<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to_____
Commission file number 0-17901
BAY VIEW CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3078031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2121 South El Camino Real, San Mateo, California 94403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 573-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, Par Value $.01 Outstanding at October 31, 1996
(Title of Class) 6,643,635 shares
1
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FORM 10-Q
INDEX
BAY VIEW CAPITAL CORPORATION
----------------------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page(s)
- ------- --------------------- -------
<S> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition.............. 3
Consolidated Statements of Operations....................... 4
Consolidated Statement of Stockholders' Equity.............. 5
Consolidated Statements of Cash Flows....................... 6
Notes to Consolidated Financial Statements.................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 12
PART II. OTHER INFORMATION
- -------- -----------------
Other Information.......................................... 36
Signatures................................................. 36
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE SEPTEMBER 30, DECEMBER 31,
AMOUNTS) 1996 1995
- -------------------------------------- -------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from depository $ 22,185 $ 24,144
institutions
Interest-bearing deposits and short-term 56,528 18,616
investments
---------- ----------
78,713 42,760
Loans held-for-sale 363,306 ---
Securities available-for-sale:
Mortgage-backed securities 112,769 149,778
Investment securities 1,015 8,035
Securities held-to-maturity:
Mortgage-backed securities 514,600 581,600
Investment securities 32,820 39,928
Loans receivable held for investment,
net 2,208,276 2,062,268
Investment in stock of the Federal Home
Loan Bank of San Francisco 45,058 39,450
Real estate owned 8,497 24,476
Premises and equipment 9,310 16,184
Core deposit premiums 4,238 5,835
Goodwill 6,636 ---
Other assets 42,937 34,182
---------- ----------
Total assets $3,428,175 $3,004,496
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits $2,094,454 $1,819,840
Advances from the Federal Home Loan
Bank of San Francisco 829,056 766,790
Securities sold under agreements to
repurchase 192,632 166,738
Senior Debentures 50,000 ---
Other borrowings 7,260 7,937
Other liabilities 61,078 35,214
---------- ----------
Total liabilities 3,234,480 2,796,519
Stockholders' equity:
Serial preferred stock; authorized,
7,000,000 shares;
outstanding, none --- ---
Common stock ($.01 par value);
authorized, 20,000,000 shares;
outstanding, 6,640,242 shares - 1996
and 7,101,590 shares - 1995 66 71
Additional paid-in capital 99,989 97,646
Retained earnings (substantially
restricted) 100,945 115,966
Unrealized loss on securities available
for sale (net of tax) (2,667) (683)
Debt of Employee Stock Ownership Plan (4,638) (5,023)
---------- ----------
Total stockholders' equity 193,695 207,977
Total liabilities and stockholders' ---------- ----------
equity $3,428,175 $3,004,496
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995
- ----------------------------------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans receivable $53,839 $40,249 $139,167 $115,055
Interest on mortgage-backed securities 10,294 12,715 32,257 42,323
Interest and dividends on investments 1,895 1,517 5,108 4,849
------- ------- -------- --------
66,028 54,481 176,532 162,227
Interest expense:
Interest on customer deposits 27,001 24,652 74,712 69,018
Interest on Senior Debentures 1,114 - 1,520
Interest on borrowings 15,035 16,083 42,370 51,467
------- ------- -------- --------
43,150 40,735 118,602 120,485
Net interest income 22,878 13,746 57,930 41,742
Provision for losses on loans 433 900 1,851 2,700
------- ------- -------- --------
Net interest income after provision for losses 22,445 12,846 56,079 39,042
Noninterest income:
Loan fees and charges 1,528 847 3,587 2,941
Gain (loss) on securities --- 1 (262) (2,195)
Rental income from premises 134 199 539 588
Other, net 1,240 1,050 3,369 3,156
------- ------- -------- --------
2,902 2,097 7,233 4,490
Noninterest expense:
General and administrative expenses 19,838 10,760 43,806 35,959
SAIF recapitalization assessment 11,750 --- 11,750 ---
Real estate owned operations, net (3,146) (336) (4,808) (946)
Provision for (recovery of) losses on
real estate 23 (81) (100) (317)
Amortization and write-down of intangibles 524 604 1,928 1,814
------- ------- -------- --------
28,989 10,947 52,576 36,510
Income (loss) before income tax expense (benefit) (3,642) 3,996 10,736 7,022
Income tax expense (benefit) (1,534) 1,720 4,635 3,052
------- ------- -------- --------
Net income (loss) $(2,108) $ 2,276 $ 6,101 $ 3,970
======= ======= ======== ========
Earnings (loss) per share $ (0.30) $ 0.31 $ 0.86 $ 0.54
======= ======= ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DEBT OF
UNREALIZED LOSS EMPLOYEE
NUMBER ADDITIONAL ON SECURITIES STOCK TOTAL
OF COMMON PAID-IN RETAINED AVAILABLE FOR OWNERSHIP STOCKHOLDERS'
(IN THOUSANDS) SHARES STOCK CAPITAL EARNINGS* SALE (NET OF TAX) PLAN EQUITY
-------- ------- ---------- ---------- ----------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 7,102 $71 $97,646 $115,966 $ (683) $(5,023) $207,977
REPURCHASE OF COMMON STOCK (495) (5) (16,963) (16,968)
PURCHASE OF COMMON STOCK
FOR DIRECTORS' RETIREMENT PLAN (33) 1,094 (1,094)
EXERCISE OF STOCK OPTIONS 66 1,249 1,249
CASH DIVIDENDS (3,065) (3,065)
UNREALIZED LOSS (NET OF TAX) (1,984) (1,984)
REPAYMENT OF DEBT 385 385
NET INCOME 6,101 6,101
----- --- ------- -------- ------- ------- --------
BALANCE AT SEPTEMBER 30, 1996 6,640 $66 $99,989 $100,945 $(2,667) $(4,638) $193,695
===== === ======= ======== ======= ======= ========
*SUBSTANTIALLY RESTRICTED
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
-----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,101 $ 3,970
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization and write-down of
intangible assets 1,928 1,814
Write-down on disposal of fixed assets 1,767 ---
Proceeds from sale of loans
available-for-sale - 135
Provision for losses 2,041 2,383
Depreciation and amortization of
premises and equipment 1,709 2,361
Amortization of deferred loan costs 840 85
Decrease in capitalized excess
servicing fees 321 568
Amortization of premiums and discounts 3,394 2,237
Loss on securities 262 2,195
Gain on sale of real estate owned (3,586) (994)
(Increase) decrease in other assets (4,074) 300
Increase in other liabilities 9,578 708
Other, net (102) 180
-----------------------
Net cash provided by operating
activities 20,179 15,942
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of California Thrift and
Loan, net of cash and cash
equivalents received (61,505) ----
Net (increase) decrease in loans
resulting from originations,
net of principal payments 37,421 (53,922)
Purchases of loans (63,554) (11,915)
Principal payments on mortgage-backed
securities 71,245 65,743
Proceeds from sales of
mortgage-backed securities
held-for-investment 2,766 -
Proceeds from sales of
mortgage-backed securities
available-for-sale 24,042 101,242
Proceeds from maturities of
investment securities
held-for-investment 28,000 5,000
Proceeds from maturities of
investment securities
available-for-sale 7,000 -
Purchase of investment securities
held-for-investment (3,200) (10,000)
Purchase of investment securities
available-for-sale - (7,000)
Proceeds from sales of real estate
owned 27,145 13,640
Proceeds from sales of loans
held-for-investment 9,668 ---
Additions to premises and equipment 6,663 (3,072)
(Increase) decrease in stock of
FHLBSF (3,725) 8,637
Other, net 605 -
-----------------------
Net cash provided by investing
activities 82,571 108,353
</TABLE>
6
<PAGE>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(DOLLARS IN THOUSANDS) 1996 1995
----------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit inflows (outflows) (182,281) 139,901
Proceeds from Federal Home Loan Bank
of San Francisco advances 922,846 133,000
Repayment of Federal Home Loan Bank
of San Francisco advances (864,580) (357,180)
Issuance of Senior Debentures, net of
issuance costs 49,300 ---
Repurchase of common stock (18,054) ---
Proceeds from reverse repurchase
agreements 177,632 166,738
Repayment of reverse repurchase
agreements (151,740) (201,422)
Net change in other borrowings 911 (569)
Proceeds from exercise of common
stock options 2,338 4,075
Dividends paid to stockholders (3,169) (3,298)
--------- ---------
Net cash used in financing activities (66,797) (118,755)
Net increase in cash and cash
equivalents 35,953 5,540
Cash and cash equivalents at
beginning of period 42,760 26,192
Cash and cash equivalents at end of
period $ 78,713 $ 31,732
========= =========
Cash paid during the period for:
Interest $ 61,359 $ 52,520
Income taxes $ 6,190 $ 3,240
Supplemental noncash investing
activities:
Loans transferred to real estate
owned $ 6,936 $ 24,434
Loans originated to sell real
estate owned $ 4,395 $ 4,459
</TABLE>
The acquisition of California Thrift and Loan involved the following (see
note 2):
<TABLE>
<S> <C>
Push-down of the Company's acquisition $ 61,819
cost
Liabilities assumed 476,492
Fair value of assets acquired, other (531,029)
than cash and cash equivalents
Goodwill (6,968)
---------
Net cash and cash equivalents received $ 314
=========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
BAY VIEW CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of Bay View Capital Corporation (the "Company" or "BVCC")
and its principal subsidiaries, Bay View Federal Bank, a Federal Savings Bank
("BVFB"), and California Thrift and Loan, a California industrial loan company
("CTL"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The information provided by these interim statements reflects all
adjustments which are, in the opinion of Management, necessary for a fair
presentation of the Company's financial condition as of September 30, 1996 and
December 31, 1995, the results of its operations for the three and nine months
ended September 30, 1996 and 1995 and the cash flows for the nine months ended
September 30, 1996 and 1995. Such adjustments are of a normal recurring nature,
unless otherwise disclosed in this Form 10-Q. As necessary, reclassifications
have been made to prior period amounts to conform to current period
presentation. These interim financial statements have been prepared in
accordance with the instructions to Form 10-Q and therefore do not include all
the necessary information and footnotes for a presentation in conformity with
generally accepted accounting principles.
