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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________________
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSACTION 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X NO
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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 definite proxy or information statement
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K [X]
As of May 31, 1997, there were outstanding 12,971,160 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 January 31, 1997, was $341,382,000. (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 1997 Annual Meeting of
Stockholders.
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The purpose of this amendment on Form 10-K/A to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (the "Form 10-K") of
Bay View Capital Corporation (the "Company") is to retroactively restate all
share and per share amounts included in the Form 10-K to give effect for a 2 for
1 stock split in the form of a 100% stock dividend declared on April 14, 1997 to
stockholders of record as of May 9, 1997 which was paid on June 2, 1997. The
Company hereby amends the Form 10-K in its entirety and replaces it with the
following:
FORM 10-K
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PART I
Item 1. Business
General............................................................ 3
Lending Activities................................................. 4
Securities Activities.............................................. 7
Retail Deposit Activities.......................................... 7
Borrowing Activities............................................... 8
Competition........................................................ 8
Supervision and Regulation......................................... 9
Other Subsidiaries................................................. 14
Employees.......................................................... 14
Executive Officers of the Registrant............................... 14
Item 2. Properties........................................................... 15
Item 3. Legal Proceedings.................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data - Five-Year Financial Information............ 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 19
Item 8. Financial Statements and Supplementary Data.......................... 55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 98
PART III
Item 10. Directors and Executive Officers of the Registrant................... 98
Item 11. Executive Compensation............................................... 98
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 98
Item 13. Certain Relationships and Related Transactions....................... 98
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 98
SIGNATURES
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FORWARD-LOOKING STATEMENTS
When used in this Form 10-K 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.
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PART I
ITEM 1. BUSINESS
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GENERAL
Bay View Capital Corporation (the "Company" or "BVCC"), a Delaware
corporation, is a savings and loan holding company incorporated in 1989. The
Company has been focused on the diversification of its asset origination
activities during 1996 and expects to continue this process prospectively (see
Management's Discussion and Analysis of Financial Condition and Results of
Operations "Strategic Overview" for further discussion of these diversification
efforts). Currently, the Company's principal business activities consist of the
operation of i) a bank through its wholly owned subsidiary, Bay View Federal
Bank, a Federal Savings Bank ("BVFB") and ii) a consumer finance company through
its wholly owned subsidiary, California Thrift & Loan, an industrial loan
company ("CTL"). The Company is also the holding company for Bay View
Securitization Corporation ("BVSC"), a Delaware corporation formed for the
purpose of issuing asset-backed securities through a trust.
Bay View Federal Bank
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BVFB is a federally chartered capital stock savings bank incorporated in
1911. In 1986, BVFB converted from a mutual to a stock association. In 1989,
BVFB became a wholly owned subsidiary of the Company. BVFB is a member of the
Federal Home Loan Bank of San Francisco ( the "FHLBSF").
BVFB has 26 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 mortgage loans originated by
BVFB are secured by properties located in California, primarily Northern
California. BVFB originates both fixed rate and adjustable rate loans. Since
1983, BVFB has shifted the concentration of its real estate loan portfolio to
adjustable rate mortgages ("ARMs"), which are sensitive to fluctuations in
market interest rates. The majority of these loans are secured by multifamily
residential properties. BVFB also originates real estate loans secured by
commercial and industrial properties. During 1996, BVFB discontinued its single
family mortgage lending activity.
California Thrift & Loan
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CTL was acquired by the Company effective June 1, 1996 in a business
purchase combination and is an FDIC-insured industrial loan company incorporated
under the laws of the State of California. CTL has 19 offices throughout
California and the western United States, and offers automobile and other
consumer financing. Its business strategy is to originate consumer loans at
yields which are generally above those offered by conventional financing sources
(such as commercial banks) while applying its traditional underwriting criteria
on a case-by-case basis to mitigate any potential loan losses. CTL underwrites
and purchases both new and used fixed-rate motor vehicle loans and consumer
installment contracts. The Company began implementing a planned restructuring
of CTL in late 1996. This restructuring, when completed, may also include
converting CTL to a "pure" finance company subject to supervision and regulation
only by the Commissioner of Corporations of the State of California.
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LENDING ACTIVITIES
Bay View Federal Bank
Residential Lending
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Multifamily Mortgage Loans (five or more units). At December 31, 1996,
loans secured by multifamily residential real estate totaled $1.03 billion,
representing 50.0% of BVFB's total loan portfolio at that date. In general,
these loans were originated as ARMs with terms of 30 years, although some of
these loans have monthly payments calculated on a 30-year amortization period
with a balloon payment due at maturity, typically 15 years. The majority of the
ARMs originated by BVFB prior to 1996 are indices to the Eleventh District Cost
of Funds ("COFI"). During 1996, management re-directed its business lending
practices and BVFB is moving away from COFI as its index for ARMs. Currently,
BVFB utilizes the London Interbank Offered Rate ("LIBOR") and prime rate as its
variable interest rate indices for the majority of its new originations.
BVFB 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. Properties securing multifamily loans are
required to generate cash flow sufficient to cover loan payments and other
property expenditures.
Single Family Mortgage Loans (one to four units). At December 31, 1996,
single family loans totaled $610.6 million and represented 29.5% of BVFB's total
loan portfolio at that date. Generally, ARMs secured by single family
residential properties have terms of 30 years. During 1996, BVFB de-emphasized
its focus on single family mortgage lending and discontinued its loan
origination operations.
Commercial Real Estate Lending
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At December 31, 1996, loans secured by commercial real estate totaled
$367.1 million, representing 17.7% of BVFB's total loan portfolio at that date.
Substantially all of the BVFB's commercial loans are ARMs. ARMs secured by
commercial real estate are generally made upon the same terms and conditions as
ARMs secured by multifamily residences. Currently, BVFB utilizes the LIBOR and
prime rate as its variable interest rate indexes for the majority of its new
originations.
Most of BVFB's commercial 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 ranging from $250,000 to
$1 million. BVFB generally does not originate commercial real estate loans
which exceed an LTV of 70%. The property's cash flow available for loan payments
is a limiting factor on the approved loan amount. Properties securing commercial
real estate loans are required to generate cash flow sufficient to cover loan
payments and other property expenditures.
Commercial real estate 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
commercial real estate properties is typically dependent on the successful
operation of the properties, as well as to adverse conditions in the real estate
market or the economy in general.
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Consumer Lending
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BVFB engages in consumer lending, primarily by making home equity loans and
auto loans. In November 1996, BVFB entered into a strategic alliance with Ultra
Funding, Ltd. ("Ultra"), a Texas limited partnership, under which BVFB has sole
first right of refusal to purchase all of the motor vehicle installment
contracts originated by Ultra subject to established underwriting criteria.
These auto receivables are serviced by CTL and are anticipated to be securitized
by BVSC on a periodic basis together with the future production from CTL.
Management expects Ultra to be a significant component (current production
approximates $3 million to $4 million per month) of its expanding consumer
finance strategy. At December 31, 1996, the consumer loan portfolio of BVFB
totaled $57.8 million, representing 2.8% of its total loan portfolio at that
date. See "California Thrift & Loan-Motor Vehicle Loans" below with regard to
the Company's strategy to securitize and sell its current assets as well as
future production.
Business Lending
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During 1995, BVFB introduced a new product line designed for small and
medium-sized businesses. Business loan products (i.e., business loans, credit
lines and term loans) and other services are being offered in order to expand
BVFB's customer base and make BVFB more competitive in the community banking
environment. As of December 31, 1996, BVFB's business loan portfolio was not
material in relation to its other lending.
Underwriting Policies and Procedures
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BVFB originates real estate loans through internal loan production
personnel. As part of the loan underwriting process, staff appraisers or
qualified 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 loan.
BVFB 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. BVFB also requires flood insurance for properties in flood
hazard zones to protect the property securing its interest. Consistent with
regional industry practices, BVFB does not necessarily require earthquake
insurance as part of its general underwriting practices, however, BVFB may
require mudslide, earthquake and/or other hazard insurance depending on the
location of the property.
Sales and Servicing of Real Estate Loans
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BVFB has historically sold (none in 1996 or 1995) whole real estate loans
and participation interests in real estate loans. BVFB 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 the sale. When
loans are sold, BVFB 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.
BVFB receives a fee for performing these services.
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California Thrift & Loan
Motor Vehicle Loans
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At December 31, 1996, motor vehicle loans totaled $286.3 million,
representing 67.8% of CTL's total loan portfolio at that date. CTL underwrites
and purchases fixed rate loans on both new and used motor vehicles on a non-
recourse basis. CTL's typical motor vehicle loan customer desires a higher
relative loan amount and/or longer term than is offered by many automobile
financing sources. In return for the flexibility of the product it offers,
management expects to continue to charge interest rates of 200 to 300 basis
points over the rates typically offered by traditional sources of motor vehicle
financing such as banks and captive finance companies. Management's primary
focus is on the credit quality of the customer rather than the value of the
collateral, and CTL will accordingly finance the full retail sales price of the
automobile plus taxes, licensing fees, insurance, dealer preparation fees and
extended warranty. CTL uses available technology, including a custom credit
scoring system, to process approval decisions typically within three hours of
receipt of information from a dealer.
CTL began to offer its motor vehicle loan products to an increased number
of selected used car dealerships in 1994. Prior to this, the amount of motor
vehicle loan business derived from used car dealerships was not significant.
CTL began offering 84-month motor vehicle loan financing in December 1994.
Prior to this, the typical motor vehicle loan had a term of 48 to 72 months.
Management believes that 84-month financing will allow it to further distinguish
its motor vehicle loan product without significantly increasing charge-offs or
delinquencies.
The Company's business strategy for CTL is focused on expanding its asset
origination capabilities and increasing the velocity of its capital utilization
through sales of its auto loans and subsequent securitization of the auto loans
by BVSC which will return a large portion of CTL's capital to the Company.
Other Consumer Financing
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At December 31, 1996, other consumer financing loans totaled $30.5 million,
representing 7.3% of CTL's total loan portfolio at that date. This activity was
discontinued in November 1996. CTL underwrites and purchases installment
contracts for larger home enhancement products such as organs, pianos and spas.
Like motor vehicle loans, installment contract financing usually comes to CTL
from dealers of the financed products. CTL will also make unsecured direct
loans and loans secured by personal property, but these loans comprise an
insignificant portion of CTL's loan portfolio. Management applies the same
credit criteria to other consumer financing as it applies to motor vehicle
lending.
Mortgage Loans, Revolving Credit Lines and Real Estate Participations
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At December 31, 1996, CTL's portfolio of mortgage loans, revolving credit
lines, and real estate loan participations totaled $105.3 million representing
24.9% of its total loan portfolio. The loan portfolio is primarily comprised of
first and second deeds of trust secured by single family residences. Almost all
of CTL's home equity loans are fixed-rate term loans, with maturities of up to
15 years. CTL's revolving credit lines (home equity lines of credit) are
variable-rate loans, which are tied to the prime rate. CTL's real estate loan
participations were purchased from and serviced by one unrelated party in 1996
and 1995. All of the real estate securing these loans is located in California.
CTL generally adheres to a maximum loan-to-value ratio of 75% at the time
of origination, supported by a thorough appraisal process. Therefore,
management has been willing to make loans to borrowers whose credit history or
financial condition might not qualify under conventional mortgage underwriting
and secondary market requirements.
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CTL's typical loan customer is a borrower who seeks to reduce monthly debt
payments. Exceptions to CTL's 75% loan-to-value criteria are small consumer-
based real estate-secured loans such as credit lines under $35,000, which are
primarily underwritten to applicants based on creditworthiness.
Commercial Equipment Leasing
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Prior to December 1996, CTL offered fixed-rate commercial equipment leases
principally in the state of California. In December 1996, CTL sold its entire
commercial equipment leasing portfolio and the related servicing obligations to
a local financial institution without recourse.
SECURITIES ACTIVITIES
The Company's securities activities are primarily conducted by BVFB. BVFB
purchases securities when high quality loan production is not available. The
securities portfolio is categorized into two general components: (i) investment
securities; and (ii) 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 the
Federal Home Loan 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. BVFB
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 BVFB's ongoing stream of net interest income and core earnings.
Securities deemed held-to-maturity are classified as such because BVFB has both
the intent and ability to hold the securities to maturity. Securities purchased
which may be sold prior to maturity are designated as available-for-sale at the
time of purchase.
As part of the Company's strategic objectives, management is de-emphasizing
the less profitable aspects of its business such as wholesale investment
activities. As a result, BVFB sold approximately $55 million of its MBS
available-for-sale in 1996. There were no additional mortgage-backed securities
purchased in 1996.
RETAIL DEPOSIT ACTIVITIES
Bay View Federal Bank
BVFB attracts both short-term and long-term deposits from the general
public by offering a wide range of deposit products and services. BVFB, 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 Network)
Enhancing the value of BVFB's retail branch franchise remains one of
Management's primary objectives. BVFB plans to continue to expand its retail
banking presence in Northern California through internal growth, new product
development and the acquisition or purchase of deposits from other institutions.
During 1995, BVFB began offering a variety of deposit and related banking
services designed for small businesses, including specialized checking. In
1996, BVFB continued to emphasize the development and marketing of its
transaction account products, and as a result has successfully increased its
percentage of transaction accounts in relation to total customer deposits to
more than 30% which has contributed to lower cost of funds.
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California Thrift & Loan
CTL's customer deposits are primarily comprised of thrift certificates
which are similar to certificates of deposits with the exception that they are
callable at par plus accrued interest. When thrift certificates are purchased by
customers, CTL has, as thrift certificates have been issued, reserved the right
to repurchase the certificates at any time upon thirty days notice. Utilizing
this call provision, CTL redeemed the higher cost component (higher than BVFB's
incremental borrowing cost) of these deposits at face value (approximately $267
million) as of December 31, 1996.
The remainder of the CTL customer deposits (which are lower cost than
BVFB's incremental borrowing cost) will be sold to BVFB. An application for the
approval of the sale of these deposits to BVFB has been filed with the Office of
Thrift Supervision. The sale is anticipated to be completed during the first
quarter of 1997.
BORROWING ACTIVITIES
The Company's borrowing activities are primarily conducted by BVFB. The
Federal Home Loan Bank ("FHLB") System functions in a reserve credit capacity
for savings institutions. As a member, BVFB 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.
The FHLBSF offers a full range of 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. BVFB 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.
BVFB also utilizes borrowings under reverse repurchase agreements with
securities dealers and the FHLBSF. Reverse repurchase agreements are sales of
securities owned by BVFB to security dealers with a commitment by BVFB to
repurchase such securities for a predetermined price at a future date.
COMPETITION
Bay View Federal Bank
BVFB faces strong competition both in originating loans and in attracting
deposits. Competition in originating multi-family and commercial real estate
mortgage loans comes primarily from other savings institutions, commercial banks
and mortgage bankers located in the San Francisco Bay Area. BVFB 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.
Competition in attracting deposits comes primarily from other savings
institutions, commercial banks, brokerage firms, mutual funds, credit unions and
other types of investment companies. The ability of BVFB 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
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BVFB has ATMs located throughout the San Francisco Bay Area which provide
24-hour cash availability to its customers. BVFB also participates in the STAR
System and the CIRRUS System Network, which link BVFB ATMs with those of a
number of major financial institutions. This linkage provides customers with
cash availability across the United States.
BVFB also has a wholly owned subsidiary, MoneyCare, Inc., which offers
uninsured investment products such as mutual funds and annuities which provide
BVFB's customers with additional choices and products that meet their individual
investment needs.
