<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-K
[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>
FORM 10-K
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1. Business............................................................. 1
General.............................................................. 1
Lending Activities................................................... 1
Securities Activities................................................ 3
Deposit Activities................................................... 3
Borrowing Activities................................................. 4
Competition.......................................................... 4
Supervision and Regulation........................................... 5
Subsidiaries......................................................... 8
Employees............................................................ 9
Executive Officers of the Registrant................................. 9
Item 2. Properties........................................................... 10
Item 3. Legal Proceedings.................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.................. 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data - Five Year Financial Information............ 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 13
Item 8. Financial Statements and Supplementary Data.......................... 44
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................... 82
PART III
Item 10. Directors and Executive Officers of the Registrant................... 82
Item 11. Executive Compensation............................................... 82
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 82
Item 13. Certain Relationships and Related Transactions....................... 82
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 83
SIGNATURES....................................................................... 86
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
- -------- --------
GENERAL
Bay View Capital Corporation (the "Company"), a Delaware corporation,
is a savings and loan holding company incorporated in 1989, which presently has
as its principal business activity the operation of a savings bank through its
wholly-owned subsidiary, Bay View Federal Bank, A Federal Savings Bank (the
"Bank"). The Bank is a federally chartered capital stock savings bank
incorporated in 1911. The Bank's assets comprise virtually all of the Company's
assets. In 1986, the Bank converted from a mutual to a stock association. In
1989, the Bank became the wholly-owned subsidiary of the Company. The Bank is a
member of the Federal Home Loan Bank of San Francisco (the "FHLBSF").
The Bank has 27 banking centers serving primarily the San Francisco
Bay Area and its principal business consists of attracting deposits from the
general public and using those deposits, together with borrowings and other
funds, to originate loans secured by real estate. All of the real estate loans
originated are secured by properties located in California, primarily Northern
California. The majority of these loans are secured by multifamily residential
properties. The Bank also originates real estate loans secured by single family
and nonresidential (commercial and industrial) properties.
The Bank originates both fixed rate and adjustable rate loans. Since
1983, the Bank has shifted the concentration of its real estate loan portfolio
to adjustable rate mortgages ("ARMs"), which are sensitive to fluctuations in
market interest rates.
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 acquisitions 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.
LENDING ACTIVITIES
MULTIFAMILY RESIDENTIAL LOANS (FIVE OR MORE UNITS). At December 31,
1995, loans secured by multifamily residences totaled $995.0 million,
representing 47.5% of the Bank's total loan portfolio. Generally, the interest
rates on multifamily ARMs are indexed to the Eleventh District Cost of Funds
("COFI") and the loans generally have terms of 30 years, although some loans
have payments calculated on a 30-year amortization with a balloon payment,
typically due in ten to fifteen years.
The Bank generally does not lend more than 75% of the appraised value
of multifamily residences on a first mortgage loan. The property's net income
available for loan payments is also a limiting factor on the approved loan
amount for multifamily residences. Multifamily properties securing loans are
required to generate net income sufficient to cover loan payments and other
property expenditures.
<PAGE>
SINGLE FAMILY RESIDENTIAL LOANS (ONE TO FOUR UNITS). At December 31,
1995, single family loans totaled $731.3 million and represented 34.9% of the
Bank's total loan portfolio. Generally, ARMs secured by single family
residential properties have terms of 30 years.
Although Federal law permits the Bank to make loans with loan-to-value
("LTV") ratios of up to 100%, the Bank generally limits new loans to a LTV ratio
of 80%. The LTV ratio is calculated by dividing the loan amount by the appraised
value of the property. Where loans are made with LTV ratios in excess of 80%,
the Bank's policy is to require private mortgage insurance on the excess.
NONRESIDENTIAL REAL ESTATE LOANS. At December 31, 1995, loans secured
by nonresidential real estate totaled $333.2 million, representing 15.9% of the
Bank's total loan portfolio. Substantially all nonresidential loans originated
by the Bank are ARMs with interest rates indexed to COFI. ARMs secured by
nonresidential real estate are generally made upon the same terms and conditions
as ARMs secured by multifamily residences.
Most of the Bank's nonresidential real estate loans consist of loans
secured by improved property such as office buildings, warehouses and retail
sales facilities. A majority of these loans are in amounts from $250,000 to $1
million. The Bank generally does not originate nonresidential real estate loans
which exceeded an LTV of 75%. The property's net income available for loan
payments is a limiting factor on the approved loan amount. Properties securing
nonresidential real estate loans are required to generate net income sufficient
to cover loan payments and other property expenditures.
Nonresidential lending entails significant additional risks compared
to single family residential mortgage lending. Income producing property loans
may involve large loan balances to single borrowers or groups of related
borrowers. In addition, the payment experience on loans secured by
nonresidential income producing properties is typically dependent on the
successful operation of the properties, and thus subject, to a great extent, to
adverse conditions in the real estate market or in the economy in general.
CONSUMER LENDING. The Bank currently engages in consumer lending,
primarily by making home equity loans and auto loans. At December 31, 1995 the
consumer loan portfolio of the Bank totaled $34.8 million, representing 1.7% of
its total loan portfolio.
BUSINESS LENDING. During 1996, the Bank plans to introduce a new
product line designed for small and medium-sized businesses. Business loan
products (i.e., business auto loans, credit lines and term loans) and other
services will be offered in order to expand the customer base and be more
competitive in the community banking environment.
UNDERWRITING POLICIES AND PROCEDURES. The Bank originates real estate
loans through internal loan production personnel and independent loan brokers.
As part of the loan underwriting process, staff appraisers or qualified outside
independent appraisers inspect and appraise the property that would secure the
loan. A loan underwriter analyzes the merits of the loan based on information
obtained relative to the borrower and property (i.e., income, credit history,
assets, liabilities, cash flows, and the value of the real property as stated on
the appraisal report). Loans are then approved at various levels of authority
depending upon the amount and type of the loan.
2
<PAGE>
The Bank requires the American Land Title Association form of title
insurance on all loans secured by real property and requires that fire and
extended coverage casualty insurance in amounts sufficient to rebuild or replace
the improvements at current replacement costs be maintained on all properties
securing the loans. The Bank also requires flood insurance for properties in
flood hazard zones to protect the property securing its interest.
SALES AND SERVICING OF REAL ESTATE LOANS. During 1995 and 1994, loans
sold were $119,000 and $12.0 million, respectively. The Bank sells whole real
estate loans, participation interests in real estate loans and loans securitized
as mortgage-backed securities in the secondary market. Most fixed rate loans
originated by the Bank are sold in the secondary market. The Bank generally
sells real estate loans and loan participations for cash equal to the unpaid
principal amount of the loans or loan participation, based upon yields currently
required in the secondary market. This may result in a gain or loss on sale.
When loans are sold, the Bank typically retains the responsibility for
collecting and remitting loan payments, inspecting the properties securing the
loans, making certain that monthly principal and interest payments and real
estate tax payments are made on behalf of borrowers, and otherwise servicing the
loans. The Bank receives a fee for performing these services.
SECURITIES ACTIVITIES
The Bank purchases securities when high quality loan production is not
available. The securities portfolio is categorized into two general components:
investment securities and mortgage-backed securities. The investment securities
portfolio mainly consists of government agency notes and debentures. The
mortgage-backed securities portfolio mainly consists of securities issued by
Federal Home Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA") and Government National Mortgage Association ("GNMA").
Securities are classified as held to maturity or available for sale.
The Bank does not maintain a trading portfolio. Securities in the held to
maturity category consist of securities purchased for long-term investment in
order to enhance Bay View's ongoing stream of net interest income and core
earnings. Securities are classified as held to maturity because the Bank has
both the intent and ability to hold the securities to maturity. Securities
purchased which foreseeably may be sold prior to maturity are designated as
available for sale at the time of purchase.
DEPOSIT ACTIVITIES
The Bank attracts both short-term and long-term deposits from the
general public by offering a wide range of deposit products and services. The
Bank, through its banking centers network, provides its banking customers with
the following services:
. Savings and checking accounts
. Certificates of deposit
. Individual retirement accounts
. 24-hour automated teller machines (STAR System and CIRRUS
System Networks)
3
<PAGE>
Increasing the value of its retail branch franchise is one of the
Bank's primary objectives. The Bank plans to expand its retail banking presence
in Northern California through internal growth, new product development and the
acquisition of, or purchase of deposits from, other savings institutions. In
1995, the Bank began offering a variety of deposit and related banking services
designed for small businesses, including specialized checking.
BORROWING ACTIVITIES
The Federal Home Loan Bank ("FHLB") System functions in a reserve
credit capacity for savings institutions. As a member, the Bank is required to
own capital stock in the FHLBSF and has the authority to apply for advances from
the FHLBSF utilizing FHLBSF capital stock, qualifying mortgage loans and
mortgage-backed securities as collateral. Advances from the FHLBSF are
restricted to financing residential mortgage lending and customer deposit
outflows.
The FHLBSF offers a full range of maturities and borrowing programs on
its advances with terms of up to ten years at competitive market rates. A
prepayment penalty is usually imposed for early repayment of FHLBSF advances.
The Bank is also a member of the Federal Reserve System ("Federal Reserve") and
may borrow from the Federal Reserve Bank of San Francisco. Thrifts are required
to utilize their FHLBSF borrowing capacity before borrowing from the Federal
Reserve.
The Bank also utilizes borrowings under reverse repurchase agreements
with securities dealers and the FHLBSF. Reverse repurchase agreements are sales
of securities owned by the Bank to security dealers with a commitment by the
Bank to repurchase such securities for a predetermined price at a future date.
COMPETITION
The Bank faces strong competition both in originating loans and in
attracting deposits. Competition in originating mortgage loans comes primarily
from other savings institutions, commercial banks and mortgage bankers located
in the San Francisco Bay Area. The Bank competes for mortgage loans
principally on the basis of interest rates, types of products, loan fees charged
and the quality of customer service it provides to borrowers.
The Bank faces intense competition in attracting deposits from other
savings institutions, commercial banks, brokerage firms, mutual funds,
individual stock market investors, credit unions and other types of investment
companies. The ability of the Bank to attract and retain deposits depends on a
number of factors which include:
. Interest rates offered on deposit products
. Fees
. Types of deposit products
. Convenient office locations
. Advertising
. Automated teller machines (ATMs)
. Quality customer service
4
<PAGE>
The Bank has 28 ATMs located throughout the San Francisco Bay Area
which provide 24-hour cash availability to its customers. The Bank also
participates in the STAR System and the CIRRUS System Network, which link the
Bank's ATMs with those of a number of major financial institutions. This
linkage provides customers with cash availability across the country.
The Bank also has a subsidiary, MoneyCare, Inc., which offers
uninsured investment products such as mutual funds and annuities which provides
the Bank's customers with additional choices and products that meet their
individual investment needs. See also "Subsidiaries".
SUPERVISION AND REGULATION
GENERAL. The Company, together with its subsidiaries, is subject to
extensive examination, supervision and regulation by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the
"FDIC"). Applicable regulations govern, among other things, the Bank's lending
and investment powers, the types of accounts it is permitted to offer, the types
of business in which it may engage and requirements for regulatory capital. The
Company is also subject to regulations of the Board of Governors of the Federal
Reserve with respect to required reserves and certain other matters.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS. The OTS has extensive
authority over the operations of savings institutions. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The OTS has extensive
enforcement authority over all savings institutions and their holding companies,
including the Bank and the Company, and their affiliated parties such as
directors, officers, agents and other persons providing services to the
institution or holding company.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member
of the Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC. The Bank's deposits are insured up to applicable limits by the FDIC and
such insurance is backed by the full faith and credit of the United States
government. As insurer, the FDIC has adopted a risk-based deposit insurance
system that assesses deposit insurance premiums for all FDIC insured banks and
thrifts according to the level of risk involved in an institution's activities.
An institution's risk category is based upon whether the institution is
classified as "well capitalized", "adequately capitalized" or "undercapitalized"
and with each risk category there are three assigned subcategories.
Each SAIF member institution is assigned an annual FDIC assessment
rate between .23% and .31%. The Bank's assessment rate for the fiscal year
ended December 31, 1995 was .23%. The assessment rate for the first quarter of
1996 will be based on an annual rate of .26%. The FDIC has the authority to
further raise or lower rates if deemed necessary.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. In addition, the FDIC may impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
5
<PAGE>
DISPARITY BETWEEN BIF AND SAIF INSURANCE PREMIUMS. Federal law
requires that the FDIC maintain the reserve level of both the SAIF and the Bank
Insurance Fund ("BIF") at a level equal to 1.25% of insured deposits. The
reserves are funded through the payment of insurance premiums by the insured
institutional members of each fund. As a result of the BIF reaching the
designated reserve ratio, effective in the third quarter of 1995, the FDIC
revised the assessment matrix for BIF insured institutions to provide a range of
.04% to .31%. The matrix was further revised, effective January 1996, to
provide a range of 0% to .27%, with a minimum annual assessment of $2,000,
for more than 90% of all BIF members. The FDIC retained the existing
assessment rate schedule of .23% to .31% applicable to SAIF member institutions.
In announcing the new schedule, the FDIC noted that the premium differential may
have adverse affects for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets as compared to BIF
members. In addition, SAIF members, such as the Bank, could be placed at a
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
Proposed Federal legislation, which includes the merger of the BIF and
SAIF, provides for the assessment of a one-time fee on the SAIF-assessable
deposits to recapitalize the SAIF fund and eliminate the BIF/SAIF disparity.
The assessment to the Bank is anticipated to be approximately $14.5 million to
$16.0 million based on SAIF-assessable deposits of approximately $1.80 billion.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
institutions, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings institutions. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual institutions on a case-
by-case basis. At December 31, 1995, the Bank was deemed "well capitalized"
under current capital regulations and exceeded its fully phased-in regulatory
capital requirements.
In August 1993, the OTS issued a final rule for the calculation of an
interest rate risk component for institutions with a greater than "normal"
(i.e., greater than 2%) level of interest rate risk exposure. Currently, the OTS
has deferred implementation of the interest rate risk component. At December
31, 1995, if the interest 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.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. The
Company's only significant asset is the outstanding common stock of the Bank,
and the Company's primary source of income is dividends on such stock paid by
the Bank. The Bank's retained earnings are substantially restricted for payment
of dividends based on certain laws and regulations relating to dividend
restrictions. OTS regulations impose various restrictions or requirements on
institutions with respect to their ability to pay dividends or make other
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the equity
account.
6
<PAGE>
Generally, tier one institutions, which are institutions that before
and after the proposed distribution meet or exceed their capital requirements,
may, after the receipt of no objection by the OTS, make capital distributions
during any calendar year equal to the greater of 100% of net income on a year-
to-date basis plus 50% of the amount by which the institution's tangible, core
or risk-based capital exceeds its respective fully phased-in capital
requirement, as measured at the beginning of the calendar year, or 75% of its
net income for the most recent four quarter period. The Bank meets the
requirements for a tier one institution and has not been notified of a need for
more than normal supervision.
In connection with the approval of the formation of the Company as the
holding company for the Bank, the Federal Home Loan Bank Board (the predecessor
of the OTS) imposed a customary condition requiring the Company to agree that
for a period of ten years thereafter, unless the Bank obtains the prior approval
of the OTS, (i) at any time when the Bank is meeting its minimum regulatory
capital requirement prior to, and after giving effect to, a proposed dividend,
but not its fully phased-in regulatory capital requirement, as defined in the
regulations of the OTS, the payment of dividends (defined for this purpose to
include payments for the repurchase or redemption of stock) by the Bank will be
limited to 50% of cumulative net income for the prior eight quarters, and (ii)
at any time when the Bank meets its fully phased-in capital requirement prior
to, and after giving effect to, a proposed dividend, such dividends will be
limited to 100% of cumulative net income for the prior eight quarters. This ten
year period will end in 1999.
HOLDING COMPANY REGULATION. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings institution.
FEDERAL RESERVE SYSTEM. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1995, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements
imposed by the OTS.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLBSF, one
of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLBSF are required to be fully secured by sufficient
collateral as determined by the FHLBSF. In addition, all long-term advances are
restricted to providing funds for residential home financing.
7
<PAGE>
SUBSIDIARIES
The Company has two wholly-owned subsidiaries, the Bank and Regent
Financial Corporation ("Regent"). The Company, through Regent and through a
subsidiary of the Bank, Bay View Financial Corporation ("BVFC"), previously
invested in real estate with various joint venture partners for development of
single family homes. During 1993, the Company sold its remaining interests in
these real estate joint ventures. As of December 31, 1995, there were no active
joint venture developments and the Company has no present plans to re-enter that
business.
The Bank has two subsidiaries chartered in the State of California.
BVFC is a wholly-owned service corporation subsidiary of the Bank, with power to
engage generally in service corporation activities. BVFC has three subsidiaries,
Bay View Auxiliary Corporation, Bay Counties Insurance Agency, Inc. and
Carquinez Reserve, Inc., the activities of which are insignificant.
MoneyCare, Inc. ("MoneyCare"), the other subsidiary of the Bank, is
also a wholly-owned service corporation. The primary activity of MoneyCare is to
sell uninsured investment products such as mutual funds and annuities under an
arrangement with CoreLink Financial Inc. MoneyCare receives commissions on sales
of such products. The Bank stresses cross-selling to improve profitability and
solidify customer relationships.
8
<PAGE>
EMPLOYEES
At December 31, 1995 the Company had a total of 402 employees on a
full-time equivalent basis. None of the Company's employees are represented by a
collective bargaining group.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers of the Bank and the Company.