The information included under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is written with the
presumption that the users of these interim financial statements have read or
have access to the Company's 1995 Annual Report on Form 10-K (as amended), which
contains the latest audited financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition as of December
31, 1995 and 1994 and Results of Operations for the years ended December 31,
1995, 1994 and 1993. Therefore, only certain changes in financial condition and
results of operations are discussed in this Form 10-Q. Furthermore, the interim
financial results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other interim period.
NOTE 2 - ACQUISITION OF CTL CREDIT, INC.
On June 14, 1996, the Company acquired CTL Credit, Inc. ("CTL Credit"), a
Delaware corporation and the holding company of CTL for total cash consideration
of approximately $62 million. The acquisition has been accounted for as a
purchase effective June 1, 1996 and the operating results of the acquired entity
are included in the Company's consolidated results of operations from the
effective date of the acquisition. See Part 1. Item 2., "Management's
Discussion and Analysis of the Financial Condition and Results of Operations"
for additional discussion of CTL Credit acquisition purchase accounting
valuation.
NOTE 3 - EARNINGS (LOSS) PER SHARE
The earnings (loss) per share computation for the three and nine months ended
September 30, 1996 and 1995 was determined by dividing net income (loss) by the
weighted average number of common shares outstanding for the given period. The
average shares outstanding include common stock equivalents, principally certain
outstanding stock options.
The average number of shares outstanding (including common stock equivalents)
for the three months ended September 30, 1996 and 1995 were 6,939,172 shares
and 7,434,905 shares, respectively, and for the nine months ended September 30,
1996 and 1995 were 7,005,621 shares and 7,334,053 shares, respectively. The
Company's fully diluted earnings per share does not differ materially from its
primary earnings per share, therefore it has not been separately reported.
8
<PAGE>
NOTE 4 - COMMON STOCK
At September 30, 1996 and December 31, 1995, the Company had 6,640,242
and 7,101,590 shares of common stock issued and outstanding, respectively. The
Company repurchased 245,000 shares of its common stock during the third quarter
of 1996 which completed its previously announced intention to repurchase a total
of 800,000 shares of common stock. The 800,000 shares were repurchased at an
average cost of $31.97 per share.
STOCK OPTIONS
The Company has adopted the "Amended and Restated 1986 Stock Option and
Incentive Plan" and the "1995 Stock Option and Incentive Plan", which authorize
the issuance of up to 879,715 and 500,000 shares of common stock, respectively.
The Company also has adopted the "Non-Employee Director Stock Option Plan",
which authorizes the issuance of up to 275,000 shares of common stock. The
stock option plans were approved by the Company's shareholders.
The following table summarizes the stock options available for grant as
of September 30, 1996.
<TABLE>
<CAPTION>
NON-EMPLOYEE
1986 1995 DIRECTOR
STOCK STOCK STOCK
OPTION OPTION OPTION
PLAN PLAN PLAN TOTAL
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Shares reserved for issuance 879,715 500,000 275,000 1,654,715
Granted (1,024,408) (295,500) (228,000) (1,547,908)
Canceled 145,037 10,000 10,000 165,037
Expired (344) - - (344)
---------- --------- ----------- -----------
Total available for grant 0 214,500 57,000 271,500
========== ========= =========== ===========
</TABLE>
At September 30, 1996, the Company had outstanding non-qualified options
for all three plans with expiration dates from 1997 to 2006, as follows:
<TABLE>
<CAPTION>
EXERCISE AVERAGE
NUMBER OF PRICE EXERCISE
OPTION SHARES RANGE PRICE
------------- ------------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1995 488,547 $13.94-$26.63 $21.02
Granted 206,500 26.94- 34.00 31.87
Exercised (66,709) 13.94- 25.00 18.73
Canceled (22,000) 25.00- 25.63 25.57
------------- ------------- --------
Outstanding at September 30, 1996 606,338 $14.56-$34.00 $24.80
============= ============= ========
</TABLE>
NOTE 5 - DIVIDEND DECLARATION
The Company declared a quarterly dividend on September 26, 1996 of $.15
per share, payable October 25, 1996 to shareholders of record as of October 11,
1996. The dividend, totaling approximately $1.0 million, was accrued as of
September 30, 1996 and is reflected in "other liabilities" and as a reduction of
retained earnings in the accompanying Consolidated Statement of Financial
Condition.
9
<PAGE>
NOTE 6 - SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
BAY VIEW CAPITAL CORPORATION
CONSOLIDATING STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------------------
PARENT
(DOLLARS IN THOUSANDS) BVFB CTL COMPANY* ELIMINATIONS CONSOLIDATED
---------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 77,258 $ 1,217 $ 1,871 $ (1,633) $ 78,713
Loans available-for-sale 5,641 357,665 363,306
Securities available-for-sale
Mortgage-backed securities 112,769 112,769
Investment securities 1,015 1,015
Securities held-to-maturity
Mortgage-backed securities 514,600 514,600
Investment securities 15,005 17,615 200 32,820
Loan receivables held-for-investment, net 2,059,810 148,466 2,208,276
Investment in stock of the Federal Home
Loan Bank of San Francisco 43,146 1,912 45,058
Real estate owned 5,741 2,756 8,497
Premises and equipment 6,206 3,104 9,310
Investment in subsidiaries 241,130 (241,130) 0
Core deposit premiums 4,238 4,238
Goodwill 6,636 6,636
Other assets 36,794 3,640 3,137 (634) 42,937
---------- -------- -------- --------- ----------
Total Assets $2,881,208 $543,011 $247,353 $(243,397) $3,428,175
========== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits $1,633,914 $462,173 $ (1,633) $2,094,454
Advances from the Federal Home Loan
Bank of San Francisco 829,056 829,056
Securities sold under agreements to repurchase 192,632 192,632
Senior Debentures $ 50,000 50,000
Other borrowings 19,486 (12,226) 7,260
Other liabilities 41,747 17,134 2,820 (623) 61,078
---------- -------- -------- --------- ----------
Total Liabilities 2,716,835 479,307 52,820 (14,482) 3,234,480
Stockholders' equity
Common stock 1 66 (1) 66
Additional paid-in capital 74,186 61,818 100,990 (137,005) 99,989
Retained earnings (substantially restricted) 97,492 1,885 93,477 (91,909) 100,945
Unrealized loss on securities
available-for-sale (net of tax) (2,667) (2,667)
Debt of Employee Stock Ownership Plan (4,638) (4,638)
---------- -------- -------- --------- ----------
Total Stockholders' Equity 164,373 63,704 194,533 (228,915) 193,695
---------- -------- -------- ---------- ----------
Total Liabilities and Stockholders' Equity $2,881,208 $543,011 $247,353 $(243,397) $3,428,175
========== ======== ======== ========= ==========
</TABLE>
* Includes Regent Financial Corporation, a wholly owned subsidiary of the
Company, which is immaterial for separate financial statement disclosure.
10
<PAGE>
NOTE 6 (CON'T) - SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
BAY VIEW CAPITAL CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------------------
PARENT
(DOLLARS IN THOUSANDS) BVFB CTL COMPANY ELIMINATIONS CONSOLIDATED
--------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest on loans receivable $120,893 $18,274 $139,167
Interest on mortgage-backed
securities 32,257 32,257
Interest on dividends on
investments 4,681 368 $1,380 $(1,321) 5,108
-------- ------- ------ ------- --------
157,831 18,642 1,380 (1,321) 176,532
Interest Expense:
Interest on customer deposits 65,656 9,056 74,712
Interest on Senior Debentures 1,520 1,520
Interest on borrowings 43,639 51 (1,320) 42,370
-------- ------- ------ ------- --------
109,295 9,107 1,520 (1,320) 118,602
Net interest income: 48,536 9,535 (140) (1) 57,930
Provisions for losses on loans 1,400 451 1,851
-------- ------- ------ ------- --------
Net interest income after
provision for losses 47,136 9,084 (140) (1) 56,079
Noninterest Income:
Loan fees and charges 2,891 696 3,587
Loss on securities (262) (262)
Rental income from premises 531 8 539
Equity in earnings of
subsidiaries 6,612 (6,612)
Other, net 3,299 83 (13) 3,369
-------- ------- ------ ------- --------
6,459 787 6,612 (6,625) 7,233
Noninterest Expense
General and
administrative expenses 37,014 6,028 777 (13) 43,806
SAIF recapitalization
assessment 11,750 11,750
Real estate owned
operations, net (4,863) 55 (4,808)
Recovery of losses on real estate (100) (100)
Amortization and write-down
of intangible assets 1,596 332 1,928
-------- ------- ------ ------- --------
45,397 6,415 777 (13) 52,576
Income before income tax
expense 8,198 3,456 5,695 (6,613) 10,736
Income tax expense (benefit) 3,470 1,571 (406) 4,635
-------- ------- ------ ------- --------
Net income $ 4,728 $ 1,885 $6,101 $(6,613) $ 6,101
======== ======= ====== ======= ========
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- --------------
GENERAL
Bay View Capital Corporation (the "Company" or "BVCC"), a Delaware
corporation, is the parent holding company of Bay View Federal Bank ("BVFB") and
California Thrift and Loan ("CTL").
