------------
AVERAGE ACTUAL AVERAGE AVERAGE ACTUAL AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- ----------- ----------- ------------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
- - ------------------------------------------
Interest-earning assets:
Loans receivable $2,064,997 $ 40,387 7.82% $2,053,483 $36,201 7.05%
Mortgage-backed securities 705,091 11,370 6.45 914,086 15,567 6.81
Investments 113,212 1,652 5.66 116,243 1,712 5.89
---------- ---------- -------- ---------- ------- ----
Total interest-earning assets 2,883,300 53,409 7.40 3,083,812 53,480 6.94
---------- -------- ------- ----
Nonperforming assets 34,693 52,431
Other assets 40,583 48,322
---------- ----------
Total assets $2,958,576 $3,184,565
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------------
Interest-bearing liabilities:
Transaction accounts $ 438,883 2,507 2.52 $ 465,283 1,926 2.13
Certificates of deposits 1,361,448 20,751 5.96 1,274,874 18,859 5.57
---------- ---------- -------- ---------- ------- ----
Customer deposits 1,800,331 23,258 5.20 1,740,157 20,785 4.84
Borrowings 922,331 13,937 6.08 1,199,494 18,266 6.18
---------- ---------- -------- ---------- ------- ----
Total interest-bearing liabilities 2,722,662 37,195 5.49 2,939,651 39,051 5.39
---------- -------- ------- ----
Other liabilities 29,724 24,994
---------- ----------
Total liabilities 2,752,386 2,964,645
Stockholders' equity 206,190 219,920
---------- ----------
Total liabilities and stockholders' equity $2,958,576 $3,184,565
========== ==========
Net interest income/net interest spread $ 16,214 1.91% $14,429 1.55%
========== ======== ======= ====
Net earning assets/net interest margin $ 160,638 2.21% $ 144,161 1.80%
========== ======== ========= ====
</TABLE>
12
<PAGE>
INTEREST INCOME
Interest income on loans was $40.4 million as compared to $36.2 million for
the first quarters of 1996 and 1995, respectively. The increase in loan
interest income was primarily due to an increase of 77 basis points in the
average yield on loans from 7.05% to 7.82%. A significant portion of the
Company's adjustable rate mortgage loans are indexed to the Federal Home Loan
Bank of San Francisco ("FHLBSF") Eleventh District Cost of Funds Index ("COFI")
which typically lags behind market interest rate movements. As of March 31,
1996, the impact of COFI on the Bank's adjustable rate mortgages increased by 75
basis points compared to a year ago.
Interest income on mortgage-backed securities ("MBS") was $11.4 million as
compared to $15.6 million for the first quarters of 1996 and 1995, respectively.
The decrease in interest income on MBS was primarily attributable to lower
average balances, which decreased from $914.1 million in the first quarter of
1995 to $705.1 million for the same period in 1996. The decrease in average
balances on mortgage-backed securities resulted from principal amortization and
sale of mortgage-backed securities available for sale in 1995 and first quarter
of 1996.
Interest and dividend income from the Company's investment portfolio was $1.7
million for the first quarters of 1996 and 1995, respectively.
INTEREST EXPENSE
Interest expense on customer deposits increased by $2.5 million, from $20.8
million in the first quarter of 1995 to $23.3 million in the first quarter of
1996. The increase primarily resulted from higher average rates and balances
related to tiered savings accounts and 18-month money market certificates of
deposit.
Interest expense on borrowings decreased by $4.4 million, from $18.3 million
in the first quarter of 1995 to $13.9 million in the first quarter of 1996. The
decrease was primarily due to lower average balances arising from lower
borrowing requirements consistent with the level of interest-earning assets
maintained. Also, in the fourth quarter of 1995 and first quarter of 1996, the
Company prepaid $190 million of high cost borrowings and replaced them with
short-term lower cost borrowings. In conjunction with the prepayment of these
borrowings, the Company entered into interest rate swap agreements to provide
interest rate risk protection for the short-term lower cost borrowings by
matching the floating interest rate characteristics and lengthening their
maturities.