<TABLE>
<CAPTION>
YEAR
NAME AGE POSITION APPOINTED
- ---- --- -------------------------------------------------- ---------
<S> <C> <C> <C>
Edward H. Sondker 48 Director, President and Chief Executive Officer of 1995
the Company and the Bank
Robert J. Flax 46 Executive Vice President, General Counsel and 1985
Corporate Secretary of the Company and the Bank
David A. Heaberlin 46 Executive Vice President, Chief Financial Officer 1995
and Treasurer of the Company and the Bank
John N. Buckley 38 Senior Vice President and Director of Credit 1994
Administration of the Bank
Cynthia L. Hart 47 Senior Vice President and Director of Banking 1992
Centers for the Bank
</TABLE>
The business experience of each of the executive officers of the
Company and/or the Bank is as follows :
Mr. Sondker has been a Director, President and Chief Executive Officer
of the Company and the Bank since 1995. He joined the Bank in August 1995 as
President and Chief Executive Officer. Previously, he served as President and
Chief Executive Officer of Independence One Bank of California, FSB, a
subsidiary of Michigan National Corporation. From 1985 to 1990, he was the
President and Chief Executive Officer of La Jolla Bank & Trust Company. Prior
to 1985, Mr. Sondker held executive and management positions with a community
bank holding company in Kansas City, Missouri.
Mr. Flax has been Executive Vice President and General Counsel of the
Bank since 1985 and has served in various capacities since 1980. He has served
as Executive Vice President, General Counsel and Corporate Secretary of the
Company since its formation. Before joining the Bank, he was a trial attorney in
private practice in San Francisco from 1976 to 1980.
9
<PAGE>
Mr. Heaberlin has been Executive Vice President and Chief Financial
Officer and Treasurer of the Company and the Bank since November 1995.
Previously, he served as Senior Vice President and Chief Financial Officer for
First California/Mortgage Service America. During 1993 and 1994, he was
Executive Vice President and Treasurer of ITT Residential Capital Corporation.
Prior to ITT, he was Executive Vice President for Numerica Financial
Corporation, a multi-bank holding company located in Manchester, New Hampshire.
He has over 20 years experience in commercial banking, savings banks and the
financial services industry. Mr. Heaberlin is a Certified Public Accountant.
Mr. Buckley has been Senior Vice President and Director of Credit
Administration since January 1995 and Manager of Credit Administration and Asset
Management since June 1994. He joined the Bank in September 1993. Previously, he
served Bank of America in various capacities from 1985 to 1993. His last
position was Vice President and Regional Credit Administrator for the Real
Estate Industries Division at Bank of America.
Ms. Hart has been Senior Vice President and Director of Banking
Centers since January 1995 and Asset Management Manager of the Bank since 1992.
She was a Portfolio Manager with HomeFed Bank from 1991 to 1992, and was with
the Bank of New England from 1990 to 1991 as a Group Leader of Controlled Loans.
From 1988 to 1990, she was with American Savings Bank as a Senior Asset Manager,
and from 1986 to 1988, she was Associate Director of Asset Quality for the
FHLBSF.
There is no family relationship among the above officers. All
executive officers serve at the pleasure of the Board of Directors.
ITEM 2. PROPERTIES
- -------- ----------
At December 31, 1995, the Company leased both the land and building
for 24 of its 27 banking centers under operating type leases expiring at various
dates through 2005. The Bank owns the building but leases the land for one
banking center. The Company owns both the land and building of the remaining
two banking centers, one of which is part of its corporate office complex.
ITEM 3. LEGAL PROCEEDINGS
- -------- ------------------
See Note 16 of the Notes to Consolidated Financial Statements in
Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------- ---------------------------------------------------
No matter was submitted for a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1995.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------- ---------------------------------------------------------------------
Bay View's common stock (symbol: BVFS) is traded on the Nasdaq Stock
Market. At December 31, 1995, 7,101,590 outstanding shares were owned by 1,558
shareholders of record. The following is a summary of market activity for 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Stock price $28.50
Book value per share $29.29
Price/book ratio 97.30%
</TABLE>
High and low stock prices and dividends declared for each quarter for the last
two years were:
<TABLE>
<CAPTION>
1995 HIGH LOW DIVIDEND
---- ---- --- --------
<S> <C> <C> <C>
First Quarter $23 1/4 $17 3/4 $.15
Second Quarter $27 7/8 $22 1/4 $.15
Third Quarter $28 1/2 $24 $.15
Fourth Quarter $29 3/4 $26 $.15
<CAPTION>
1995 HIGH LOW DIVIDEND
---- ---- --- --------
<S> <C> <C> <C>
First Quarter $23 3/4 $19 1/2 $.15
Second Quarter $26 1/2 $19 1/4 $.15
Third Quarter $25 1/2 $23 1/2 $.15
Fourth Quarter $25 1/2 $16 13/16 $.15
</TABLE>
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA - FIVE YEAR FINANCIAL INFORMATION
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET INFORMATION 1995 1994 1993 1992 1991
- ------------------------------------------------------ ------------- --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total assets $3,004,496 $3,166,529 $2,663,542 $2,586,775 $2,709,850
Mortgage-backed securities 731,378 921,680 718,696 457,215 285,941
Loans receivable 2,062,268 2,054,563 1,776,820 1,943,346 2,221,833
Investment securities 47,963 32,841 11,399 23,231 20,071
Customer deposits 1,819,840 1,707,376 1,694,263 1,488,252 1,562,101
Borrowings 941,465 1,219,958 741,414 884,479 935,170
Stockholders' equity 207,977 217,315 210,976 196,869 189,665
===================================================================================================================================
<CAPTION>
SELECTED RESULTS OF OPERATIONS INFORMATION YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 216,463 $ 197,326 $ 191,526 $ 219,834 $ 273,064
Interest expense (160,547) (130,401) (121,850) (148,295) (197,792)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 55,916 66,925 69,676 71,539 75,272
Provision for losses on loan and securities (4,600) (3,407) (7,031) (24,953) (23,078)
Gain (loss) on sale of assets (2,194) (41) 1,091 378 1,343
Other income 8,652 8,619 8,465 6,708 8,434
Equity in loss of real estate joint ventures --- --- --- (1,275) (1,025)
Provision for losses on real estate (749) (145) (819) (1,872) (3,399)
Other expenses (59,879) (49,610) (48,976) (40,834) (36,232)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (2,854) 22,341 22,406 9,691 21,315
Income tax (expense) benefit 708 (7,828) (9,765) (3,596) (11,673)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting change and extraordinary items (2,146) 14,513 12,641 6,095 9,642
Cumulative effect of change in accounting for income
taxes --- --- --- 4,197 ---
Extraordinary items, net of tax (2,544) --- (132) (265) (680)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,690) $ 14,513 $ 12,509 $ 10,027 $ 8,962
===================================================================================================================================
Primary earnings (loss) per share:
Income before cumulative effect of accounting
change and extraordinary items $ (0.29) $ 2.02 $ 1.80 $ 0.89 $ 1.41
Net income (loss) $ (0.64) $ 2.02 $ 1.78 $ 1.47 $ 1.31
Dividends per share $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60
===================================================================================================================================
<CAPTION>
SELECTED OTHER INFORMATION AT OR FOR YEARS ENDED DECEMBER 31,
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net interest margin 1.86% 2.34% 2.74% 2.84% 2.77%
Ratio of general and administrative expenses
to average assets 1.61% 1.59% 1.78% 1.51% 1.23%
Return on average assets (0.15)% 0.49% 0.47% 0.38% 0.32%
Return on average equity (2.11)% 6.79% 6.14% 5.10% 4.72%
Dividend payout ratio (93.75)% 29.70% 33.71% 40.82% 45.80%
Book value per share $ 29.29 $ 30.32 $ 29.90 $ 28.65 $ 27.94
Tangible book value per share 28.46 28.95 28.17 27.55 26.65
Average capital/average assets 7.17% 7.17% 7.61% 7.47% 6.68%
Ratio of capital to total assets 6.92% 6.86% 7.92% 7.61% 7.00%
Regulatory capital (the Bank):
Tangible 5.16% 5.87% 6.64% 6.53% 6.06%
Core (leverage) 5.28% 6.07% 6.92% 6.67% 6.22%
Risk-based 10.51% 12.29% 12.70% 11.49% 9.98%
Nonperforming assets $ 38,811 $ 50,577 $ 72,365 $ 69,301 $ 65,395
Ratio to total assets 1.29% 1.60% 2.72% 2.68% 2.41%
Troubled debt restructures $ 15,641 $ 13,948 $ 14,188 $ 20,791 $ 13,922
Ratio to total assets 0.52% 0.44% 0.53% 0.80% 0.51%
Full service banking centers 27 27 27 21 21
====================================================================================================================================
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS
SUMMARY
The Company's 1995 results of operations were dramatically impacted by
fourth quarter restructuring of the Company to begin removing impediments to
future profitability and shareholder value enhancement. The summary below
segregates the 1995 financial impacts associated with this restructuring effort.
This restructuring process was primarily focused on:
. Reducing the Company's exposure to future interest rate risk
. Write-off of intangibles and accelerating the sales of
problem assets
. Reducing future operating costs, including pursuing a sale
of the Company's corporate office complex
. De-emphasizing wholesale activities including the
mortgage-backed securities component of the balance sheet
The Company's net loss for 1995 was $4.7 million compared with net
income of $14.5 million and $12.5 million for 1994 and 1993, respectively. The
decrease in net income in 1995 compared with 1994 was primarily attributable to
the following items:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Decrease in net interest income $ 11,009
Increase in provision for losses on loans and securities 1,193
Loss on sale of mortgage-backed securities available for sale 2,212
Severance payments relating to workforce reductions 2,818
Lower compensation and benefits expense due to workforce reductions (2,808)
Fixed assets written-off 866
Lower deferred loan origination costs and fixed assets written-off 1,215
Writedown of corporate office complex 7,100
Writedown of intangible assets 1,612
Higher income from real estate owned operations (986)
Other 964
--------
Decrease in income before income tax expense and extraordinary items 25,195
Less: Decrease in income tax expense (8,536)
--------
Decrease in income before extraordinary items 16,659
Prepayment penalties on FHLBSF advances, net of tax 2,544
--------
Decrease in net income $ 19,203
========
</TABLE>
13
<PAGE>
The increase in net income in 1994 as compared to 1993 was primarily
attributable to lower provisions for losses on loans, securities and real estate
and a reduction of income tax expense in connection with an IRS examination. The
provisions for losses on loans, securities and real estate declined to $3.6
million in 1994 from $7.9 million in 1993 as a result of the continued
improvement in the quality of the loan portfolio and aggressive management of
problem assets. However, net interest income decreased from $69.7 million in
1993 to $66.9 million in 1994 due to a decrease in net interest margin, which
declined from 2.74% to 2.34%.
NET INTEREST INCOME
Net interest income for 1995 was $55.9 million as compared with $66.9
million in 1994 and $69.7 million in 1993. The decrease in net interest income
in 1995 from 1994 was primarily attributable to a lower net interest margin,
which declined from 2.34% for 1994 to 1.86% in 1995. The impact of the decline
in net interest margin was partially offset by an increase in average balances
of interest-earning assets from $2.86 billion in 1994 to $3.01 billion in 1995.
The net interest margin for 1995 was unfavorably impacted by an
increase in cost of funds which out paced the increase in yields on interest-
earning assets. A significant portion of the Company's adjustable rate loan
portfolio is indexed to COFI which typically lags market interest rate
movements.
Generally, the Company's net interest margin is favorably affected
during periods of declining interest rates as the cost of the Company's
interest-bearing liabilities may adjust to market rates more quickly than the
yield on its interest-earning assets. Conversely, during periods of rising
interest rates, the Company's net interest margin is unfavorably affected by
this lag factor. The Federal Reserve began increasing market interest rates in
1994 in order to slow down the U.S. economy and to reduce inflationary
pressures. From February 1994 to December 1994, the prime lending rates rose 250
basis points. The net interest margin for 1995 was unfavorably affected by the
lag factor which began in 1994. By year-end 1994, the interest margin had
decreased to 2.00% from 2.48% at year-end 1993. In addition to the impact of the
COFI lag factor, the net interest margin for 1995 was also negatively affected
by faster amortization of deferred loan origination costs due to loans paid off.
As a result, the net interest margin declined from 2.34% in 1994 to 1.86% in
1995. In 1995, the monthly net interest margin reached a low of 1.67% in March
1995 and improved to 2.05% by year-end 1995.
The decrease in net interest income from $69.7 million in 1993 to
$66.9 million in 1994 was attributable to the decrease in net interest margin
from 2.74% to 2.34%, respectively. The net interest margin for 1994 was
negatively impacted by the increase in market interest rates in 1994. The impact
of the decline in net interest margin was partially offset by an increase in
average balances of interest-earning assets from $2.55 billion in 1993 to $2.86
billion in 1994.
The Company pursues various balance sheet strategies that should, in
the long run, mitigate the Bank's net interest income exposure to rising
interest rates. The Company considers other strategies to minimize the
variability of the net interest margin including off-balance sheet activities
that could accomplish the stated objective. For further discussion of the
Company's asset/liability management strategies, see "Asset/Liability
Management".
14
<PAGE>
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 years 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 for 1995 and 1994 were derived from daily
average balances. Average balances for 1993 were derived from average of month-
end 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.
15
<PAGE>
AVERAGE BALANCES, YIELDS AND RATES PAID
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1994
-------------------------------------- -----------------------------------
AVERAGE ACTUAL AVERAGE AVERAGE ACTUAL AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- ----------- ----------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Loans $2,083,700 $ 155,853 7.48% $1,840,742 $131,783 7.16%
Mortgage-backed securities 810,982 54,236 6.69 933,334 61,111 6.55
Investments 110,720 6,374 5.76 81,243 4,432 5.46
---------- ---------- ---------- ---------- -------- ----
Total interest-earning assets 3,005,402 216,463 7.20 2,855,319 197,326 6.91
---------- ---------- -------- ----
Nonperforming assets 49,673 70,965
Other assets 44,667 54,481
---------- ----------
Total assets $3,099,742 $2,980,765
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ---------------------
Interest-bearing liabilities:
Transaction accounts $ 367,164 8,245 2.25 $ 395,791 8,298 2.10
Certificates of deposits 1,438,353 85,153 5.92 1,259,744 58,126 4.61
---------- ---------- ---------- ---------- -------- ----
Total customer deposits 1,805,517 93,398 5.17 1,655,535 66,424 4.01
Borrowings 1,049,107 67,149 6.40 1,088,495 63,977 5.88
---------- ---------- ---------- ---------- -------- ----
Total interest-bearing
liabilities 2,854,624 160,547 5.62 2,744,030 130,401 4.75
---------- ---------- -------- ----
Other liabilities 22,886 23,132
---------- ----------
Total liabilities 2,877,510 2,767,162
Stockholders' equity 222,232 213,603
---------- ----------
Total liabilities and
stockholders' equity $3,099,742 $2,980,765
========== ==========
Net interest income/net
interest spread $ 55,916 1.58% $ 66,925 2.16%
========== ========== ========= ====
Net earning assets/net
interest margin $ 150,778 1.86% $111,289 2.34%
========== ========== ======== ==========
Ratio of interest-earning
assets to interest-bearing
liabilities 105.28% 104.06%
========== ======
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993
-------------------------------------
AVERAGE ACTUAL AVERAGE
BALANCE INTEREST YIELD/RATE
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Loans $1,850,608 $145,361 7.85%
Mortgage-backed securities 633,043 43,038 6.80
Investments 63,277 3,127 4.94
---------- -------- ----
Total interest-earning assets 2,546,928 191,526 7.52
-------- ----
Nonperforming assets 80,595
Other assets 49,854
----------
Total assets $2,677,377
==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ---------------------
Interest-bearing liabilities:
Transaction accounts $ 384,613 $ 9,721 2.53
Certificates of deposits 1,245,403 58,354 4.69
---------- -------- ----
Total customer deposits 1,630,016 68,075 4.18
Borrowings 824,040 53,775 6.53
---------- -------- ----
Total interest-bearing
liabilities 2,454,056 121,850 4.97
-------- ----
Other liabilities 19,701
-----------
Total liabilities 2,473,757
Stockholders' equity 203,620
-----------
Total liabilities and
stockholders' equity $ 2,677,377
===========
Net interest income/net
interest spread $ 69,676 2.55%
======== ====
Net earning assets/net
interest margin $ 92,872 2.74%
============ ====
Ratio of interest-earning
assets to interest-bearing
liabilities 103.78%
===========
</TABLE>
16
<PAGE>
INTEREST INCOME
The principal source of earnings for the Company is interest income on
loans. During 1995, interest income on loans was $155.9 million as compared to
$131.8 million for 1994, an increase of $24.1 million. The increase in loan
interest income for 1995 was primarily due to the following:
. A 32 basis point increase in the average yield on loans from 7.16% in
1994 to 7.48%.
. Increase in the average balances of loans from $1.84 billion in 1994 to
$2.08 billion in 1995.
Interest income on loans for 1994 was $131.8 million as compared to $145.4
million for 1993, a decrease of $13.6 million. The decline in loan interest
income was primarily attributable to a 69 basis point decrease in the average
loan yield from 7.85% to 7.16%.
The second principal source of earnings for the Company is interest income
on mortgage-backed securities. Interest income on mortgage-backed securities
decreased by $6.9 million from $61.1 million in 1994 to $54.2 million in 1995.
The decrease in interest income on mortgage-backed securities was attributable
to lower average balances, which decreased from $933.3 million in 1994 to $811.0
million in 1995, partially offset by an increase in average yield from 6.55% to
6.69%, respectively. The decrease in average balances on mortgage-backed
securities resulted from principal amortization and sale of mortgage-backed
securities available for sale. The increase in the average yield resulted from
lower premium amortization due to slower prepayments of the underlying loans on
the securities.
Interest income for mortgage-backed securities for 1994 as compared to 1993
increased $18.1 million, from $43.0 million to $61.1 million. The increase in
interest income on mortgage-backed securities from 1993 to 1994 resulted mainly
from an increase in average balances from $633.0 million to $933.3 million
partially offset by a decrease in asset yield from 6.80% to 6.55%. The increase
in average balances was mainly attributable to the purchase of $400.8 million of
fixed rate mortgage-backed securities with a weighted average yield of 6.67%.
The decrease in average yield was due to an increase in the premium amortization
resulting from higher prepayments of the underlying loans on the securities.