STRATEGIC OVERVIEW
Mission Statement
-----------------
The primary objectives of the Company can be summarized as follows:
1. To build a diversified financial services company by acquiring or
investing in and creating niche lending companies that originate high
yielding assets.
2. To enhance shareholder value by maximizing per share market value.
Capital Strategy
----------------
In order to achieve the Company's objectives, the Company's capital
strategy encompasses the following strategies:
1. To de-emphasize less profitable elements of the Company's subsidiaries.
2. To return the capital of subsidiaries in excess of the regulatory "well
capitalized" requirement to the Company.
3. To redeploy excess capital to generate a more profitable, risk-based
return or repurchase shares.
4. To increase the velocity of capital utilization.
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "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 wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, substantial 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 the
Company's 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 occurrences or
unanticipated events or circumstances after the date of such statements.
12
<PAGE>
BAY VIEW FEDERAL BANK STRATEGIES
Bay View Federal Bank has 26 branches serving primarily the San Francisco Bay
Area. Its principal business consists of attracting deposits from the general
public and using those deposits, together with borrowings, to originate loans
secured by real estate. Historically, BVFB's performance has been negatively
impacted by weak retail asset origination (primarily COFI-based, commodity
oriented mortgage products), high general and administrative expenses and also
unfavorable interest rate risk exposures. In addition, BVFB had purchased
mortgage-backed securities ("MBS") when high quality loan production was not
available.
In 1996, Management redirected BVFB's strategic focus to concentrate on
enhancing the deposit franchise and (beginning in late 1995) the restructuring
of the wholesale (MBS/borrowings) portion of the balance sheet. As a result,
transaction accounts as a percentage of total deposits increased to 28% at
September 30, 1996 from approximately 20% at year-end 1995. In addition, BVFB
prepaid a significant portion of its high cost borrowings and also sold certain
mortgage-backed securities from its available-for-sale portfolio to mitigate its
interest rate risk exposure. At September 30, 1996, BVFB had entered into
interest rate swaps with notional amounts of $421 million which provide interest
rate risk protection by matching the floating interest rate risk of its balance
sheet. As a result, 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) was approximately .93% at the end of third quarter 1996 compared to
approximately 0.79% at December 31, 1995 and 3.02% at December 31, 1994.
CALIFORNIA THRIFT AND LOAN STRATEGIES
CTL is a California industrial loan company which underwrites and purchases
primarily high quality, high yielding auto loans and has successfully carved out
a niche in the increasingly competitive auto finance industry. It is currently
headquartered in Santa Barbara, California and operates 19 offices throughout
California and the western United States.
Management's focus at CTL is to capture asset values and increase the
velocity of capital utilization. In order to achieve this objective, Management
intends to sell the indirect equipment lease portfolio, securitize its auto loan
portfolio by late 1996 or early 1997 and transform CTL into a consumer finance
company. The sale and/or securitization of these assets will allow the Company
to recover a large portion of its invested capital. The future production of
auto loans is anticipated to be securitized on a quarterly basis.
CAPITAL REDEPLOYMENT
Management estimates that capital of $48 million associated with the sale and
securitization of CTL's assets, as discussed above, would be returned to the
Company for redeployment. This capital, combined with excess capital available
at BVFB and excess cash at the Company would be redeployed to either
aggressively pursue acquisitions of accretive asset origination capabilities,
repurchase additional shares of the Company's common stock or enhance/expand the
BVFB deposit franchise valuation.
RESULTS OF OPERATIONS
The Company's net loss for the three months ended September 30, 1996 was $2.1
million, or $.30 per share, which includes a one-time special assessment charge
of $6.7 million (after tax) or $.97 per share relating to recent legislation to
recapitalize the Savings Association Insurance Fund (SAIF). This compares with
net income of $2.3 million, or $.31 per share, for the third quarter of 1995.
Net income for the nine months ended September 30, 1996 was $6.1 million or
$0.86 per share (which includes the SAIF special assessment charge of
13
<PAGE>
$6.7 million after tax or $0.97 per share) compared with $4.0 million or $.54
per share for the same period in 1995. The increase in earnings (excluding the
SAIF special assessment) was primarily due to improvements in the Company's net
interest margin, which has continued to expand during the nine months ended
September 30, 1996.
Net income for the first nine months of 1996 includes certain items that
warrant special mention. The impact of these items on operating results for the
three and nine months ended September 30, 1996 was approximately $(72,000) and
$52,000, respectively. A summary of the items by quarter is as follows:
Third Quarter 1996 (pretax)
- ---------------------------
The following special mention items benefited net income during the period:
- - $3.2 million gain from the sale of and income received from certain real
estate owned properties.
- - $1.4 million of enhanced profitability resulting from revised purchase
accounting valuations associated with the CTL assets being held-for-sale
The following special mention items reduced net income during the period:
- - $2.0 million accrual for termination of data processing contracts and an
additional write-down for computer hardware relating to the Company's long-
term information services technology agreement with BISYS Group, Inc.
- - $1.3 million loss accrual for lease obligations in excess of related sublease
rentals resulting from unfavorable lease agreement terms.
- - $1.2 million expense accrual for long-term incentive plan awards.
- - $210,000 accrual for downsizing loan operations and relocation of
administrative functions.
The following is a summary of the special mention items for the two previous
quarters:
Second Quarter 1996 (pretax)
- ----------------------------
- - $770,000 gain from the sale of and income received from certain real estate
owned properties.
- - $500,000 additional write-down due to the sale of the corporate office
complex which closed in the third quarter of 1996. The Company had
initially provided a write-down of $7.1 million on this property.
- - $425,000 write-down related to certain computer hardware and software. The
computer related write-down was directly related to the Company's decision
to enter into a long-term information services technology agreement with
BISYS Group, Inc.
First Quarter 1996 (pretax)
- ---------------------------
- - $800,000 gain from the sale of and income received from certain real estate
owned properties.
- - $350,000 write-off of core deposit intangibles and fixed assets due to a
branch closure.
- - $260,000 loss resulting from the sale of approximately $24 million of
mortgage-backed securities from the available-for-sale portfolio.
ACQUISITION OF CTL CREDIT, INC.
On June 14, 1996, the Company acquired CTL Credit, a Delaware corporation and
the holding company for CTL. In connection with the acquisition, CTL Credit was
liquidated, with its assets transferred to and liabilities assumed by the
Company, and CTL became a stand-alone subsidiary of the Company and a sister
bank to BVFB.
14
<PAGE>
The Company acquired all of the outstanding common stock of CTL Credit for
$18.00 per share, or total cash consideration of approximately $62 million,
which was funded with existing cash and borrowings. During May 1996, the
Company issued $50 million in Senior Debentures yielding 8.42% (all-in cost was
8.91% annualized) and $26 million of the proceeds were used to finance the CTL
Credit acquisition. The residual proceeds of the debt offering will be utilized
for future accretive acquisitions or other business purposes deemed to enhance
shareholder value, such as the repurchase of the Company's common stock, if
warranted (see "Redeployment of Excess Capital" below).
The CTL Credit acquisition has been accounted for as a purchase effective
June 1, 1996. Under the purchase accounting method, the purchase price is
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the time of consummation of the transaction. Based on initial
estimates performed in association with the June 30, 1996 interim financial
statements, aggregate costs exceeded the estimated fair value of net assets
acquired (i.e., goodwill) by $18.4 million. Subsequent market data and analysis
has determined that the realizable value of the acquired assets is higher than
the initial estimates, specifically the value attributable to certain assets
positioned for securitization or sale. Given the revised estimates, goodwill
has been adjusted to $7.0 million and is being amortized on a straight-line
basis over a period of seven years.
The following table summarizes the revised purchase accounting valuation and
related adjustments as compared to the initial estimates performed for the June
30, 1996 interim financial statements. The revised purchase price allocations
are based on estimates of the fair value of the net assets acquired given
available information and may be subject to further adjustment in accordance
with the guidelines established under Accounting Principles Board Opinion No. 16
"Business Combinations".