13
<PAGE>
The following table sets forth the changes in net interest income due to
changes in the rate and volume of the Company's interest-earning assets and
interest-bearing liabilities for the three months ended March 31, 1996 compared
with the same period in 1995. Rate and volume changes are calculated excluding
nonperforming assets. Changes in rate and volume (changes in weighted average
interest rate multiplied by average portfolio balance), which cannot be
segregated, have been allocated proportionately between the change in rate and
the change in volume.
<TABLE>
<CAPTION>
RATE VOLUME TOTAL
------- -------- --------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest income from interest-earning assets:
Loans receivable $3,982 $ 204 $ 4,186
Mortgage-backed securities (791) (3,406) (4,197)
Investments (16) (44) (60)
------ ------- -------
3,175 (3,246) (71)
------ ------- -------
Interest expense on interest-bearing liabilities:
Customer deposits 1,737 736 2,473
Borrowings (140) (4,189) (4,329)
------ ------- -------
1,597 (3,453) (1,856)
------ ------- -------
Net interest income $1,578 $ 207 $ 1,785
====== ======= =======
</TABLE>
PROVISION FOR LOSSES
The provision for losses on loans and securities were $600,000 in the first
quarter of 1996 and $900,000 for the same period in 1995. See the Loans and
Real Estate Owned section below for a more detailed discussion of the provision
for losses.
NONINTEREST INCOME
Noninterest income was $1.8 million for the first quarter of 1996 compared to
$2.4 million for the first quarter of 1995. The decrease resulted from
reduction in loan fees and charges arising from lower prepayment fees during the
three months ended March 31, 1996 and loan fees collected relating to
forbearance of foreclosure action on one large loan in the prior year period.
The decrease was also due to a loss on sale of mortgage-backed securities of
$262,000 in the first quarter of 1996.
NONINTEREST EXPENSE
Noninterest expense was $10.5 million and $11.7 million for the first quarter
of 1996 and 1995, respectively. General and administrative expenses were $10.7
million in the first quarter of 1996 compared with $12.0 million for the same
period in 1995. The reduction in general and administrative expenses was
primarily due to lower compensation and benefits expense. Staffing levels have
been reduced by 18.2% from year-end 1994 due to right-sizing and co-sourcing
initiatives implemented through March 31, 1996.
14
<PAGE>
Income from real estate owned operations increased from $350,000 in the first
quarter of 1995 to $888,000 in the first quarter of 1996 primarily due to gains
from the sale of and income received from real estate owned properties.
Recovery of prior provisions for real estate losses decreased from $571,000 in
the first quarter of 1995 to $53,000 in the first quarter of 1996. In the first
quarter of 1995, the recovery of the prior provisions for real estate losses was
due to reversal of the allowance for losses on real estate owned. In the first
quarter of 1996, the recovery of prior provisions for real estate losses was due
to recoveries arising from sales of real estate owned.
The writedown of intangible assets during the first quarter of 1996 of
$270,000 was attributable to core deposit intangibles written-off due to a
decision to close one of the Bank's branches.
Federal legislation to recapitalize the Savings Association Insurance Fund
("SAIF") is pending enactment which would entail the Bank paying an estimated
one-time special assessment of approximately $14.5 million to $16.0 million
pretax. It is anticipated that this assessment would be accrued in the period
in which legislation is enacted. The pending legislation would also eliminate
the disparity between the deposit insurance premiums paid by SAIF-insured
institutions, such as the Bank, and institutions insured by the Bank Insurance
Fund. The Bank's deposit insurance premiums in 1996 will be 26 cents per $100
of deposits. No assurance can be given as to whether or in what form the
legislation will be enacted or its effect on the Company or the Bank.