The third principal source of income for the Company is interest and
dividend income from the Company's investment portfolio (excluding mortgage-
backed securities). During 1995, interest income on the investment portfolio was
$6.4 million, as compared to $4.4 million for 1994. The increase in investment
and dividend income was primarily due to an increase of $29.5 million in average
investment balances primarily related to investment in government agency notes
and overnight investments.
Interest and dividends on investments for 1994 as compared to 1993
increased by $1.3 million from $3.1 million to $4.4 million, due to an increase
of $18.0 million in the average investment balances, primarily related to
government agency notes.
17
<PAGE>
INTEREST EXPENSE
Interest expense on customer deposits is the largest expense component in
the statement of operations. Interest expense on customer deposits increased by
$27.0 million from $66.4 million in 1994 to $93.4 million in 1995. The increase
primarily resulted from higher average rates and customer deposit balances in
1995 as compared to 1994. The average rates on customer deposits were 5.17% and
4.01% for the years ended December 31, 1995 and 1994, respectively. The average
balances were $1.81 billion and $1.66 billion for the years ended December 31,
1995 and 1994, respectively. The increase in average rates and balances were
primarily attributable to an increase in certificates of deposit accounts which
paid higher interest rates than in the prior year.
Interest expense on customer deposits for 1994 as compared to 1993
decreased $1.7 million, from $68.1 million in 1993 to $66.4 million in 1994. The
decrease primarily resulted from a decline in average rates to 4.01% from 4.18%,
which was partially offset by an increase in average balances to $1.66 billion
from $1.63 billion.
Interest expense on borrowings is the second largest expense component on
the statement of operations. Interest expense on borrowings increased $3.1
million from $64.0 million in 1994 to $67.1 million in 1995. The increase
primarily resulted from a higher cost of borrowings, which increased 52 basis
points from 5.88% in 1994 to 6.40% in 1995, partially offset by lower average
balances which decreased from $1.09 billion in 1994 to $1.05 billion in 1995.
The lower average borrowing balances were primarily attributable to the lower
level of the Company's cash requirements resulting from lower mortgage loan
origination volume and increases in customer deposits, which supplemented the
Company's borrowing needs.
Interest expense on borrowings increased $10.2 million from $53.8 million
in 1993 to $64.0 million in 1994. The increase was primarily attributable to
higher average balances, which increased from $824.0 million in 1993 to $1.09
billion in 1994 partially offset by lower cost of borrowings, which decreased 65
basis points from 6.53% to 5.88% for the respective years. The higher average
balances primarily resulted from fixed rate FHLBSF advances and reverse
repurchase agreements, which were used to fund planned purchases of fixed rate
mortgage-backed securities and supplement cash flow requirements.
18
<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. 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 to the change in rate and the
change in volume.
<TABLE>
<CAPTION>
CHANGE CHANGE
IN IN
RATE VOLUME TOTAL
--------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995 VS. 1994
- -------------------------------------
Interest income from interest-earning assets:
Loans $ 6,095 $17,975 $ 24,070
Mortgage-backed securities 1,283 (8,158) (6,875)
Investments 257 1,685 1,942
-------- ------- --------
Total 7,635 11,502 19,137
-------- ------- --------
Interest expense from interest-bearing liabilities:
Customer deposits 20,541 6,433 26,974
Borrowings 5,547 (2,375) 3,172
-------- ------- --------
Total 26,088 4,058 30,146
-------- ------- --------
Net interest income $(18,453) $ 7,444 $(11,009)
======== ======= ========
YEAR ENDED DECEMBER 31, 1994 VS. 1993
- -------------------------------------
Interest income from interest-earning assets:
Loans $(12,807) $ (771) $(13,578)
Mortgage-backed securities (1,643) 19,716 18,073
Investments 350 955 1,305
-------- ------- --------
Total (14,100) 19,900 5,800
-------- ------- --------
Interest expense from interest-bearing liabilities:
Customer deposits (2,705) 1,054 (1,651)
Borrowings ( 5,747) 15,949 10,202
-------- ------- --------
Total (8,452) 17,003 8,551
-------- ------- --------
Net interest income $ (5,648) $ 2,897 $ (2,751)
======== ======= ========
</TABLE>
PROVISION FOR LOSSES
The provision for losses on loans and securities was $4.6 million, $3.4
million and $7.0 million for 1995, 1994 and 1993, respectively. Provision for
losses on real estate was $749,000, $145,000 and $819,000 for 1995, 1994 and
1993, respectively. See the Loans and Real Estate Owned section below for a more
detailed discussion of the provision for losses.
19
<PAGE>
NONINTEREST INCOME
LOAN FEES AND CHARGES
The Company's fourth principal source of revenue, loan fees and loan
related charges, decreased by $0.8 million, from $4.5 million in 1994 to $3.7
million in 1995. The decrease in loan fees and loan related charges in 1995 was
primarily attributable to lower prepayment penalties due to a rising interest
rate environment. Loan fees and loan related charges for 1994 as compared to
1993 decreased by $0.5 million from $5.0 million to $4.5 million. The decrease
in loan fees and loan related charges for 1994 was attributable to lower
prepayment penalties and lower fees recognized resulting from lower sales of
fixed rate loans.
GAIN (LOSS) ON SALE OF ASSETS
Gain (loss) on sale of assets for 1995, 1994 and 1993 were ($2.2)
million, ($41,000) and $1.1 million, respectively. The loss on sale of assets of
$2.2 million in 1995 was primarily due to the loss on sale of mortgage-backed
securities available for sale. Gain on sale of assets for 1993 was primarily
attributable to the gain on sale of mortgage-backed securities available for
sale of $1.5 million. The loss on sale of assets for 1994 was not significant.
NONINTEREST EXPENSE
GENERAL AND ADMINISTRATIVE EXPENSE
The following table shows the major categories of general and
administrative expenses for each of the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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 11,273 9,603 10,358
-------- ------- -------
51,235 49,821 47,761
Deferred loan origination costs ( 1,319) (2,534) (890)
-------- ------- -------
Total $ 49,916 $47,287 $46,871
======== ======= =======
</TABLE>
20
<PAGE>
General and administrative expenses increased by $2.6 million, from $47.3
million in 1994 to $49.9 million in 1995. The following is an analysis of the
changes in the major categories of general and administrative expenses:
. Compensation and benefits expense were essentially the same at $25.1 million
in 1995 and $25.3 million in 1994. Severance payments relating to workforce
reductions were $2.8 million in 1995. The workforce reductions resulted from
the implementation of an early retirement program and right sizing and co-
sourcing opportunities to improve the Company's profitability. The impact of
the severance expenses was offset by reduced salary expenses as a result of
lower average number of employees due to workforce reductions throughout
1995.
. Office occupancy and equipment expense increased by $0.3 million to $8.7
million in 1995 from $8.4 million in 1994. The increase was primarily due to
higher repair and maintenance costs including branch refurbishment expenses.
. Deposit insurance premiums and regulatory fees decreased by $0.3 million,
from $4.8 million in 1994 to $4.5 million in 1995, resulting from a decrease
in deposit insurance premiums from 26 cents per $100 of deposits to 23 cents
per $100 of deposits.
. 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.
. Other expenses increased primarily due to fixed assets written-off of
$866,000 related to fixed asset disposals resulting from the process of
vacating the Company's corporate office tower and workforce reductions.
. Deferred loan origination costs decreased $1.2 million primarily due to lower
loan origination volumes. Loan originations declined from $564.3 million in
1994 to $258.4 million in 1995.
General and administrative expenses remained almost flat at $47.3 million
and $46.9 million for 1994 and 1993, respectively. The increase in compensation
and benefits expense was primarily due to a higher average number of employees,
normal salary increases, and increased employee benefit costs. The increase in
office occupancy and equipment expense was primarily due to higher depreciation
expense on computer equipment. Deposit insurance premiums were higher because of
a larger deposit base in 1994. However, data processing expenses decreased due
to a renegotiated service contract. General and administrative expenses in 1994
were reduced by higher deferred loan origination costs as a result of a
significantly higher volume of loan originations in 1994 as compared to 1993.
21
<PAGE>
WRITEDOWN OF CORPORATE OFFICE COMPLEX
Due to reductions in workforce throughout 1995 and its decision to pursue
disposal of its corporate office complex, the Company is in the process of
vacating the tower building and occupying the annex buildings in the complex.
During the fourth quarter of 1995, a charge of $7.1 million was recorded to
adjust the carrying amount of the land and building of the corporate office
complex to its estimated fair value less costs to sell.
REAL ESTATE OWNED OPERATIONS, NET
Income from real estate owned operations was $1.1 million and $95,000 for
1995 and 1994, respectively. The amount was insignificant for 1993. The increase
in income from real estate owned operations was primarily due to income received
on one large property foreclosed in April 1995. Prior to foreclosure, the income
received was reported as interest income on loans.
CORE DEPOSIT PREMIUMS AND GOODWILL (INTANGIBLE ASSETS)
The amortization of core deposit intangibles was $1.9 million, $2.0 million
and $1.7 million for 1995, 1994 and 1993, respectively. During the fourth
quarter of 1995, core deposit premiums of $854,000 were written-off due to an
impairment in the value of core deposit premiums attributable to higher than
expected decay rates in the customer deposits acquired. The balance of the core
deposit premiums will be subsequently amortized over the remaining useful life.
Goodwill amortization was $0.4 million 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 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. As a result, goodwill of $758,000 was written-off in the fourth
quarter of 1995.
INCOME TAXES
The income tax benefit for 1995 before extraordinary items was $708,000
compared to income tax expense of $7.8 million and $9.8 million for 1994 and
1993, respectively. The effective tax rates for 1995, 1994 and 1993 were
(24.8%), 35.0% and 43.6%, respectively. The decrease in the effective tax rate
in 1995 was due to the net loss of the Bank partially offset by the net income
of the Company and a subsidiary of the Bank.
Income tax expense for 1994 was reduced by $2.1 million to reflect a
revision of the Company's estimated tax liabilities resulting from a tentative
agreement with the Internal Revenue Service for the taxable years 1987 through
1989. The agreement resolved certain disputed savings and loan industry tax
issues which the Company was contesting.
22
<PAGE>
EXTRAORDINARY ITEM
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 short-term FHLBSF advances. In addition, the Company committed to
prepay an additional $145.0 million of its short-term FHLBSF advances in
February 1996. As a result, the Company incurred a prepayment charge of $2.5
million (net of applicable income taxes). In accordance with generally accepted
accounting principles, the prepayment penalties were reported as an
extraordinary charge (net of applicable income taxes). The prepayment penalties
were $132,000 (net of applicable income taxes) in 1993. There were no prepayment
penalties in 1994.
Although the amount of the charge reduces the Company's earnings at
the time the debt is extinguished, management believes that the Company's future
earnings will be enhanced by such actions. For further discussion of the
Company's asset/liability management strategies, see "Asset/Liability
Management".
23
<PAGE>
BALANCE SHEET ANALYSIS
The Bank's total assets at December 31, 1995 and 1994 were $3.00 billion
and $3.17 billion, respectively, which comprised virtually all of the Company's
consolidated assets as of the same dates. The decrease in the Bank's assets was
primarily due to sale of mortgage-backed securities available for sale. The
proceeds from the sale were used to repay certain of the Company's borrowings.
The Company's financial condition at December 31, 1995 and 1994 is compared
below.
SECURITIES
The Company purchases various securities to maintain appropriate interest-
earning asset levels when sufficient high quality loan production is not
available. The majority of the securities purchased are high quality mortgage-
backed securities, primarily issued by FHLMC, FNMA, GNMA and Student Loan
Mortgage Association ("SLMA"). Since mortgage-backed securities are
collateralized by mortgages, these assets qualify under the OTS regulations
requiring the Bank to hold certain levels of mortgage-related assets. The
Company also invests in investment securities such as FHLMC and FNMA notes and
debentures and other short-term securities.
The following table reflects the composition of the Company's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994 1993
-------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AVAILABLE FOR SALE
FHLMC and SLMA notes $ 7,000 $ --- $ ---
FHLMC preferred stock 1,035 980 1,070
U.S. Treasury securities --- --- 5,329
------- ------- ------
$ 8,035 $ 980 $6,399
======= ======= ======
HELD TO MATURITY
FHLMC/FNMA notes and debentures $ 9,988 $21,938 $ ---
FHLB callable notes 24,940 4,923 ---
Federal Farm Credit Bank notes 5,000 5,000 ---
Other securities --- --- 5,000
------- ------- ------
$39,928 $31,861 $5,000
======= ======= ======
</TABLE>
24
<PAGE>
The following table reflects the composition of the Company's mortgage-
backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994 1993
--------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AVAILABLE FOR SALE
FHLMC, FNMA and GNMA $149,778 $108,561 $183,276
Financial institutions and intermediaries --- 295 3,367
-------- -------- --------
$149,778 $108,856 $186,643
======== ======== ========
HELD TO MATURITY
FHLMC, FNMA and GNMA $572,822 $802,893 $518,981
Financial institutions and intermediaries 6,128 6,497 8,548
Other nonrated, nonresidential 3,580 5,008 5,058
-------- -------- --------
582,530 814,398 532,587
Allowance for losses (930) (1,574) (534)
-------- -------- --------
$581,600 $812,824 $532,053
======== ======== ========
</TABLE>
At December 31, 1995, the Company did not have any securities (exclusive of
obligations of FHLMC, FNMA and GNMA) issued by any one entity with a total book
value in excess of 10% of stockholders' equity.
The principal balances of mortgage-backed securities purchased and sold for
the years ended December 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Purchased $ --- $400.7 $617.8
Sold 103.5 --- 83.8
</TABLE>
During 1995, the Company sold $103.5 million of fixed rate mortgage-
backed securities available for sale, which resulted in a pretax loss of $2.2
million. The purpose of the sale of the fixed rate mortgage-backed securities
available for sale was to reduce the Company's exposure to interest rate
increases. The proceeds from the sale were used to reduce the Company's
borrowings.
The increase in the mortgage-backed securities portfolio in 1994 was
attributable to purchases of mortgage-backed securities funded with fixed rate
FHLBSF advances and borrowings from securities sold under agreements to
repurchase. During 1993, the Company increased its purchases of mortgage-backed
securities in order to offset some of the shrinkage in its interest-earning
assets resulting from the relatively low loan origination volumes and high
levels of prepayments.
25
<PAGE>
In November 1995, the Financial Accounting Standards Board ("FASB")
issued "A Guide to Implementation of Statement of Financial Accounting Standards
No.115 ("SFAS 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, the
Special Report requires such transfers be accounted for as transfers in
accordance with SFAS 115. As a result, concurrent with the initial adoption of
this implementation guidance, the Company 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 of the mortgage-backed securities was
recorded at a fair value of $146.0 million with $981,000 of unrealized losses
(net of tax) recorded as a separate component of stockholders' equity.
The unrealized loss on securities available for sale included in
stockholders' equity at December 31, 1995 was $683,000 (net of tax) as compared
to an unrealized loss of $3.6 million (net of tax) at December 31, 1994. The
decrease was attributable to the sale of mortgage-backed securities available
for sale which comprised most of the unrealized loss as of December 31, 1994
offset by the unrealized loss of $981,000 (net of tax) related to the transfer
of securities from held to maturity to available for sale as discussed above.
The Company does not maintain a trading portfolio.
LOANS AND REAL ESTATE OWNED
GENERAL
The Company's primary business is generating single family and
multifamily loans and, to a lesser degree, nonresidential and consumer loans.
The Company's operating strategies for improving and maintaining overall asset
quality include:
. Maintaining a credit culture within the Company that allows for the
generation of safe and sound assets at an appropriate return
. Enhancing the credit underwriting process and systems for
monitoring and controlling the overall quality of assets
. Resolving or disposing of assets with inadequate
credit quality.
. Generating new high quality assets
During 1995, the Company continued to make strong progress towards the
resolution of nonperforming assets. As a result of aggressive management of
delinquent and nonperforming assets, loan quality has continued to improve.
26
<PAGE>
A major portion of the Company's loan portfolio consists of loans
collateralized by income-producing properties, all of which are located in
California, principally Northern California. Construction lending has been
insignificant. The Company believes that income property lending affords an
opportunity to receive interest income at yields higher than those obtainable
from single family lending. Nevertheless, loans on income properties,
particularly nonresidential properties, generally present a higher risk than do
single family residential loans due to the sensitivity of the underlying
property to changes in economic conditions. Management takes such risks into
account when it establishes the loan rates, underwriting standards, loss
allowances and decisions regarding portfolio mix.
LOAN PORTFOLIO COMPOSITION
The following table shows the composition of the Company's loan portfolio
(before deductions for net deferred loan origination fees, net unamortized
discounts and allowance for loan losses) by type of loan at the dates indicated.