<TABLE>
<CAPTION>
REVISED PURCHASE ACCOUNTING
ALLOCATION
---------------------------------------
INITIAL REVISED
(DOLLARS IN MILLIONS) ESTIMATE ADJUSTMENTS ESTIMATE
------------ ------------- -----------
<S> <C> <C> <C>
Cash paid $ 62.2 - $ 62.2
Cash and cash equivalents acquired from CTL (1.4) - (1.4)
Acquisition costs 0.4 $ 0.6 1.0
------------ ------------ ----------
Total purchase price 61.2 0.6 61.8
Liabilities assumed
Deposits 456.9 456.9
Debt 6.3 6.3
Deferred tax (1.5) 8.5 7.0
Other liabilities 6.8 0.1 6.9
------------ ------------ ----------
Total purchase price and assumed liabilities 529.7 9.2 538.9
Less fair value of acquired assets
Cash and cash equivalents 0.3 0.3
Securities 17.5 17.5
Receivables and contracts 481.5 20.8 502.3
Fixed assets 3.2 0.3 3.5
Real estate owned 2.2 (0.4) 1.8
Other assets 6.6 (0.1) 6.5
------------ ------------ ----------
Cost in excess of fair value of net assets acquired $ 18.4 $ (11.4) $ 7.0
============ ============ ==========
</TABLE>
15
<PAGE>
SIGNIFICANT PURCHASE PRICE ALLOCATION ASSUMPTIONS
The significant assumptions utilized in association with the purchase
accounting valuations as of the date of acquisition are as follows:
A. The estimated fair value of loans held for investment was determined by
discounting the applicable cash flows at the market rate as of the
effective date of the acquisition. The market rate represents the
corresponding yield that a willing buyer would receive as a result of the
sale of similar loans issued to borrowers of similar credit risk. The
applicable cash flows represent the projected loan payments, net of
estimated prepayments based on historical experience and published data for
similar loans.
Fair values of loans held-for-sale are based on prices for similar loans in
the secondary market. Management intends to securitize the auto loan
portfolio during the fourth quarter of 1996 or early 1997. Future auto
loans are anticipated to be securitized on a quarterly basis. To facilitate
the realization of these values the Company entered into certain hedges in
October 1996 designed to insulate these values from movements in interest
rates. In addition, Management expects to sell CTL's indirect equipment
leasing portfolio.
B. The adjustment to real estate owned represents a write-down based on an
evaluation of the fair value less estimated costs to sell.
C. The adjustment to fixed assets represents a write-down relating to the
pending sale of the building used as the corporate headquarters of CTL.
D. The adjustment to other liabilities represents reserves established for
costs to be incurred from terminating lease obligations, data processing
activities and CTL's employee automobile program. The adjustment also
includes costs associated with termination and integration of certain
employee functions.
E. No adjustment has been made for valuations associated with the deposit
portfolio. It is likely that these liabilities will be sold to BVFB or
retired at face value as selective assets are sold or securitized.
F. The adjustment related to deferred taxes represents the tax impact of all
purchase accounting adjustments by applying enacted statutory taxes
applicable to future years. This adjustment effectively represents the
estimated future tax consequences associated with these purchase price
valuations.
REDEPLOYMENT OF EXCESS CAPITAL
Based on current valuations, Management intends to sell the CTL lease
portfolio (approximately $65 million) as well as securitize and sell the auto
loan portfolio (approximately $280 million). Management estimates that capital
of $48 million associated with these assets would be returned to the Company for
redeployment. This capital, combined with excess capital available at BVFB and
excess cash at the Company will allow the Company to pursue a business strategy
focused on redeploying and increasing the velocity of capital utilization.
The sale and/or securitization of these assets will allow the Company to
recover a large portion of its invested capital while positioning CTL to
contribute to the Company's continued future earnings growth momentum through
quarterly securitizations of future loan originations. Management expects to
utilize this capital pool to pursue accretive acquisition opportunities. In the
event Management is unable to identify meaningful accretive acquisition
opportunities within the next 6-12 months, it is likely that these funds will be
utilized to repurchase additional shares of the Company's common stock, if
warranted.
16
<PAGE>
NET INTEREST INCOME
Net interest income for the third quarter of 1996 was $22.9 million
compared to $13.7 million for the same period in 1995. The net interest margin
for the third quarter of 1996 increased to 2.80% from 1.85% in the prior year
period. Net interest income for the nine months ended September 30, 1996 was
$57.9 million compared to $41.7 million for the same period in 1995. The net
interest margin increased to 2.51% from 1.82% for the first nine months of 1996
and 1995, respectively.
The following table summarizes net interest income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
-------------------- -------------------
NET NET NET NET
INTEREST INTEREST INTEREST INTEREST
(DOLLARS IN THOUSANDS) INCOME MARGIN INCOME MARGIN
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BVFB $17,120 2.45% $13,723 1.85%
CTL (beginning June 1, 1996) 6,854 5.65% - -
BVCC* (1,096) N/A 23 N/A
------- -------
BVCC-Consolidated $22,878 2.80% $13,746 1.85%
======= =======
<CAPTION>
NINE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
-------------------- -------------------
NET NET NET NET
INTEREST INTEREST INTEREST INTEREST
(DOLLARS IN THOUSANDS) INCOME MARGIN INCOME MARGIN
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BVFB $49,857 2.33% $41,670 1.82%
CTL (beginning June 1, 1996) 9,535 5.61% - -
BVCC* (1,462) N/A 72 N/A
------- -------
BVCC-Consolidated $57,930 2.51% $41,742 1.82%
======= =======
</TABLE>
* Excludes intercompany transactions and consists primarily of interest expense
on $50 million of 8.42% Senior Debentures (all-in cost 8.91% annualized) issued
in May 1996; the proceeds of which were utilized to finance the acquisition of
CTL and repurchase shares (approximately $15 million of these borrowings remain
undeployed at September 30, 1996).
The increase in the net interest margin for BVFB for the three and nine
months ended September 30, 1996 as compared to the same periods in 1995 was due
to an increase in yields on interest-earning assets combined with a decrease in
cost of funds. The increase in yields on interest-earning assets for BVFB was
primarily due to the repricing of a significant portion of loans indexed to the
Cost of Funds Index ("COFI") and to a lesser extent, the one-year United States
Treasury note. The decrease in cost of retail deposits was primarily due to
favorable repricing of certificates of deposit and increase in transaction
accounts which are at lower rates than certificates of deposit. Transaction
accounts as a percentage of total deposits increased to 28% from approximately
20% at year-end 1995. The retail cost of deposits at September 30, 1996 was
4.66% as compared to COFI of 4.84%. Retail deposit costs at September 30, 1995
was 5.33%, as compared to COFI of 5.13%.
The net interest margin for CTL (which includes purchase accounting
adjustments) has remained relatively unchanged since the acquisition date.
17
<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 periods indicated. Such yields and rates are derived by
dividing interest income or expense by the average balances of interest-earning
assets or interest-bearing liabilities, respectively, for the periods shown.
Average balances of interest-earning assets and interest-bearing liabilities
were derived from daily average balances for BVCC and BVFB. Average balances of
interest-earning assets and interest-bearing liabilities for CTL were monthly
averages. The yields for the periods indicated include the amortization of
deferred loan origination fees, net of costs, which are considered adjustments
to yield
18
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES PAID
---------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---------------------------------------------------------------------------
AVERAGE ACTUAL AVERAGE AVERAGE ACTUAL AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------------ ---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Loans receivable $ 2,567,126 $ 53,839 8.43% $ 2,103,844 $ 40,249 7.59%
Mortgage-backed securities (2) 639,918 10,294 6.43 762,324 12,715 6.67
Investments 125,868 1,895 5.96 102,920 1,517 5.85
------------ --------- ---------- ------------ --------- ----------
Total interest-earning assets 3,332,912 $ 66,028 7.95% 2,969,088 $ 54,481 7.29%
========= ========== ========= ==========
Nonperforming assets 31,204 48,829
Other assets 46,543 47,946
------------ -------------
Total assets $ 3,410,659 $ 3,065,863
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Customer deposits $ 2,141,809 $ 27,001 5.02% $ 1,838,852 $ 24,652 5.32%
Borrowings (1) 1,026,745 16,149 6.27 979,276 16,083 6.51
------------ --------- ---------- ------------ --------- ----------
Total interest-bearing liabilities 3,168,554 $ 43,150 5.42% 2,818,128 $ 40,735 5.73%
========= ========== ========= ==========
Other liabilities 38,240 22,062
------------ ------------
Total liabilities 3,206,794 2,840,190
Stockholders' equity 203,865 225,673
------------ ------------
Total liabilities and stockholders'
equity $ 3,410,659 $ 3,065,863
============ ============
Net interest income/net interest spread $ 22,878 2.53% $ 13,746 1.56%
========= ========== ========= ==========
Net earning assets $ 164,358 $ 150,960
============ ============
Net interest margin including
nonperforming assets 2.77% 1.82%
========== ==========
Net interest margin excluding
nonperforming assets 2.80% 1.85%
========== ==========
</TABLE>
(1) Interest expense for borrowings includes interest expense on interest rate
swaps of $808,000 and $1,000 for the three months ended September 30, 1996
and 1995, respectively.
(2) Average balances for mortgage-backed securities available-for-sale are based
on historical amortized cost balances.