California Thrift & Loan
CTL has experienced increased competition, particularly for its motor
vehicle loan programs. This competition comes primarily from large well-
capitalized lending institutions and finance companies. Management intends to
build origination and purchase volumes through more competitive loan pricing and
further improvements in service, marketing and product flexibility. It also
intends to expand origination capability and market share through geographic
expansion and additional business acquisitions, as warranted.
SUPERVISION AND REGULATION
Bay View Capital Corporation
General. The Company, together with its subsidiaries, is subject to
extensive examination, supervision and regulation by the OTS and the Federal
Deposit Insurance Corporation (the "FDIC"). Applicable regulations govern, among
other things, BVFB'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 the
regulations of the Board of Governors of the Federal Reserve System with respect
to required reserves and certain other matters.
Holding Company Regulations. 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.
Bay View Federal Bank
Federal Regulation of Savings Institutions. The OTS has extensive
authority over the operations of savings institutions. As part of this
authority, BVFB is required to file periodic reports with the OTS and the FDIC.
The OTS has extensive enforcement authority over all savings institutions and
their holding companies, including BVFB 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. BVFB is a member of the
Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC.
BVFB's deposits are insured up to applicable limits by the FDIC. 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 within each risk category
there are three subcategories.
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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.
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.
During the third quarter of 1996, federal legislation to recapitalize and
fully fund the Savings Association Insurance Fund was signed into law. Customer
deposits for BVFB are SAIF-insured, and as a result of the legislation BVFB was
required to pay a one-time special assessment of $11.7 million pre-tax ($6.7
million after tax or $.485 per share). The legislation had no effect on CTL, as
its deposits are insured under the Bank Insurance Fund.
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 6.48 basis points which will translate into lower annual deposit
costs in 1997. The estimated annual savings associated with these lower
premiums will be approximately $2.7 million based on the level of deposits for
BVFB at December 31, 1996.
Regulatory Capital Requirements. Federally insured savings institutions
such as BVFB 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, 1996, 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,
1996, if the interest risk component regulation had been implemented, BVFB 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 retained
earnings of BVFB are substantially restricted based on certain laws and
regulations relating to the payment of dividends. Federal 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.
Generally, Tier I 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 regulators, 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 institutions tangible core or
risk-based capital exceeds its respective fully
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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. BVFB
meets the requirements for a Tier I 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, 1996, BVFB 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. BVFB 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 geographic 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.
California Thrift & Loan
CTL is subject to supervision and regulation by the Commissioner of
Corporations of the State of California (the "Commissioner") and, as a Federally
insured depository institution, by the FDIC. In addition, CTL is subject to
regulation in Arizona, Colorado, Illinois, Nevada, New Mexico, Oregon and Texas
as a result of its operations in those states. The Company began implementing a
significant restructuring of CTL in late 1996. This restructuring, when
completed, may also include converting CTL to a "pure" finance company subject
to supervision and regulation by the Commissioner only.
CALIFORNIA LAW
The thrift and loan business conducted by CTL is governed by the California
Industrial Loan Law and the rules and regulations of the Commissioner, which,
among other things, regulate the issuance of certain thrift investment
certificates as well as the collateral requirements and maximum maturities of
the various types of loans that are permitted to be made by California-chartered
industrial loan companies (also called thrift and loan companies).
Subject to restrictions imposed by California law, CTL is permitted to make
secured and unsecured consumer and non-consumer loans. The maximum term for
repayment of loans made by thrift and loan companies ranges up to 40 years
depending upon the type of collateral and priority of secured position, if any.
Although non-consumer secured loans of fewer than 10 years may generally be
repaid in unequal periodic payments, consumer loans must generally be repaid in
substantially equal periodic payments. California law limits lending activities
outside of California by thrift and loan companies to no more than 40% of total
assets.
California law contains extensive requirements for the diversification of
the loan portfolios of thrift and loan companies. A thrift and loan with
outstanding investment certificates may not, among other things, place more than
25% of its loans or other obligations in loans or obligations which are secured
only partially, but not primarily, by real property; may not make any one loan
secured primarily by improved real property which exceeds 20% of its paid-up and
unimpaired capital stock and surplus not available for dividends (10% for
unimproved property); may not lend an amount in excess of 5% of its paid-up and
unimpaired capital stock and surplus not available for dividends upon the
security of the stock of any one corporation; may not make loans to, or hold the
obligations of, any one person as primary obligor in an aggregate principal
amount exceeding 20% of its paid-up and unimpaired capital stock and surplus not
available for dividends (5% if the loans are unsecured); may
11
<PAGE>
not have outstanding leases which exceed 20% of the thrift's aggregate
receivables; and may have no more than 70% of its total assets consisting of
loans which have remaining terms to maturity in excess of seven years and are
secured solely or primarily by real property. Loans that are for the purchase or
refinance of residential property, are salable in the secondary market and are
owned by the company for less than 90 days are considered to have a remaining
term less than seven years for this purpose. Any loan insured by a federal or
state agency is also deemed to have a term of less than seven years for this
purpose. Management believes that CTL can maintain compliance with such
regulatory requirements by managing the mix of its assets and loans without any
material adverse impact on earnings or liquidity.
A thrift and loan generally may not make any loan to, or hold an obligation
of, any of its directors or officers or any director or officer of its holding
company or affiliates, except in specified cases and subject to regulation by
the Commissioner. A thrift and loan also may not make any loan to, or hold any
obligation of, any of its stockholders or any stockholder of its holding company
or affiliates, except that this prohibition does not apply to persons who own
less than 10% of the stock of a holding company or affiliates which are listed
on a national securities exchange.
A thrift and loan is subject to certain leverage limitations which are not
generally applicable to commercial banks or savings and loan associations, but
these are generally preempted by stricter federal rules. The Commissioner may
limit the amount of brokered deposits a thrift and loan may have outstanding.
The limit on CTL's brokered deposits is $100 million.
Thrift and loan companies are not permitted to borrow, except by the sale
of thrift investment certificates, in an amount exceeding 300% of tangible net
worth, surplus and undivided profits without the Commissioner's prior consent.
All sums borrowed in excess of 150% of tangible net worth, surplus and undivided
profits must be unsecured borrowings or, if secured, approved in advance by the
Commissioner, and be included as thrift investment certificates for purposes of
computing the maximum amount of certificates a thrift and loan may issue.
However, collateralized Federal Home Loan Bank advances are excluded for this
test of secured borrowings and are not specifically limited by California law.
Under California law, thrift and loan companies are generally limited to
investments, other than loans, that are legal investments for commercial banks.
Current policy of the Commissioner prohibits investment in subsidiary companies.
California commercial banks are prohibited from investing an amount exceeding
15% of stockholders' equity in the securities of any one issuer, except for
specified obligations of the United States, California and local governments and
agencies. A thrift and loan company may acquire real property only in
satisfaction of debts previously contracted, pursuant to certain foreclosure
transactions or as may be necessary for the transaction of its business, in
which case such investment is limited to one-third of a thrift and loan's paid-
in capital stock and surplus not available for dividends. Management believes
it is in compliance with these requirements.
The California Industrial Loan Law allows a thrift and loan to increase its
secondary capital by issuing interest-bearing capital notes in the form of
subordinated notes and debentures. Such notes are not deposits and are not
insured by the FDIC or any other governmental agency, and generally are required
to have a maturity of at least seven years, and are subordinated to thrift
investment certificate holders, general creditors and secured creditors of the
issuing thrift.
Although investment authority and other activities that may be engaged in
by CTL generally are prescribed under the California Industrial Loan Law,
certain federal laws may limit CTL's ability to engage in certain activities
that otherwise are authorized under the California Industrial Loan Law. See
"Federal Law" below.
12
<PAGE>
FEDERAL LAW
CTL's thrift investment certificates are insured by the Bank Insurance Fund
(the "BIF") administered by the FDIC to the full extent by law. As an insurer of
deposits, the FDIC issues regulations, conducts examinations, requires the
filing of reports and generally supervises the operations of institutions to
which it provides deposit insurance. The FDIC is also the federal agency charged
with regulating state-chartered banks that are not members of the Federal
Reserve System. For this purpose, CTL is considered to be a state-chartered
bank. The approval or non-objection of the FDIC is required prior to any merger,
consolidation or acquisition of control of CTL, and prior to the establishment
or relocation of a branch office facility of CTL. An acquirer may be deemed to
control CTL if it holds, directly or indirectly or acting in concert with
others, 10% or more of a class of voting stock of CTL. This supervision and
regulation is intended primarily for the protection of depositors.
FDIC Insurance Assessments and Regulatory Capital. All FDIC-insured
institutions pay semi-annual assessments against deposit balances. CTL paid 23
cents per $100 of deposits effective January 1, 1994 based on its "well-
capitalized" status. The FDIC reduced deposit insurance premium rates to 4 cents
per $100 of deposits effective June 1, 1995, and then reduced the annual deposit
insurance premium to a flat $2,000 effective January 1, 1996. CTL's capital
ratios at December 31, 1996 placed it in the "well capitalized" category.
Brokered Deposits and Benefit Plan Deposits. An undercapitalized bank
cannot accept, renew, or roll over deposits obtained through a deposit broker,
and may not solicit deposits by offering interest rates that are more than 75
basis points higher than market rates. Banks that are adequately capitalized
but not well capitalized must obtain a waiver from the FDIC in order to accept,
renew or roll over brokered deposits, and even if a waiver is granted may not
solicit deposits, through a broker or otherwise, by offering interest rates that
exceed market rates by more than 75 basis points. Similarly, the ability to
accept benefit plan deposits with pass-through deposit insurance (for each plan
beneficiary) is tied to capitalization levels. CTL is well capitalized, and
therefore may accept brokered deposits and benefit plan deposits free from these
restrictions.
Fair Lending Laws. The Federal government announced a policy of strict
enforcement of laws that prohibit discrimination against protected groups in
lending and require banking institutions to serve the credit needs of their
communities. Federal regulations seek to measure whether a retail institution,
such as CTL, is adequately serving the credit needs of low and moderate income
communities in its markets. Management believes that CTL's lending practices and
other policies fully comply with current law.
Restrictions on Activities. Under FDIC regulations, CTL may not engage as
principal in any activities that are not permissible for national banks and
their subsidiaries unless (i) CTL meets the applicable FDIC capital standards
described above, and (ii) the FDIC has determined that the activity would pose
no significant risk to the BIF. The types of consumer finance, real property
lending (including second mortgage lending) and equipment leasing activities
conducted by CTL have been determined by the Office of the Comptroller of the
Currency to be permissible activities for national banks.
CTL is prohibited, under both federal and state laws, from engaging in
certain tying arrangements in connection with an extension of credit, sale or
lease of property or provision of services. For example, with certain
exceptions, CTL may not require a customer to obtain other services provided by
CTL and may not require the customer to promise not to obtain other services
from a competitor as a condition to an extension of credit or reduced
consideration for credit to the customer.
In addition, federal law imposes restrictions on transactions between CTL
and its affiliates. All such transactions, including leases and service
contracts, must be on terms and under circumstances that are substantially the
same, or at least as favorable to CTL, as those prevailing at the time for
comparable transactions involving non-affiliated companies. Affiliate
transactions are also subject to certain quantitative limits.
13
<PAGE>
OTHER SUBSIDIARIES
Previously, the Company had invested in real estate with various joint
venture partners for the development of single family homes through Regent
Financial Corporation, a subsidiary of the Company, and Bay View Financial
Corporation ("BVFC"), a subsidiary of BVFB. BVFC is a wholly owned service
corporation subsidiary of BVFB with the power to engage generally in service
corporation activities, and has three subsidiaries: Bay View Auxiliary
Corporation, Bay Counties Insurance Agency, Inc. and Carquinez Reserve, Inc.
During 1993, the Company curtailed its participation in real estate joint
ventures and sold off all of its related interests in these type of ventures.
The Company has no current plans to re-enter this type of business. At present,
these subsidiaries of BVFB are principally inactive and were insignificant to
the Company's operations during 1996 and 1995.
MoneyCare, Inc. ("MoneyCare"), a wholly owned subsidiary of BVFB, is also a
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. BVFB stresses cross-selling to improve profitability and solidify
customer relationships.
EMPLOYEES
At December 31, 1996, the Company had a total of 576 employees on a full-
time equivalent ("FTE") basis (383 FTE at BVFB and 193 FTE at CTL). The
Company's employees are not represented by any collective bargaining groups. The
Company considers its relations with its employees to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Registrant.
<TABLE>
<CAPTION>
YEAR
NAME AGE POSITION APPOINTED
- ----------------------- ----- ------------------------------- ---------
<S> <C> <C> <C>
Edward H. Sondker 49 Director, President and Chief 1995
Executive Officer
Robert J. Flax 47 Executive Vice President, 1985
General Counsel and Corporate
Secretary
David A. Heaberlin 47 Executive Vice President and 1995
Chief Financial Officer
John N. Buckley 39 Senior Vice President and 1994
Director of Credit
Administration for the Company
and BVFB
Cynthia L. Hart 49 Senior Vice President and 1992
Director of Banking Centers
for the Company and BVFB
</TABLE>
The business experience of each of the executive officers of the Company is
as follows:
Mr. Sondker has been a Director, President and Chief Executive Officer of
the Company since 1995. He joined BVFB 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 BVFB
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 BVFB, he was a trial attorney in private
practice in San Francisco from 1976 to 1980.
14
<PAGE>
Mr. Heaberlin has been Executive Vice President and Chief Financial Officer
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 BVFB in September 1993. Previously, he
served at 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 BVFB 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 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
- --------------------
As of December 31, 1996, BVFB occupies 25 of its 26 banking centers and the
administrative corporate office for the Company under operating lease
arrangements expiring at various dates through 2012. BVFB owns the property in
which one of its banking centers is located. In 1996, the Company sold its
corporate office complex and entered into an operating lease arrangement for new
facilities.
As of December 31, 1996, CTL occupies 19 offices under operating lease
arrangements expiring on various dates through 2006. In 1996, CTLs corporate
office complex was sold and CTL relocated its administrative offices.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
See Note 19 of the Consolidated Financial Statement Notes at 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,
1996.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The Company's common stock (symbol: BVFS) is traded on the NASDAQ National
Market. At December 31, 1996, there were 13,349,270 shares of the Company's
common stock outstanding, which were owned by 1,441 shareholders of record. The
following is a summary of year-end values for 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Stock price $21 3/16 $14 1/4
Book value per share $14.98 $14.64
Price/book ratio 141% 97%
Tangible book value per share $14.22 $14.23
Price/tangible book ratio 149% 100%
Earnings (loss) per share $ 0.79 $(0.32)
Earnings multiple 26.8 N/A
Core earnings per share (note 1) $ 1.27 $ 0.45
Core earnings multiple 16.6 31.3
Tangible cash earnings per share (note 2) $ 1.46 $ 0.66
Tangible cash earnings multiple 14.5 21.6
</TABLE>
The following is a summary of selected financial ratios excluding special
mention items and SAIF recapitalization assessment for 1996 and fourth quarter
nonrecurring charges for 1995. See also Item 6 for these selected financial
ratios including such items:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Ratio of general and administrative
expenses to average assets 1.65% 1.53%
Efficiency ratio 58.04% 73.46%
Return on average assets 0.55% 0.21%
Return on average equity 8.70% 2.99%
Dividend payout ratio 23.92% 65.93%
</TABLE>
The following is a summary of selected quarterly financial data, stock
price activity and dividends declared for 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------
(DOLLARS IN THOUSANDS FIRST SECOND THIRD FOURTH
EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Core earnings (note 1) $ 3,993 $ 4,216 $ 4,648 $ 4,868
Per share data:
Core earnings (note 1) $ 0.28 $ 0.30 $ 0.33 $ 0.36
Tangible cash earnings (note 2) $ 0.31 $ 0.34 $ 0.41 $ 0.40
Stock price - high $16 9/16 $17 3/4 $19 5/8 $21 3/4
Stock price - low $13 1/8 $15 1/8 $ 16 $17 3/8
Dividends $ 0.075 $ 0.075 $ 0.075 $ 0.08
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------
(DOLLARS IN THOUSANDS FIRST SECOND THIRD FOURTH
EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Core earnings (loss) (note 1) $ 2,443 $ (749) $ 2,276 $ 2,676
Per share data:
Core earnings (loss) (note 1) $ 0.17 $ (0.05) $ 0.15 $ 0.18
Tangible cash earnings (loss) (note 2) $ 0.20 $ (0.02) $ 0.18 $ 0.29
Stock price - high $11 5/8 $13 15/16 $14 1/4 $14 7/8
Stock price - low $ 8 7/8 $11 1/8 $ 12 $ 13
Dividends $ 0.075 $ 0.075 $ 0.075 $ 0.075
</TABLE>
Note:
(1) Core earnings are calculated excluding the one-time SAIF recapitalization
assessment of $6.7 million ($0.485 per share) for 1996 and excluding fourth
quarter 1995 nonrecurring charges of $11.3 million ($0.775 per share).