Except as shown below, the Company did not have any loan concentrations that
exceeded 10% of total loans at December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1995 1994 1993
--------------------- ------------------------- ---------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- ------- ----------- ----------- ----------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single family (one to four units) $ 731,310 34.9% $ 733,265 35.2% $ 424,095 23.4%
Multifamily (five or more units) 995,038 47.5 980,849 47.1 1,019,174 56.2
Nonresidential 333,236 15.9 337,483 16.2 336,383 18.5
---------- ----- ---------- ---------- ---------- -----
2,059,584 98.3 2,051,597 98.5 1,779,652 98.1
Consumer loans 34,849 1.7 31,483 1.5 35,572 1.9
---------- ----- ---------- ---------- ---------- -----
Total $2,094,433 100.0% $2,083,080 100.0% $1,815,224 100.0%
========== ===== ========== ========== ========== =====
<CAPTION>
DECEMBER 31,
---------------------------------------------
1992 1991
------------------ ----------------------
% OF % OF
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
---------- ------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Single family (one to four units) $ 458,473 23.0% $ 586,070 25.9%
Multifamily (five or more units) 1,116,729 56.1 1,191,690 52.8
Nonresidential 364,611 18.3 404,034 17.9
---------- ----- ---------- -----
1,939,813 97.4 2,181,794 96.6
Consumer loans 49,770 2.6 77,025 3.4
---------- ----- ---------- -----
Total $1,989,583 100.0% $2,258,819 100.0%
========== ===== ========== =====
</TABLE>
27
<PAGE>
The following table shows the composition of the Company's fixed and
adjustable rate loan portfolios (before deductions for net unearned loan
origination fees, discounts and allowance for loan losses) by dollar amount and
percentage of total loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans:
Real estate $ 255,897 12.2% $ 279,552 13.4% $ 376,276 20.7%
Consumer 5,372 0.3 2,825 0.2 7,996 0.4
---------- ----- ---------- ----- ---------- -----
261,269 12.5 282,377 13.6 384,272 21.1
---------- ----- ---------- ----- ---------- -----
Adjustable rate loans:
Real estate 1,803,687 86.1 1,772,045 85.1 1,405,288 77.3
Consumer 29,477 1.4 28,658 1.3 27,576 1.6
---------- ----- ---------- ----- ---------- -----
1,833,164 87.5 1,800,703 86.4 1,432,864 78.9
---------- ----- ---------- ----- ---------- -----
Total loans $2,094,433 100.0% $2,083,080 100.0% $1,817,136 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
LOAN ORIGINATIONS, PURCHASES AND SALES
As a part of its business strategy, the Company originates and purchases
single family, multifamily and nonresidential loans. The Company is not
currently active in the secondary market for loan sales. However, if
opportunities arise and market conditions are more favorable, secondary
marketing activity would be reviewed to determine its profitability to the
Company. For each of the years ended December 31, 1995, 1994 and 1993, loans
originated, purchased and sold were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Loans originated $258.4 $564.3 $158.3
Loans purchased 12.9 5.4 34.8
Loans sold 0.1 12.0 54.7
Loans securitized and sold --- 10.0 2.6
</TABLE>
The decrease in loan originations in 1995 as compared to 1994 resulted
from the slowdown of both wholesale and retail lending. During 1995, the
Company reduced its wholesale loan origination function in order to rebuild and
concentrate on originations at the retail level. In 1994, the Company
extensively utilized loan brokers to originate loans which contributed to the
high level of originations. During 1993, the Company originated loans utilizing
both wholesale and retail lending. Also, during the second half of 1993, the
Company re-entered the multifamily and nonresidential lending market after a
two-year absence during which the Company restructured the operating and credit
functions for these product lines.
The Company's consumer loan origination function is relatively
insignificant compared to its mortgage lending functions. The Company's main
consumer loan product line for 1995 consisted of home equity lines. During the
second half of 1995, the Company began offering automobile loans.
28
<PAGE>
DELINQUENT, NONACCRUAL AND RESTRUCTURED LOANS
LOANS DELINQUENT 60 DAYS OR MORE
Single family mortgage loan delinquencies for 1995 were $10.2 million,
as compared to $9.8 million and $18.4 million for 1994 and 1993, respectively.
Actual losses experienced on these loans have been minimal. Loan delinquencies
on multifamily and nonresidential loans were $9.8 million, $38.5 million and
$44.9 million for 1995, 1994 and 1993, respectively. As a result of the
improvement in the national and the Northern California economies, there has
been a positive trend in delinquent loans in 1995 as compared to 1994 and 1993.
The improvement in loan delinquencies was also attributable to the aggressive
management and resolution of delinquent assets. Total loan delinquencies will
continue to fluctuate primarily due to large loans occasionally becoming
delinquent, national and regional economic conditions and interest rate trends.
Loans delinquent 60 days or more as a percentage of gross loan
portfolio by property type were as follows at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family (one to four units) $10,229 1.40% $ 9,790 1.34% $18,437 4.34%
Multifamily (five or more units) 7,603 0.76 15,528 1.58 22,276 2.18
Nonresidential 2,232 0.67 22,988 6.81 22,582 6.71
Consumer 102 0.29 159 0.50 388 1.09
------- ---- ------- ---- ------- ----
Total Loans $20,166 0.96% $48,465 2.33% $63,683 3.50%
======= ==== ======= ==== ======= ====
</TABLE>
NONPERFORMING ASSETS, TROUBLED DEBT RESTRUCTURES AND REAL ESTATE OWNED
The Company defines nonperforming assets as loans 90 days or more
delinquent (excluding accruing loans delinquent 90 days or more), loans less
than 90 days delinquent designated as nonperforming when the Company determines
that the full collection of principal and/or interest is doubtful, defaulted
mortgage-backed securities, real estate owned, and other repossessed assets.
Nonperforming assets are placed on nonaccrual status.
Troubled debt restructures are real estate loans that have been
modified (due to borrower financial difficulties) to allow a stated interest
rate and/or a monthly payment rate lower than those prevailing in the market. At
December 31, 1995 and 1994, all such restructured loans were performing in
accordance with their modified terms.
29
<PAGE>
The following is a summary of nonperforming assets:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real Estate loans $10,675 $36,167 $54,136
Consumer loans 80 154 300
Mortgage-backed securities 3,580 --- ---
Real estate owned 24,476 14,255 17,875
Other repossessed assets --- 1 54
------- ------- -------
Total $38,811 $50,577 $72,365
======= ======= =======
</TABLE>
The following schedule shows the Company's real estate owned, net of
specific valuation allowances, by property type:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Single family $ 1,656 $ 2,474 $ 4,136
Multifamily 8,112 8,120 7,240
Nonresidential 14,303 3,270 6,499
Consumer 405 391 ---
------- ------- -------
Total $24,476 $14,255 $17,875
======= ======= =======
</TABLE>
Management actively seeks to return nonperforming assets to performing
status or expediently dispose of foreclosed assets at their fair value. The
decrease in nonperforming loans and increase in real estate owned in 1995 from
1994 was primarily due to the foreclosure of the underlying collateral relating
to several large loans in 1995. During 1995, 1994 and 1993, sales of real estate
owned were $19.3 million, $22.9 million and $12.1 million, respectively.
30
<PAGE>
The following table sets forth nonaccrual loans, accruing loans
delinquent 90 days or more and troubled debt restructures. The Company accrues
interest on loans delinquent more than 90 days when the loans are considered to
be well secured and in the process of collection.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUING LOANS:
Single family (one to four units) $ 6,272 $ 5,915 $14,755 $12,689 $ 6,613
Multifamily (five or more units) 3,551 13,134 17,366 18,955 10,344
Nonresidential 852 17,118 22,015 20,794 21,295
Consumer 80 154 300 264 227
------- ------- ------- ------- -------
$10,755 $36,321 $54,436 $52,702 $38,479
======= ======= ======= ======= =======
Percentage of total assets 0.36% 1.15% 2.04% 2.04% 1.42%
ACCRUING LOANS DELINQUENT 90 DAYS OR MORE:
Single family (one to four units) $ 27 $ --- $ --- $ --- $ 5,007
Multifamily (five or more units) 51 434 --- --- ---
Nonresidential 1,325 243 --- --- ---
Consumer 22 --- --- --- ---
------- ------- ------- ------- -------
$ 1,425 $ 677 $ --- $ --- $ 5,007
======= ======= ======= ======= =======
Percentage of total assets 0.05% 0.02% ---% ---% .18%
TROUBLED DEBT RESTRUCTURES:
Multifamily (five or more units) $13,212 $12,243 $12,452 $20,756 $ ---
Nonresidential 2,429 1,705 1,736 35 13,922
------- ------- ------- ------- -------
$15,641 $13,948 $14,188 $20,791 $13,922
======= ======= ======= ======= =======
Percentage of total assets 0.52% 0.44% 0.53% 0.80% .51%
</TABLE>
ALLOWANCE FOR LOSSES
Bay View conducts an ongoing review of its asset categories to assess
the adequacy of general valuation allowances ("GVA"), which are maintained at
levels the Company believes are sufficient to cover potential losses. In
determining the 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.
Management periodically reviews specific loans and other real estate
related assets on an individual basis. Such evaluation includes an analysis of
creditworthiness, cash flows, financial status of the borrower and the estimated
fair value of the underlying collateral. The Company provides for losses on
individual assets when its investment in the asset is not expected to be fully
collectible or realizable.
31
<PAGE>
The following is a summary of activity of the Company's GVA on loans for
the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $29,115 $33,790 $ 38,434 $ 27,251 $ 17,119
Charge-offs:
Single family (one to four units) (766) (1,334) (1,193) (545) (245)
Multifamily (five or more units) (2,476) (5,532) (6,259) (3,044) (75)
Nonresidential real estate (1,485) (1,562) (3,928) (9,694) (11,516)
Consumer (152) (86) (149) (325) (699)
------- ------- -------- -------- --------
(4,879) (8,514) (11,529) (13,608) (12,535)
Recoveries:
Single family (one to four units) 143 25 57 --- ---
Multifamily (five or more units) 1,059 425 161 --- ---
Nonresidential real estate 222 887 --- --- ---
Consumer 70 135 135 212 239
------- ------- -------- -------- --------
1,494 1,472 353 212 239
Net charge-offs (3,385) (7,042) (11,176) (13,396) (12,296)
Provision for loan losses 4,284 2,367 6,532 24,579 22,428
------- ------- -------- -------- --------
Balance at end of year $30,014 $29,115 $ 33,790 $ 38,434 $ 27,251
======= ======= ======== ======== ========
</TABLE>
The following is a breakdown of GVA by loan category at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------- --------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate $29,541 98.4% $28,560 98.1% $33,117 98.0% $37,435 97.4% $26,712 98.0%
Consumer 473 1.6 555 1.9 673 2.0 999 2.6 539 2.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $30,014 100.0% $29,115 100.0% $33,790 100.0% $38,434 100.0% $27,251 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
32
<PAGE>
The ratio of net charge-offs to average loans outstanding for each of the
years in the five-year period ended December 31, 1995 was 0.16%, 0.38%, 0.58%,
0.63% and 0.53%, respectively. GVA ratios at December 1995, 1994 and 1993 were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
GVA to nonperforming assets 79.73% 62.11% 48.84%
GVA to classified assets 28.67% 22.48% 19.35%
Loan GVA to nonperforming loans 279.07% 80.16% 62.07%
Loan GVA to gross loans 1.43% 1.40% 1.87%
</TABLE>
Provisions for losses are recorded to maintain the level of GVA management
believes is adequate to cover estimated losses. The provision for losses on
loans and securities was $4.6 million, $3.4 million and $7.0 million for 1995,
1994 and 1993, respectively. The increase in the provision for losses in 1995
compared with 1994 was primarily due to one large loan classified as a troubled
debt restructuring. As part of its strategy to aggressively resolve problem
assets, management intends to accelerate the disposal of this asset. The
decrease in the provision for losses on loans and securities in 1994 compared to
1993 was attributable to the improvement in the credit quality of the loan
portfolio.
GVA for loans and securities was $30.9 million and $30.7 million at
December 31, 1995 and 1994, respectively. The credit quality of the Company's
loan portfolio continued to improve in 1995. Nonperforming assets declined from
$50.6 million, or 1.60% of total assets at December 31, 1994, to $38.8 million,
or 1.29% of total assets at December 31, 1995. Classified assets also declined
from $139.8 million to $108.0 million from December 31, 1994 to December 31,
1995.
Provision for losses on real estate was $749,000, $145,000 and $819,000 in
1995, 1994 and 1993, respectively. The increase in the provision for losses from
1994 to 1995 was attributable to further write downs of the fair value of
foreclosed properties during the fourth quarter of 1995 because the Company
intends to pursue the accelerated disposal of these foreclosed properties. The
impact of these writedowns was partially offset by the reversal of the allowance
for losses on real estate during the first quarter of 1995 because it was no
longer considered necessary.
Management believes that it uses appropriate information to make loss
determinations and considers its allowance for losses at December 31, 1995 and
1994 to be adequate to cover losses from loan and real estate related assets.
However, future adjustments in the level of GVA may be necessary and earnings
could be significantly affected, if circumstances differ substantially from the
assumptions used in making such determinations.
Management monitors the impact of the economic environment on its lending
activities on a periodic basis. If real estate markets weaken in future periods,
no assurance can be given that the Company's future loss experience will
approximate its current estimates. In addition, various regulatory agencies
review the Company's allowance for losses as an integral part of their
examination process. Such agencies may require the Company to recognize
additions to this allowance based on their judgment relating to information
available to them at the time of their examinations.
33
<PAGE>
CUSTOMER DEPOSITS
As a primary part of the Company's business, deposits are gathered for
purposes of funding loans and purchasing securities. The customer deposits at
December 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Transaction accounts $ 387.6 $ 379.4 $ 425.0
Certificates of deposit 1,432.2 1,328.0 1,251.3
Brokered deposits --- --- 18.0
-------- -------- --------
$1,819.8 $1,707.4 $1,694.3
======== ======== ========
</TABLE>
The following table reflects the Bank's deposits of $100,000 or more by
time remaining until maturity at December 31, 1995.
<TABLE>
<CAPTION>
PASSBOOK, CHECKING AND
CERTIFICATES MONEY MARKET
OF DEPOSIT ACCOUNTS
------------ ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less $ 62,808 $55,324
Over three through six months 85,567 ---
Over six through twelve months 84,849 ---
Over twelve months 125,611 ---
-------- -------
Total $358,835 $55,324
======== =======
</TABLE>
Increasing the value of its retail branch franchise is one of Bay View's
primary objectives. The Company believes that a rational expansion of its retail
deposit base, particularly transaction accounts, in Northern California will
enhance its core earnings by lowering its cost of funds, increasing fee income
and expanding opportunities for cross-selling products and services. In 1995,
certificates of deposits increased by $104.2 million to $1.43 billion, primarily
related to increases in 18-month certificates of deposit.
34
<PAGE>
BORROWINGS
The Company utilizes collateralized advances from the FHLBSF for purposes
of funding loans. In addition, the Company utilizes other borrowings, on a
collateralized and noncollateralized basis, such as securities sold under
agreements to repurchase (reverse repurchase agreements). The following table
sets forth certain information as to the Company's borrowings at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Advances from FHLBSF $766,790 $ 956,310 $719,600
Securities sold under agreements to repurchase 166,738 255,106 12,729
Capitalized lease 2,914 3,165 3,383
Note payable to commercial bank 5,023 5,377 5,702
-------- ---------- --------
$941,465 $1,219,958 $741,414
======== ========== ========
</TABLE>
The decrease in borrowings for 1995 was primarily attributable to
repayments from the proceeds related to the sale of $103.5 million of mortgage-
backed securities available for sale and lower borrowing requirements. In
addition, during the fourth quarter of 1995 the Company prepaid $45 million of
its short-term advances from the FHLBSF as part of its asset/liability
management strategy. For further discussion of the Company's asset/liability
management strategies, see "Asset/Liability Management".
The Bank is a member of the FHLBSF. As such, the Bank must purchase stock
in the FHLBSF equal to the greater of one percent of residential mortgage loans
or five percent of its borrowings. At December 31, 1995 and 1994, the investment
in FHLBSF stock amounted to $39.5 million and $49.6 million, respectively. The
Company maintained an excess borrowing capacity with the FHLBSF of approximately
$385.7 million at December 31, 1995.
The Company expects to continue to utilize collateralized advances from the
FHLBSF as a source of funding. Advances can be fixed or variable rate, with
maturities staggered in accordance with the Company's asset/liability
strategies.
35
<PAGE>
ASSET/LIABILITY MANAGEMENT
GENERAL
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. Through overall management of
its balance sheet and by controlling various risks, the Company seeks to
optimize its financial returns within safe and sound parameters. The Company's
operating strategies for attaining this objective include:
. Managing net interest margin through appropriate risk/return pricing of
assets and liabilities
. Controlling noninterest expense and enhancing noninterest income, utilizing
improved information systems to facilitate the analysis of the
profitability of individual business units and products
. Increasing retail deposits as a percentage of interest-bearing liabilities
and reducing the Company's cost of funds
. Utilizing Bay View's strong capital position to boost the earnings power of
the Bank through acquisition of higher yielding assets
. Enhancing internal analysis capability for measuring, evaluating and
monitoring risk
INTEREST RATE RISK
Financial institutions are subject to interest rate risk to the degree that
interest-bearing liabilities reprice or mature on a different basis and at
different times than interest-earning assets. The Company's strategy has been to
reduce the sensitivity of its earnings to interest rate fluctuations by more
closely matching the effective maturities or repricing characteristics of its
assets and liabilities. Certain assets and liabilities, however, may react in
different degrees to changes in market interest rates. Further, interest rates
on certain types of assets and liabilities may fluctuate prior to changes in
market interest rates, while rates on other types may lag behind. Additionally,
certain assets, such as adjustable rate mortgages, have features, including
payment and rate caps, which restrict changes in their interest rates. The
Company considers the anticipated effects of these factors when implementing its
interest rate risk management objectives.
The Company pursues balance sheet strategies that should, in the long run,
mitigate the Bank's exposure to rising interest 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.
36
<PAGE>
In 1995, the Company sold $103.5 million of fixed rate mortgage-backed
securities available for sale. The purpose of the sale was to reduce the
Company's exposure to interest rate increases. In addition, during the fourth
quarter of 1995, the Company reclassified $147.7 million of its mortgage-backed
securities from held to maturity to available for sale as a result of adopting
the implementation guide to SFAS 115. This reclassification will allow the
Company to position these securities for potential sale, which will assist in
the reduction of its interest rate risk exposure without tainting its remaining
held to maturity portfolio.
At December 31, 1995, the Company was party to interest rate swap
agreements with notional principal amounts of $150.0 million and forward
starting swaps with notional principal amounts of $150.0 million, which involve
the receipt of floating interest rates (based on 3-month LIBOR) and payment of
fixed interest rates on the underlying notional amounts.
During the fourth quarter of 1995, the Company prepaid $45 million of its
short-term high cost borrowings. In addition, the Company committed to prepay
another $145 million of its short-term high cost borrowings in February 1996. As
a result, the Company incurred a prepayment charge of $2.5 million (net of
applicable income taxes). In conjunction with the prepayment of these
borrowings, the Company entered into interest rate swap agreements with notional
principal amounts of $50 million and forward starting swaps with notional
principal amounts of $150 million. The impact of these actions is a reduction of
the Company's interest rate risk exposure by prepaying its short-term high cost
borrowings and replacing the prepayments with short-term lower cost borrowings.