19
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES PAID
-------------------------------------------------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------------------------- -------------------------------------
AVERAGE ACTUAL AVERAGE AVERAGE ACTUAL AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------------- ----------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Loans receivable $ 2,285,289 $ 139,167 8.12% $ 2,078,863 $ 115,055 7.38%
Mortgage-backed securities (2) 670,288 32,257 6.42 834,945 42,323 6.76
Investments 116,648 5,108 5.84 114,602 4,849 5.62
------------- ----------- ------- ------------ ---------- ------
Total interest-earning assets 3,072,225 $ 176,532 7.66% 3,028,410 $ 162,227 7.14%
=========== ======= ========== ======
Nonperforming assets 33,529 51,841
Other assets 50,191 46,339
------------- ------------
Total assets $ 3,155,945 $ 3,126,590
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Customer deposits $ 1,955,984 $ 74,712 5.10% $ 1,798,029 $ 69,018 5.13%
Borrowings (1) 950,878 43,890 6.16 1,084,993 51,467 6.34
------------- ---------- ------- ------------ ---------- ------
Total interest-bearing liabilities 2,906,862 $ 118,602 5.45% 2,883,022 $ 120,485 5.59%
========== ======= ========== ======
Other liabilities 44,079 20,678
------------- ------------
Total liabilities 2,950,941 2,903,700
Stockholders' equity 205,004 222,890
------------- ------------
Total liabilities and stockholders'
equity $ 3,155,945 $ 3,126,590
============= ============
Net interest income/net interest spread $ 57,930 2.21% $ 41,742 1.55%
========== ======= ========== ======
Net earning assets $ 165,363 $ 145,388
============= ============
Net interest margin including
nonperforming assets 2.48% 1.79%
======= ======
Net interest margin excluding
nonperforming assets 2.51% 1.82%
======= ======
</TABLE>
(1) Interest expense for borrowings includes interest expense on interest rate
swaps of $1.8 million and $1,000 for the nine months ended September 30,
1996 and 1995, respectively.
(2) Average balances for mortgage-backed securities available-for-sale are based
on historical amortized cost balances.
20
<PAGE>
INTEREST INCOME
INTEREST INCOME ON LOANS RECEIVABLE
Interest income on loans was $53.8 million as compared to $40.2 million for
the third quarters of 1996 and 1995, respectively. Interest income on loans for
the nine months ended September 30, 1996 and 1995 was $139.2 million and $115.1
million, respectively. The following table is a summary of interest income on
loans (including CTL beginning June 1, 1996).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNTS YIELDS AMOUNTS YIELDS
------- ------ ------- ------
<S> <C> <C> <C> <C>
BVFB $ 40,389 7.78% $ 40,249 7.59%
CTL (beginning June 1, 1996) 13,450 11.15 - -
------ ------ -------- ----
BVCC - Consolidated $ 53,839 8.43% $ 40,249 7.59%
======== ===== ======== ====
</TABLE>
[CAPTION]
<TABLE>
NINE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNTS YIELDS AMOUNTS YIELDS
------- ------ ------- ------
<S> <C> <C> <C> <C>
BVFB $120,893 7.80% $115,055 7.38%
CTL (beginning June 1, 1996) 18,274 11.16 - -
-------- ----- -------- ----
BVCC - Consolidated $139,167 8.12% $115,055 7.38%
======== ===== ======== ====
</TABLE>
The increase in yields on loans for BVFB was primarily due to the repricing
of a significant portion of loans indexed to the Cost of Funds Index ("COFI")
and to a lesser extent, the one-year Treasury note. The average COFI for the
nine months ended September 30, 1996 and 1995, which impacted BVFB's adjustable
rate mortgages, was 4.99% and 4.67%, respectively, an increase of 32 basis
points.
The interest income on loans for CTL primarily relates to interest income on
auto loans, real estate loans and indirect equipment leases. The interest
income on loans for CTL includes the amortization of purchase accounting
valuation adjustments for loans held-for-investment. The yields on loans for CTL
remained essentially the same since acquisition date.
INTEREST INCOME ON MORTGAGE-BACKED SECURITIES
Interest income on mortgage-backed securities ("MBS") was $10.3 million as
compared to $12.7 million for the third quarters of 1996 and 1995, respectively.
Interest income on MBS for the nine months ended September 30, 1996 and 1995 was
$32.3 million and $42.3 million, respectively. All the interest income on MBS
was related to BVFB only. The decrease in interest income on MBS was primarily
attributable to lower average balances resulting from principal amortization and
sale of mortgage-backed securities available for sale in 1995 and the first
quarter of 1996. The sale of MBS in 1996 was due to Management's strategic
focus on restructuring the wholesale balance sheet. There were no MBS purchases
in 1996.
21
<PAGE>
INTEREST AND DIVIDENDS ON INVESTMENTS
Interest and dividend income from the Company's investment portfolio was
essentially the same at $1.9 million as compared to $1.5 million for the third
quarters of 1996 and 1995, respectively. Interest income for the nine months
ended September 30, 1996 and 1995 was $5.1 million and $4.8 million,
respectively. The interest and dividend income from CTL was $368,000 for the
period since acquisition date.
INTEREST EXPENSE
INTEREST EXPENSE ON CUSTOMER DEPOSITS
Interest expense on customer deposits increased to $27.0 million in the third
quarter of 1996 from $24.7 million in the third quarter of 1995. Interest
expense for the nine months ended September 30, 1996 and 1995 was $74.8 million
and $69.0 million, respectively.
The following table summarizes interest expense on deposits (including CTL
beginning June 1, 1996).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNTS YIELDS AMOUNTS YIELDS
------- ------ ------- ------
<S> <C> <C> <C> <C>
BVFB $20,151 4.77% $24,652 5.32%
CTL (beginning June 1, 1996) 6,850 5.92 - -
------- ---- ------- ----
BVCC - Consolidated $27,001 5.02% $24,652 5.32%
======= ==== ======= ====
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1966 SEPTEMBER 30, 1966
------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNTS YIELDS AMOUNTS YIELDS
------- ------ ------- ------
<S> <C> <C> <C> <C>
BVFB $65,656 5.01% $69,018 5.13%
CTL (beginning June 1, 1996) 9,056 5.92 - -
------- ---- ------- ----
BVCC - Consolidated $74,712 5.10% $69,018 5.13%
======= ==== ======= ====
</TABLE>
The decrease in cost of retail deposits for BVFB was primarily due to
favorable repricing of certificates of deposit and an increase in transaction
accounts which are at lower rates than certificates of deposit. Transaction
accounts as a percentage of total deposits increased to approximately 28% from
approximately 20% at year-end 1995. The retail cost of deposits at September 30,
1996 was 4.66% as compared to COFI of 4.84%. Retail deposit costs at September
30, 1995 was 5.33% as compared to COFI of 5.13% for the same period.
22
<PAGE>
The following table summarizes the cost of retail deposits for BVFB versus
COFI.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
Cost of retail deposits 4.66 % 5.33%
COFI 4.84 % 5.13%
----- ----
Spread above / (below) COFI (0.18)% 0.20%
===== ====
</TABLE>
The cost of deposits for CTL remained essentially unchanged since the
acquisition date.
INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings was essentially the same at $16.1 million
for the third quarters of 1996 and 1995, respectively. Interest expense for the
first nine months of 1996 and 1995 was $43.9 million and $51.5 million,
respectively. The following table summarizes the interest expense on borrowings
(including CTL beginning June 1, 1996).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
BVFB $14,998 6.14% $16,083 6.51%
CTL (beginning June 1, 1996) 37 6.71 ---
BVCC (Senior Debentures only) 1,114 8.91 ---
------- ---- ------- ----
BVCC - Consolidated $16,149 6.27% $16,083 6.51%
======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
BVFB $42,319 6.09% $51,467 6.34%
CTL (beginning June 1, 1996) 51 6.23 --- -
BVCC (Senior Debentures only) 1,520 8.91 --- -
------- ---- ------- ----
BVCC - Consolidated $43,890 6.16% $51,467 6.34%
======= ==== ======= ====
</TABLE>
The decrease in interest expense on borrowings for BVFB was primarily due to
lower average balances arising from lower borrowing requirements consistent with
the level of interest-earning assets maintained. Also, in the fourth quarter of
1995 and first quarter of 1996, the Company prepaid $190 million of high cost
borrowings and replaced them with short-term lower cost borrowings. In
conjunction with the prepayment of these borrowings, the Company entered into
interest rate swap agreements to provide interest rate risk protection for the
short-term lower cost borrowings by matching the floating interest rate
characteristics and lengthening their maturities. The lower average balances in
1996 are consistent with Management's strategy to de-emphasize the wholesale
balance sheet and enhance the retail deposit franchise.
The interest expense on borrowings for CTL was not significant.