(2) The tangible cash earnings calculation is based on core earnings excluding
charges tied to the market value of the Company's shares related to
management incentive plans, the Employee Stock Ownership Plan and non-cash
charges associated with the amortization of intangibles. The following table
shows the components of tangible cash earnings for the respective periods:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Core earnings $17,725 $6,646
Adjustments:
Amortization of intangibles 1,746 2,758
ESOP 222 203
Management incentive plans 690 -
------------ ------------
Tangible cash earnings $20,383 $9,607
============ ============
</TABLE>
The ability of the Company to pay dividends may be limited by certain
regulatory restrictions. "See Supervision and Regulatory Limitations on
Dividends and Other Capital Distributions" at Item 1 and Note 14 of the
Consolidated Financial Statements at Item 8.
On May 28, 1996, the Company completed the sale of $50 million of 8.42%
Senior debentures (the "Debentures") which were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in a private
placement under Section 4(2) of the Securities Act. The debentures were sold
only to (i) "qualified institutional buyers," as defined in, and in accordance
with, Rule 144A under the Securities Act and (ii) a small number of private
investment companies, each of which had assets of at least $20 million and was
an "accredited investor" as defined in, and in accordance with, Regulation D
under the Securities Act. The aggregate offering price was $50 million. Keefe,
Bruyette & Woods, Inc. acted as placement agent on a best efforts basis in
connection with the sale of the Debentures. For its services as placement agent,
Keefe, Bruyette & Woods, Inc. received $700,000 in commissions.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA - FIVE-YEAR FINANCIAL INFORMATION (INCLUDING
- -----------------------------------------------------------------------------
CTL EFFECTIVE JUNE 1, 1996) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET INFORMATION
Total assets $3,300,262 $3,004,496 $3,166,529 $2,663,542 $2,586,775
Investment securities 29,006 47,963 32,841 11,399 23,231
Mortgage-backed securities 577,613 731,378 921,680 718,696 457,215
Loans receivable 2,474,717 2,062,268 2,054,563 1,776,820 1,943,346
Customer deposits 1,763,967 1,819,840 1,707,376 1,694,263 1,488,252
Borrowings 1,245,537 941,465 1,219,958 741,414 884,479
Stockholders' equity 200,062 207,977 217,315 210,976 196,869
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS
INFORMATION
Interest income $ 241,755 $ 216,463 $ 197,326 $ 191,526 $ 219,834
Interest expense (160,773) (160,547) (130,401) (121,850) (148,295)
--------- --------- --------- --------- ---------
Net interest income 80,982 55,916 66,925 69,676 71,539
Provision for losses on loans (1,898) (4,284) (2,367) (7,031) (24,953)
Gain (loss) on loans and securities (1,453) (2,510) (1,081) 1,091 378
Other income 10,017 8,652 8,619 8,465 6,708
Equity in loss of real estate joint - - - - (1,275)
ventures
Provision for losses on real estate 103 (749) (145) (819) (1,872)
SAIF recapitalization assessment (11,750) - - - -
Other expenses (56,755) (59,879) (49,610) (48,976) (40,834)
--------- --------- --------- --------- ---------
Income (loss) before income tax expense 19,246 (2,854) 22,341 22,406 9,691
Income tax (expense) benefit (8,277) 708 (7,828) (9,765) (3,596)
Cumulative effect of accounting change - - - - 4,197
Extraordinary items, net of tax - (2,544) - (132) (265)
--------- --------- --------- --------- ---------
Net income (loss) $ 10,969 $ (4,690) $ 14,513 $ 12,509 $ 10,027
========= ========= ========= ========= =========
Primary earnings (loss) per share:
Income before cumulative effect of
accounting change and extraordinary items $ 0.79 $ (0.14) $ 1.01 $ 0.90 $ 0.44
Net income (loss) $ 0.79 $ (0.32) $ 1.01 $ 0.89 $ 0.73
Dividends per share $ 0.305 $ 0.30 $ 0.30 $ 0.30 $ 0.30
SELECTED OTHER INFORMATION
Net interest margin 2.57% 1.86% 2.34% 2.74% 2.84%
Ratio of general and administrative
expenses to average assets 1.84% 1.84% 1.59% 1.78% 1.51%
Efficiency ratio 64.79% 88.30% 62.60% 59.98% 49.95%
Return on average assets 0.34% (0.15)% 0.49% 0.47% 0.38%
Return on average equity 5.39% (2.11)% 6.79% 6.14% 5.10%
Dividend payout ratio 38.61% (93.75)% 29.70% 33.71% 40.82%
Book value per share $ 14.98 $ 14.64 $ 15.16 $ 14.95 $ 14.32
Tangible book value per share $ 14.22 $ 14.23 $ 14.47 $ 14.08 $ 13.77
Average capital/average assets 6.37% 7.17% 7.17% 7.61% 7.47%
Ratio of capital to total assets 6.06% 6.92% 6.86% 7.92% 7.61%
Nonperforming assets $ 24,310 $ 38,811 $ 50,577 $ 72,365 $ 69,301
Ratio to total assets 0.74% 1.29% 1.60% 2.72% 2.68%
Troubled debt restructures $ 509 $ 15,641 $ 13,948 $ 14,188 $ 20,791
Ratio to total assets 0.02% 0.52% 0.44% 0.53% 0.80%
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------
RESULTS OF OPERATION
- --------------------
INDEX
<TABLE>
<S> <C>
Strategic Overview.............................................................. 20
Acquisition of California Thrift & Loan......................................... 23
Results of Operations........................................................... 25
Net Interest Income.......................................................... 27
Interest Income................................................................. 30
Interest Income on Loans Receivable.......................................... 30
Interest Income on Mortgage-backed Securities................................ 30
Interest and Dividends on Investments........................................ 30
Interest Expense................................................................ 31
Interest Expense on Customer Deposits........................................ 31
Interest Expense on Borrowings............................................... 32
Provision for Losses on Loans................................................... 33
Noninterest Income.............................................................. 33
Noninterest Expense............................................................. 33
General and Administrative Expense........................................... 33
SAIF Recapitalization Assessment............................................. 35
Income and Expenses from Real Estate Owned................................... 35
Amortization and Write-down of Intangibles................................... 35
Income Taxes................................................................. 36
Extraordinary Item........................................................... 36
Balance Sheet Analysis.......................................................... 37
Securities................................................................... 37
Loans and Real Estate Owned.................................................. 39
Loan Portfolio Composition............................................... 39
Loan Originations, Purchases and Sales................................... 40
Delinquent, Nonaccrual and Restructured Loans............................ 41
Loans Delinquent 60 days or More......................................... 41
Nonperforming Assets, Troubled Debt Restructures and Real Estate Owned... 41
Allowance for Losses on Loans................................................ 43
Retail Customer Deposits..................................................... 45
Borrowings................................................................... 47
Asset/Liability Management...................................................... 48
General...................................................................... 48
Interest Rate Risk........................................................... 48
Interest Rate Sensitivity.................................................... 49
Liquidity and Capital Resources................................................. 52
Liquidity.................................................................... 52
Capital Resources............................................................ 53
Impact of New Accounting Standards.............................................. 54
Impact of Inflation and Changing Prices......................................... 54
</TABLE>
19
<PAGE>
STRATEGIC OVERVIEW
------------------
The Company has been aggressively restructuring and diversifying its
operations since late 1995. The following is an overview of the principal
strategies being pursued and the most significant actions implemented thus far.
THE COMPANY'S MISSION STATEMENT
To build a diversified financial services company by investing in and
creating niche lending generating companies that originate high yielding assets
and maximizing per share market value.
THE COMPANY'S CAPITAL STRATEGY
In order to realize the Company's objectives, management is pursuing a
capital strategy that encompasses the following:
1. To de-emphasize the 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.
BAY VIEW FEDERAL BANK STRATEGIES
BVFB has 26 branches servicing 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 exposure. 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 30.3% at
December 31, 1996 from approximately 20% at year-end 1995. In addition, BVFB
prepaid a significant portion of its high cost borrowings and also sold certain
MBS from its available-for-sale portfolio to mitigate its interest rate risk
exposure. At December 31, 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. Including the
effect of interest rate swaps, 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
increase/decrease in interest rates) was 1.15% and 0.79% at December 31, 1996
and 1995, respectively, as compared to 3.02% at December 31, 1994.
20
<PAGE>
CALIFORNIA THRIFT & LOAN STRATEGIES
CTL is the Company's consumer finance subsidiary 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. The
Company acquired CTL in June 1996 and the acquisition was accounted for under
the purchase accounting method. It is currently headquartered in Covina,
California and operates 19 offices throughout California and western United
States.
The Company's focus at CTL is to capture asset values and increase the
velocity of capital utilization. As a result, the Company's management began
implementing a significant restructuring of CTL's balance sheet in late 1996.
The following summarizes the status of those actions.
Sale of Equipment Leasing Portfolio
- -----------------------------------
CTL signed a definitive agreement for the sale of its entire equipment
leasing portfolio for cash. The leases sold aggregated $60 million and this
transaction closed in December, 1996. The proceeds from this transaction
slightly exceeded the value established during the purchase accounting valuation
process. This sale combined with other restructuring efforts outlined herein
enabled CTL to return $15 million of capital to the Company for redeployment on
December 31, 1996.
Reduction of High Cost Customer Deposits
- ----------------------------------------
CTL's customer deposits are primarily comprised of thrift certificates
which are similar to certificates of deposit with the exception that they are
callable at par plus accrued interest. When thrift certificates are purchased by
customers, CTL reserves the right to repurchase the certificates at any time
upon thirty days notice. Utilizing this call provision, CTL redeemed the higher
cost component (higher than BVFB's incremental borrowing cost) of these deposits
at face value (approximately $267 million) as of December 31, 1996.
The remainder of the CTL customer deposits (which are lower cost than
BVFB's incremental borrowing cost) will be sold to BVFB. An application for the
approval of the sale of these deposits to BVFB has been filed with the OTS. The
sale is anticipated to be completed during the first quarter of 1997 and will
allow CTL to further return approximately $8 million of capital to the Company.
Sale and Securitization of Auto Loan Portfolio
- ----------------------------------------------
CTL intends to sell a portion of its auto loan portfolio to BVSC, a
Delaware corporation formed for the purpose of issuing asset-backed securities
through a trust. The sale of the auto loans is expected to enable CTL to return
approximately $25 million of capital to the Company.
The premium arising from the sale of the auto loan portfolio has been
recorded as part of the purchase accounting valuations related to the June 1996
acquisition of CTL. In conjunction with the decision to securitize the auto
loan portfolio, management entered into certain hedges which materially
insulated the purchase accounting valuation from movements in interest rates.
In November 1996, BVSC filed with the Securities and Exchange Commission
("SEC") a shelf registration statement on Form S-3 for $500 million of
automobile receivable-backed securities. The shelf registration statement was
declared effective by the SEC and in January 1997, $253 million of such
securities were issued pursuant to this shelf registration. Capital Markets
Assurance Corporation provided credit enhancement of this initial transaction.
21
<PAGE>
BVFB has entered into a strategic alliance with Ultra Funding, Ltd., a
Texas limited partnership, to purchase motor vehicle installment contracts
("auto receivables") originated by Ultra. These auto receivables are serviced by
CTL and are anticipated to be securitized on a periodic basis together with the
future production from CTL. Management expects Ultra to be a significant
component (current production approximates $3 - $4 million per month) of its
expanding consumer finance strategy.
The actions described above are consistent with the Company's capital
strategy to increase the velocity of capital utilization, de-emphasize less
profitable activities and return the capital of subsidiaries in excess of the
regulatory "well capitalized" requirement to the Company. The Company expects to
utilize the estimated $48 million of capital being returned by CTL to
aggressively pursue accretive acquisition opportunities and/or repurchase
additional shares. See discussion on "Capital Redeployment Strategies".
CAPITAL REDEPLOYMENT STRATEGIES
Stock Repurchase Program
- ------------------------
The Company's outstanding shares of common stock at December 31, 1996 and
1995 were 13,349,270 shares and 14,203,180 shares, respectively. The decrease in
the number of outstanding shares was primarily attributable to the repurchase of
990,000 shares in 1996 partially offset by the exercise of stock options. As a
result of the stock repurchases, weighted average shares outstanding (including
certain common stock equivalents) used for earnings per share calculations has
decreased from 14,586,984 shares for 1995 to 13,899,838 shares for 1996, a
decrease of approximately 4.9%. The Company's share repurchases during 1995 and
1996 completed its previously announced intention to repurchase 1,600,000 shares
of common stock. These shares were repurchased at an average cost of $15.985.
In January 1997, the Company approved a further repurchase program of $25
million to further redeploy its excess capital. This authorization should
enable the Company to repurchase approximately 950,000 shares (based on most
recent share price of $26.4375) bringing the aggregate repurchases to
approximately 2.6 million shares or 17.5% of the 14.8 million shares outstanding
when the initial share repurchase program was approved.
Acquisition of EXXE Data Corporation/Concord Growth Corporation
- ---------------------------------------------------------------
In January 1997, the Company signed a definitive agreement to acquire EXXE
Data Corporation ("EXXE") and its wholly owned nationwide commercial finance
subsidiary, Concord Growth Corporation ("CGC"). Under the terms of the
definitive agreement, holders of EXXE capital stock, warrants and options will
receive an initial aggregate payment of $19.8 million at closing and will be
entitled to potential future payments, dependent on the future financial
performance of CGC, of up to $34 million.
The Company estimates that the first full year EPS enhancement from this
transaction will approximate $.07 per share or $.025 (50%+) more than the
estimated $.045 per share benefit that which would be achieved from utilizing
the $19.8 million to repurchase shares of the Company's common stock. The
closing payment of $19.8 million constitutes approximately 9.4 times the
estimated initial year net income for CGC. Cash basis EPS enhancement from this
transaction, which excludes the amortization of goodwill arising from the
transaction, is estimated at $.15 for the first full year of operations or more
than 300% better than that which would be achieved by utilizing the $19.8
million to repurchase the Company shares. When measured against the first full
year cash basis EPS, the closing payment of $19.8 million represents
approximately 6.2 times the initial year earnings estimate for CGC. The Company
expects, for the twelve months following the completion of the CGC acquisition,
that consumer and commercial finance activities will contribute approximately
20% of the Company's consolidated profits.