15
<PAGE>
BALANCE SHEET ANALYSIS
The consolidated assets of the Company were $2.91 and 3.00 billion at March
31, 1996 and December 31, 1995, respectively. The Bank's assets comprised
virtually all of the Company's consolidated assets at those dates. The
Company's financial condition at March 31, 1996 and December 31, 1995 are
compared below.
SECURITIES
The Company invests in high-quality MBS, primarily issued by Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA")
and Government National Mortgage Association ("GNMA"). The securities portfolio
at March 31, 1996 and December 31, 1995 was as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
--------------------------- ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
AVAILABLE FOR SALE (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities $ 1,000 $ 1,025 $ 8,000 $ 8,035
Mortgage-backed securities:
FHLMC, FNMA and GNMA 123,806 120,061 151,000 149,778
-------- -------- -------- --------
$124,806 $121,086 $159,000 $157,813
======== ======== ======== ========
MARCH 31, 1996 DECEMBER 31, 1995
--------------------------- ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
HELD TO MATURITY (DOLLARS IN THOUSANDS)
Investment securities $ 15,006 $ 14,931 $ 39,928 $ 39,969
Mortgage-backed securities:
FHLMC, FNMA and GNMA
and other 560,311 545,923 582,530 75,321
Allowance for losses (164) --- (930) ---
-------- -------- -------- --------
$560,147 $545,923 $581,600 $575,321
-------- -------- -------- --------
$560,153 $560,854 $621,528 $615,290
======== ======== ======== ========
</TABLE>
In December 1995, the Company reclassified $147.7 million of MBS from
held to maturity to available for sale as a result of adopting the
implementation guide to Statement of Financial Accounting Standards No. 115.
During the first quarter of 1996, the Company sold $24.2 million of these
securities for a loss of $262,000, which represented approximately 50% of the
unrealized loss on securities available for sale. Also, during the first
quarter of 1996, the Company sold a $3.5 million mortgage-backed security which
was scheduled to mature in April 1996 from its held
16
<PAGE>
to maturity portfolio. An allowance for losses on securities was previously
provided for this security due to deterioration in the issuer's
creditworthiness. A charge-off of $766,000 was recorded against this allowance
in connection with the sale.
LOANS AND REAL ESTATE OWNED
The following is a summary of the Company's loan portfolio (before deductions
for deferred fees, discounts and allowance for losses) at March 31, 1996 and
December 31, 1995.
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
------------------- ------------------
AMOUNT % AMOUNT %
---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Single family (1 to 4 units) $ 713,328 34.4 $ 731,310 34.9
Multifamily (5+ units) 988,064 47.7 995,038 47.5
Nonresidential 334,603 16.1 333,236 15.9
Consumer loans 37,050 1.8 34,849 1.7
---------- ----- ---------- -----
$2,073,045 100.0 $2,094,433 100.0
========== ===== ========== =====
</TABLE>
Loan originations for the first quarter of 1996 decreased to $43.4 million
from $71.3 million for the first quarter of 1995. However, loan purchases for
the first quarter of 1996 increased to $19.7 million from $1.6 million for the
same period in 1995.
The following table summarizes the Company's loan delinquencies (60 days or
more delinquent) by property type at March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
--------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
Single family (1-4 units) $ 7,993 $10,229
Multifamily (5+ units) 5,952 7,603
Nonresidential 3,466 2,232
Consumer loans 344 102
------- -------
$17,755 $20,166
======= =======
Percentage of loan portfolio 0.86% 0.96%
======= =======
</TABLE>
17
<PAGE>
The following table summarizes the Company's nonperforming assets and troubled
debt restructurings:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
--------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate loans $ 8,910 $10,675
Consumer loans 155 80
Mortgage-backed securities --- 3,580
Real estate owned 20,085 24,476
------- -------
$29,150 $38,811
======= =======
Percentage of total assets 1.00% 1.29%
======= =======
Troubled debt restructurings $ 3,623 $15,641
======= =======
Percentage of total assets 0.12% 0.52%
======= =======
</TABLE>
Credit quality has continued to improve as evidenced by the continuing decline
in nonperforming assets and delinquencies. As a result of the improvement in
credit quality, the provision for losses on loans and securities declined from
$900,000 during the first quarter of 1995 to $600,000 in the first quarter of
1996.