23
<PAGE>
CHANGES IN RATE AND VOLUME
The following table sets forth the changes in net interest income due to
changes in the rate and volume of the Company's interest-earning assets and
interest-bearing liabilities for the three and nine months ended September 30,
1996 compared with the same periods in 1995. The rate and volume variances for
the three and nine months ended September 30, 1996 include the impact of CTL
beginning June 1, 1996. Rate and volume changes are calculated excluding
nonperforming assets. Changes in rate and volume (changes in weighted average
interest rate multiplied by average portfolio balance), which cannot be
segregated, have been allocated proportionately between the change in rate and
the change in volume.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------------------
THREE MONTH VARIANCE NINE MONTH VARIANCE
-------------------------- -------------------------------
(DOLLARS IN THOUSANDS) RATE VOLUME TOTAL RATE VOLUME TOTAL
---- ------ ----- ----- ------ -----
INCREASE (DECREASE)
<S> <C> <C> <C> <C> <C> <C>
Income from interest-earning assets:
Loans receivable $ 4,133 $ 9,457 $13,590 $12,117 $11,995 $ 24,112
Mortgage-backed securities (439) (1,982) (2,421) (2,056) (8,010) (10,066)
Investment securities and other 33 345 378 171 88 259
------- ------- ------- ------- ------- --------
3,727 7,820 11,547 10,232 4,073 14,305
Expense on interest-bearing liabilities:
Customer deposits (1,535) 3,884 2,349 (341) 6,035 5,694
Borrowings (696) 762 66 (1,340) (6,237) (7,577)
------- ------- ------- ------- ------- --------
(2,231) 4,646 2,415 (1,681) (202) (1,883)
Net interest incom $ 5,958 $ 3,174 $ 9,132 $11,913 $ 4,275 $ 16,188
======= ======= ======= ======= ======= ========
</TABLE>
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans was $433,000 in the third quarter of
1996 and $900,000 for the same period in 1995. The provision for losses on
loans for the nine months ended September 30, 1996 and 1995 was $1.9 million and
$2.7 million, respectively. See the Allowance for Losses on Loans section below
for a more detailed discussion of the provision for losses
NONINTEREST INCOME
Noninterest income was $2.9 million for the third quarter of 1996 compared
to $2.1 million for the third quarter of 1995. Noninterest income for the nine
months ended September 30, 1996 and 1995 was $7.2 million and $4.5 million,
respectively, and included losses on sale of securities of $262,000 and $2.2
million for the respective periods. Excluding the loss on sale of securities
and noninterest income related to CTL, noninterest income for the first nine
months of 1996 and 1995 did not have any significant changes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
(DOLLARS IN THOUSANDS) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
BVFB $2,330 $2,097 $6,446 $4,490
CTL (beginning June 1, 1996) 572 - 787 -
------ ------ ------ ------
BVCC - Consolidated $2,902 $2,097 $7,233 $4,490
====== ====== ====== ======
</TABLE>
24
<PAGE>
NONINTEREST EXPENSE
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the third quarters of 1996 and 1995
were $19.8 million and $10.8 million, respectively. General and administrative
expenses for the nine months ended September 30, 1996 and 1995 were $43.8
million and $36.0 million, respectively. The higher general and administrative
expenses in 1996 versus 1995 were primarily due to the following special mention
items discussed elsewhere herein.
Third Quarter 1996
- $2.0 million accrual for termination of data processing contracts and
an additional write-down for computer hardware relating to the
Company's long-term information services technology agreement with
BISYS Group, Inc.
- $1.3 million loss accrual for lease obligations in excess of related
sublease rentals resulting from unfavorable lease agreement terms.
- $1.2 million expense accrual for long-term incentive plan awards.
- $210,000 accrual for downsizing loan operations and relocation of
administrative functions.
Second Quarter 1996
- $500,000 additional write-down due to the sale of the corporate office
complex which closed in the third quarter of 1996. The Company had
initially provided a write-down of $7.1 million on this property.
- $425,000 write-down related to certain computer hardware and software.
The computer related write-down was directly related to the Company's
decision to enter into a long-term information services technology
agreement with BISYS Group, Inc.
First Quarter 1996
- None
The general and administrative expenses in 1995 included a charge of $1.9
million relating to work force reductions and other costs related to downsizing
the Company's operations.
The following table summarizes general and administrative expenses (including
CTL beginning June 1, 1996).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
(DOLLARS IN THOUSANDS) 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BVFB $15,049 $10,639 $37,001 $35,487
CTL (beginning June 1, 1996) 4,401 6,028
Parent company 388 121 777 472
------- ------- ------- -------
BVCC - Consolidated $19,838 $10,760 $43,806 $35,959
======= ======= ======= =======
</TABLE>
25
<PAGE>
The following table of general and administrative expenses and efficiency
ratios excludes special mention items.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS) G&A % G&A %
------- ------ ------- ------
<S> <C> <C> <C> <C>
BVFB $10,340 53.90% $10,639 67.92%
CTL (beginning June 1, 1996) 4,620 52.93% - -
BVCC 389 N/A 121 N/A
------- ----- ------- -----
BVCC-Consolidated $15,349 56.68% $10,760 67.92%
======= ===== ======= =====
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS) G&A % G&A %
------- ------ ------- ------
<S> <C> <C> <C> <C>
BVFB $31,370 56.76% $35,487 74.25%
CTL (beginning June 1, 1996) 6,248 53.75% - -
BVCC 774 N/A 472 N/A
------- ----- ------- -----
BVCC-Consolidated $38,392 57.54% $35,959 74.25%
======= ===== ======= =====
</TABLE>
General and administrative expenses (excluding CTL and special mention
items) for the third quarter of 1996 and 1995 remained nearly the same at $10.7
million and $10.8 million, respectively. General and administrative expenses
(excluding CTL and special mention items) for the nine months ended September
30, 1996 were $32.1 million as compared to $35.9 million for the same period in
1995, which represents a decrease of $3.8 million. The higher expenses during
1995 were primarily due to expenses incurred relating to the downsizing of the
Company's operations. General and administrative expenses for CTL have declined
during the period subsequent to acquisition due to termination and integration
of certain employee functions.
The consolidated efficiency ratios (excluding special mention items) for
the three and nine months ended September 30, 1996 were 56.68% and 57.54%,
respectively, compared to 67.92% and 74.25% for the same periods in 1995,
respectively. This ratio for the second quarter of 1996 was 57.65%. The
improvement in the ratio was attributable to a combination of higher net
interest income and noninterest income as well as lower general and
administrative expenses (excluding special mention items).
SAIF RECAPITALIZATION SPECIAL ASSESSMENT
Federal legislation to recapitalize and fully fund the Savings Association
Insurance Fund ("SAIF") was signed into law on September 30, 1996. Customer
deposits for BVFB are SAIF-insured, and as a result of the legislation BVFB is
required to pay an one-time special assessment of $11.7 million pre-tax ($6.7
million after tax or $.97 per share). The legislation had no effect on CTL, as
its deposits are insured under the Bank Insurance Fund (BIF).
Pursuant to this legislation, premiums on SAIF-insured deposits for BVFB
will be reduced in 1997 from the previously anticipated 23 basis points to
approximately 6.4 basis points which will translate into lower annual deposit
costs in 1997. The estimated annual savings associated with this lower premium
will be approximately $2.7 million based on the level of deposits for BVFB at
September 30, 1996. The estimated future benefit resulting from this
legislation is consistent with Management's general expectations regarding 1997
operating result projections.
26
<PAGE>
INCOME AND EXPENSES FROM REAL ESTATE OWNED
Income from real estate owned operations increased to $3.1 million in the
third quarter of 1996 from $336,000 in the same period in 1995. Income from
real estate owned operations for the nine months ended September 30, 1996 and
1995 was $4.8 million and $946,000, respectively. The increase was primarily
due to gains from the sale of and higher income received from real estate owned
properties (see discussion of special mention items included elsewhere herein).
There were no significant changes in the provision for losses on real estate
owned.
AMORTIZATION AND WRITE-DOWN OF INTANGIBLES
The following table summarizes the amortization and write-down of intangibles
(including CTL beginning June 1, 1996)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
(DOLLARS IN THOUSANDS) 1996 1995 1996 1995
----- ------ ------ -------
<S> <C> <C> <C> <C>
BVFB $ 428 $ 604 $1,596 $ 1,814
CTL (beginning June 1, 1996) 96 --- 332 ---
----- ------ ------ -------
BVCC - Consolidated $ 524 $ 604 $1,928 $ 1,814
===== ====== ====== =======
</TABLE>
The amortization of the intangible assets of CTL was due to the inclusion of
the amortization of goodwill arising from the excess of the purchase price over
the fair value of net assets acquired discussed previously. The amortization of
intangible assets for CTL for the three months ended September 30, 1996 was due
to goodwill amortization of $83,000 per month since the acquisition date
adjusted by amortization of $236,000 of goodwill previously recorded in June
1996 based on the initial estimate. The amortization and write-down of
intangible assets for BVFB during the first nine months of 1996 included core
deposit intangibles written-off of $270,000 due to a decision to close one of
BVFB's branches.
BALANCE SHEET ANALYSIS
The consolidated assets of the Company were $3.43 billion and $3.00 billion
at September 30, 1996 and December 31, 1995, respectively. The increase in
total assets was primarily due to the acquisition of CTL Credit. CTL had total
assets of $543 million at September 30, 1996 which consisted primarily of loans
receivable held-for-sale of $358 million, loans receivable held-for-investment
of $148 million and customer deposits of $462 million. The total assets of BVFB
declined to $2.88 billion at September 30, 1996 from $3.00 billion at December
31, 1995 primarily due to decreases in mortgage-backed securities resulting from
sales of mortgage-backed securities and principal paydowns. The level of assets
in 1996 is consistent with BVFB's strategic focus to enhance the deposit
franchise and restructure (beginning in late 1995) the wholesale
(MBS/borrowings) portion of the balance sheet.
27
<PAGE>
SECURITIES
The Company invests in high-quality mortgage-backed securities
("MBS"), primarily issued by Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA").