22
<PAGE>
The acquisition of EXXE/CGC will be accounted for as a purchase and is
expected to be completed during March 1997. Subject to the approval of EXXE
shareholders, the purchase price is currently estimated to exceed the fair value
of the net assets acquired by $16.5 million which the Company anticipates
amortizing over a 15 year period. CGC is expected to be a stand-alone
subsidiary of the Company.
Other Capital Strategies
- ------------------------
The Company has estimated that capital of $48 million would be returned
from CTL in connection with the sales of CTL's auto loans and the subsequent
securitization of such assets by BVSC and balance sheet restructuring of CTL.
The capital returned from CTL when combined with excess capital available at
BVFB and excess cash at the Company would approximate more than $80 million.
The Company is currently contemplating the issuance of commercial paper and
the issuance of subordinated notes by BVFB. The commercial paper issuance would
be utilized as a funding alternative for CGC, CTL and certain BVFB assets. The
subordinated notes would be utilized to expand BVFB's Tier II regulatory capital
and reduce Tier I capital. Management estimates that these actions combined
with 1997 earnings will enable the Company to generate at least $40 million of
additional capital for redeployment.
The EXXE/CGC acquisition and the $25 million share repurchase will redeploy
roughly $50 million of the $80 million currently available. Following the
completion of these transactions, the Company estimates that at least $70
million of capital remains available for redeployment during 1997.
The Company expects to continue utilizing this capital pool to aggressively
pursue accretive acquisition opportunities to expand its commercial and consumer
finance platforms. Management will also continue to explore the acquisition of
other potential high quality niche origination capabilities, as well as
opportunities to further enhance the BVFB deposit franchise. These acquisition
activities are likely to be combined with further future share repurchases.
ACQUISITION OF CALIFORNIA THRIFT & LOAN
On June 14, 1996, the Company acquired CTL Credit, Inc. ("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.
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 "Capital Redeployment Strategies").
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.
23
<PAGE>
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 6.2 0.1 6.3
------ ------ ------
Total purchase price and assumed
liabilities 529.1 9.2 538.3
Less fair value of acquired assets
Cash and cash equivalents 0.3 0.3
Securities 17.5 17.5
Loans 481.5 20.8 502.3
Fixed assets 3.4 0.3 3.7
Real estate owned 2.2 (0.4) 1.8
Other assets 5.8 (0.1) 5.7
------ ------ ------
Cost in excess of fair value of net
assets acquired $ 18.4 $(11.4) $ 7.0
====== ====== ======
</TABLE>
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. The initial estimate of the fair
value of the loan portfolio was based on carrying amounts. The adjustment
was based on fair values that management expects to realize from the sale
of such loans.
B. The adjustment to real estate owned represents a write-down based on a
revised evaluation of the fair value less estimated costs to sell.
C. The adjustment to fixed assets is based on a revised estimate of the
proceeds from the sale of the building (sale closed in December 1996) used
as the corporate headquarters of CTL.
24
<PAGE>
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 was assumed 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.
RESULTS OF OPERATIONS
The Company reported consolidated net income of $11.0 million or $0.79 per
share for the year ended December 31, 1996 (including CTL effective June 1,
1996) as compared to a consolidated net loss of $4.7 million or $0.32 per share
for the year ended December 31, 1995 and consolidated net income of $14.5
million or $1.01 per share for the year ended December 31, 1994. Operating
results for 1996 included a one-time charge of $6.7 million or $0.485 per share
($11.7 million pre-tax) relating to a special assessment to recapitalize the
Savings Association Insurance Fund. Operating results for 1995 included certain
nonrecurring charges of $11.3 million after tax ($18.0 million pre-tax) related
to performance impediments which were eliminated to improve the Company's future
profitability and enhance shareholder value. Excluding the impact of the SAIF
recapitalization assessment in 1996 and the nonrecurring charges in 1995, the
increase in earnings for 1996 over 1995 was primarily due to an improvement in
net interest margin and lower general and administrative expenses as discussed
further elsewhere herein.
SPECIAL MENTION ITEMS
- ---------------------
Net income for the year ended December 31, 1996 contained certain items
which deserve special mention. The impact of these items on full year 1996
earnings was a net decrease of $52,000 or $0.005 per share.
First Quarter 1996 (pretax)
- ------------------
The net impact of the following items on first quarter 1996 results was a net
improvement of $109,000 after tax or $0.01 per share.
- - $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.
Second Quarter 1996 (pretax)
- -------------------
The net impact of the following items on second quarter 1996 results was a net
decrease of approximately $89,000 after tax or $0.005 per share.
- - $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
provided a write-down of $7.1 million on this property in 1995.
25
<PAGE>
- - $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.
Third Quarter 1996 (pretax)
- ------------------
The net impact of the following items on third quarter 1996 results was a net
decrease of $72,000 after tax or $0.005 per share.
- - $3.2 million gain from the sale of and income received from certain real
estate owned properties.
- - $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.
- - $1.4 million of enhanced profitability resulting from purchase accounting
valuations associated with the CTL assets being held-for-sale.
- - $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.
Fourth Quarter 1996 (pretax)
- -------------------
The net impact of the following items on fourth quarter 1996 results completely
offset each other.
- - $1.0 million of enhanced profitability resulting from purchase accounting
valuations associated with the CTL assets being held-for-sale.
- - $538,000 loss on sale of mortgage-backed securities and short sale of
Treasury securities.
- - $400,000 additional accrual for the termination of data processing
contracts which was finalized during the fourth quarter of 1996.
- - $80,000 net expense arising from the impact of the sale of the leasing
portfolio partially offset by refunds of FDIC insurance premiums.
The decrease in net income in 1995 compared with 1994 was primarily
attributable to lower net interest income, nonrecurring charges relating to
losses on the sale of mortgage-backed securities available-for-sale, severance
payments relating to workforce reductions, fixed assets written-off, write-down
of corporate office complex, write-down of intangibles and prepayment penalties
on FHLBSF advances.
26
<PAGE>
NET INTEREST INCOME
Net interest income was $81.0 million for the year ended December 31, 1996
as compared to $55.9 million and $66.9 million for the years 1995 and 1994,
respectively. The increase in net interest income for 1996 as compared to 1995
was primarily due to an improvement in net interest margin for BVFB which
increased to 2.38% in 1996 from 1.86% in 1995 and also the impact of the
acquisition of CTL. The decrease in net income in 1995 from 1994 was primarily
attributable to a lower net interest margin, which declined to 1.86% in 1995
from 2.34% in 1994. The following table summarizes net interest income
(excluding intercompany interest income/expense) for each of the years
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- -------------------
NET NET NET NET NET NET
INTEREST INTEREST INTEREST INTEREST INTEREST INTEREST
(DOLLARS IN THOUSANDS) INCOME MARGIN INCOME MARGIN INCOME MARGIN
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BBVFB $67,303 2.38% $55,837 1.86% $66,846 2.34%
CCTL (beginning June 1, 1996) 16,222 5.10 - NA - NA
BBVCC (2,543) NA 79 NA 79 NA
------- ---- ------- ---- ------- ----
BBVCC-Consolidated $80,982 2.57% $55,916 1.86% $66,925 2.34%
======= ==== ======= ==== ======= ====
</TABLE>
Bay View Capital Corporation
- ----------------------------
The net interest expense for BVCC in 1996 consists primarily of interest
expense on $50 million of 8.42% senior debentures (all-in cost 8.91% annualized)
issued in May 1996.
Bay View Federal Bank
- ---------------------
BVFB's 1996 net interest margin was 2.38%, an increase of 52 basis points
as compared to net interest margin of 1.86% for 1995. The improvement in net
interest margin was primarily due to lower cost of funds related to retail
deposits.
The cost of retail deposits at December 31, 1996 was 4.60%, 24 basis points
below COFI of 4.84%. The cost of retail deposits decreased by 64 basis points
as compared to December 31, 1995. The decrease in the cost of retail deposits
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. As of December 31, 1996, transaction accounts as a percentage of total
deposits increased to 30.3% from 21.3% and 22.2% at December 31, 1995 and 1994,
respectively. The following table is a summary of cost of retail deposits for
BVFB versus COFI as of December 31 for each of the years indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cost of retail deposits 4.60% 5.24% 4.53%
COFI 4.84 5.12 4.37
----------------- ----------------- -----------------
Spread above/(below) COFI (0.24)% 0.12% 0.16%
================= ================= =================
</TABLE>
A significant portion of BVFB's adjustable rate loan portfolio is indexed
to COFI which typically lags market interest rate movements. Generally, BFVB's
net interest margin is favorably affected during periods of declining interest
rates as the cost of BVFB'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, BVFB's net interest margin is
unfavorably affected by this lag factor. The Federal Reserve began increasing
the discount rate and/or federal funds rates in 1994 and as a result, the
general interest rate environment was higher in 1996 as compared to 1995. The
net interest margin in 1996 for BVFB was adversely affected by the movements in
the
27
<PAGE>
COFI as a result of the rising interest rates and BVFB's exposure to interest
rate movements. However, the decrease in the cost of retail deposits more than
offset the unfavorable impact of COFI in 1996 which resulted in an improvement
in BVFB's net interest margin. Management actions in late 1995 and early 1996
which significantly reduced BVFB's exposure to interest rates also benefited the
net interest margin during 1996 (see "Asset and Liability Management" for
further discussion).
The net interest margin was lower in 1995 as compared to 1994 primarily due
to this lag factor compounded by higher cost of retail deposits and BVFB's
exposure to interest rate movements.
California Thrift & Loan
- ------------------------
CTL's 1996 net interest margin was 5.10%. As discussed elsewhere herein,
the Company began implementing a significant restructuring of CTL's balance
sheet in late 1996 which included a sale of its entire equipment leasing
portfolio, reduction of high cost customer deposits, sale of its auto loan
portfolio and subsequent securitization by BVSC.
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 of interest-bearing liabilities, respectively, for the
periods shown. The yields for the periods indicated include the amortization of
deferred loan origination fees, net of costs, which were considered adjustments
to yield.
28
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES PAID
--------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995
---------------------------------------- ----------------------------------------
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 $2,370,501 $192,443 8.12% $2,083,700 $155,853 7.48%
Mortgage-backed securities 654,671 42,081 6.43 810,982 54,236 6.69
Investments 126,056 7,231 5.74 110,720 6,374 5.76
---------- -------- ---- ---------- -------- ----
Total interest-earning assets 3,151,228 241,755 7.67 3,005,402 216,463 7.20
-------- ---- -------- ----
Nonperforming assets 23,949 49,673
Other assets 24,374 44,667
---------- ----------
Total assets $3,199,551 $3,099,742
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Transaction accounts $ 447,915 11,037 2.46 $ 367,164 8,245 2.25
Certificates of deposits 1,523,213 89,188 5.86 1,438,353 85,153 5.92
---------- -------- ---- ---------- -------- ----
Total customer deposits 1,971,128 100,225 5.08 1,805,517 93,398 5.17
Borrowings 979,069 60,548 6.18 1,049,107 67,149 6.40
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities 2,950,197 160,773 5.45 2,854,624 160,547 5.62
-------- ---- -------- ----
Other liabilities 45,677 22,886
---------- ----------
Total liabilities 2,995,874 2,877,510
Stockholders' equity 203,677 222,232
---------- ----------
Total liabilities and stockholders'
equity $3,199,551 $3,099,742
========== ==========
Net interest income/net interest
spread $ 80,982 2.22% $ 55,916 1.58%
======== ==== ======== ====
Net interest earning assets $ 201,031 $ 150,778
========== ==========
Net interest margin including
nonperforming assets 2.55% 1.83%
========== ==========
Net interest margin excluding
nonperforming assets 2.57% 1.86%
========== ==========
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES PAID
----------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------
1994
----------------------------------------
AVERAGE ACTUAL AVERAGE
BALANCE INTEREST YIELD/RATE
----------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Assets
- ------
Interest-earning assets:
Loans $1,840,742 $131,783 7.16%
Mortgage-backed securities 933,334 61,111 6.55
Investments 81,243 4,432 5.46
---------- -------- ----
Total interest-earning assets 2,855,319 197,326 6.91
-------- ----
Nonperforming assets 70,965
Other assets 54,481
----------
Total assets $2,980,765
==========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Transaction accounts $ 395,791 8,298 2.10
Certificates of deposits 1,259,744 58,126 4.61
---------- -------- ----
Total customer deposits 1,655,535 66,424 4.01
Borrowings 1,088,495 63,977 5.88
---------- -------- ----
Total interest-bearing liabilities 2,744,030 130,401 4.75
-------- ----
Other liabilities 23,132
----------
Total liabilities 2,767,162
Stockholders' equity 213,603
----------
Total liabilities and stockholders'
equity $2,980,765
==========
Net interest income/net interest
spread $ 66,925 2.16%
======== ====
Net interest earning assets $ 111,289
==========
Net interest margin including
nonperforming assets 2.29%
==========
Net interest margin excluding
nonperforming assets 2.34%
==========
</TABLE>
(1) Interest expense for borrowings includes interest expense on interest rate
swaps of $2.6 million, $40,000 and $80,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
(2) Average balances and yields for securities available-for-sale are based on
historical amortized cost balances.
29
<PAGE>
INTEREST INCOME
INTEREST INCOME ON LOANS RECEIVABLE
Interest income on loans was $192.4 million for the year ended December 31,
1996 as compared to $155.9 million and $131.8 million for the years 1995 and
1994, respectively. The following table is a summary of interest income on
loans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNTS YIELDS AMOUNTS YIELDS AMOUNTS YIELDS
--------- ------ --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BVFB $161,149 7.79% $155,853 7.48% $131,783 7.16%
CTL (beginning June 1, 1996) 31,294 10.32% - - - -
-------- ----- -------- ---- -------- ----
BVCC - Consolidated $192,443 8.12% $155,853 7.48% $131,783 7.16%
======== ===== ======== ==== ======== ====
</TABLE>
Bay View Federal Bank
- ---------------------
The increase in yields on loans for BVFB of 31 basis points between 1996
and 1995 was primarily due to the repricing of a significant portion of loans
indexed to the COFI and to a lesser extent, the one-year Treasury note. The
average monthly COFI for the years ended December 31, 1996 and 1995, which
impacted BVFB's adjustable rate mortgages, increased by 16 basis points. The
average loan balances for 1996 and 1995 were essentially the same at $2.07
billion and $2.08 billion, respectively. The average monthly COFI for the years
ended December 31, 1995 and 1994, which impacted BVFB's adjustable rate
mortgages, increased by 101 basis points. However, this increase was partially
offset by slower repricing of loans which adjust other than on a monthly basis
and a higher amortization of SFAS 91 deferred fees due to higher level of loan
prepayments.
California Thrift & Loan
- ------------------------
The interest income on loans for CTL primarily relates to interest income
on auto loans, mortgage loans, revolving lines of credit, 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.
In December 1996, CTL sold its entire leasing portfolio of $60 million for cash.
INTEREST INCOME ON MORTGAGE-BACKED SECURITIES
Interest income on MBS was $42.1 million for the year ended December 31,
1996 as compared to $54.2 million and $61.1 million for the years ended December
31, 1995 and 1994, respectively. All of 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 MBS
available-for-sale in 1996 and 1995. The sale of MBS was due to management's
strategic focus on restructuring the wholesale balance sheet and reduction of
interest rate risk exposure. There were no MBS purchased in 1996 and 1995.
INTEREST AND DIVIDENDS ON INVESTMENTS
Interest and dividend income from the Company's investment portfolio was
$7.2 million for the year ended December 31, 1996 as compared to $6.4 million
and $4.4 million for the years 1995 and 1994, respectively. The interest and
dividend income from CTL was $761,000 for the period since acquisition date.