The Company conducts an ongoing review of its asset categories to assess the
adequacy of general valuation allowances ("GVA"), which are maintained at levels
that the Company believes are sufficient to cover estimated possible losses in
the portfolios. In determining the necessary level of GVA, the Company considers
prevailing and anticipated economic conditions, historical loss experience, the
levels of classified, nonperforming and delinquent assets, weighting by property
type, loan portfolio trends and other factors. The following table sets forth
the Company's allowance for losses on loans and real estate related assets at
March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans:
Mortgage loans $27,131 $29,541
Consumer loans 484 473
------- -------
27,615 30,014
Mortgage-backed securities 164 930
------- -------
$27,779 $30,944
======= =======
</TABLE>
The allowance for losses on loans and securities as a percentage of
nonperforming assets at March 31, 1996 and December 31, 1995 were 95.30% and
79.73%, respectively. The allowance for losses on loans as a percentage of
nonperforming loans increased to 304.63% at
18
<PAGE>
March 31, 1996 from 279.07% at December 31, 1995. The loan GVA to total loans
was 1.33% and 1.43% at March 31, 1996 and December 31, 1995, respectively.
During the first quarter of 1996, one large loan classified as a troubled debt
restructuring was sold for $9.7 million. An allowance for losses on loan was
previously provided on this loan. A charge-off of $2.3 million was recorded
against this allowance in connection with the sale.
Management believes that the GVA at March 31, 1996 was adequate to cover
estimated losses in its asset portfolios. However, future adjustments may be
necessary and earnings could be significantly affected, if circumstances differ
substantially from the assumptions used in making such determinations.
Management will continue to monitor closely the adequacy of the allowance for
losses related to problem assets.
19
<PAGE>
CUSTOMER DEPOSITS
As a primary part of the Company's business, customer deposits were generated
for the purpose of funding loans. The customer deposits at March 31, 1996 and
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
------------------------ ------------------
AMOUNT % AMOUNT %
---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Transaction accounts $ 421,693 23.3 $ 387,610 21.3
Certificates of deposit 1,387,337 76.7 1,432,230 78.7
---------- ----- ---------- -----
$1,809,030 100.0 $1,819,840 100.0
========== ===== ========== =====
</TABLE>
The increase in transaction accounts was consistent with the Company's
asset/liability strategies on lowering its cost of funds.
BORROWINGS
The Company utilizes collateralized advances from the FHLBSF for purposes of
funding loans and investments. In addition, the Company utilizes other
borrowings, on a collateralized and noncollateralized basis, such as securities
sold under agreements to repurchase.
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
------------------------ ------------------
AMOUNT % AMOUNT %
---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Advances from FHLBSF $727,930 83.4 $766,790 81.4
Reverse repurchase agreements 137,640 15.8 166,738 17.7
Other borrowings 7,461 0.8 7,937 1.9
-------- -------- -------- -----
$873,031 100.0 $941,465 100.0
======== ======== ======== =====
</TABLE>
During the first quarter of 1996, the Company prepaid $145 million of its high
cost borrowings and replaced them with short-term lower cost borrowings. The
decrease in borrowings was primarily due to lower borrowing requirements
consistent with the level of interest-earning assets maintained.
20
<PAGE>
INTEREST RATE RISK
The objective of the Company's asset/liability management activities is to
improve earnings by adjusting the type and mix of assets and liabilities to
effectively address changing conditions and risks. The Company pursues balance
sheet strategies that should, in the long run, mitigate the Bank's exposure to
rising rates. The Company also considers other strategies to minimize the
variability of the net interest margin including off-balance sheet activities.