The interest rate swap agreements were used to provide interest rate risk
protection for the short-term lower cost borrowings by matching the floating
interest rate characteristics and lengthening their maturities.
INTEREST RATE SENSITIVITY
The Company's interest rate risk policies are established and monitored by
its Asset/Liability Committee ("ALCO"). The ALCO reviews the sensitivity of the
Company's net interest income and market value of equity to interest rate
changes.
To measure the Company's interest rate sensitivity, a cumulative gap
measure can be used to assess the impact of potential changes in interest rates
on the net interest income. The repricing gap represents the net position of
assets and liabilities subject to repricing in specified time periods. Assets
and liabilities are categorized according to the expected repricing time frames
based on management's judgment. A cumulative gap measure alone cannot be used to
evaluate interest rate sensitivity because interest rate changes do not affect
all categories of assets and liabilities equally or simultaneously. In measuring
interest rate sensitivity, the Company also uses simulation modeling to estimate
the potential effects of movements in interest rates. Interest rate risk
sensitivity estimated by management, as measured by the change in the net
portfolio value of equity as a percentage of the present value of assets from an
immediate 200 basis point change in interest rates, declined to approximately
0.79% at December 31, 1995. The interest rate sensitivity was 3.02% at December
31, 1994.
The following table sets forth information regarding asset and liability
repricing at December 31, 1995. The comparative cumulative repricing gap at
December 31, 1994 for under one year was 2.21%; over one to three years was
(14.79%); over three to five years was (11.96%) and total cummulative was 2.61%.
37
<PAGE>
<TABLE>
<CAPTION>
REPRICING PERIOD
---------------------------------------------------------------
UNDER OVER OVER OVER
ONE ONE TO THREE THREE TO FIVE FIVE
YEAR YEARS YEARS YEARS TOTAL
---------- ------------ ------------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Cash and investments $ 82,210 $ 2,000 $ 45,000 $ 1,000 $ 130,210
Mortgage loans and
mortgage-backed securities
/(1)//(2)/ 1,867,463 245,767 149,252 495,868 2,758,350
Consumer loans /(2)/ 30,280 1,775 456 2,258 34,769
---------- --------- --------- --------- ----------
Total interest rate
sensitive assets/(3)/ $1,979,953 $ 249,542 $ 194,708 $ 499,126 $2,923,329
========== ========= ========= ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ---------------------
Deposits:
Certificates of deposit $1,197,172 $ 204,568 $ 30,490 $ --- $1,432,230
Money market accounts 106,276 --- --- --- 106,276
Checking accounts 107,595 --- --- --- 107,595
Passbook accounts 173,739 --- --- --- 173,739
Borrowings 669,184 196,075 56,206 20,000 941,465
---------- --------- --------- --------- ----------
Total interest rate
sensitive liabilities $2,253,966 $ 400,643 $ 86,696 $ 20,000 $2,761,305
---------- --------- --------- --------- ----------
Repricing gap-positive
(negative) before
impact of interest rate
swaps $(274,013) $(151,101) $ 108,012 $ 479,126
Impact of interest rate
swaps 300,000 (25,000) (175,000) (100,000)
---------- --------- --------- ---------
Cumulative repricing
gap-positive (negative) $25,987 $(150,114) $(217,102) $162,024
---------- --------- --------- ---------
Cumulative repricing gap as
a percentage of interest
rate sensitive assets 0.89% (5.14)% (7.43)% 5.54%
========= ========= ========== =========
</TABLE>
/(1)/ Net of nonperforming assets.
/(2)/ Based on assumed annual prepayment and amortization rates which
approximate the Company's historical experience.
/(3)/ Investments and mortgage-backed securities are at face value.
38
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Bay View's primary sources of funds include:
. Customer deposits
. Advances from the FHLBSF
. Reverse repurchase agreements
. Loan and mortgage-backed securities repayments
The Company uses its liquidity resources principally as follows:
. Origination of mortgage loans
. Funding the withdrawal of certificates of deposits and other deposit
products
. Repayment and/or refinance of maturing FHLBSF advances and reverse
repurchase agreements
The Company expects to fund, repay and/or refinance, on a timely basis, its
commitments, short-term and long-term liabilities. During 1995, cash outflows
from financing activities totaled $168.4 million primarily due to the net
repayment of FHLBSF advances and reverse repurchase agreements of $189.5 million
and $88.4 million, respectively, partially offset by cash flows from net deposit
inflows and proceeds from the sale and principal repayments of mortgage-backed
securities. In 1994, financing activities were primarily funded by net
borrowings from the FHLBSF and reverse repurchase agreements totaling $236.7
million and $254.4 million, respectively.
The following table sets forth the period ending balances for the Company's
short-term FHLBSF advances, securities sold under agreements to repurchase,
other short-term borrowings and the weighted average interest rate of total
short-term borrowings:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Advances from FHLBSF $486,940 $439,520 $164,000
Securities sold under agreements to repurchase 151,738 255,106 12,729
Other 792 654 542
-------- -------- --------
Total short-term borrowings $639,470 $695,280 $177,271
======== ======== ========
Weighted average interest rate of total
short-term borrowings at period end 6.56% 5.54% 7.40%
======== ======== ========
</TABLE>
39
<PAGE>
The following table sets forth the maximum outstanding balance of each type
of short-term borrowings at any month-end during 1995, 1994 and 1993 and the
average balances and weighted average interest rates on short-term borrowings
for 1995, 1994 and 1993.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Advances from FHLBSF $510,880 $451,720 $183,000
Securities sold under agreements to repurchase $248,131 $271,486 $226,428
Other $ 792 $ 654 $ 542
Commercial mortgage-backed bonds $ --- $ --- $ 60,000
Average amount of total short-term borrowings
outstanding during year $622,080 $475,231 $237,811
Weighted average interest rate of total
short-term borrowings during year 6.09% 5.66% 5.92%
</TABLE>
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. Historically, the Bank
has maintained its liquid assets above the minimum requirements imposed by the
OTS regulations and at a level believed adequate to meet requirements of normal
banking activities, repayment of maturing debt and potential deposit outflows.
The Bank maintained liquidity ratios of 5.26% and 5.17% for the months ended
December 31, 1995 and 1994, respectively.
CAPITAL RESOURCES
The OTS has established minimum capital standards for all savings
institutions, including a tangible capital requirement, a leverage ratio (or
core capital) requirement and a risk-based capital requirement.
The Bank's regulatory capital at December 31, 1995 and 1994 exceeded the
minimum requirements of each regulatory capital standard, both in effect on such
dates and on a fully phased-in basis. The fully phased-in capital ratios become
effective in 1996 when the total amount of nonqualifying investments in
subsidiaries is required to be fully deducted from regulatory capital.
Regulatory capital ratios of the Bank were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
FULLY
MINIMUM ACTUAL ACTUAL PHASED-IN
CAPITAL STANDARD REQUIRED 1995 1994 1995
- ---------------- --------- ------- ---------- ------
<S> <C> <C> <C> <C>
Tangible 1.50% 5.16% 5.87% 5.13%
Core (leverage) 3.00 5.28 6.07 5.25
Risk-based 8.00 10.51 12.29 10.46
</TABLE>
40
<PAGE>
Under capital guidelines enacted in the Federal Deposit Insurance
Corporation Improvement Act of 1991, the Bank meets the criteria for the "well
capitalized" standard. This designation requires that the risk-based capital
ratio be at least 10%, the tier one risk-based capital ratio be at least 6%, and
the core (leverage) ratio be at least 5%. Such ratios for the Bank at December
31, 1995 were 10.51%, 9.25% and 5.28%, respectively.
In August 1993, the OTS issued a final rule for the calculation of an
interest rate risk component for institutions with a greater than "normal"
(i.e., greater than 2%) level of interest rate risk exposure. Currently, the OTS
has deferred implementation of the interest rate risk component. At December 31,
1995, if the interest 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.
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 the evaluation of all available capital redeployment opportunities.
IMPACT OF NEW ACCOUNTING STANDARDS
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" was issued in March 1995, with implementation required for
fiscal years beginning after December 15, 1995. SFAS 121 requires that long-
lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. Measurement
of an impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair value of the asset.
SFAS 121 also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The financial statement impact of adopting SFAS
121 is not expected to be material.
Statement of Financial Accounting Standards No. 122 ("SFAS 122"),
"Accounting for Mortgage Servicing Rights" was issued in May 1995, with
implementation required for fiscal years beginning after December 15, 1995. SFAS
122 amends Statement of Financial Accounting Standards No. 65, " Accounting for
Certain Mortgage Banking Activities," to require capitalization of mortgage
servicing rights purchased or mortgage servicing rights retained in transactions
for a mortgage banking enterprise that sells or securitizes mortgage loans. SFAS
122 also requires that mortgage banking enterprises assess their capitalized
mortgage servicing rights for impairment based on the fair value of the rights
on a disaggregated basis. The financial statement impact of adopting SFAS 122 is
not expected to be material.
41
<PAGE>
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation" with
implementation required for fiscal years beginning after December 15, 1995. The
scope of SFAS 123 includes all arrangements by which employees receive shares of
stock or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the employer's stock.
SFAS 123 also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from nonemployees. These transactions
must be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measurable. The compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period which is usually
the vesting period.
The Company accounts for stock option plans 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". Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date over the amount an employee must pay
to acquire stock. The Company's stock option plans have no intrinsic value at
grant date, and under APB 25 no compensation cost is recognized.
The disclosure requirements of SFAS 123 are effective for financial
statements for fiscal years beginning after December 15, 1995. SFAS 123
requires pro forma disclosures for entities that elect to continue to measure
compensation cost using APB 25 which must include effects of all awards granted
on net income and earnings per share for fiscal years beginning after December
15, 1994. The Company has determined that it will continue to account for its
stock options under APB 25. As a result, when adopted by the Company, the
financial statement impact of SFAS 123 is not expected to be material.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time, due to the fact that almost all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than general levels of inflation. Interest rates do not necessarily
move in the same direction or magnitude as the prices of goods and services.
42
<PAGE>
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 acquisitions 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.
CTLC is the holding company for California Thrift & Loan, which had $496
million in assets at December 31, 1995. California Thrift & Loan underwrites and
purchases primarily high quality, high yielding consumer loans and has
successfully carved out a niche in the increasingly competitive auto finance
industry. It is headquartered in Santa Barbara, California and operates 19
offices throughout California and the United States.
Management believes this acquisition is consistent with its strategic focus
in that it allows the redeployment of the Company's excess capital, improves the
attractiveness of the Bank's community banking franchise and expands the
consumer credit origination capabilities. This transaction is expected to
immediately enhance earnings per share and provide significant earnings per
share growth opportunities beyond 1996.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K, in future SEC filings or in press releases or
other written or oral communications, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company cautions that such forward looking statements speak only
as of the date made and that various factors including regional and national
economic conditions, changes in levels of market interest rates, credit and
other risks of lending and investment activities, and competitive and regulatory
factors could affect the Company's financial performance and could cause actual
results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements.
43
<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
81
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------- --------------------------------------------------
Information concerning Executive Officers of the Company is contained under
the heading "Executive Officers of the Registrant" on page 9 therein.
Information concerning directors of the Registrant is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 23, 1996, a copy of which will be
filed not later than 120 days after the close of the fiscal year. The
compensation report and performance graph included in the Proxy Statement
pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
- --------- ----------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 23, 1996, a copy of which will be
filed not later than 120 days after the close of the fiscal year. The
compensation report and performance graph included in the Proxy Statement
pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------- --------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
May 23, 1996, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------- ----------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on May 23, 1996, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
82
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------- -----------------------------------------------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a) (3) Exhibits:
- -----------------
<TABLE>
<CAPTION>
Regulation Reference to Sequential page
S-K prior filing or number where
Exhibit exhibit number attached exhibits are
Number Document attached hereto located in this report
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2 Plan of acquisition, reorganization, None Not applicable
arrangement, liquidation or succession
3 Articles of Incorporation 3a Not applicable
Bylaws 3b Not applicable
4 Instruments defining the rights of security
holders, including indentures:
Articles of Incorporation 3a Not applicable
Bylaws 3b Not applicable
Specimen of common stock certificate 4a Not applicable
Stockholder Protections Rights Agreement, 4b Not applicable
dated July 31, 1990 (the "Rights Agreement")
First Amendment to the Rights Agreement, 4c Not applicable
dated February 26, 1993
Form of Rights Certificate and of Election to 4d Not applicable
Exercise pursuant to the Rights Agreement
9 Voting trust agreement None Not applicable
10 Material contracts:
Employment Contract with Edward H. Sondker 10a Not applicable
Employment Contract with Bruce E. Moyer 10b Not applicable
Employment Contract with John E. Brubaker 10b Not applicable
Employment Contract with Robert J. Flax 10b Not applicable
Employment Contract with James E. Tecca 10c Not applicable
Employment Contract with David A. Heaberlin Page
Employment Contract with John N. Buckley Page
Employment Contract with Cynthia L. Hart Page
Supplemental Executive Retirement Plan 10d Not applicable
Senior Management Incentive Plan 10e Not applicable
Senior Management Long-Term Incentive Plan 10f Not applicable
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Regulation Reference to Sequential page
S-K prior filing or number where
Exhibit exhibit number attached exhibits are
Number Document attached hereto located in this report
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1986 Stock Option and Incentive Plan 10g Not applicable
Amended and Restated 1989 Non-Employee 10h Not applicable
Director Stock Option Plan
1995 Stock Option and Incentive Plan 10i Not applicable
11 Statement re computation of per share earnings Not required Not applicable
12 Statements of re computation of ratios Not required Not applicable
13 Annual Report to security holders Not required Not applicable
16 Letter re change in certifying accountant Not required Not applicable
18 Letter re change in accounting principles None Not applicable
21 Subsidiaries of the registrant 21 Page
22 Published report regarding matters submitted None Not applicable
to vote of security holders
23 Consent of Deloitte & Touche LLP 23 Page
24 Power of attorney Not required Not applicable
27 Financial Data Schedule 27 Page
28 Information from reports furnished to state None Not applicable
insurance regulatory authorities
99 Additional Exhibits None Not applicable
</TABLE>
84
<PAGE>
- --------------------------
(References to Prior Filings)
<TABLE>
<C> <S>
3a Filed as exhibit 4.1 to the Registrant's Registration Statement on Form
S-8 filed July 26, 1991 (File No. 33-41924)
3b Filed as exhibit 1 to the Registrant's Current Report on Form 8-K filed
January 10, 1994 (File No. 0-17901)
4a Filed as exhibit 4.3 to the Registrant's Registration Statement on Form
S-8 filed July 26, 1991 (File No. 33-41924)
4b Filed as exhibit 1 to the Registrant's Registration Statement on Form 8
filed March 9, 1993 (the second amendment to a Form 8-A filed August 6,
1990)(File no. 0-17901)
4c Filed as exhibit 3 to the Registrant's Registration Statement on Form 8
filed March 9, 1993 (the second amendment to a Form 8-A filed August 6,
1990)(File no. 0-17901)
4d Filed as exhibit 2 to the Registrant's Registration Statement on Form 8
filed March 9, 1993 (the second amendment to a Form 8-A filed August 6,
1990)(File no. 0-17901)
10a Filed as exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
filed October 30, 1995 for the quarter ended September 30, 1995 (File
No. 0-17901)
10b Filed as exhibits 10.1 to 10.3 respectively, to the Registrant's Annual
Report on Form 10-K filed March 30, 1994 for the year ended December 31,
1993 (File No. 0-17901)
10c-f Filed as exhibits 10.5 to 10.8 respectively, to the Registrant's Annual
Report on Form 10-K filed March 30, 1993 for the year ended December 31,
1992 (File No. 0-17901)
10g Filed as exhibit 4 to the Registrant's Registration Statement on Form S-
8 filed August 11, 1995 (File No. 33-95724)
10h Filed as exhibit 4.4 to the Registrant's Registration Statement on Form
S-8 filed July 26, 1991 (File No. 33-41924)
10i Filed as exhibit 4 to the Registrant's Registration Statement on Form S-
8 filed August 11, 1995 (File No. 33-95726)
</TABLE>
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
- ------------------------
The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 1995.
85
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 22, 1996 By: /s/ Edward H. Sondker
--------------------------- --------------------------------------
Edward H. Sondker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Edward H. Sondker By: /s/ John R. McKean
------------------------------ -------------------------------------
Edward H. Sondker, Director John R. McKean
President and Chief Executive Chairman of the Board
Officer
Date: March 22, 1996 Date: March 22, 1996
------------------------------ -------------------------------------
By: /s/ Paula R. Collins By: /s/ Roger K. Easley
------------------------------ -------------------------------------
Paula R. Collins, Director Roger K. Easley, Director
Date: March 22, 1996 Date: March 22, 1996
------------------------------ -------------------------------------
By: /s/ Thomas M. Foster By: /s/ Richard J. Quinlan
------------------------------ -------------------------------------
Thomas M. Foster, Director Richard J. Quinlan, Director
Date: March 22, 1996 Date: March 22, 1996
------------------------------ -------------------------------------
By: /s/ Robert L. Witt By: /s/ David A. Heaberlin
------------------------------ -------------------------------------
Robert L. Witt, Director David A. Heaberlin
Executive Vice President
Chief Financial Officer and Treasurer
Date: March 22, 1996 Date: March 22, 1996
------------------------------ -------------------------------------
86
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
Employment contract with David A. Heaberlin 10.1
Employment contract with John N. Buckley 10.2
Employment contract with Cynthia L. Hart 10.3
Subsidiaries of the registrant 21
Consent of Deloitte & Touche LLP 23
Financial Data Schedule 27
</TABLE>
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this 1st
day of November 1995 by and between Bay View Federal Bank (the "Bank"), a
Federal Savings Bank, and David A. Heaberlin (the "Employee").
R E C I T A L S:
A. The parties desire to enter into this Agreement setting forth the terms
and conditions of the employment relationship between the Bank and the Employee.