The securities portfolio at September 30, 1996 and December 31, 1995
was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
--------- ----- --------- -----
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
- ------------------
Investment securities $ 1,000 $ 1,015 $ 8,000 $ 8,035
Mortgage-backed securities
FHLMC, FNMA and GNMA 117,409 112,769 151,000 149,778
-------- -------- -------- --------
118,409 113,784 159,000 157,813
HELD-TO-MATURITY
- ----------------
Investment securities 32,820 32,439 39,928 39,969
Mortgage-backed securities:
FHLMC, FNMA, GNMA
and other 514,600 497,685 581,600 575,321
-------- -------- -------- --------
547,420 530,124 621,528 615,290
$665,829 $643,908 $780,528 $773,103
======== ======== ======== ========
</TABLE>
In December 1995, the Company reclassified $147.7 million of MBS from held-to-
maturity to available-for-sale as a result of certain provisions made available
relating to Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". During the first quarter of
1996, the Company sold $24.2 million of these securities for a loss of $262,000,
which represented approximately 50% of the unrealized loss on securities
available-for-sale at the time of sale. Also, during the first quarter of 1996,
the Company sold a $3.5 million mortgage-backed security which was scheduled to
mature in April 1996 from its held-to-maturity portfolio. There were no
securities sold during the second and third quarters of 1996. The sale of MBS
in 1996 was consistent with Management's strategic focus to restructure the
wholesale balance sheet. There were no MBS purchases in 1996.
28
<PAGE>
LOANS AND REAL ESTATE OWNED
The loan portfolio of BVFB primarily consists of mortgage loans and the loan
portfolio of CTL primarily consists of consumer loans. The following is a
summary of the Company's loan portfolio (before purchase accounting valuations
and deductions for deferred fees, discounts and allowance for losses) at
September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
----------------------------------- ---------------------------------
(DOLLARS IN THOUSANDS) BVFB CTL TOTAL BVFB CTL TOTAL
---------- -------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single family (1-4 units) $ 660,016 $ 78,952 $ 738,968 $ 731,310 - $ 731,310
Multifamily (5+ units) 1,020,628 14,846 1,035,474 995,038 - 995,038
Nonresidential 356,891 16,102 372,993 333,236 - 333,236
---------- -------- ---------- ---------- --------- ----------
2,037,535 109,900 2,147,435 2,059,584 - 2,059,584
Consumer loans:
Auto and other 21,057 288,860 309,917 2,366 - 2,366
Home equity 36,399 32,558 68,957 32,483 - 32,483
Equipment leases - 61,488 61,488 - - -
---------- -------- ---------- ---------- --------- ----------
57,456 382,906 440,362 34,849 - 34,849
$2,094,991 $492,806 $2,587,797 $2,094,433 - $2,094,433
========== ======== ========== ========== ========= ==========
</TABLE>
The following is a summary of loan originations (including CTL beginning June 1,
1996).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
(DOLLARS IN THOUSANDS) 1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
BVFB $ 77,348 $57,478 $188,542 $212,342
CTL (beginning June 1, 1996) 54,282 - 72,909 -
-------- ------- -------- --------
BVCC - Consolidated $131,630 $57,478 $261,451 $212,342
======== ======= ======== ========
</TABLE>
The following is a summary of loan purchases (including CTL beginning June 1,
1996).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
(DOLLARS IN THOUSANDS) 1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
BVFB $21,151 $11,376 $58,031 $13,025
CTL (beginning June 1, 1996) 7,812 - 7,812 -
------- ------- ------- -------
BVCC - Consolidated $28,963 $11,376 $65,843 $13,025
======= ======= ======= =======
</TABLE>
29
<PAGE>
CREDIT QUALITY
Credit quality has continued to improve as evidenced by the decline in
nonperforming assets and delinquencies as shown in the tables below:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
AS A PERCENTAGE OF TOTAL ASSETS
----------------------------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ ------------------
<S> <C> <C> <C> <C>
BVFB $16,409 0.57% $38,811 1.29%
CTL (beginning June 1, 1996) 6,659 1.23 - -
------- ---- ------- ----
BVCC - Consolidated $23,068 0.67% $38,811 1.29%
======= ==== ======= ====
<CAPTION>
LOANS DELINQUENT 60 DAYS OR MORE
AS PERCENTAGE OF GROSS LOANS
----------------------------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ ------------------
<S> <C> <C> <C> <C>
BVFB $16,234 0.77% $20,166 0.96%
CTL (beginning June 1, 1996) 3,307 0.67 - -
------- ---- ------- ----
BVCC - Consolidated $19,541 0.76% $20,166 0.96%
======= ==== ======= ====
</TABLE>
The following table summarizes the Company's nonperforming assets and
troubled debt restructuring:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------- -------------------
(DOLLARS IN THOUSANDS) BVFB CTL TOTAL BVFB CTL TOTAL
------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans $10,574 $2,132 $12,706 $10,675 - $10,675
Consumer loans 94 481 575 80 - 80
Equipment leases - 614 614 -
Mortgage-backed securities - - 3,580 - 3,580
Real estate owned 5,741 2,756 8,497 24,476 - 24,476
Other repossessed assets - 676 676 -
------- ------ ------- ------- ------- -------
Nonperforming assets 16,409 6,659 23,068 38,811 - 38,811
Troubled debt restructuring 647 - 647 15,641 - 15,641
------- ------ ------- ------- ------- -------
Total $17,056 $6,659 $23,715 $54,452 - $54,452
======= ====== ======= ======= ======= =======
</TABLE>
ALLOWANCE FOR LOSSES ON LOANS
The Company conducts an ongoing review of its asset categories to assess
the adequacy of general valuation allowances ("GVA"), which are maintained at
levels that the Company believes are sufficient to cover estimated possible
losses in the portfolios. In determining the necessary level of GVA, the Company
considers prevailing and anticipated economic conditions, historical loss
experience, the levels of classified, nonperforming and delinquent assets,
weighting by property type, loan portfolio trends and other factors.
The CTL allowance for loan losses reflects Management's intention to
securitize selective assets which have been reclassified as held-for-sale and
recorded at estimated realizable fair values consistent with purchase
accounting. Excluding CTL, the allowance for loan losses for BVFB was $27.8
million and $30.9 million at September 30, 1996 and December 31, 1995,
respectively.
30
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOSSES ON LOANS
AS A PERCENTAGE OF NONPERFORMING
ASSETS
----------------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------- ------------------
% %
<S> <C> <C> <C> <C>
BVFB $27,839 169.66 $30,944 79.73
CTL (beginning June 1, 1996)
Assets held-for-portfolio 2,677 -
Assets held-for-sale 8,574 -
------- -------
11,251 168.96 -
BVCC - Consolidated $39,090 169.46 $30,944 79.73
======= ====== ======= =====
<CAPTION>
ALLOWANCE FOR LOSSES ON LOANS
AS A PERCENTAGE OF NONPERFORMING
LOANS
----------------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1996 DECEMBER 31, 1995
-------------------- -----------------
% %
<S> <C> <C> <C> <C>
BVFB $27,674 259.41 $30,014 279.07
CTL (beginning June 1, 1996)
Assets held-for-portfolio 2,677 -
Assets held-for-sale 8,574 -
------- -------
11,251 348.65 -
BVCC - Consolidated $38,925 280.14 $30,014 279.07
======= ====== ======= ======
</TABLE>
The consolidated provision for losses on loans was $433,000 for the third
quarter of 1996 and $900,000 for the third quarter of 1995. The provision for
losses on loans for BVFB was $400,000 for the third quarter of 1996 and $900,000
for the third quarter of 1995. The lower provision for losses for BVFB was
primarily due to the improvements in credit quality as compared to a year ago.
The following is a summary of provision for losses on loans (including CTL
beginning June 1, 1996).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
(DOLLARS IN THOUSANDS) 1996 1995 1996 1995
--------- ------- -------- -------
<S> <C> <C> <C> <C>
BVFB $400 $900 $1,400 $2,700
CTL (beginning June 1, 1996) 33 - 451 -
---- ---- ------ ------
BVCC - Consolidated $433 $900 $1,851 $2,700
==== ==== ====== ======
</TABLE>
The decrease in the provision for losses for BVFB was primarily due to the
improvement in the credit quality and recoveries of prior loan charge-offs.
Management believes that the GVA at September 30, 1996 is adequate to cover
estimated losses in its asset portfolios. However, future adjustments may be
necessary and earnings could be significantly affected, if circumstances differ
substantially from the assumptions used in making such determinations.
Management will continue to monitor the adequacy of the allowance for losses
related to problem assets.
31
<PAGE>
CUSTOMER DEPOSITS
Customer deposits are generated for the purpose of funding loans. The
customer deposits at September 30, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
BVFB (SAIF-insured)
- -------------------
Transaction accounts $ 457,820 28.0 $ 387,610 21.3
Certificates of deposit 1,174,461 72.0 1,432,230 78.7
---------- ----- ---------- -----
Total 1,632,281 100.0 1,819,840 100.0
CTL (BIF-insured)
- -----------------
Investment certificates:
Money Market Rate 16,360 3.5 - -
Term 445,813 96.5 - -
---------- ----- ---------- -----
Total 462,173 100.0 - -
BVCC Consolidated $2,094,454 $1,819,840
========== ==========
</TABLE>
The increase in transaction accounts and the decrease in certificates of
deposits from December 31, 1995 to September 30, 1996 for BVFB was consistent
with Management's strategy to enhance the retail deposit franchise which
resulted in lower cost of funds. The average balances for transaction accounts
at BVFB increased from $370 million to $479 million during the nine months ended
September 30, 1995 and 1996, respectively.
The investment certificates acquired in connection with the acquisition of
CTL are similar to certificates of deposits with the exception that they are
callable at par plus accrued interest. As discussed elsewhere herein, it is
likely that the investment certificates for CTL will be sold to BVFB or retired
at face value as certain assets are sold or securitized. In addition, CTL will
be transformed into a consumer finance company.