Excluding CTL, the investment income for BVFB remained essentially the same for
1996 and 1995. The increase in investment income from 1994 to 1995 was
primarily due to higher average investment balances.
30
<PAGE>
INTEREST EXPENSE
INTEREST EXPENSE ON CUSTOMER DEPOSITS
Interest expense on customer deposits was $100.2 million for the year ended
December 31, 1996 as compared to $93.4 million and $66.4 million for the years
ended December 31, 1995 and 1994, respectively. The following table summarizes
interest expense on deposits:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNTS YIELDS AMOUNTS YIELDS AMOUNTS YIELDS
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
BVFB $ 84,466 4.95% $93,398 5.17% $66,424 4.01%
CTL (beginning June 1, 1996) 15,759 5.94% - - - -
-------- ---- ------- ---- ------- ----
BVCC - Consolidated $100,225 5.08% $93,398 5.17% $66,424 4.01%
======== ==== ======= ==== ======= ====
</TABLE>
Bay View Federal Bank
- ---------------------
The decrease in the cost of retail deposits 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. As of December 31, 1996,
transaction accounts as a percentage of total deposits increased to 30.23% from
21.3% and 22.2% at December 31, 1995 and 1994, respectively. The average
balances of retail deposits decreased from $1.81 billion in 1995 to $1.71
billion in 1996. However, average transaction accounts increased from $367
million to $439 million.
The increase in interest expense from 1994 to 1995 was primarily due to
higher average rates and customer deposit balances primarily in certificates of
deposit.
California Thrift & Loan
- ------------------------
The cost of deposits for CTL remained essentially unchanged since June 1,
1996, the acquisition date. CTL redeemed the higher cost component (higher than
BVFB's incremental borrowing cost) of these deposits at face value
(approximately $267 million) at year-end 1996.
31
<PAGE>
INTEREST EXPENSE ON BORROWINGS
The following table summarizes interest expense on borrowings:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
--------------- --------------- -------- ----
(DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
BVFB $57,851 6.09% $67,149 6.40% $63,977 5.88%
CTL (beginning June 1, 1996) 74 5.57 - - - -
BVCC (Senior Debentures only) 2,623 8.91 - - - -
------- ---- ------- ---- ------- ----
BVCC - Consolidated $60,548 6.18% $67,149 6.40% $63,977 5.88%
======= ==== ======= ==== ======= ====
</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, BVFB prepaid $190 million of high
cost borrowings and replaced them with short-term lower cost borrowings. In
conjunction with the prepayment of these borrowings, BVFB 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.
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 acquisition of CTL.
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. The variances 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 to the change in rate and the change in volume.
<TABLE>
<CAPTION>
RATE VOLUME TOTAL
(DOLLARS IN THOUSANDS) VARIANCE VARIANCE VARIANCE
-------- -------- --------
YEAR ENDED DECEMBER 31, 1996 VS. 1995
<S> <C> <C> <C>
Interest income:
Loans $ 6,463 $ 30,127 $ 36,590
Mortgage-backed securities (2,039) (10,116) (12,155)
Investments 104 753 857
-------- -------- --------
4,528 20,764 25,292
-------- -------- --------
Interest expense:
Customer deposits (692) 7,519 6,827
Borrowings (2,169) (4,432) (6,601)
-------- -------- --------
(2,861) 3,087 226
-------- -------- --------
Net interest income $ 7,389 $ 17,677 $ 25,066
======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 VS. 1994
<S> <C> <C> <C>
Interest income:
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:
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)
======== ======== ========
</TABLE>
32
<PAGE>
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans was $1.9 million for the year ended
December 31, 1996 as compared to $4.3 million and $2.4 million for the years
1995 and 1994, respectively. See the Allowance for Losses on Loans section
below for a more detailed discussion.
NONINTEREST INCOME
Noninterest income was $8.6 million, $6.1 million and $7.5 million for the
years 1996, 1995 and 1994 which includes losses on securities of $0.8 million
for 1996, $2.5 million for 1995, and $1.1 million for 1994. The following table
summarizes noninterest income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
BVFB $8,154 $6,142 $7,538
CTL (beginning June 1, 1996) 410 - -
------ ------ ------
BVCC - Consolidated $8,564 $6,142 $7,538
====== ====== ======
</TABLE>
Excluding the loss on securities, noninterest income for BVFB remained
relatively flat between 1996 and 1995. During 1996, total mortgage-backed
securities sold from the available-for-sale portfolio were $55.0 million and
aggregated a loss of $507,000. BVFB's interest rate risk profile has been
favorably impacted by the sale of these securities. At December 31, 1996, the
remaining balance of mortgage-backed securities available-for-sale was $84.4
million and the unrealized loss was $1.2 million or 1.5%.
In conjunction with the pending securitization of CTL's auto loan
portfolio, during the fourth quarter of 1996, CTL entered into a short sale of
Treasury securities to hedge the valuations from movements in interest rates. A
loss of $293,000 in accordance with generally accepted accounting principles was
recorded in the fourth quarter associated with this short sale of Treasury
securities.
NONINTEREST EXPENSE
GENERAL AND ADMINISTRATIVE EXPENSE
The following table is a summary of the major categories of general and
administrative expenses (including special mention items) for each of the years
indicated (including CTL effective June 1, 1996).
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994
--------------------------------------- ------- -------
(DOLLARS IN THOUSANDS) BVCC BVFB CTL TOTAL
------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Compensation and benefits $ 402 $21,298 $ 6,255 $27,955 $25,148 $25,268
Office occupancy and equipment - 9,044 821 9,865 8,658 8,436
Deposit insurance premiums - 4,911 - 4,911 4,473 4,813
Marketing - 1,381 203 1,584 1,070 1,016
Data processing service bureau - 3,671 573 4,244 1,683 1,701
Write-down of corporate office - 500 - 500 7,100 -
Other, net 833 6,743 2,320 9,896 8,884 6,053
------ ------- ------- ------- ------- -------
Total $1,235 $47,548 $10,172 $58,955 $57,016 $47,287
====== ======= ======= ======= ======= =======
</TABLE>
33
<PAGE>
Bay View Capital Corporation and Bay View Federal Bank
- ------------------------------------------------------
General and administrative expenses for BVCC in 1996 includes a higher
allocation of expenses from BVFB as compared to prior years due to an increase
in activity relating to redeployment of capital as discussed elsewhere herein.
General and administrative expenses for BVFB in 1996 included the special
mention items discussed below which totaled $6.1 million. Excluding these
special mention items and including the normalization of deposit insurance
premiums (due to impact of SAIF legislation), general and administrative
expenses for BVCC and BVFB combined for 1996 would have been approximately $40.4
million as compared to the previously indicated annualized threshold of less
than $42 million. The following is a summary of special mention items in 1996.
- - $2.8 million accrual for termination of existing data processing contracts
and a write-down for computer hardware and software relating to the
Company's new 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.
- - $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
provided a write-down of $7.1 million on this property in 1995.
- - $310,000 accrual for downsizing loan operations and relocation of
administrative functions.
General and administrative expenses in 1995 included the following special
mention items which totaled $10.8 million:
- - $7.1 million write-down due to the pending sale of the corporate office
complex.
- - $2.8 million severance payment relating to workforce reductions.
- - $866,000 write-off relating to fixed asset disposals.
Excluding special mention items, general and administrative expenses for
1996 were lower than 1995 primarily due to lower compensation and benefit
expense and other cost reduction initiatives. General and administrative
expenses for 1995 (excluding special mention items) and 1994 were essentially
the same.
California Thrift & Loan
- ------------------------
General and administrative expenses for CTL have declined during the period
subsequent to acquisition due to the termination of certain employee functions,
impact of the sale of the entire leasing portfolio and the continued
implementation of cost reduction opportunities.
34
<PAGE>
The following table summarizes general and administrative expenses and
efficiency ratios exclusive of special mention items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS) G&A EFFICIENCY G&A EFFICIENCY G&A EFFICIENCY
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
BVFB $41,414 54.52% $46,864 74.34% $46,793 61.94%
CTL (beginning June 1, 1996) 10,172 52.34% - - - -
Parent Company 1,235 NA 582 NA 494 NA
------- ----- ------- ----- ------- -----
BVCC-Consolidated $52,821 58.04% $47,446 73.46% $47,287 62.60%
======= ===== ======= ===== ======= =====
</TABLE>
SAIF RECAPITALIZATION ASSESSMENT
Federal legislation to recapitalize and fully fund the Savings Association
Insurance Fund was signed into law on September 30, 1996. Customer deposits for
BVFB are SAIF-insured, and as a result of the legislation, BVFB was required to
pay a one-time special assessment of $11.7 million pre-tax ($6.7 million after
tax or $0.485 per share). The legislation had no effect on CTL, as its deposits
are insured under the Bank Insurance Fund.
Pursuant to this legislation, premiums on SAIF-insured deposits for BVFB
will be reduced in 1997 from the previously anticipated 23 basis points to 6.48
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 December
31, 1996.
INCOME AND EXPENSES FROM REAL ESTATE OWNED
Income from operations of real estate owned was $4.8 million for the year
ended December 31, 1996 as compared to $1.1 million and $95,000 for the years
1995 and 1994, 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.
The increase in income from real estate owned operations during 1995 as
compared to 1994 was primarily due to income received from one large property
foreclosed upon in April 1995. Prior to foreclosure, the income received was
reported as interest income on loans.
AMORTIZATION AND WRITE-DOWN OF INTANGIBLES
The following table summarizes the amortization and write-down of
intangibles:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
BVFB $2,025 $3,944 $2,418
CTL (beginning June 1, 1996) 581 - -
------ ------ ------
BVCC - Consolidated $2,606 $3,944 $2,418
====== ====== ======
</TABLE>
Bay View Federal Bank
- ---------------------
The amortization and write-down of intangibles in 1996 includes core
deposit intangible write-offs of $274,000 due to a decision to close one of
BVFB's branches. 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 was subsequently
amortized over the remaining useful life.
35
<PAGE>
During the fourth quarter of 1995, BVFB 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.
California Thrift & Loan
- ------------------------
The amortization of the intangible assets of CTL was due to the
amortization of goodwill arising from the excess of the purchase price over the
fair value of net assets acquired.
INCOME TAXES
The effective tax rates for 1996, 1995 and 1994 were 43.0%, (24.8%) and
35.0%, respectively. The decrease in the effective tax rate in 1995 was due to
the net loss of BVFB partially offset by the net income of the Company and a
subsidiary of BVFB.
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.
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). There were no prepayment
penalties in 1994. Although the amount of the charge reduced the Company's
earnings at the time the debt was 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".
36
<PAGE>
BALANCE SHEET ANALYSIS
The Company's total assets at December 31, 1996 and 1995 were $3.3 billion
and $3.0 billion, respectively. The increase in total assets was primarily due
to the acquisition of CTL which had total assets of $464 million at December 31,
1996.
The total assets of BVFB were the same at $3.0 billion at December 31, 1996
and 1995, respectively. The total assets of BVFB at year-end 1996 included a
line of credit of $163.2 million to CTL. Excluding the intercompany line of
credit, total assets of BVFB have declined from 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 retail deposit franchise and restructure
(beginning in late 1995) the wholesale (MBS/borrowings) portion of the balance
sheet.
SECURITIES
The Company's securities activities are primarily conducted by BVFB. BVFB
has historically purchased (no significant purchases in 1996 and 1995)
securities to maintain appropriate interest-earning asset levels when sufficient
high quality loan production was not available. The majority of the securities
purchased are high quality MBS, primarily issued by FHLMC, FNMA, GNMA and
Student Loan Mortgage Association ("SLMA"). Since MBS are collateralized by
mortgages, these assets qualify under the OTS regulations requiring BVFB 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 as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
AVAILABLE-FOR-SALE
FHLMC and SLMA notes $ - $ 7,000 $ -
FHLMC preferred stock 1,010 1,035 980
U.S. Treasury securities 12,792
------- ------- -------
$13,802 $ 8,035 $ 980
======= ======= =======
HELD-TO-MATURITY
FHLMC/FNMA notes and debentures $10,004 $ 9,988 $21,938
FHLB callable notes - 24,940 4,923
Federal Farm Credit Bank notes 5,000 5,000 5,000
U.S. Treasury Bills 200 - -
------- ------- -------
$15,204 $39,928 $31,861
======= ======= =======
</TABLE>
37
<PAGE>
The following table reflects the composition of BVFB's MBS securities
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Available-for-sale
FHLMC, FNMA, and GNMA $ 83,154 $149,778 $108,561
Financial institutions and intermediaries - - 295
-------- -------- --------
$ 83,154 $149,778 $108,856
======== ======== ========
Held-to-maturity
FHLMC, FNMA, and GNMA $488,557 $572,822 $802,893
Financial institutions and intermediaries 5,902 6,128 6,497
Other nonrated, nonresidential - 2,650 3,434
-------- -------- --------
$494,459 $581,600 $812,824
======== ======== ========
</TABLE>
The principal balances of MBS purchased and sold for the years ended
December 31, 1996, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
(DOLLARS IN MILLIONS) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Purchased $ - $ - $ 400.7
Sold 57.6 103.5 -
</TABLE>
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 that 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 MBS 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, 1996 and 1995 was $0.7 million (net of
tax). During 1996, the Company sold $57.6 million of MBS including $2.6 million
of MBS which were scheduled to mature within three months of sale. The $2.6
million MBS was sold from the held-to-maturity portfolio and the remainder of
$55.0 million was from the available-for-sale portfolio. BVFB does not maintain
a trading portfolio.
38
<PAGE>
LOANS AND REAL ESTATE OWNED
Loan Portfolio Composition
The following table shows the composition of the Company's loan portfolio
(before deductions for net deferred loan origination fees, 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 loan as of December 31, 1996. The Company also did not have any loan
concentrations which may result in uncertainties materially impacting its future
operations.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS) BVFB CTL BVCC
---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single family $ 610,607 $ 81,479 $ 692,086 $ 731,310 $ 733,265 $ 424,095 $ 458,473
Multifamily 1,033,252 15,039 1,048,291 995,038 980,849 1,019,174 1,116,729
Commercial 367,104 14,718 381,822 333,236 337,483 336,383 364,611
---------- -------- ---------- ---------- ---------- ---------- ----------
2,010,963 111,236 2,122,199 2,059,584 2,051,597 1,779,652 1,939,813
Consumer loans:
Auto 21,703 293,736 315,439 396 1,126 5,552 2,063
Home equity and other 36,058 31,960 68,018 34,453 30,357 30,020 47,707
---------- -------- ---------- ---------- ---------- ---------- ----------
57,761 325,696 383,457 34,849 31,483 35,572 49,770
---------- -------- ---------- ---------- ---------- ---------- ----------
Total $2,068,724 $436,932 $2,505,656 $2,094,433 $2,083,080 $1,815,224 $1,989,583
========== ======== ========== ========== ========== ========== ==========
</TABLE>
39
<PAGE>
Bay View Federal Bank
- ---------------------
A major portion of the BVFB's loan portfolio consists of loans
collateralized by income-producing properties, all of which are located in
California, principally Northern California. Construction loans have been
insignificant. During 1996, BVFB de-emphasized its focus on single family
mortgage lending and discontinued its loan origination operations for this
category. 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.