The Company uses interest rate swap agreements to reduce the interest rate
fluctuation risk related to certain assets and liabilities. Interest rate swaps
involve the exchange of fixed and floating rate interest payment obligations
without the exchange of the underlying notional amounts.
During the first quarter of 1996, the Company entered into interest rate swaps
with notional principal amounts of $150.0 million as part of the prepayment of
$145.0 million of advances from the FHLBSF and replaced them with short-term
lower cost borrowings. The interest rate swaps were used to provide interest
rate risk protection for the lower cost borrowings by matching the floating
interest rate risk characteristics and lengthening their maturities. As of
March 31, 1996 and December 31, 1995, the total notional amount of interest rate
swaps were $300 million and $150 million, respectively.
The information presented below is based on interest rates at March 31, 1996.
To the extent that interest rates change, variable interest rate information
will change. The following schedule represents the maturities and weighted
average rates of interest rate swaps outstanding as of March 31, 1996.
<TABLE>
<CAPTION>
MATURITIES OF DERIVATIVE INSTRUMENTS
----------------------------------------------
<S> <C> <C> <C>
2000 2001+ TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
Notional amount $100,000 $200,000 $300,000
Weighted average receive rate
(3-month LIBOR) 5.42% 5.34% 5.37%
Weighted average pay rate 6.10% 6.27% 6.21%
</TABLE>
Interest rate risk, as measured by the change in the net portfolio value as a
percentage of assets from an immediate 200 basis point change in interest rates,
has decreased to 0.92% ($31 million) as of March 31, 1996 from 3.02% ($93
million) as of December 31, 1994. Interest rate risk has increased slightly
from December 31, 1995 (0.79% or $24 million), resulting from the increase in
general interest rate levels during the first quarter of 1996.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's primary sources of funds include loan and MBS repayments, retail
deposit generation, advances from the FHLBSF, collateralized short-term
borrowings under reverse repurchase agreements and cash flows generated from
operations. The Company uses its liquidity resources principally to fund
mortgage loans, repay maturing borrowings, fund maturing time deposits and
savings withdrawals and provide for its foreseeable short and long-term cash
needs. The Company expects to be able to fund or refinance, on a timely basis,
its commitments and long-term liabilities.
OTS regulations require savings institutions to maintain a specified liquidity
ratio (presently 5.00%) of cash and specified securities to total customer
deposits and borrowings due in one year or less. During the months ended March
31, 1996 and December 31, 1995, the Bank maintained liquidity ratios of 6.07%
and 5.26%, respectively.
CAPITAL RESOURCES
The OTS has established minimum capital standards for all savings
institutions, including a tangible capital requirement, a core capital
requirement and a risk-based capital requirement. The Bank's regulatory capital
at March 31, 1996 exceeded the minimum requirements of each regulatory capital
standard, including on a fully phased-in basis. Regulatory capital ratios of
the Bank were as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------
FULLY
MINIMUM ACTUAL PHASED-IN
REQUIRED 1996 1996
--------- ---------- ----------
<S> <C> <C> <C>
Tangible 1.50% 5.49% 5.46%
Core 3.00% 5.60% 5.57%
Risk-based 8.00% 10.85% 10.80%
</TABLE>
Under capital guidelines enacted in the FDICIA, the Bank meets the criteria
for the "well capitalized" standard. This designation requires that the risk-
based capital ration be at least 10%, the tier one risk-based ratio be at least
6%, and the core (leverage) ratio be at least 5%. Such ratios for the Bank at
March 31, 1996 were 10.85%, 9.60% and 5.60%, respectively.
The Company's outstanding shares at March 31, 1996 and December 31, 1995 were
6,900,306 shares and 7,101,590 shares, respectively. The decrease of 201,284
shares was due to the Company's repurchase of 250,000 shares partially offset
by stock options exercised during the first quarter of 1996.