BORROWINGS
The Company utilizes collateralized advances from the FHLBSF for purposes
of funding loans and investments. In addition, the Company utilizes other
borrowings, on a collateralized and noncollateralized basis, such as securities
sold under agreements to repurchase. There were no borrowings at CTL for the
periods indicated. A summary of outstanding borrowings is as follows.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------- -----------------------------
PARENT PARENT
(DOLLARS IN THOUSANDS) BVFB CO. TOTAL BVFB CO. TOTAL
---------- ------ ---------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Advances from FHLBSF $ 829,056 - $ 829,056 $766,790 - $766,790
Reverse repurchase agreements 192,632 - 192,632 166,738 - 166,738
Senior Debentures 50,000 50,000 - -
Other borrowings 7,260 - 7,260 7,937 - 7,937
---------- ------ ---------- -------- ------ --------
$1,028,948 50,000 $1,078,948 $941,465 - $941,465
========== ====== ========== ======== ====== ========
</TABLE>
32
<PAGE>
As discussed elsewhere herein, in 1996, Management redirected BVFB's
strategic focus to restructure the wholesale borrowings (beginning in late 1995)
in conjunction with the enhancement of its retail deposit franchise. In the
fourth quarter of 1995 and first quarter of 1996, the Company prepaid $190
million of high cost borrowings and replaced them with short-term lower cost
borrowings. In conjunction with the prepayment of these borrowings, the Company
entered into interest rate swap agreements to provide interest rate risk
protection for the short-term lower cost borrowings by matching the floating
interest rate characteristics and lengthening their maturities. As a result, the
average balances for borrowings at BVFB decreased from $1.1 billion to $0.9
billion during the nine months ended September 30, 1995 and 1996, respectively.
INTEREST RATE RISK
The Company pursues balance sheet strategies designed, in the long run, to
mitigate the Company'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 principal amounts.
During the fourth quarter of 1995, BVFB entered into forward starting swaps
with notional principal amounts of $150.0 million as part of the prepayment of
$145.0 million of advances from the Federal Home Loan Bank of San Francisco
("FHLBSF") and replaced them with short-term lower cost borrowings in February
1996. The interest rate swaps were used to provide interest rate risk protection
for the lower cost borrowings by matching the floating interest rate risk
characteristics and lengthening their maturities. As of September 30, 1996 and
December 31, 1995, the total notional amount of interest rate swaps was $421
million and $150 million, respectively.
The following schedule sets forth the maturities and weighted average rates
of BVFB's interest rate swaps outstanding as of September 30, 1996, based on
interest rates at September 30, 1996. To the extent that interest rates change,
variable interest rate information will change. There were no interest rate
swaps for CTL as of September 30, 1996.
<TABLE>
<CAPTION>
MATURITIES OF DERIVATIVE
INSTRUMENTS
---------------------------------
(DOLLARS IN THOUSANDS) 2000 2001+ TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Notional amount $143,500 $277,500 $421,000
Weighted average receive rate
(3-month LIBOR) 5.61% 5.63% 5.62%
Weighted average pay rate 6.27% 6.52% 6.44%
</TABLE>
The objective of the Company's asset/liability Management activities is to
improve earnings by adjusting the types of assets and liabilities to effectively
address changing conditions and risks. Management believes that its
asset/liability activities have improved earnings within safe and sound
parameters.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's primary sources of funds include loan and MBS repayments,
retail deposit generation, advances from the FHLBSF, collateralized short-term
borrowings under reverse repurchase agreements and cash flows generated from
operations. The Company uses its liquidity resources principally to fund loans,
repay maturing borrowings, fund maturing time deposits and savings withdrawals
and provide for its foreseeable short and long-term cash needs. The Company
expects to be able to fund or refinance, on a timely basis, its commitments and
long-term liabilities.
CAPITAL RESOURCES
BAY VIEW FEDERAL BANK
The OTS has established minimum capital standards for all savings
institutions, including tangible core risk-based capital requirements. BVFB's
fully phased in regulatory capital at September 30, 1996 exceeded the minimum
requirements of each regulatory capital standard as follows:
<TABLE>
<CAPTION>
MINIMUM
ACTUAL REQUIREMENT EXCESS
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Tangible $160,203 5.56% $ 43,184 1.50% $117,019 4.06%
Core $164,235 5.70% $ 86,490 3.00% $ 77,745 2.70%
Total Risk-based $186,100 10.63% $140,062 8.00% $ 46,038 2.63%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires each Federal banking agency, including the OTS, to implement
prompt corrective actions for institutions that it regulates. Under capital
guidelines enacted by FDICIA, BVFB met the criteria for the "well capitalized"
standard at September 30, 1996 as follows:
<TABLE>
<CAPTION>
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
----------------- ----------------- ----------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Leverage $164,235 5.70% $144,150 5.00% $20,086 0.70%
Tier 1 Risk-based $164,235 9.38% $105,046 6.00% $59,189 3.38%
Total Risk-based $186,101 10.63% $175,077 10.00% $11,024 0.63%
</TABLE>
34
<PAGE>
CALIFORNIA THRIFT AND LOAN
The FDIC has established minimum capital standards for FDIC-insured
institutions, including tier capital and risk-based capital. CTL's regulatory
capital at September 30, 1996 exceeded the minimum requirements of regulatory
capital standard as follows:
<TABLE>
<CAPTION>
MINIMUM
ACTUAL REQUIREMENT EXCESS
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Risk-based $57,069 11.17% $20,442 4.00% $36,627 7.17%
Total Risk-based $63,457 12.54% $40,494 8.00% $22,963 4.54%
</TABLE>
Under capital guidelines enacted by FDICIA, CTL met the criteria for the
"well capitalized" standard at September 30, 1996 as follows:
<TABLE>
<CAPTION>
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Leverage $57,069 10.87% $26,246 5.00% $30,823 5.87%
Tier 1 Risk-based $57,069 11.17% $30,663 6.00% $26,406 5.17%
Total Risk-based $63,457 12.54% $50,618 10.00% $12,839 2.54%
</TABLE>
SHARES OUTSTANDING
At September 30, 1996 and December 31, 1995, the Company had outstanding
common stock of 6,640,242 and 7,101,590 shares, respectively. The decrease in
the number of outstanding shares was primarily attributable to the repurchase of
495,000 shares in 1996 (245,000 shares were repurchased in the third quarter of
1996) partially offset by the exercise of stock options. The Company's share
repurchases during the third quarter of 1996 completed its previously announced
intention to repurchase 800,000 shares of common stock. These shares were
repurchased at an average cost of $31.97 per share.
ACCOUNTING PRONOUNCEMENTS
-------------------------
On June 28, 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 establishes standards for when
transfers of financial assets including those with continuing involvement by the
transferor, should be considered a sale. SFAS No. 125 also establishes
standards for when a liability should be considered extinguished. This
statement was initially to be fully effective for transactions relating to the
transfers of assets and extinguishment of liabilities occurring after December
31, 1996; however, based on recent actions by the Financial Accounting Standards
Board (FASB) implementation of certain provisions of the statement may be
delayed for a year. The financial statement impact of adopting this standard is
not expected to be material to the Company.
35
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Financial Data Schedule (Exhibit 27)
b. On August 23, 1996, the Company filed an Amendment on Form 8-K/A to its
Current Report on Form 8-K (the "Current Report") to provide certain pro forma
financial information related to the Company's acquisition of CTL Credit Inc.
required by Form 8-K which, at the time of the filing of the Current Report, was
impracticable for the Company to have provided.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
----------------------------
Registrant
DATE: November 14, 1996 BY: /s/ Edward H. Sondker
--------------------------------------
Edward H. Sondker
President and Chief Executive Officer
DATE: November 14, 1996 BY: /s/ David A. Heaberlin
---------------------------------------
David A. Heaberlin
Executive Vice President and
Chief Financial Officer
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,185
<INT-BEARING-DEPOSITS> 615
<FED-FUNDS-SOLD> 37,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 113,784
<INVESTMENTS-CARRYING> 665,829
<INVESTMENTS-MARKET> 643,908
<LOANS> 2,571,582
<ALLOWANCE> 38,925
<TOTAL-ASSETS> 3,428,175
<DEPOSITS> 2,094,454
<SHORT-TERM> 830,813
<LIABILITIES-OTHER> 61,078
<LONG-TERM> 248,135
0
0
<COMMON> 66
<OTHER-SE> 193,629
<TOTAL-LIABILITIES-AND-EQUITY> 3,428,175
<INTEREST-LOAN> 139,167
<INTEREST-INVEST> 37,365
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 176,532
<INTEREST-DEPOSIT> 74,712
<INTEREST-EXPENSE> 118,602
<INTEREST-INCOME-NET> 57,930
<LOAN-LOSSES> 1,851
<SECURITIES-GAINS> (262)
<EXPENSE-OTHER> 52,576
<INCOME-PRETAX> 10,736
<INCOME-PRE-EXTRAORDINARY> 6,101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,101
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
<YIELD-ACTUAL> 2.48
<LOANS-NON> 13,895
<LOANS-PAST> 1,152
<LOANS-TROUBLED> 647
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 43,014
<CHARGE-OFFS> 6,204
<RECOVERIES> 1,015
<ALLOWANCE-CLOSE> 38,925
<ALLOWANCE-DOMESTIC> 38,925
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