B. The Board of Directors of the Bank (or "Board") believes it is in the
best interests of the Bank to enter into this Agreement with the Employee in
order to assure continuity of management of the Bank, and has approved and
authorized the execution by the Bank of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises herein contained, the parties hereto agree as follows:
1. Executive's Title, Duty, Authority and Time Commitment.
------------------------------------------------------
a. Title. The Employee's position and title with the Bank shall be that
-----
of Executive Vice President, Chief Financial Officer and Treasurer.
b. Duties and Authority. The Employee's duties and authority shall be
--------------------
consistent with those of an Executive Vice President, Chief Financial Officer
and Treasurer. The Employee shall render such administrative and management
services to the Bank as are customarily performed by persons employed in the
savings bank industry in a similar executive capacity. In addition, the
Employee shall perform such other duties as the Board, or its authorized
representative, may from time to time require. All duties performed by the
Employee hereunder shall be in accordance with such reasonable standards as are
established from time to time by the Board, or its authorized representative,
and performance evaluations shall be conducted by or under the direction of the
Board and reviewed with the Employee annually.
c. Time Commitment. During the "Term of this Agreement", as defined in
---------------
Section 5 of this Agreement, unless the Employee has obtained the prior written
consent of the Board, or its authorized representative,
(1) The Employee shall render his full productive time and services to the
Bank, keeping normal business
<PAGE>
hours, but is authorized to engage in such savings and loan trade association
and related activities during normal business hours which, in his judgment, with
the concurrence of his immediate supervisor, are in the business interests of
the Bank; and
(2) The Employee shall not render personal services to any other person or
entity for compensation, either as an employee, consultant, director or officer,
but shall remain free to engage in community, charitable, political and personal
pursuits which do not interfere with his performance under this Agreement.
2. Compensation. The Bank agrees to pay the Employee during the Term of
------------
this Agreement a salary as follows: salary of $200,000 per annum, with the
salary to be reviewed on July 1, 1996. Salary increases are not guaranteed or
automatic. The salary provided for in this Agreement shall be payable semi-
monthly in accordance with the practices of the Bank.
3. Discretionary Bonuses. The Employee may be entitled to participation
---------------------
in discretionary bonuses and incentive payments to the extent authorized and
declared by the Board or its authorized representative. For the calendar year
1995, the award of any performance bonus will be at the sole discretion of the
Board of Directors. For calendar years after 1995, Employee shall be entitled to
an annual performance bonus of up to 40% of base salary depending upon the
achievement of specific goals set by the Board of Directors.
4. Additional Benefits.
-------------------
a. Participation in Employee Benefit Plans. The Employee shall be
---------------------------------------
entitled to participate in any plan of the Bank, as such plan may from time to
time provide, relating to stock options, stock purchases, pension, thrift,
deferred profit-sharing, group insurance coverage, education or other retirement
or supplemental employee benefits that the Bank may adopt for the benefit of its
employees.
b. Fringe Benefits. The Employee shall be entitled to participate in any
---------------
other program which may be or become applicable to the Bank's executive
employees, as such program may from time to time provide including a reasonable
expense account, the payment of reasonable expenses for attending educational
seminars and annual and periodic meetings of trade associations, and other
benefits which are commensurate with the responsibilities and functions to be
performed by the Employee under this Agreement.
5. Term.
----
a. Initial Term and Extension. The initial term of employment under this
--------------------------
Agreement shall be for a period of two years commencing on November 1, 1995 (the
"Commencement Date"). If
2
<PAGE>
the Board of Directors, or its authorized representative, fails to extend the
Term of this Agreement, then this Agreement shall expire on October 31, 1997;
provided, however, that Section 9, entitled "Change in Control," shall survive
the expiration of this Agreement for a period of one (1) year so long as
Employee is employed by the Bank.
b. Consequences of Non-Extension. If this Agreement is not extended, on
-----------------------------
the expiration of the Term of this Agreement, the Employee shall be deemed to be
employed by the Bank for no specific term and the Employee's rights as an
employee of the Bank shall be no less than those provided by the laws of the
State of California and the laws of the United States; provided, however, that
such post expiration employment may be terminated at any time by the Employee or
by the Board, or its authorized representative, with or without cause by
delivery to the Employee of a written notice (the "Termination Notice") of such
termination.
6. Vacations. At such reasonable times as the Board, or its authorized
---------
representative, shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, all such voluntary absences to count as
vacation time, provided that:
a. Basic Vacation. The Employee shall be entitled to an annual paid
--------------
vacation of 20 days per year.
b. Timing of Vacation. Vacations shall be scheduled in a reasonable
------------------
manner by the Employee and subject to the Bank's needs, except that the Employee
shall take not less than ten (10) days vacation consecutively in each calendar
year.
7. Termination of Employment.
-------------------------
a. Termination by Bank. The Employee's employment under this Agreement
-------------------
may be terminated, with or without cause, at any time by the Board, or its
authorized representative, by delivery to the Employee of a written notice (the
"Termination Notice") of such termination. The Termination Notice shall state
the effective date of such termination and whether such termination is for
"cause," as defined in Section 7a(1), or without cause pursuant to Section
7a(2). Unless the Termination Notice states that the termination is for cause
and states with reasonable particularity the cause, the termination shall be
deemed to be without cause pursuant to Section 7a(2). In the event an
arbitrator appointed pursuant to Section 14 of this Agreement determines that a
purported termination for cause was in fact without proper cause, the
termination shall nonetheless be effective, but the Employee shall, be entitled
to the severance payment pursuant to Section 7a(2) hereof.
3
<PAGE>
(1) Termination by Bank for Cause. The Employee's employment under this
-----------------------------
Agreement may be terminated at any time by the Board, or its authorized
representative, for "cause," which shall include, but not be limited to, the
items specified in 12 C.F.R. (S) 563.39 and the following:
(a) The commission by the Employee of an act of misconduct (including, but
not limited to, the violation of any law, rule, regulation or cease and desist
order applicable to the Employee or the Bank), or an act which constitutes a
conflict of interest with the Bank or its stockholders, or a breach of a
fiduciary duty owed by the Employee;
(b) The Employee's breach of this Agreement, dishonesty, incompetence,
willful misconduct, habitual absence from work, failure to perform duties, or
negligence or incompetence in the performance of stated duties;
(c) The Employee's becoming physically or mentally incapable of performing
the essential functions of his employment position; or
(d) Any criminal conviction of the Employee (other than for a minor traffic
violation or similar offense), whether or not in the line of duty.
In the event of termination for cause under this Section 7a(1), the Employee
shall have no right to receive compensation or other benefits under this
Agreement for any period after such termination.
(2) Termination by Bank Without Cause. The Employee's employment under
---------------------------------
this Agreement may be terminated at any time by the Board, or its authorized
representative, without cause; provided, however, that unless the termination of
this Agreement is for "cause," as set forth in Section 7a(1), or pursuant to
Sections 7b, 7c, 7d, or 9, then, upon such termination, in addition to any
benefits that had accrued to the date of termination but in lieu of any rights
or benefits that would have accrued following such termination, the Employee
shall be entitled, upon execution of a release acceptable to the Board, or its
authorized representative, to a lump sum severance payment of twelve (12) months
salary.
b. Termination by the Employee. This Agreement may be terminated by the
---------------------------
Employee at any time upon 90 days written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board.
c. Termination by Death. In the event of the death of the Employee during
--------------------
the Term of this Agreement, the Employee's estate, or such person as the
Employee may have previously designated in writing for group insurance purposes,
4
<PAGE>
shall be entitled to receive the salary due the Employee through the last day of
the calendar month in which his death shall have occurred.
d. Suspension or Termination by Regulatory Action.
----------------------------------------------
(1) Suspension. If the Employee is suspended from office and/or
----------
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C.(S)1818(e)(3); (g)(1), the Bank's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Bank may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of the obligations which were suspended, but
vested rights of the parties shall not be affected.
(2) Removal. If the Employee is removed from office and/or permanently
-------
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8 (e)(4) or (g)(1) of the FDIA, 12 U.S.C.(S)1818(e)(4);
(g)(1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(3) Termination on Default. If the Bank becomes in default (as defined in
----------------------
Section 3(x)(1) of the FDIA, 12 U.S.C.(S)1813(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(4) Supervisory Assistance or Merger. All obligations under this Agreement
--------------------------------
shall be terminated, except to the extent determined that continuation of the
Agreement is necessary for the continued operation of the Bank: (i) by the
Director of the Office of Thrift Supervision ("OTS") or his or her designee at
the time the Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the FDIA, 12
U.S.C.(S)1823(c); or (ii) by the Director of the OTS or his or her designee at
the time the Director of the OTS or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by any such action.
8. Disability. If the Employee shall become disabled or incapacitated to
----------
the extent that in the judgment of the Board, or its authorized representative,
he is unable to perform the
5
<PAGE>
essential functions of his employment position, he shall be entitled to receive
disability benefits of the type provided for other executive employees of the
Bank. In such event, any rights of the Employee to receive the salary provided
in Section 2 of this Agreement shall be suspended until the Employee is able to
fully perform his duties.
9. Change in Control. If during the Term of this Agreement, or within one
-----------------
(1) year following the expiration of this Agreement and if Employee is employed
by the Bank, there is a "change in control," as hereinafter defined, of the Bank
or of any company holding more than 50 percent of the outstanding Common Stock
of the Bank ("Holding Company"), the Employee shall be entitled upon execution
of a release acceptable to the Board or its authorized representative to a
severance payment in the event the Employee's employment is terminated, other
than for "cause" as set forth in Section 7a(1) or pursuant to Sections 7b
(except as provided below), 7c, or 7d, within twenty-four (24) months after the
change in control. The amount of this payment shall equal Two Hundred (200%) of
the Employee's annual salary as of the date of termination and shall be in lieu
of any severance payment that would be due Employee under Section 7a(2);
provided, however, that in no event shall the amount of such payment combined
with other payments to be paid upon Employee's termination or upon said change
in control, exceed two hundred ninety-nine percent (299%) of the employee's
"base amount" of compensation, as discussed in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), or such other amount as would
from time to time constitute an excess parachute payment nondeductible or
taxable respectively under Code Sections 280G or 4999 as they may be amended.
Except as provided above, such termination or severance payment shall be in
addition to all other amounts payable to the Employee pursuant to this
Agreement; provided, however, that the amount of termination or severance
payment described in the preceding sentence shall be reduced to the extent that
such additional amounts are included in the computation of the payment described
in Section 280G(b)(2) of the Code. This termination or severance payment shall
also be made in the case of a termination of employment by the Employee pursuant
to Section 7b of this Agreement within twenty-four (24) months after a change in
control because during such twenty-four (24) month period there has been a
material diminution of or interference with the Employee's duties,
responsibilities and benefits as Executive Vice President, Chief Financial
Officer and Treasurer of the Bank. By way of example and not by way of
limitation, any of the following actions, if unreasonable or materially adverse
to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (i) a change in the principal workplace
of the Employee to a location more than 25 miles from the Bank's main office;
(ii) a reduction or adverse change in the salary or benefits which had
theretofore been provided to the Employee, other than as part of an overall
program applied uniformly and with equitable effect to all
6
<PAGE>
members of senior management of the Bank or Holding Company; or (iii) a change
in Employee's title.
Any payments made to the Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. (S) 1828(k)
and any regulations promulgated thereunder.
The term "change in control" is defined solely as any acquisition of
control of the Bank or the Holding Company (other than pursuant to the
Conversion or by a trustee or other fiduciary holding securities under an
employee benefit plan of the Bank or Holding Company), as defined in 12 C.F.R.
(S) 574.4, or any successor regulation, which would require the filing of an
application for acquisition of control or notice of change in control as set
forth in 12 C.F.R. (S) 574.3, or any successor regulation.
10. Successors and Assigns. The terms, provisions, covenants, and
----------------------
conditions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that the Employee may not sell, assign, pledge, hypothecate or
otherwise transfer this Agreement or any part thereof without the prior written
consent of the Bank, which consent may be withheld by the Bank for any reason it
deems appropriate. "Successors and assigns" shall mean, in the case of the
Bank, any successor pursuant to a merger, consolidation or sale or transfer of
all or substantially all of the assets of the Bank.
11. Indemnification. The Bank hereby agrees that the Bank shall indemnify
---------------
the Employee to the fullest extent permitted by Section 545.121 of the Rules and
Regulations for Federal Associations, as such section may be amended.
12. Disclosure of Information. Employee recognizes that as an executive
-------------------------
of the Bank, Employee occupies a position of trust with respect to much business
information of a secret or confidential nature which is the property of the Bank
and which will be imparted to Employee from time to time in the course of
Employee's duties. Employee therefore agrees that Employee shall not at any
time, whether in the course of his employment or thereafter, use or disclose
directly or indirectly to any person outside the Bank any of such information,
except as required in the ordinary course of Employee's duties under this
Agreement.
13. Arbitration. The parties hereby agree that any controversy or dispute
-----------
arising out of or relating to this Agreement shall be resolved pursuant to this
Section 13.
a. Agreement to Negotiate. Prior to submitting any controversy, dispute
----------------------
or claim arising out of, or relating to,
7
<PAGE>
this Agreement to arbitration, the parties hereto agree to observe the following
procedures:
(1) The party desiring to submit any such controversy, dispute or claim to
arbitration (the "claimant") first shall give written notice thereof to the
other party (the "recipient") setting forth in detail the pertinent facts and
circumstances relating to such controversy, dispute or claim;
(2) The recipient shall have a period of fifteen (15) days in which to
consider the controversy, dispute or claim which is the subject of the notice
and to furnish in writing to the claimant a written statement of the recipient's
position;
(3) Within seven days of claimant's receipt of recipient's written
statement, the parties shall meet in an effort to resolve amicably any
differences which may exist and, failing such resolution, either or both of the
parties shall have the right to submit the matter to arbitration.
b. Procedure for Arbitration.
-------------------------
(1) The parties hereby agree that any controversy, dispute or claim arising
out of, or relating to, this Agreement, or breach of this Agreement, including
disputes concerning termination of this Agreement, shall be settled by
arbitration in San Mateo, California. This agreement to arbitrate shall be
specifically enforceable. Judgment upon any award rendered by an arbitrator may
be entered in any court having jurisdiction.
(2) Any demand for arbitration must be served on the other party within
forty-five (45) days of the act or omission giving rise to the controversy,
dispute or claim.
(3) There shall be one impartial arbitrator chosen by the Bank from a list
procured from the California Mediation and Conciliation Service.
(4) The arbitrator shall not extend, modify or suspend any of the terms of
this Agreement.
(5) The decision of the Arbitrator within the scope of the submission shall
be final and binding on all parties, and any right to judicial action on any
matter subject to arbitration hereunder is hereby waived (unless otherwise
provided by applicable law), except suit to enforce this arbitration award.
(6) Employee agrees that such arbitration shall be the exclusive forum for
any controversy, dispute or claim arising out of or relating to this Agreement,
or breach or termination of this Agreement. Employee further expressly agrees
8
<PAGE>
that in arbitration his exclusive remedy shall be a money award not to exceed
the amount of wages he would have earned under this Agreement but for the
alleged violation and the Employee shall not be entitled to any other remedy, at
law or in equity, including but not limited to reinstatement, other money
damages, punitive damages and/or injunctive relief.
(7) Each party shall pay such party's own attorney or other representative,
and the expenses of such party's witnesses and all other expenses connected with
his case. Other costs of the arbitration, including the cost of any record or
transcript of the arbitration, administrative fees, arbitrator's fees, and all
other fees and costs, shall be borne equally by the parties.
14. General Provisions.
------------------
c. Notices. Any notice, request, demand or other communication required
-------
or permitted hereunder shall be deemed to be properly given when personally
served in writing and when deposited in the United States mail, registered or
certified, postage prepaid, addressed to the party at the last address supplied
to the sending party by the addressed party.
d. Waiver. The waiver by any party of a breach of any provision of this
------
Agreement by the other shall not operate or be construed as a waiver of any
subsequent breach of the same provision or any other provision of this
Agreement.
e. Entire Agreement. Except as provided herein, this Agreement contains
----------------
the entire agreement of the parties. It supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Employee by the Bank. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements, oral
or otherwise, have been made by any party, or anyone acting on behalf of any
party, which are not embodied herein, and that no other agreement, statement or
promise not contained in this Agreement shall be valid and binding. The Offer
and Acceptance Letter ("Offer") of October 18, 1995, shall be attached to this
Agreement and incorporated by this reference. If any conflict arises between the
Offer and this Agreement, the Offer shall control.
f. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
g. Paragraph Headings. The paragraph headings used in this Agreement are
------------------
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
9
<PAGE>
h. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
i. Governing Law. Except where federal law governs, this Agreement is to
-------------
be governed by and construed under the internal substantive laws of the State of
California (and not under conflict of law principles) as such laws apply to
contracts made and to be performed entirely in the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
BAY VIEW FEDERAL BANK,
A Federal Savings Bank
/s/ Edward H. Sondker
By: ------------------------------
Name: Edward H. Sondker
Title: President and Chief Executive
Officer
THE EMPLOYEE
/s/ David A. Heaberlin
---------------------------------
David A. Heaberlin
10
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this 10th
day of April, 1995 by and between Bay View Federal Bank (the "Bank"), a Federal
Savings Bank, and John N. Buckley (the "Employee").
R E C I T A L S:
A. The parties desire to enter into this Agreement setting forth the terms
and conditions of the employment relationship between the Bank and the Employee.