California Thrift & Loan
- ------------------------
The loan portfolio for CTL consists primarily of consumer loans. As
described elsewhere herein, management began implementing a significant
restructuring of CTL's balance sheet in late 1996. The entire leasing portfolio
was sold in December 1996. In addition, CTL sold $253 million of its auto loan
portfolio to BVSC in January 1997 which was subsequently securitized and sold by
BVSC. These actions are consistent with the Company's capital strategy to
increase the velocity of capital utilization, de-emphasize less profitable
activities and return the capital of subsidiaries in excess of the regulatory
"well capitalized" requirement to the Company. 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):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
------------------------------------ ---------- ----------
(DOLLARS IN THOUSANDS) BVFB CTL BVCC
---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Fixed rate loans:
Mortgage $ 235,320 $ 94,038 $ 329,358 $ 255,897 $ 279,552
Consumer 19,541 317,271 336,812 5,372 2,825
----------------------------------------------------------------
254,861 411,309 666,170 261,269 282,377
Adjustable rate loans:
Mortgage 1,775,643 17,198 1,792,841 1,803,687 1,772,045
Consumer 38,220 8,425 46,645 29,477 28,658
----------------------------------------------------------------
1,813,863 25,623 1,839,486 1,833,164 1,800,703
----------------------------------------------------------------
Total loans $2,068,724 $436,932 $2,505,656 $2,094,433 $2,083,080
================================================================
</TABLE>
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 BVFB
are the Federal Home Loan Bank's Eleventh District Cost of Funds Index, the one-
year Constant Maturity Treasury Index and the 6-month LIBOR rate.
Loan Originations, Purchases and Sales
For each of the years indicated, loans originated, purchased and sold were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
------------------------------------ ---------- ----------
(DOLLARS IN MILLIONS) BVFB CTL BVCC
---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Loans originated $256.8 $119.7 $376.5 $258.4 $564.3
Loans purchased 57.0 7.8 64.8 12.9 5.4
Loans sold - 59.8 59.8 0.1 12.0
Loans securitized and sold - - - - 10.0
</TABLE>
40
<PAGE>
Bay View Federal Bank
- ---------------------
Loans originated by BVFB in 1996 were primarily multifamily mortgages
indexed to LIBOR. Loans originated in 1995 consisted of single family and
multifamily mortgages indexed to COFI and the one-year Treasury rate. The
increase in loan purchases in 1996 as compared to 1995 and 1994 was primarily
due to management's strategy to supplement its loan production with purchases of
higher yielding loans.
California Thrift & Loan
- ------------------------
Loans originated by CTL in 1996 were primarily auto loans. As discussed
elsewhere herein, CTL sold $253 million of its auto loans in January 1997 to
BVSC which were subsequently securitized and sold by BVSC. The $59.8 million of
loans sold in 1996 consisted of CTL's entire leasing portfolio.
Delinquent, Nonaccrual and Restructured Loans
Credit quality has continued to improve as evidenced by the decline in
nonperforming assets and delinquencies. A summary of trends in credit quality
follows:
Loans Delinquent 60 Days or More
- --------------------------------
Loans delinquent 60 days or more as a percentage of gross loan portfolio by
property type were as follows:
<TABLE>
<CAPTION>
LOANS DELINQUENT 60 DAYS OR MORE AS A PERCENTAGE OF GROSS LOANS
---------------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
BVFB $19,769 0.96% $20,166 0.96% $48,465 2.33%
CTL 3,239 0.74% - - - -
------- ---- ------- ---- ------- ----
BVCC-Consolidated $23,008 0.92% $20,166 0.96% $48,465 2.33%
======= ==== ======= ==== ======= ====
</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. As of
December 31, 1996 and 1995, all such restructured loans were performing in
accordance with their modified terms. The following is a summary of
nonperforming assets:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS AS A PERCENTAGE OF TOTAL ASSETS
---------------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
BVFB $18,929 0.63% $38,811 1.29% $50,577 1.60%
CTL 5,381 1.16% - - - -
------- ---- ------- ---- ------- ----
BVCC-Consolidated $24,310 0.74% $38,811 1.29% $50,577 1.60%
======= ==== ======= ==== ======= ====
</TABLE>
Management actively seeks to return nonperforming assets to performing
status or expediently dispose of foreclosed assets at their fair value. During
1996, 1995 and 1994, sales of real estate owned were $26.5 million, $19.3
million and $22.9 million, respectively.
41
<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,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS) BVFB CTL BVCC
------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
Mortgage $13,724 $1,864 $15,588 $10,675 $36,167 $54,136 $52,438
Consumer 309 228 537 80 154 300 264
------- ------ ------- ------- ------- ------- -------
Total $14,033 $2,092 $16,125 $10,755 $36,321 $54,436 $52,702
======= ====== ======= ======= ======= ======= =======
Percentage of total assets 0.47% 0.45% 0.49% 0.36% 1.15% 2.04% 2.04%
Accruing loans delinquent 90 days or more:
Mortgage $ 18 $ - $ 18 $ 1,403 $ 677 $ - $ -
Consumer - - - 22 - - -
------- ------ ------- ------- ------- ------- -------
Total $ 18 $ - $ 18 $ 1,425 $ 677 $ - $ -
======= ====== ======= ======= ======= ======= =======
Percentage of total assets 0.01% 0.01% 0.05% 0.02%
Troubled debt restructures:
Mortgage $ 509 $ - $ 509 $15,641 $13,948 $14,188 $20,791
======= ====== ======= ======= ======= ======= =======
Percentage of total assets 0.02% 0.02% 0.52% 0.44% 0.53% 0.80%
</TABLE>
42
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The Company conducts an ongoing review of its asset categories to assess
the adequacy of allowance for loan losses, which are maintained at levels the
Company believes are sufficient to cover potential losses. In determining the
level of allowance, the Company considers prevailing and anticipated economic
conditions, historical loss experience, the levels of classified, nonperforming
and delinquent assets, weighing 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. The following is a summary of activity of the
Company's allowance on loans for the years indicated (including CTL effective
June 1, 1996):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------ ------- ------- -------- --------
(DOLLARS IN THOUSANDS) BVFB CTL BVCC
------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $30,014 $2,860 $32,874 $29,115 $33,790 $ 38,434 $ 27,251
Charge offs:
Mortgage (5,706) (221) (5,927) (4,727) (8,428) (11,380) (13,283)
Consumer (8) (466) (474) (152) (86) (149) (325)
------- ------ ------- ------- ------- -------- --------
(5,714) (687) (6,401) (4,879) (8,514) (11,529) (13,608)
Recoveries:
Mortgage 522 - 522 1,424 1,337 218 -
Consumer 59 61 120 70 135 135 212
------- ------ ------- ------- ------- -------- --------
581 61 642 1,494 1,472 353 212
Net charge-offs (5,133) (626) (5,759) (3,385) (7,042) (11,176) (13,396)
Provision for loan losses 1,800 98 1,898 4,284 2,367 6,532 24,579
------- ------ ------- ------- ------- -------- --------
Ending balance $26,681 $2,332 $29,013 $30,014 $29,115 $ 33,790 $ 38,434
======= ====== ======= ======= ======= ======== ========
Net charge-offs ratio to average loans 0.23% 0.31% 0.24% 0.16% 0.38% 0.58% 0.63%
Allowance for loans by category:
Mortgage $26,157 $1,812 $27,969 $29,541 $28,560 $ 33,117 $ 37,435
Consumer 524 520 1,044 473 555 673 999
------- ------ ------- ------- ------- -------- --------
Total $26,681 $2,332 $29,013 $30,014 $29,115 $ 33,790 $ 38,434
======= ====== ======= ======= ======= ======== ========
</TABLE>
The percentage of mortgage loans to total loans for each of the years in
the five-year period ended December 31, 1996 was 84.7%, 98.3%, 98.5%, 98.1% and
97.4%, respectively. The percentage of consumer loans to total loans for each
of the years in the five-year period ended December 31, 1996 was 15.3%, 1.7%,
1.5%, 1.9% and 2.6%, respectively.
43
<PAGE>
A summary of allowance for losses is as follows:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOSSES
AS A PERCENTAGE OF NONPERFORMING ASSETS
---------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BVFB
Assets held for investment $26,681 141% $30,944 80% $31,415 62%
------- --- ------- --- ------- --
CTL
Assets held for investment 2,332 - - - - -
Assets held for sale 7,391 - - - - -
------- --- ------- --- ------- --
Subtotal 9,723 181% - - - -
------- --- ------- --- ------- --
BVCC-Consolidated $36,404 150% $30,944 80% $31,415 62%
======= === ======= === ======= ==
Assets held for investment $29,013 119% $30,944 80% $31,415 62%
Assets held for sale 7,391 31% - - - -
------- --- ------- --- ------- --
BVCC-Consolidated $36,404 150% $30,944 80% $31,415 62%
======= === ======= === ======= ==
<CAPTION>
ALLOWANCES FOR LOSSES ON LOANS
AS A PERCENTAGE OF NONPERFORMING ASSETS
---------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BVFB $26,681 190% $30,014 279% $29,115 80%
Loans held for investment
------- --- ------- --- ------- --
CTL
Loans held for investment 2,332 - - - - -
Loans held for sale 7,391 - - - - -
------- --- ------- --- ------- --
Subtotal 9,723 465% - - - -
------- --- ------- --- ------- --
BVCC-Consolidated $36,404 226% $30,014 279% $29,115 80%
======= === ======= === ======= ==
Loans held for investment $29,013 180% $30,014 279% $29,115 80%
Loans held for sale 7,391 46% - - - -
------- --- ------- --- ------- --
BVCC-Consolidated $36,404 226% $30,014 279% $29,115 80%
======= === ======= === ======= ==
</TABLE>
Note: The allowance for losses on loans held for sale has been included in the
lower of cost or market measurement of the carrying value of loans held
for sale.
Provision for loan losses
Provisions for loan losses are recorded to maintain the level of allowance
that management believes is adequate to cover estimated losses. The provision
for losses on loans was $1.9 million, $4.3 million and $2.4 million for 1996,
1995 and 1994, respectively.
44
<PAGE>
Bay View Federal Bank
- ---------------------
The provision for losses on loans was $1.8 million, $4.3 million and $2.4
million, respectively. The decrease in the provision for losses on loans in
1996 as compared to 1995 was attributable to the improvement in the credit
quality of the loan portfolio. The higher provision for loan losses in 1995 was
primarily due to a higher level of nonperforming assets and provision for losses
on one large loan classified as a troubled debt restructuring due to
management's decision to accelerate the disposal of this asset.
California Thrift & Loan
- ------------------------
The CTL allowance for loan losses included the allowance for loans held for
investment and loans held for sale. The allowance for loans held for sale
reflects management's intention to securitize auto loans which have been
classified as held for sale and recorded at estimated realizable value
consistent with purchase accounting. As a result, the allowance for losses on
loans held for sale has been included in the lower of cost or market measurement
of the carrying value of loans held for sale. The allowance for losses on loans
held for sale will be included in the carrying value as the auto loan portfolio
is sold and securitized by BVSC.
Management believes that it uses appropriate information to make loss
determinations and considers its allowances for losses at December 31, 1996 and
1995 to be adequate to cover losses from loan and real estate related assets.
However, future adjustment in the level of allowance for loan losses 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.
RETAIL CUSTOMER DEPOSITS
As a primary part of the Company's business, deposits are gathered for
purposes of funding loans and purchasing securities. A summary of the retail
customer deposits (excluding intercompany accounts) follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
% OF WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AVERAGE RATE
---------- ------ ------------
<S> <C> <C> <C>
BVFB (SAIF-INSURED):
Transaction accounts $ 477,777 30.3% 2.57%
Certificates of deposit 1,100,559 69.7 5.48
---------- ----- ----
$1,578,336 100.0% 4.60%
========== ===== ====
CTL (BIF-INSURED):
Money market accounts $ 16,057 8.6% 4.16%
Thrift certificates 169,837 91.4 5.55
---------- ----- ----
$ 185,894 100.0% 5.43%
========== ===== ====
BVCC:
Transaction accounts $ 493,571 27.9% 2.62%
Certificates of deposit 1,100,559 62.4 5.48
Thrift certificates 169,837 9.7 5.55
---------- ----- ----
$1,763,967 100.0% 4.69%
========== ===== ====
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------
% OF WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AVERAGE RATE
---------- ------ ------------
<S> <C> <C> <C>
Transaction accounts $ 387,610 21.3% 2.38%
Certificates of deposit 1,432,230 78.7 6.02
---------- ----- ----
$1,819,840 100.0% 5.24%
========== ===== ====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------
% OF WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AVERAGE RATE
---------- ------ ------------
<S> <C> <C> <C>
Transaction accounts $ 379,424 22.2% 2.01%
Certificates of deposit 1,327,952 77.8 5.25
---------- ----- ----
$1,707,376 100.0% 4.53%
========== ===== ====
</TABLE>
Bay View Federal Bank
- ---------------------
Increasing the value of its retail branch franchise is one of management's
primary objectives. BVFB believes that a gradual 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. Throughout
1996, BVFB continued to emphasize the development and marketing of new products
and as a result has successfully increased its percentage of transaction
accounts in relation to total deposits which has contributed to lower cost of
funds. Transaction accounts as a percentage of total deposits increased to
30.23% at December 31, 1996 from 21.3% and 22.2% at December 31, 1995 and 1994,
respectively.
California Thrift & Loan
- ------------------------
The customer deposits are primarily comprised of thrift certificates which
are similar to certificates of deposit with the exception that they are callable
at par plus accrued interest. When thrift certificates are purchased by
customers, CTL has, as thrift certificates have been issued, reserved the right
to repurchase the certificates at any time upon thirty days notice. Utilizing
this call provision, CTL redeemed the higher cost component (higher than BVFB's
incremental borrowing cost) of these deposits at face value (approximately $267
million) at December 31, 1996.
The remainder of the CTL customer deposits (which are lower cost than
BVFB's incremental borrowing cost) will be sold to BVFB. An application for the
approval of the sale of these deposits to BVFB has been filed with the Office of
Thrift Supervision.
Customer deposits of $100,000 or more by time remaining until maturity as
of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995
------------------------------- --------
(DOLLARS IN THOUSANDS) BVFB CTL BVCC
-------- ------- --------
<S> <C> <C> <C> <C>
Three months or less $171,011 $14,130 $185,141 $ 62,808
Over three through twelve months 114,094 25,146 139,240 170,416
Over twelve months 76,358 9,831 86,189 125,611
-------- ------- -------- --------
Total $361,463 $49,107 $410,570 $358,835
======== ======= ======== ========
</TABLE>
46
<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 (also known as reverse repurchase agreements). The
following table sets forth certain information as to the Companys borrowings as
of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
---------- -------- ----------
<S> <C> <C> <C>
Advances from FHLBSF $ 977,750 $766,790 $ 956,310
Securities sold under agreements to 210,640 166,738 255,106
repurchase
Capitalized lease 2,509 2,914 3,165
Note payable to commercial bank 4,638 5,023 5,377
Senior Debentures 50,000 - -
---------- -------- ----------
Total $1,245,537 $941,465 $1,219,958
========== ======== ==========
</TABLE>
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. The
average balances for borrowings at BVFB decreased from $1.05 billion in 1995 to
$977.7 million in 1996. In the fourth quarter of 1995 and the first quarter of
1996, BVFB 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 increase in borrowings at December 31, 1996 as compared to 1995
was due to borrowings from the FHLBSF used to fund the redemption of CTL's high
cost thrift certificates as discussed elsewhere herein.
BVFB is a member of the FHLBSF. As such, BVFB must purchase stock in the
FHLBSF equal to the greater of 1% of residential mortgage loans or 5% of its
borrowings. As of December 31, 1996 and 1995, the investment in FHLBSF stock
amounted to $49.6 million and $39.5 million, respectively. BVFB 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/liabilities management strategies.