22
<PAGE>
PENDING ACQUISITION OF CTL CREDIT, INC.
---------------------------------------
In February 1996, the Company announced a definitive agreement to acquire CTL
Credit, Inc. ("CTLC"), the holding company for California Thrift and Loan, for
$18.00 per share in cash for each share of common stock held or an aggregate
price of approximately $65 million including acquisition costs. The acquisition
is subject to the approvals of CTLC shareholders, the California Department of
Corporations ("CDC") and the Federal Deposit Insurance Corporation ("FDIC"). The
Company filed its applications for regulatory approval with the CDC and FDIC on
March 13, 1996. These filings are currently under review and the Company's
expectation for completing this acquisition by June 30, 1996 remains unchanged.
IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company had
previously measured impairment of long-lived assets in accordance with methods
consistent with SFAS 121. As a result, the impact of adopting SFAS 121 was not
material.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing
Rights". As of March 31, 1996, there were no transactions that should be
accounted for under the scope of SFAS 122. As a result, the impact of adopting
SFAS 122 was not material.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation". The Company accounts for stock options using the intrinsic value
based method of accounting as prescribed by Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". The Company's
stock options have no intrinsic value at grant date, and under APB 25 no
compensation cost is recognized. As a result, the impact of adopting SFAS 123
was not material.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
----------------------- --------
None
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Financial Data Schedule (exhibit 27)
b(i). The Registrant filed the following report on Form 8-K dated
February 5, 1996 during the three months ended March 31, 1996:
On February 5, 1996, the Registrant issued a press release
announcing a definitive agreement to acquire CTL Credit, Inc.,
the holding company for California Thrift and Loan, for $18.00
per share in cash for each share of common stock held or an
aggregate price of approximately $65 million including
acquisition costs. Additional information regarding the
acquisition described in the press release was presented in the
exhibits included in the Form 8-K.
b(ii). The Registrant filed the following report on Form 8-K dated
March 13, 1996 during the three months ended March 31, 1996:
The Board of Directors of the Registrant fixed May 23, 1996 as
the date of the Annual Meeting of Stockholders.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
----------------------------
Registrant
DATE: May 10, 1996
BY: /s/ Edward H. Sondker
----------------------------
Edward H. Sondker
President and Chief Executive Officer
DATE: May 10, 1996
BY: /s/ David A. Heaberlin
---------------------------
David A. Heaberlin
Executive Vice President
Chief Financial Officer and Treasurer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 36,036
<INT-BEARING-DEPOSITS> 1,354
<FED-FUNDS-SOLD> 19,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,086
<INVESTMENTS-CARRYING> 575,153
<INVESTMENTS-MARKET> 560,854
<LOANS> 2,043,266
<ALLOWANCE> 27,615
<TOTAL-ASSETS> 2,910,295
<DEPOSITS> 1,809,030
<SHORT-TERM> 616,594
<LIABILITIES-OTHER> 24,966
<LONG-TERM> 256,437
0
0
<COMMON> 69
<OTHER-SE> 203,199
<TOTAL-LIABILITIES-AND-EQUITY> 2,910,295
<INTEREST-LOAN> 40,387
<INTEREST-INVEST> 13,022
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 53,409
<INTEREST-DEPOSIT> 23,258
<INTEREST-EXPENSE> 37,195
<INTEREST-INCOME-NET> 16,214
<LOAN-LOSSES> 600
<SECURITIES-GAINS> (262)
<EXPENSE-OTHER> 10,522
<INCOME-PRETAX> 6,915
<INCOME-PRE-EXTRAORDINARY> 3,993
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,993
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<YIELD-ACTUAL> 2.21
<LOANS-NON> 9,065
<LOANS-PAST> 3,158
<LOANS-TROUBLED> 3,623
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 30,014
<CHARGE-OFFS> 3,029
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 27,615
<ALLOWANCE-DOMESTIC> 27,615
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