B. The Board of Directors of the Bank (or "Board") believes it is in the
best interests of the Bank to enter into this Agreement with the Employee in
order to assure continuity of management of the Bank, and has approved and
authorized the execution by the Bank of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises herein contained, the parties hereto agree as follows:
1. Executive's Title, Duty, Authority and Time Commitment.
------------------------------------------------------
a. Title. The Employee's position and title with the Bank shall be that
-----
of Senior Vice President and Credit Administrator.
b. Duties and Authority. The Employee's duties and authority shall be
--------------------
consistent with those of a Senior Vice President and Credit Administrator. The
Employee shall render such administrative and management services to the Bank as
are customarily performed by persons employed in the savings bank industry in a
similar executive capacity. In addition, the Employee shall perform such other
duties as the Board, or its authorized representative, may from time to time
require. All duties performed by the Employee hereunder shall be in accordance
with such reasonable standards as are established from time to time by the
Board, or its authorized representative, and performance evaluations shall be
conducted by or under the direction of the Board and reviewed with the Employee
annually.
c. Time Commitment. During the "Term of this Agreement", as defined in
---------------
Section 5 of this Agreement, unless the Employee has obtained the prior written
consent of the Board, or its authorized representative,
(1) The Employee shall render his or her full productive time and services
to the Bank, keeping normal business
<PAGE>
hours, but is authorized to engage in such savings and loan trade association
and related activities during normal business hours which, in his or her
judgment, with the concurrence of his or her immediate supervisor, are in the
business interests of the Bank; and
(2) The Employee shall not render personal services to any other person or
entity for compensation, either as an employee, consultant, director or officer,
but shall remain free to engage in community, charitable, political and personal
pursuits which do not interfere with his performance under this Agreement.
2. Compensation. The Bank agrees to pay the Employee during the Term of
------------
this Agreement a salary as follows: salary of $112,152.00 per annum, with the
salary to be reviewed on July 1, 1995, and annually on each July 1st thereafter
during the Term of this Agreement. Salary increases are not guaranteed or
automatic. The salary provided for in this Agreement shall be payable semi-
monthly in accordance with the practices of the Bank.
3. Discretionary Bonuses. The Employee may be entitled to participation
---------------------
in discretionary bonuses and incentive payments to the extent authorized and
declared by the Board or its authorized representative.
4. Additional Benefits.
-------------------
a. Participation in Employee Benefit Plans. The Employee shall be
---------------------------------------
entitled to participate in any plan of the Bank, as such plan may from time to
time provide, relating to stock options, stock purchases, pension, thrift,
deferred profit-sharing, group insurance coverage, education or other retirement
or supplemental employee benefits that the Bank may adopt for the benefit of its
employees.
b. Fringe Benefits. The Employee shall be entitled to participate in any
---------------
other program which may be or become applicable to the Bank's executive
employees, as such program may from time to time provide including a reasonable
expense account, the payment of reasonable expenses for attending educational
seminars and annual and periodic meetings of trade associations, and other
benefits which are commensurate with the responsibilities and functions to be
performed by the Employee under this Agreement.
5. Term.
----
a. Initial Term and Extension. The initial term of employment under this
--------------------------
Agreement shall be from April 10, 1995 to December 31, 1995. As of January 1,
1996 and as of each January 1st thereafter, the Term of this Agreement may be
extended by the Board of Directors, or its authorized representative, for one
additional year beyond the then-current expiration date. Reference
2
<PAGE>
herein to the "Term of this Agreement" shall include the term as so extended. If
the Board of Directors, or its authorized representative, fails at any time to
extend the Term of this Agreement, then this Agreement shall automatically
expire at the then-current expiration date.
b. Consequences of Non-Extension. If this Agreement is not extended as
-----------------------------
provided in Section 5a above, on the expiration of the Term of this Agreement,
the Employee shall be deemed to be employed by the Bank for no specific term and
the Employee's rights as an employee of the Bank shall be no less than those
provided by the laws of the State of California and the laws of the United
States provided, however, that such post expiration employment may be terminated
at any time by the Employee or by the Board, or its authorized representative,
with or without cause by delivery to the Employee of a written notice (the
"Termination Notice") of such termination.
6. Vacations. At such reasonable times as the Board, or its authorized
---------
representative, shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself or herself voluntarily from the
performance of his or her employment under this Agreement, all such voluntary
absences to count as vacation time, provided that:
a. Basic Vacation. The Employee shall be entitled to an annual paid
--------------
vacation of 20 days per year.
b. Timing of Vacation. Vacations shall be scheduled in a reasonable
------------------
manner by the Employee and subject to the Bank's needs, except that the Employee
shall take not less than ten (10) days vacation consecutively in each calendar
year.
7. Termination of Employment.
-------------------------
a. Termination by Bank. The Employee's employment under this Agreement
-------------------
may be terminated, with or without cause, at any time by the Board, or its
authorized representative, by delivery to the Employee of a written notice (the
"Termination Notice") of such termination. The Termination Notice shall state
the effective date of such termination and whether such termination is for
"cause," as defined in Section 7a(1), or without cause pursuant to Section
7a(2). Unless the Termination Notice states that the termination is for cause
and states with reasonable particularity the cause, the termination shall be
deemed to be without cause pursuant to Section 7a(2). In the event an
arbitrator appointed pursuant to Section 14 of this Agreement determines that a
purported termination for cause was in fact without proper cause, the
termination shall nonetheless be effective, but the Employee shall, be entitled
to the severance payment pursuant to Section 7a(2) hereof.
3
<PAGE>
(1) Termination by Bank for Cause. The Employee's employment under this
-----------------------------
Agreement may be terminated at any time by the Board, or its authorized
representative, for "cause," which shall include, but not be limited to, the
items specified in 12 C.F.R. (S) 563.39 and the following:
(a) The commission by the Employee of an act of misconduct (including, but
not limited to, the violation of any law, rule, regulation or cease and desist
order applicable to the Employee or the Bank), or an act which constitutes a
conflict of interest with the Bank or its stockholders, or a breach of a
fiduciary duty owed by the Employee;
(b) The Employee's breach of this Agreement, dishonesty, incompetence,
willful misconduct, habitual absence from work, failure to perform duties, or
negligence or incompetence in the performance of stated duties;
(c) The Employee's becoming physically or mentally incapable of performing
the essential functions of his employment position; or
(d) Any criminal conviction of the Employee (other than for a minor traffic
violation or similar offense), whether or not in the line of duty.
In the event of termination for cause under this Section 7a(1), the Employee
shall have no right to receive compensation or other benefits under this
Agreement for any period after such termination.
(2) Termination by Bank Without Cause. The Employee's employment under
---------------------------------
this Agreement may be terminated at any time by the Board, or its authorized
representative, without cause; provided, however, that unless the termination of
this Agreement is for "cause," as set forth in Section 7a(1), or pursuant to
Sections 7b, 7c, 7d, or 9, then, upon such termination, in addition to any
benefits that had accrued to the date of termination but in lieu of any rights
or benefits that would have accrued following such termination, the Employee
shall be entitled, upon execution of a release acceptable to the Board, or its
authorized representative, to a lump sum severance payment pursuant to the
following schedule:
<TABLE>
<CAPTION>
Length of Service Severance Pay
----------------- -------------
<S> <C>
(from most recent hire date)
Up to six months 0 months salary
Six months to two years 6 months salary
More than two years 12 months salary
</TABLE>
4
<PAGE>
b. Termination by the Employee. This Agreement may be terminated by the
---------------------------
Employee at any time upon 90 days written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board.
c. Termination by Death. In the event of the death of the Employee during
--------------------
the Term of this Agreement, the Employee's estate, or such person as the
Employee may have previously designated in writing for group insurance purposes,
shall be entitled to receive the salary due the Employee through the last day of
the calendar month in which his death shall have occurred.
d. Suspension or Termination by Regulatory Action.
----------------------------------------------
(1) Suspension. If the Employee is suspended from office and/or
----------
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C.(S)1818(e)(3); (g)(1), the Bank's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Bank may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of the obligations which were suspended, but
vested rights of the parties shall not be affected.
(2) Removal. If the Employee is removed from office and/or permanently
-------
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8 (e)(4) or (g)(1) of the FDIA, 12 U.S.C.(S)1818(e)(4);
(g)(1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(3) Termination on Default. If the Bank becomes in default (as defined in
----------------------
Section 3(x)(1) of the FDIA, 12 U.S.C.(S)1813(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(4) Supervisory Assistance or Merger. All obligations under this Agreement
--------------------------------
shall be terminated, except to the extent determined that continuation of the
Agreement is necessary for the continued operation of the Bank: (i) by the
Director of the Office of Thrift Supervision ("OTS") or his or her designee at
the time the Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the FDIA, 12
U.S.C.(S)1823(c); or (ii) by the Director of the OTS or his or her designee at
the time the Director of the OTS or his or her designee approves a supervisory
merger to resolve
5
<PAGE>
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
action.
8. Disability. If the Employee shall become disabled or incapacitated to
----------
the extent that in the judgment of the Board, or its authorized representative,
he or she is unable to perform the essential functions of his or her employment
position, he or she shall be entitled to receive disability benefits of the type
provided for other executive employees of the Bank. In such event, any rights
of the Employee to receive the salary provided in Section 2 of this Agreement
shall be suspended until the Employee is able to fully perform his or her
duties.
9. Change in Control. If during the Term of this Agreement, there is a
-----------------
"change in control," as hereinafter defined, of the Bank or of any company
holding more than 50 percent of the outstanding Common Stock of the Bank
("Holding Company"), the Employee shall be entitled upon execution of a release
acceptable to the Board or its authorized representative to a severance payment
in the event the Employee's employment is terminated, other than for "cause" as
set forth in Section 7a(1) or pursuant to Sections 7b (except as provided
below), 7c, or 7d, within twenty-four (24) months after the change in control.
The amount of this payment shall equal One Hundred Thirty percent (130%) of the
Employee's annual salary as of the date of termination and shall be in lieu of
any severance payment that would be due Employee under Section 7a(2); provided,
however, that in no event shall the amount of such payment combined with other
payments to be paid upon Employee's termination or upon said change in control,
exceed two hundred ninety-nine percent (299%) of the employee's "base amount" of
compensation, as discussed in Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), or such other amount as would from time to time
constitute an excess parachute payment nondeductible or taxable respectively
under Code Sections 280G or 4999 as they may be amended. Except as provided
above, such termination or severance payment shall be in addition to all other
amounts payable to the Employee pursuant to this Agreement, provided, however,
that the amount of termination or severance payment described in the preceding
sentence shall be reduced to the extent that such additional amounts are
included in the computation of the payment described in Section 280G(b)(2) of
the Code. This termination or severance payment shall also be made in the case
of a termination of employment by the Employee pursuant to Section 7b of this
Agreement within twenty-four (24) months after a change in control because
during such twenty-four (24) month period there has been a material diminution
of or interference with the Employee's duties, responsibilities and benefits as
a Senior Vice President and Credit Administrator of the Bank. By way of example
and not by way of limitation, any of the following actions, if unreasonable or
materially adverse to the Employee, shall constitute such
6
<PAGE>
diminution or interference unless consented to in writing by the Employee: (i) a
change in the principal workplace of the Employee to a location more than 25
miles from the Bank's main office; or (ii) a reduction or adverse change in the
salary, or benefits which had theretofore been provided to the Employee, other
than as part of an overall program applied uniformly and with equitable effect
to all members of senior management of the Bank or Holding Company.
Any payments made to the Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. (S) 1828(k)
and any regulations promulgated thereunder.
The term "change in control" is defined solely as any acquisition of
control of the Bank or the Holding Company (other than pursuant to the
Conversion or by a trustee or other fiduciary holding securities under an
employee benefit plan of the Bank or Holding Company), as defined in 12 C.F.R.
(S) 574.4, or any successor regulation, which would require the filing of an
application for acquisition of control or notice of change in control as set
forth in 12 C.F.R. (S) 574.3, or any successor regulation.
10. Successors and Assigns. The terms, provisions, covenants, and
----------------------
conditions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that the Employee may not sell, assign, pledge, hypothecate or
otherwise transfer this Agreement or any part thereof without the prior written
consent of the bank, which consent may be withheld by the Bank for any reason it
deems appropriate. "Successors and assigns" shall mean, in the case of the
Bank, any successor pursuant to a merger, consolidation or sale or transfer of
all or substantially all of the assets of the Bank.
11. Indemnification. The Bank hereby agrees that the Bank shall indemnify
---------------
the Employee to the fullest extent permitted by Section 545.121 of the Rules and
Regulations for Federal Associations, as such section may be amended.
12. Disclosure of Information. Employee recognizes that as an executive
-------------------------
of the Bank, Employee occupies a position of trust with respect to much business
information of a secret or confidential nature which is the property of the Bank
and which will be imparted to Employee from time to time in the course of
Employee's duties. Employee therefore agrees that Employee shall not at any
time, whether in the course of his or her employment or thereafter, use or
disclose directly or indirectly to any person outside the Bank any of such
information, except as required in the ordinary course of Employee's duties
under this Agreement.
7
<PAGE>
13. Arbitration. The parties hereby agree that any controversy or dispute
-----------
arising out of or relating to this Agreement shall be resolved pursuant to this
Section 13.
a. Agreement to Negotiate. Prior to submitting any controversy, dispute
----------------------
or claim arising out of, or relating to, this Agreement to arbitration, the
parties hereto agree to observe the following procedures:
(1) The party desiring to submit any such controversy, dispute or claim to
arbitration (the "claimant") first shall give written notice thereof to the
other party (the "recipient") setting forth in detail the pertinent facts and
circumstances relating to such controversy, dispute or claim;
(2) The recipient shall have a period of fifteen (15) days in which to
consider the controversy, dispute or claim which is the subject of the notice
and to furnish in writing to the claimant a written statement of the recipient's
position;
(3) Within seven days of claimant's receipt of recipient's written
statement, the parties shall meet in an effort to resolve amicably any
differences which may exist and, failing such resolution, either or both of the
parties shall have the right to submit the matter to arbitration.
b. Procedure for Arbitration.
-------------------------
(1) The parties hereby agree that any controversy, dispute or claim arising
out of, or relating to, this Agreement, or breach of this Agreement, including
disputes concerning termination of this Agreement, shall be settled by
arbitration in San Mateo, California. This agreement to arbitrate shall be
specifically enforceable. Judgment upon any award rendered by an arbitrator may
be entered in any court having jurisdiction.
(2) Any demand for arbitration must be served on the other party within
forty-five (45) days of the act or omission giving rise to the controversy,
dispute or claim.
(3) There shall be one impartial arbitrator chosen by the Bank from a list
procured from the California Mediation and Conciliation Service.
(4) The arbitrator shall not extend, modify or suspend any of the terms of
this Agreement.
(5) The decision of the Arbitrator within the scope of the submission shall
be final and binding on all parties, and any right to judicial action on any
matter subject to
8
<PAGE>
arbitration hereunder is hereby waived (unless otherwise provided by applicable
law), except suit to enforce this arbitration award.
(6) Employee agrees that such arbitration shall be the exclusive forum for
any controversy, dispute or claim arising out of or relating to this Agreement,
or breach or termination of this Agreement. Employee further expressly agrees
that in arbitration his or her exclusive remedy shall be a money award not to
exceed the amount of wages he or she would have earned under this Agreement but
for the alleged violation and the Employee shall not be entitled to any other
remedy, at law or in equity, including but not limited to reinstatement, other
money damages, punitive damages and/or injunctive relief.
(7) Each party shall pay such party's own attorney or other representative,
and the expenses of such party's witnesses and all other expenses connected with
his case. Other costs of the arbitration, including the cost of any record or
transcript of the arbitration, administrative fees, arbitrator's fees, and all
other fees and costs, shall be borne equally by the parties.
14. General Provisions.
------------------
a. Notices. Any notice, request, demand or other communication required
-------
or permitted hereunder shall be deemed to be properly given when personally
served in writing and when deposited in the United States mail, registered or
certified, postage prepaid, addressed to the party at the last address supplied
to the sending party by the addressed party.
b. Waiver. The waiver by any party of a breach of any provision of this
------
Agreement by the other shall not operate or be construed as a waiver of any
subsequent breach of the same provision or any other provision of this
Agreement.
c. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties. It supersedes any and all other agreements, either oral or in writing,
between the parties hereto with respect to the employment of the Employee by the
Bank. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement or promise not contained in this
Agreement shall be valid and binding.
d. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
9
<PAGE>
e. Paragraph Headings. The paragraph headings used in this Agreement are
------------------
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
f. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
g. Governing Law. Except where federal law governs, this Agreement is to
-------------
be governed by and construed under the internal substantive laws of the State of
California (and not under conflict of law principles) as such laws apply to
contracts made and to be performed entirely in the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
BAY VIEW FEDERAL BANK,
A Federal Savings Bank
/s/ James E. Tecca
By: -------------------------------------
Name: James E. Tecca
Title: Acting President and Chief
Executive Officer
THE EMPLOYEE
/s/ John N. Buckley
----------------------------------------
JOHN N. BUCKLEY
10
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this 1st
day of January, 1994 by and between Bay View Federal Bank (the "Bank"), a
Federal Savings Bank, and Cynthia Hart (the "Employee").
R E C I T A L S:
A. The parties desire to enter into this Agreement setting forth the terms
and conditions of the employment relationship between the Bank and the Employee.
B. The Board of Directors of the Bank (or "Board") believes it is in the
best interests of the Bank to enter into this Agreement with the Employee in
order to assure continuity of management of the Bank, and has approved and
authorized the execution by the Bank of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises herein contained, the parties hereto agree as follows:
1. Executive's Title, Duty, Authority and Time Commitment.
------------------------------------------------------
a. Title. The Employee's position and title with the Bank shall be that
-----
of Senior Vice President, Asset Management Division Manager.
b. Duties and Authority. The Employee's duties and authority shall be
--------------------
consistent with those of a Senior Vice President, Asset Management Division
Manager. The Employee shall render such administrative and management services
to the Bank as are customarily performed by persons employed in the savings bank
industry in a similar executive capacity. In addition, the Employee shall
perform such other duties as the Board, or its authorized representative, may
from time to time require. All duties performed by the Employee hereunder shall
be in accordance with such reasonable standards as are established from time to
time by the Board, or its authorized representative, and performance evaluations
shall be conducted by or under the direction of the Board and reviewed with the
Employee annually.
c. Time Commitment. During the "Term of this Agreement", as defined in
---------------
Section 5 of this Agreement, unless the Employee has obtained the prior written
consent of the Board, or its authorized representative,
(1) The Employee shall render his or her full productive time and services
to the Bank, keeping normal business hours, but is authorized to engage in such
savings and loan trade association and related activities during normal business
<PAGE>
hours which, in his or her judgment, with the concurrence of his or her
immediate supervisor, are in the business interests of the Bank; and
(2) The Employee shall not render personal services to any other person or
entity for compensation, either as an employee, consultant, director or officer,
but shall remain free to engage in community, charitable, political and personal
pursuits which do not interfere with his performance under this Agreement.