In 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 acquisition of CTL. The residual proceeds of the debt
offering will be utilized for future accretive acquisitions or other business
purposes to enhance shareholder value, such as the repurchase of the Company's
common stock, if warranted. (See "Capital Redeployment Strategies")
47
<PAGE>
ASSET AND 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
. Utilizing interest rate swap agreements and other hedging strategies to
reduce exposure to fluctuations in interest rates
. 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 the Company's strong capital position to boost the earnings
power 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 its 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 principally 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. The Company has initiated numerous actions in late
1995 and 1996 which significantly reduced the Company's exposure to fluctuations
in interest rates. These actions include:
Sale of mortgage-backed securities
- ----------------------------------
In 1996, the Company sold $55 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. During the fourth quarter of 1995
the Company reclassified $148 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 allowed the Company to
position these securities for potential sale, which assisted in the reduction of
its interest rate risk exposure without tainting its remaining held-to-maturity
portfolio.
48
<PAGE>
Interest Rate Swaps
- -------------------
As of December 31, 1996, the Company was party to interest rate swap
agreements with notional principal amounts of $421 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 $200 million.
The impact of these actions was 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
borrowings by matching the floating interest rate characteristics and
lengthening their maturities.
Hedging Auto Loans Pending Securitization
- -----------------------------------------
As discussed elsewhere herein, in conjunction with the decision to sell
CTL's auto loans and their subsequent securitization by BVSC, management entered
into a short sale of Treasury securities that has materially insulated the
purchase accounting valuations from movements in interest rates. The short sale
transaction was paired-off in December 1996 with a loss of $293,000 recorded as
a loss on securities. At December 31, 1996, a Treasury rate lock transaction
with a notional principal amount of $210 million was entered into to hedge the
auto loans pending sale by CTL and securitization by BVSC.
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. The objective of the Company's ALCO 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. 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 increase/decrease in interest rates, was 1.15% and
0.79% at December 31, 1996 and 1995 as compared to 3.02% at December 31, 1994.
Interest rate sensitivity from a 200 basis point increase/decrease in interest
rates for CTL was 0.54% at December 31, 1996.
Market Value of Equity ("MVE")
- ------------------------------
The following analysis compares the market value of equity for BVFB with
and without interest rate swaps for the indicated basis points ("bp") market
shift scenarios at December 31, 1996:
<TABLE>
<CAPTION>
CHANGES IN MARKET VALUE OF EQUITY
--------------------------------------------
Projected Effect: +100 BP +200 BP +300 BP +400 BP
-------- -------- -------- --------
<S> <C> <C> <C> <C>
MVE without swaps $203,008 $165,594 $125,753 $ 84,338
MVE with swaps $216,463 $193,741 $167,862 $139,720
Benefit from swaps $ 13,455 $ 28,147 $ 42,109 $ 55,382
</TABLE>
49
<PAGE>
Bay View Federal Bank
- ---------------------
The following table sets forth information regarding asset and liability
repricing as of December 31, 1996:
<TABLE>
<CAPTION>
REPRICING PERIOD
-----------------------------------------------------------------------------
UNDER OVER OVER OVER
ONE ONE TO THREE THREE TO FIVE FIVE
(DOLLARS IN THOUSANDS) YEAR YEARS YEARS YEARS TOTAL
---------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS (1)
- ----------
Cash and investments (2) $ 319,379 $ 5,004 $ 10,000 - $ 334,383
Mortgage loans and mortgage-backed 1,821,042 219,814 138,108 $ 397,135 2,576,099
securities (2) (3)
Consumer loans (3) 27,397 17,668 12,387 57,452
---------- --------- --------- --------- ----------
Total interest rate sensitive assets $2,167,818 $ 242,486 $ 160,495 $ 397,135 $2,967,934
========== ========= ========= ========= ==========
LIABILITIES
- -----------
Deposits:
Certificates of deposit $ 878,878 $ 206,875 $ 14,806 - $1,100,559
Money market accounts 176,799 - - - 176,799
Checking accounts 113,180 - - - 113,180
Passbook accounts 189,279 - - - 189,279
Borrowings 1,060,991 118,270 40,000 - 1,219,261
---------- --------- --------- --------- ----------
Total interest rate sensitive liabilities $2,419,127 $ 325,145 $ 54,806 - $2,779,078
========== ========= ========= ========= ==========
Repricing gap-positive (negative)
before impact of interest rate swaps $ (251,309) $ (82,659) $ 105,689 $ 397,135 $ 168,856
==========
Impact of interest rate swaps 421,000 (164,500) (154,000) (102,500)
---------- --------- --------- ---------
Cumulative repricing gap-positive negative $ 169,691 $ (77,468) $(125,779) $ 168,856
========== ========= ========= =========
Cumulative repricing gap as a percentage
of interest rate sensitive assets
1996 5.72% (2.61%) (4.23%) 5.69%
1995 0.89% (5.14%) (7.43%) 5.54%
</TABLE>
(1) Net of nonperforming assets
(2) Investments and mortgage-backed securities are at amortized cost
(3) Based on assumed annual prepayment and amortization rates which approximate
the Company's historical experience
50
<PAGE>
California Thrift & Loan
- ------------------------
The following table sets forth information regarding asset and liability
repricing as of December 31, 1996:
<TABLE>
<CAPTION>
REPRICING PERIOD
-----------------------------------------------------------------------------
UNDER OVER OVER OVER
ONE ONE TO THREE THREE TO FIVE FIVE
(DOLLARS IN THOUSANDS) YEAR YEARS YEARS YEARS TOTAL
---------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Cash and investments (1) $ 15,717 $ 15,717
Loans (2) (3) 322,933 $73,709 $28,327 $ 17,262 442,231
-------- ------- ------- -------- --------
Total interest rate sensitive assets $338,650 $73,709 $28,327 $ 17,262 $457,948
======== ======= ======= ======== ========
LIABILITIES
- -----------
Deposits:
Certificates of deposit $122,404 $42,302 $ 5,131 $169,837
Money market accounts 16,057 16,057
Borrowings 163,220 163,220
-------- ------- ------- -------- --------
Total interest rate sensitive liabilities $301,681 $42,302 $ 5,131 - $349,114
======== ======= ======= ======== ========
Repricing gap-positive (negative) $ 36,969 $31,407 $23,196 $ 17,262 $108,834
-------- ------- ------- -------- ========
Cumulative repricing gap-positive (negative) $ 36,969 $68,376 $91,572 $108,834
======== ======= ======= ========
Cumulative repricing gap as a percentage of
interest rate sensitive assets
1996 8.07% 14.93% 20.00% 23.76%
</TABLE>
(1) Investments are at amortized cost
(2) Net of nonperforming assets
(3) Based on assumed annual prepayment and amortization rates which approximate
the Company's historical experience
51
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company'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 and purchases 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 1996, cash flows from
operating activities totaled $83 million. Cash flows from investing activities
totaled $220 million, primarily from the sale and principal repayments of MBS
and net loan repayments. Cash outflows from financing activities totaled $240
million primarily due to redemption of CTL thrift certificates and net deposit
outflows offset by borrowings from the FHLBSF and reverse repurchase agreements.
The following table sets forth the period ending balances for the Company's
short-term borrowings and the weighted average interest rates:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Advances from FHLBSF $774,480 $486,940 $439,520
Securities sold under agreement to repurchase 210,640 151,738 255,106
repurchase
-------- -------- --------
Total short-term borrowings $985,120 $638,678 $694,626
======== ======== ========
Weighted average interest rate of total
short-term borrowings at period end 5.66% 6.56% 5.54%
======== ======== ========
</TABLE>
The following table sets forth the maximum outstanding balance of each type
of short-term borrowings at any month-end during 1996, 1995 and 1994, and the
average balances and weighted average interest rates on short-term borrowings
for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Advances from FHLBSF $774,480 $510,880 $451,720
Securities sold under agreement to repurchase $220,281 $248,131 $271,486
Average amount of total short-term borrowings
outstanding during year $762,258 $622,080 $475,231
Weighted average interest rate of total
short-term borrowings during the year 5.66% 6.09% 5.66%
</TABLE>
52
<PAGE>
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, BVFB has
maintained its liquid assets above the minimum requirements imposed by the OTS
regulations and at a level believed adequate to meet 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.
BVFB maintained liquidity ratios of 5.39% and 5.26% for the months ended
December 31, 1996 and 1995, respectively.
CAPITAL RESOURCES
See also "Strategic Overview" discussion.
BAY VIEW FEDERAL BANK
BVFB's regulatory capital at December 31, 1996 and 1995 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 became
effective in 1996 whereas the total amount of nonqualifying investments in
subsidiaries is required to be fully deducted in its entirety from regulatory
capital. Regulatory capital ratios of BVFB were 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 $165,110 5.52% $ 44,860 1.50% $120,250 4.02%
Core 168,782 5.64% 89,829 3.00% 78,953 2.64%
Total Risk-based 190,981 10.74% 142,308 8.00% 48,673 2.74%
</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 December 31, 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 $168,782 5.64% $149,716 5.00% $19,066 0.64%
Tier I Risk-based 168,782 9.49% 106,731 6.00% 62,051 3.49%
Tier II Risk-based 190,981 10.74% 177,885 10.00% 13,096 0.74%
</TABLE>
CALIFORNIA THRIFT AND LOAN
Under capital guidelines enacted by FDICIA, CTL met the criteria for the
"well capitalized" standard at December 31, 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 $43,462 9.50% $22,885 5.00% $20,577 4.50%
Tier I Risk-based 43,462 9.97% 26,164 6.00% 17,298 3.97%
Tier II Risk-based 48,913 11.33% 43,179 10.00% 5,374 1.33%
</TABLE>
53
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 ("SFAS 125") "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS 125 establishes standards for when transfers of financial assets, including
those with continuing involvement by the transferor, should be considered a
sale. SFAS 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, in December 1996, the
FASB reconsidered certain provisions of SFAS 125 and issued Statement of
Financial Accounting Standards No. 127 "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125" to defer, for one year, the
effective date of implementation for transactions related to repurchase
agreements, dollar-roll repurchase agreements, securities lending and similar
transactions. The financial statement impact of adopting this standard is not
expected to be material to the Company.
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.
54
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995
----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 22,608 $ 24,144
Interest-bearing deposits and short-term investments 84,220 18,616
---------- ----------
106,828 42,760
Loans held for sale 294,949 -
Securities available-for-sale:
Investment securities 13,802 8,035
Mortgage-backed securities 83,154 149,778
Securities held-to-maturity:
Investment securities (fair value: 1996, $15,112; 1995, $39,969) 15,204 39,928
Mortgage-backed securities (fair value: 1996, $483,461; 1995, $575,321) 494,459 581,600
Loans receivable held for investment, net of
allowance for losses; 1996 - $29,013; 1995 - $30,014 2,179,768 2,062,268
Investment in stock of FHLBSF 51,891 39,450
Real estate owned 7,387 24,476
Premises and equipment, net 6,905 16,184
Intangibles 10,197 5,835
Other assets 35,718 34,182
---------- ----------
Total Assets $3,300,262 $3,004,496
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits $1,763,967 $1,819,840
Advances from FHLBSF 977,750 766,790
Securities sold under agreements to repurchase 210,640 166,738
Senior Debentures 50,000 -
Other borrowings 7,147 7,937
Other liabilities 90,696 35,214
---------- ----------
Total liabilities 3,100,200 2,796,519
---------- ----------
Commitments and contingencies (Note 19)
Stockholders' equity:
Serial preferred stock; authorized, 7,000,000 shares;
outstanding, none - -
Common stock ($.01 par value); authorized, 20,000,000 shares;
issued, 1996 - 15,005,384 shares and 1995 - 14,803,180 shares;
outstanding, 1996 - 13,349,270 shares and 1995 - 14,203,180 shares 150 148
Additional paid-in capital 100,436 97,484
Retained earnings (substantially restricted) 131,324 124,487
Treasury stock at cost, 1996 - 1,656,114 shares and 1995 - 600,000 shares (26,497) (8,436)
Unrealized loss on securities available-for-sale, net of tax (713) (683)
Debt of Employee Stock Ownership Plan (4,638) (5,023)
---------- ----------
Total stockholders' equity 200,062 207,977
---------- ----------
Total Liabilities and Stockholders' Equity $3,300,262 $3,004,496
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
55
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans receivable $192,443 $155,853 $131,783
Interest on mortgage-backed securities 42,081 54,236 61,111
Interest and dividends on investments 7,231 6,374 4,432
-------- -------- --------
241,755 216,463 197,326
Interest expense:
Interest on customer deposits 100,225 93,398 66,424
Interest on Senior Debentures 2,623 - -
Interest on borrowings 57,925 67,149 63,977
-------- -------- --------
160,773 160,547 130,401
Net interest income 80,982 55,916 66,925
Provision for losses on loans 1,898 4,284 2,367
-------- -------- --------
Net interest income after provision for loan losses 79,084 51,632 64,558
Noninterest income:
Loan fees and charges 4,930 3,691 4,537
Loss on loans and securities (1,453) (2,510) (1,081)
Rental income from premises 534 781 809
Other, net 4,553 4,180 3,273
-------- -------- --------
8,564 6,142 7,538
Noninterest expense:
General and administrative:
Compensation and employee benefits 27,956 25,148 25,268
Office occupancy and equipment 9,865 8,658 8,436
Write-down of corporate office complex 500 7,100 -
Deposit insurance premiums and regulatory fees 4,911 4,473 4,813
Data processing service bureau 4,243 1,683 1,701
Other, net 11,480 9,954 7,069
-------- -------- --------
58,955 57,016 47,287
SAIF recapitalization assessment 11,750 - -
Real estate owned operations, net (4,806) (1,081) (95)
Provision for (recovery of) losses on real estate (103) 749 145
Amortization and write-down of intangible assets 2,606 3,944 2,418
-------- -------- --------
68,402 60,628 49,755
Income (loss) before income tax expense (benefit)
and extraordinary item 19,246 (2,854) 22,341
Income tax expense (benefit) 8,277 (708) 7,828
-------- -------- --------
Income (loss) before extraordinary item 10,969 (2,146) 14,513
Extraordinary item, net of tax - (2,544) -
Net income (loss) $ 10,969 $ (4,690) $ 14,513
======== ======== ========
Primary earnings per share:
Income (loss) before extraordinary item $ 0.79 $ (0.15) $ 1.01
Extraordinary item - (0.17) -
-------- -------- --------
Net income (loss) per share $ 0.79 $ (0.32) $ 1.01
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
56
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED TREASURY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SHARES STOCK CAPITAL EARNINGS* STOCK
--------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 14,109 $141 $ 90,655 $123,394 $ -
Exercise of stock options 226 2 1,904
Cash dividends declared ($0.30 per share) (4,283)
Unrealized loss, net of tax
Repayment of debt
Net income 14,513
------ --- -------- -------- --------
Balance at December 31, 1994 14,335 143 92,559 133,624 -
Repurchase of common stock (8,577)
Exercise of stock options, including tax benefits 468 5 4,925 (53) 141
Cash dividends declared ($0.30 per share) (4,394)
Unrealized gain, net of tax
Repayment of debt
Net loss (4,690)
------ --- -------- -------- --------
Balance at December 31, 1995 14,803 148 97,484 124,487 (8,436)
Repurchase of common stock (16,971)
Repurchase of common stock for retirement plan 1,090 (1,090)
Exercise of stock options 202 2 1,862
Cash dividends declared ($0.305 per share) (4,132)
Unrealized loss, net of tax
Repayment of debt
Net income 10,969
------ ---- -------- -------- --------
Balance at December 31, 1996 15,005 $150 $100,436 $131,324 $(26,497)
====== ==== ======== ======== ========
<CAPTION>
UNREALIZED DEBT OF
GAIN (LOSS) EMPLOYEE
ON SECURITIES STOCK TOTAL
AVAILABLE-FOR-SALE OWNERSHIP STOCKHOLDERS'
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (NET OF TAX) PLAN EQUITY
------------------ ---------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993 $ 2,488 (5,702) $210,976
Exercise of stock options 1,906
Cash dividends declared ($0.30 per share) (4,283)
Unrealized loss, net of tax (6,122) (6,122)
Repayment of debt 325 325
Net income 14,513
------- ------ --------
Balance at December 31, 1994 (3,634) (5,377) 217,315
Repurchase of common stock (8,577)
Exercise of stock options, including tax benefits 5,018
Cash dividends declared ($0.30 per share) (4,394)
Unrealized gain, net of tax 2,951 2,951
Repayment of debt 354 354
Net loss (4,690)
------- ------ --------
Balance at December 31, 1995 (683) (5,023) 207,977
Repurchase of common stock (16,971)
Repurchase of common stock for retirement plan -
Exercise of stock options 1,864
Cash dividends declared ($0.305 per share) (4,132)
Unrealized loss, net of tax (30) (30)
Repayment of debt 385 385
Net income 10,969
------- ------ --------
Balance at December 31, 1996 $ (713) (4,638) $200,062
======= ====== ========
</TABLE>
* Substantially restricted
The accompanying notes are an integral part of these consolidated financial
statements.