2. Compensation. The Bank agrees to pay the Employee during the Term of
------------
this Agreement a salary as follows: salary of $105,288.00 per annum, with the
salary to be reviewed on July 1, 1994, and annually on each July 1st thereafter
during the Term of this Agreement. Salary increases are not guaranteed or
automatic. The salary provided for in this Agreement shall be payable semi-
monthly in accordance with the practices of the Bank.
3. Discretionary Bonuses. The Employee may be entitled to participation
---------------------
in discretionary bonuses and incentive payments to the extent authorized and
declared by the Board or its authorized representative.
4. Additional Benefits.
-------------------
a. Participation in Employee Benefit Plans. The Employee shall be
---------------------------------------
entitled to participate in any plan of the Bank, as such plan may from time to
time provide, relating to stock options, stock purchases, pension, thrift,
deferred profit-sharing, group insurance coverage, education or other retirement
or supplemental employee benefits that the Bank may adopt for the benefit of its
employees.
b. Fringe Benefits. The Employee shall be entitled to participate in any
---------------
other program which may be or become applicable to the Bank's executive
employees, as such program may from time to time provide including a reasonable
expense account, the payment of reasonable expenses for attending educational
seminars and annual and periodic meetings of trade associations, and other
benefits which are commensurate with the responsibilities and functions to be
performed by the Employee under this Agreement.
5. Term.
----
a. Initial Term and Automatic Extension. The initial term of employment
------------------------------------
under this Agreement shall be for a period of one year commencing on January 1,
1994 (the "Commencement Date"). On the first anniversary of the Commencement
Date and on each anniversary date thereafter, the Term of this Agreement may be
extended by the Board of Directors, or its authorized
2
<PAGE>
representative, for one additional year beyond the then-current expiration date.
Reference herein to the "Term of this Agreement" shall include the term as so
extended. If the Board of Directors, or its authorized representative, fails at
any time to extend the Term of this Agreement, then this Agreement shall
automatically expire at the then-current expiration date.
b. Consequences of Non-Extension. If this Agreement is not extended as
-----------------------------
provided in Section 5a above, on the expiration of the Term of this Agreement,
the Employee shall be deemed to be employed by the Bank for no specific term and
the Employee's rights as an employee of the Bank shall be no less than those
provided by the laws of the State of California and the laws of the United
States provided, however, that such post expiration employment may be terminated
at any time by the Employee or by the Board, or its authorized representative,
with or without cause by delivery to the Employee of a written notice (the
"Termination Notice") of such termination.
6. Vacations. At such reasonable times as the Board, or its authorized
---------
representative, shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself or herself voluntarily from the
performance of his or her employment under this Agreement, all such voluntary
absences to count as vacation time, provided that:
a. Basic Vacation. The Employee shall be entitled to an annual paid
--------------
vacation of 20 days per year.
b. Timing of Vacation. Vacations shall be scheduled in a reasonable
------------------
manner by the Employee and subject to the Bank's needs, except that the Employee
shall take not less than ten (10) days vacation consecutively in each calendar
year.
7. Termination of Employment.
-------------------------
a. Termination by Bank. The Employee's employment under this Agreement
-------------------
may be terminated, with or without cause, at any time by the Board, or its
authorized representative, by delivery to the Employee of a written notice (the
"Termination Notice") of such termination. The Termination Notice shall state
the effective date of such termination and whether such termination is for
"cause," as defined in Section 7a(1), or without cause pursuant to Section
7a(2). Unless the Termination Notice states that the termination is for cause
and states with reasonable particularity the cause, the termination shall be
deemed to be without cause pursuant to Section 7a(2). In the event an
arbitrator appointed pursuant to Section 14 of this Agreement determines that a
purported termination for cause was in fact without proper cause, the
termination shall nonetheless be effective, but the Employee shall, be entitled
to the severance payment pursuant to Section 7a(2) hereof.
3
<PAGE>
(1) Termination by Bank for Cause. The Employee's employment under this
-----------------------------
Agreement may be terminated at any time by the Board, or its authorized
representative, for "cause," which shall include, but not be limited to, the
items specified in 12 C.F.R. (S) 563.39 and the following:
(a) The commission by the Employee of an act of misconduct (including, but
not limited to, the violation of any law, rule, regulation or cease and desist
order applicable to the Employee or the Bank), or an act which constitutes a
conflict of interest with the Bank or its stockholders, or a breach of a
fiduciary duty owed by the Employee;
(b) The Employee's breach of this Agreement, dishonesty, incompetence,
willful misconduct, habitual absence from work, failure to perform duties, or
negligence or incompetence in the performance of stated duties;
(c) The Employee's becoming physically or mentally incapable of performing
the essential functions of his employment position; or
(d) Any criminal conviction of the Employee (other than for a minor traffic
violation or similar offense), whether or not in the line of duty.
In the event of termination for cause under this Section 7a(1), the Employee
shall have no right to receive compensation or other benefits under this
Agreement for any period after such termination.
(2) Termination by Bank Without Cause. The Employee's employment under
---------------------------------
this Agreement may be terminated at any time by the Board, or its authorized
representative, without cause; provided, however, that unless the termination of
this Agreement is for "cause," as set forth in Section 7a(1), or pursuant to
Sections 7b, 7c, 7d, or 9, then, upon such termination, in addition to any
benefits that had accrued to the date of termination but in lieu of any rights
or benefits that would have accrued following such termination, the Employee
shall be entitled, upon execution of a release acceptable to the Board, or its
authorized representative, and in a form substantially identical to Exhibit "A",
to a lump sum severance payment pursuant to the following schedule:
<TABLE>
<CAPTION>
Length of Service Severance Pay
----------------- -------------
<S> <C>
(from most recent hire date)
Up to six months 0 months salary
Six months to two years 6 months salary
More than two years 12 months salary
</TABLE>
4
<PAGE>
b. Termination by the Employee. This Agreement may be terminated by the
---------------------------
Employee at any time upon 90 days written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board.
c. Termination by Death. In the event of the death of the Employee during
--------------------
the Term of this Agreement, the Employee's estate, or such person as the
Employee may have previously designated in writing for group insurance purposes,
shall be entitled to receive the salary due the Employee through the last day of
the calendar month in which his death shall have occurred.
d. Suspension or Termination by Regulatory Action.
----------------------------------------------
(1) Suspension. If the Employee is suspended from office and/or
----------
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C.(S)1818(e)(3); (g)(1), the Bank's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Bank may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of the obligations which were suspended, but
vested rights of the parties shall not be affected.
(2) Removal. If the Employee is removed from office and/or permanently
-------
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8 (e)(4) or (g)(1) of the FDIA, 12 U.S.C.(S)1818(e)(4);
(g)(1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(3) Termination on Default. If the Bank becomes in default (as defined in
----------------------
Section 3(x)(1) of the FDIA, 12 U.S.C.(S)1813(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(4) Supervisory Assistance or Merger. All obligations under this Agreement
--------------------------------
shall be terminated, except to the extent determined that continuation of the
Agreement is necessary for the continued operation of the Bank: (i) by the
Director of the Office of Thrift Supervision ("OTS") or his or her designee at
the time the Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the FDIA, 12
U.S.C.(S)1823(c); or (ii) by the Director of the OTS or his or her designee at
the time the Director of the OTS or his or her designee approves a supervisory
merger to resolve
5
<PAGE>
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
action.
8. Disability. If the Employee shall become disabled or incapacitated to
----------
the extent that in the judgment of the Board, or its authorized representative,
he or she is unable to perform the essential functions of his or her employment
position, he or she shall be entitled to receive disability benefits of the type
provided for other executive employees of the Bank. In such event, any rights
of the Employee to receive the salary provided in Section 2 of this Agreement
shall be suspended until the Employee is able to fully perform his or her
duties.
9. Change in Control. If during the Term of this Agreement, there is a
-----------------
"change in control," as hereinafter defined, of the Bank or of any company
holding more than 50 percent of the outstanding Common Stock of the Bank
("Holding Company"), the Employee shall be entitled upon execution of a release
acceptable to the Board or its authorized representative to a severance payment
in the event the Employee's employment is terminated, other than for "cause" as
set forth in Section 7a(1) or pursuant to Sections 7b (except as provided
below), 7c, or 7d, within twenty-four (24) months after the change in control.
The amount of this payment shall equal One Hundred Thirty percent (130%) of the
Employee's annual salary as of the date of termination and shall be in lieu of
any severance payment that would be due Employee under Section 7a(2); provided,
however, that in no event shall the amount of such payment combined with other
payments to be paid upon Employee's termination or upon said change in control,
exceed two hundred ninety-nine percent (299%) of the employee's "base amount" of
compensation, as discussed in Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), or such other amount as would from time to time
constitute an excess parachute payment nondeductible or taxable respectively
under Code Sections 280G or 4999 as they may be amended. Except as provided
above, such termination or severance payment shall be in addition to all other
amounts payable to the Employee pursuant to this Agreement, provided, however,
that the amount of termination or severance payment described in the preceding
sentence shall be reduced to the extent that such additional amounts are
included in the computation of the payment described in Section 280G(b)(2) of
the Code. This termination or severance payment shall also be made in the case
of a termination of employment by the Employee pursuant to Section 7b of this
Agreement within twenty-four (24) months after a change in control because
during such twenty-four (24) month period there has been a material diminution
of or interference with the Employee's duties, responsibilities and benefits as
a Senior Vice President, Asset Management Division Manager of the Bank. By way
of example and not by way of limitation, any of the following actions, if
unreasonable or materially adverse to the Employee, shall
6
<PAGE>
constitute such diminution or interference unless consented to in writing by the
Employee: (i) a change in the principal workplace of the Employee to a location
more than 25 miles from the Bank's main office; or (ii) a reduction or adverse
change in the salary, or benefits which had theretofore been provided to the
Employee, other than as part of an overall program applied uniformly and with
equitable effect to all members of senior management of the Bank or Holding
Company.
Any payments made to the Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. (S) 1828(k)
and any regulations promulgated thereunder.
The term "change in control" is defined solely as any acquisition of
control of the Bank or the Holding Company (other than pursuant to the
Conversion or by a trustee or other fiduciary holding securities under an
employee benefit plan of the Bank or Holding Company), as defined in 12 C.F.R.
(S) 574.4, or any successor regulation, which would require the filing of an
application for acquisition of control or notice of change in control as set
forth in 12 C.F.R. (S) 574.3, or any successor regulation.
10. Successors and Assigns. The terms, provisions, covenants, and
----------------------
conditions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that the Employee may not sell, assign, pledge, hypothecate or
otherwise transfer this Agreement or any part thereof without the prior written
consent of the bank, which consent may be withheld by the Bank for any reason it
deems appropriate. "Successors and assigns" shall mean, in the case of the
Bank, any successor pursuant to a merger, consolidation or sale or transfer of
all or substantially all of the assets of the Bank.
11. Indemnification. The Bank hereby agrees that the Bank shall indemnify
---------------
the Employee to the fullest extent permitted by Section 545.121 of the Rules and
Regulations for Federal Associations, as such section may be amended.
12. Disclosure of Information. Employee recognizes that as an executive
-------------------------
of the Bank, Employee occupies a position of trust with respect to much business
information of a secret or confidential nature which is the property of the Bank
and which will be imparted to Employee from time to time in the course of
Employee's duties. Employee therefore agrees that Employee shall not at any
time, whether in the course of his or her employment or thereafter, use or
disclose directly or indirectly to any person outside the Bank any of such
information, except as required in the ordinary course of Employee's duties
under this Agreement.
7
<PAGE>
13. Arbitration. The parties hereby agree that any controversy or dispute
-----------
arising out of or relating to this Agreement shall be resolved pursuant to this
Section 13.
a. Agreement to Negotiate. Prior to submitting any controversy, dispute
----------------------
or claim arising out of, or relating to, this Agreement to arbitration, the
parties hereto agree to observe the following procedures:
(1) The party desiring to submit any such controversy, dispute or claim to
arbitration (the "claimant") first shall give written notice thereof to the
other party (the "recipient") setting forth in detail the pertinent facts and
circumstances relating to such controversy, dispute or claim;
(2) The recipient shall have a period of fifteen (15) days in which to
consider the controversy, dispute or claim which is the subject of the notice
and to furnish in writing to the claimant a written statement of the recipient's
position;
(3) Within seven days of claimant's receipt of recipient's written
statement, the parties shall meet in an effort to resolve amicably any
differences which may exist and, failing such resolution, either or both of the
parties shall have the right to submit the matter to arbitration.
b. Procedure for Arbitration.
-------------------------
(1) The parties hereby agree that any controversy, dispute or claim arising
out of, or relating to, this Agreement, or breach of this Agreement, including
disputes concerning termination of this Agreement, shall be settled by
arbitration in San Mateo, California. This agreement to arbitrate shall be
specifically enforceable. Judgment upon any award rendered by an arbitrator may
be entered in any court having jurisdiction.
(2) Any demand for arbitration must be served on the other party within
forty-five (45) days of the act or omission giving rise to the controversy,
dispute or claim.
(3) There shall be one impartial arbitrator chosen by the Bank from a list
procured from the California Mediation and Conciliation Service.
(4) The arbitrator shall not extend, modify or suspend any of the terms of
this Agreement.
8
<PAGE>
(5) The decision of the Arbitrator within the scope of the submission shall
be final and binding on all parties, and any right to judicial action on any
matter subject to arbitration hereunder is hereby waived (unless otherwise
provided by applicable law), except suit to enforce this arbitration award.
(6) Employee agrees that such arbitration shall be the exclusive forum for
any controversy, dispute or claim arising out of or relating to this Agreement,
or breach or termination of this Agreement. Employee further expressly agrees
that in arbitration his or her exclusive remedy shall be a money award not to
exceed the amount of wages he or she would have earned under this Agreement but
for the alleged violation and the Employee shall not be entitled to any other
remedy, at law or in equity, including but not limited to reinstatement, other
money damages, punitive damages and/or injunctive relief.
(7) Each party shall pay such party's own attorney or other representative,
and the expenses of such party's witnesses and all other expenses connected with
his case. Other costs of the arbitration, including the cost of any record or
transcript of the arbitration, administrative fees, arbitrator's fees, and all
other fees and costs, shall be borne equally by the parties.
14. General Provisions.
------------------
a. Notices. Any notice, request, demand or other communication required
-------
or permitted hereunder shall be deemed to be properly given when personally
served in writing and when deposited in the United States mail, registered or
certified, postage prepaid, addressed to the party at the last address supplied
to the sending party by the addressed party.
b. Waiver. The waiver by any party of a breach of any provision of this
------
Agreement by the other shall not operate or be construed as a waiver of any
subsequent breach of the same provision or any other provision of this
Agreement.
c. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties. It supersedes any and all other agreements, either oral or in writing,
between the parties hereto with respect to the employment of the Employee by the
Bank. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement or promise not contained in this
Agreement shall be valid and binding.
d. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
9
<PAGE>
e. Paragraph Headings. The paragraph headings used in this Agreement are
------------------
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
f. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
g. Governing Law. Except where federal law governs, this Agreement is to
-------------
be governed by and construed under the internal substantive laws of the State of
California (and not under conflict of law principles) as such laws apply to
contracts made and to be performed entirely in the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
BAY VIEW FEDERAL BANK,
A Federal Savings Bank
/s/ John E. Brubaker
By: -----------------------------
Name: John E. Brubaker
Title: President and Chief Executive
Officer
THE EMPLOYEE
/s/ Cynthia Hart
---------------------------------
Cynthia Hart
10
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or Other
Percentage Jurisdiction of
of Incorporation
Parent Subsidiary Ownership of Subsidiary
<S> <C> <C> <C>
Bay View Capital Corporation Bay View Federal Bank, A Federal 100% Delaware
Savings Bank
Bay View Capital Corporation Regent Financial Corporation 100% California
Bay View Federal Bank MoneyCare, Inc. 100% California
Bay View Federal Bank Bay View Financial Corporation 100% California
Bay View Financial Corporation Bay View Auxiliary Corporation 100% California
Bay View Financial Corporation Bay Counties Insurance Agency, Inc. 100% California
Bay View Financial Corporation Carquinez Reserve, Inc. 100% California
</TABLE>
The financial statements of the Registrant are consolidated with those of its
subsidiaries
<PAGE>
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,
appearing in this Annual Report on Form 10-K 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
San Francisco, California
March 22, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 24,144
<INT-BEARING-DEPOSITS> 2,366
<FED-FUNDS-SOLD> 16,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 157,813
<INVESTMENTS-CARRYING> 621,528
<INVESTMENTS-MARKET> 615,290
<LOANS> 2,062,268
<ALLOWANCE> 30,014
<TOTAL-ASSETS> 3,004,496
<DEPOSITS> 1,819,840
<SHORT-TERM> 639,470
<LIABILITIES-OTHER> 35,214
<LONG-TERM> 301,995
0
0
<COMMON> 71
<OTHER-SE> 207,906
<TOTAL-LIABILITIES-AND-EQUITY> 3,004,496
<INTEREST-LOAN> 155,853
<INTEREST-INVEST> 60,610
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 216,463
<INTEREST-DEPOSIT> 93,398
<INTEREST-EXPENSE> 160,547
<INTEREST-INCOME-NET> 55,916
<LOAN-LOSSES> 4,284
<SECURITIES-GAINS> (2,194)
<EXPENSE-OTHER> 60,628
<INCOME-PRETAX> (2,854)
<INCOME-PRE-EXTRAORDINARY> (2,146)
<EXTRAORDINARY> (2,544)
<CHANGES> 0
<NET-INCOME> (4,690)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
<YIELD-ACTUAL> 1.86
<LOANS-NON> 10,755
<LOANS-PAST> 1,425
<LOANS-TROUBLED> 15,641
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 29,115
<CHARGE-OFFS> (4,879)
<RECOVERIES> 1,494
<ALLOWANCE-CLOSE> 30,014
<ALLOWANCE-DOMESTIC> 30,014
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