57
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 10,969 $ (4,690) $ 14,513
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Write-down on disposal of premises and equipment 1,767 7,100 -
Write-down and amortization of intangible assets 2,606 3,944 2,418
Loans originated for sale - - (16,401)
Proceeds from loans sold 9,668 135 11,798
Proceeds from loans securitized and sold - - 10,034
Provision for losses on loans and real estate owned 1,795 5,033 2,512
Depreciation and amortization of premises and equipment 2,210 3,079 3,128
Amortization of deferred loan (fees) costs 1,396 452 (1,558)
Decrease in capitalized excess servicing fees 411 853 1,373
Amortization of premiums, net of discounts 5,160 4,343 6,220
Loss on loans and securities 1,160 2,510 1,081
(Increase) decrease in other assets 1,866 (1,722) (715)
Increase in other liabilities 47,933 6,991 4,923
Other, net (3,558) (867) (4,282)
-------- -------- ---------
Net cash provided by operating activities 83,383 27,161 35,044
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of California Thrift & Loan, net of cash and
cash equivalents received (61,505) - -
Net (increase) decrease in loans resulting from originations
net of principal payments 70,138 (31,575) (294,592)
Purchase of loans (64,721) (12,928) (5,352)
Principal payments on mortgage-backed securities 91,748 88,580 203,255
Purchase of mortgage-backed securities - - (411,269)
Proceeds from sale of mortgage-backed securities held-to-maturity 2,602 - -
Proceeds from sale of mortgage-backed securities available-for-sale 54,458 101,242 -
Proceeds from maturities of investment securities held-to-maturity 24,493 17,000 5,000
Proceeds from maturities of investment securities available-for sale 15,000 - -
Purchase of investment securities held-to-maturity (3,041) (32,000) (31,843)
Proceeds from sale of investment securities available-for-sale - - 5,317
Proceeds from sale of real estate 32,690 20,435 23,906
Proceeds from sale of leasing portfolio held for sale 59,848 - -
Proceeds from sale of premises and equipment 10,648 - -
Additions to premises and equipment (1,577) (3,155) (5,217)
(Increase) decrease in stock of FHLBSF (10,558) 10,196 (11,509)
-------- -------- ---------
Net cash provided by (used in) investing activities 220,223 157,795 (522,304)
-------- -------- ---------
</TABLE>
58
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
----------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit inflows (outflows) (245,268) 112,464 13,113
Redemption of CTL deposits (267,500) - -
Proceeds from advances from FHLBSF 1,644,226 480,000 519,110
Repayment of advances from FHLBSF (1,433,266) (669,520) (282,400)
Repurchase of common stock (24,359) (2,279) -
Issuance of Senior Debentures, net of issuance costs 49,406 - -
Proceeds from reverse repurchase agreements 373,272 166,738 376,960
Repayment of reverse repurchase agreements (329,370) (255,106) (122,530)
Net change in other borrowings (4,406) (605) (12,596)
Proceeds from issuance of common stock 1,864 4,294 1,906
Dividends paid to stockholders (4,137) (4,374) (4,266)
----------- --------- ---------
Net cash provided by (used in) financing activities (239,538) (168,388) 489,297
----------- --------- ---------
Net increase in cash and cash equivalents 64,068 16,568 2,037
Cash and cash equivalents at beginning of year 42,760 26,192 24,155
----------- --------- ---------
Cash and cash equivalents at end of year $ 106,828 $ 42,760 $ 26,192
=========== ========= =========
Cash paid during the year for:
Interest $ 87,422 $ 80,226 $ 58,806
Income taxes $ 4,951 $ 4,450 $ 4,584
Supplemental noncash investing and financing activities:
Loans transferred to real estate owned $ 10,065 $ 31,070 $ 19,706
Transfer of mortgage-backed securities from held-to-maturity
to available-for-sale (Note 1) $ - $ 147,661 $ -
Mortgage-backed securities acquired in exchange for
securitized loans $ - $ - $ 10,034
Loans originated to sell real estate owned $ 5,011 $ 8,905 $ 1,550
</TABLE>
The acquisition of California Thrift & Loan involved the following (see note 2):
<TABLE>
<CAPTION>
<S> <C>
Push-down of the Company's acquisition cost $ 61,819
Liabilities assumed 476,492
Fair value of assets acquired, other than cash and cash equivalents (531,029)
Goodwill (6,968)
---------
Net cash and cash equivalents received $ 314
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements include the consolidated accounts of
Bay View Capital Corporation, a holding company incorporated in Delaware (the
"Company" or "BVCC"), and its wholly owned subsidiaries: Bay View Federal Bank,
a Federal Savings Bank ("BVFB"), California Thrift & Loan, a California
industrial loan company ("CTL") and Bay View Securitization Corporation, a
Delaware corporation ("BVSC"). All significant intercompany accounts and
transactions have been eliminated. As used herein, the terms "Company" or
"BVCC" refer to the Company and its consolidated subsidiaries unless otherwise
indicated.
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 effect 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
Cash equivalents consist of highly liquid financial instruments, with
maturities of 90 days or less at the time of purchase, that are readily
convertible into cash and have insignificant interest rate risk.
Loans Receivable
Loans receivable originated or purchased by the Company are identified as
either held for sale or held for investment at, or soon after, origination or
purchase and are recorded at cost net of discounts, deferred loan origination
fees, and allowance for loan losses as applicable. Loans receivable held for
investment are carried at amortized cost and are not adjusted to the lower of
cost or market because management intends and the Company has the ability, to
hold these loans to maturity. Interest is accrued as income only to the extent
considered collectible. Generally, the Company discontinues interest accruals
on loans 90 days or more past due. Interest income on nonaccrual loans is
measured on a cash basis. Loans classified as held for sale are carried at the
lower of cost or market on an aggregate basis by property type. Market value
for these loans is based on prices for similar loans in the secondary loan
market.
The Company charges fees for originating loans at the time the loan is
granted. The Company recognizes these loan origination fees, net of certain
direct costs, as a yield adjustment over the life of the related loan using the
interest method. Amortization of net deferred loan origination fees are
discontinued on nonperforming loans. When a loan is sold or paid off, any
unamortized net loan origination fees are included in income at that time.
Statement of 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" was effective January
1, 1995. A loan is impaired when, based on current information and events, it
is
60
<PAGE>
probable that the Company is unable to collect all amounts due according to the
contractual terms of the loan agreement. The Company considers nonperforming
loans and troubled debt restructurings as impaired loans. Nonperforming loans
are defined as loans 90 days or more delinquent (excluding accruing loans
delinquent 90 days or more) and loans less than 90 days delinquent when the
Company determines that full collection of principal and interest is doubtful.
Troubled debt restructurings are loans which have been modified based on
interest rate concessions and/or payment concessions. SFAS 114 is not
applicable to large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. The Company considers its consumer loans
as homogeneous loans for purposes of the application of SFAS 114.
Charge-offs are recorded when the measure of the impaired loan is less than
the recorded investment in the loan. In determining charge-offs for specific
loans, management evaluates its loans on an individual basis that includes
assessing the creditworthiness and financial status of the borrower and
analyzing cash flows and current property appraisals. 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. The Company's impaired loans
are measured based on the fair value of the collateral because they are
collateral dependent. At December 31, 1996, there were $16.6 million of
impaired loans.
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan. The Company recognizes interest income on impaired
loans on a cash basis.
Allowance for Loan Losses
Allowances for loan losses are maintained at levels that management deems
adequate to cover estimated losses and are continually reviewed and adjusted.
The Company adheres to an internal asset review system and an established loan
loss reserve methodology. Management evaluates factors such as the prevailing
and anticipated economic conditions, historic loss experiences, composition of
the loan portfolio by property type, levels and trends of classified loans and
loan delinquencies in assessing overall valuation allowance levels to be
maintained.
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 owned, 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.
Loan Sales and Servicing
Gains or losses on the sale of loans are recognized at the time of sale.
When a participating interest in loans sold had an average contractual interest
rate, adjusted for normal servicing fees, which was different than the agreed
upon yield to the purchaser, the sales price was adjusted by the present value
of the differential for the estimated remaining life of the loans. Any
resulting net premium or discount is amortized to interest income over the
estimated remaining life of the loans based on a methodology that approximates
the effective interest yield method. The aggregate amount of unamortized
premiums arising from loan sales (capitalized excess servicing) is included as
other assets. Capitalized excess servicing fees are periodically reviewed for
impairment based on their fair values in accordance with Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights". The
fair value of the capitalized excess servicing, for the purposes of impairment,
is
61
<PAGE>
measured using a discounted cash flow analysis based on the Company's estimated
annual cost of servicing, the market prepayment rates, and the market discount
rates. At December 31, 1996, there was no impairment relating to capitalized
excess servicing fees. Amortization of capitalized excess servicing fees and
any related impairments are included in noninterest income as incurred.
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 classified as held-to-maturity are
recorded at amortized cost because management intends and the Company has the
ability to hold these securities to maturity. Securities classified as
available-for-sale are reported at fair value. Fair value for these securities
is obtained principally from published information or 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 are 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 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 prior to the issuance of this Special Report and
the effects of adoption resulted in reclassification of securities between
categories, the guidance stipulated that the transfers should be accounted for
in accordance with SFAS 115. As a result, concurrent with the initial adoption
of the Special Report, the Company reassessed the appropriateness of its
classifications for 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 a 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 is comprised of property acquired through foreclosure and
is recorded at the lower of cost (i.e., net loan value) or fair value less
estimated costs to sell, as of the date of foreclosure. Thereafter, specific
valuation allowances are established for adverse changes in the fair value of
the underlying assets.
62
<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 estimated useful lives for each of the various asset categories.
Intangibles
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. In addition, the market value of core deposit premiums is
established on an annual basis to evaluate the recoverability of its carrying
value for inclusion as a component of regulatory capital.
Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is amortized to expense over a period no greater than the
estimated remaining life of the long-term interest-earning assets acquired. If
the assets acquired do not include a significant amount of long-term interest-
earning 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 up to 7 years. If it
becomes probable that the estimated undiscounted future cash flows will be less
than the carrying amount of goodwill, a reduction in the carrying amount is
recognized.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles to be held and used
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement
of an impairment loss for long-lived assets and identifiable intangibles that
management expects to hold and use are based on the fair value of the asset.
Long-lived assets and certain identifiable intangibles to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which are considered financing activities. The
obligations to repurchase the securities are reflected as liabilities, and
related underlying securities for the agreements are included in the Company's
securities portfolio as recorded assets.
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 for a change
in tax rates is recognized in income during the period of enactment.
63
<PAGE>
Derivative Financial Instruments
The Company uses certain derivative financial instruments to manage
interest rate risk, principally interest rate exchange agreements (swaps, caps
and collars). The Company does not hold any derivative financial instruments
for trading purposes. The Company uses interest rate swap agreements as part of
its overall asset/liability management in order to reduce its exposure to
interest rate fluctuation risk. The agreements 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 counterparties 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 counterparty selection
process. The Company does not anticipate nonperformance by the other parties.
Stock Based Compensation
The Company accounts for stock based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
(APB) No. 25 "Accounting for Stock Issued to Employees".
Earnings (Loss) Per Share
Earnings per share for 1996 and 1994 were calculated using weighted average
number of common shares outstanding including common stock equivalents
(primarily outstanding stock options). Loss per share for 1995 was calculated
using the weighted average number of common shares outstanding. The average
number of shares outstanding (including common stock equivalents) for 1996 and
1994 were 13,899,838 and 14,361,760 shares, respectively. The average number of
shares outstanding for 1995 was 14,586,984. 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.
Reclassification
Certain reclassifications have been made to the prior year balances in
order to conform to the current year presentation.
NOTE 2. ACQUISITION OF CTL
Effective June 1, 1996, the Company acquired all the outstanding stock of
CTL Credit, Inc. and its wholly owned subsidiary California Thrift & Loan
("CTL") for cash.
CTL is an FDIC insured California industrial loan company with a specific
focus on consumer lending. The acquisition was accounted for using the purchase
method of accounting in accordance with APB No. 16, "Business Combinations".
Under this method of accounting, the acquisition purchase price of approximately
$62 million was allocated to assets acquired and liabilities assumed based on
their estimated fair values as of the effective date of acquisition.
64
<PAGE>
In conjunction with the transaction, the Company issued $50 million of
8.42% Senior Debentures in May 1996 of which a portion was used to partially
finance the acquisition.
The aggregate cost of the acquisition exceeded the estimated fair value of
net assets acquired by approximately $7 million and is being amortized on a
straight-line basis over seven years. Results of operations for the acquired
entity have been included in the Company's consolidated financial statements
commencing as of the effective date of acquisition.
Pro Forma Financial Information
The following unaudited pro forma financial information assumes the
acquisition occurred as of the beginning of 1995. The disclosed results have
been prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had the acquisition been made as of the beginning of
1995 or of the results which may occur in the future.
The following table reflects the combined historical results of operations
for BVCC and CTL after giving effect to the amortization of fair value and other
purchase accounting adjustments recorded in connection with the acquisition of
CTL. Such adjustments include the revaluation of assets held-for-sale, the
capitalization of goodwill and other intangibles, and specific expense accruals
and reserves for acquisition-related costs and contingencies.
The following pro forma historical results for the years ended December 31,
1996, and 1995 have been adjusted to include amortization of the aforementioned
adjustments for the full periods presented which was calculated based on
appropriate methods and periods of benefit as determined by management.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
(DOLLARS IN THOUSANDS) 1996 1995
------------ -------------
<S> <C> <C>
Interest income $265,298 $267,444
Interest expense 171,121 187,933
-------- --------
Net interest income 94,177 79,511
Provision for loan losses 4,981 9,432
-------- --------
Net interest income after provision for loan losses 89,196 70,079
Noninterest income 10,433 9,365
Noninterest expense 77,386 81,685
-------- --------
Income (loss) before income taxes and extraordinary item 22,243 (2,241)
Income tax provision (benefit) 9,694 (140)
Extraordinary item, net of tax - (2,544)
-------- --------
Net income (loss) $ 12,549 $ (4,645)
======== ========
Per share data:
Income (loss) before extraordinary item $ 0.90 $ (0.14)
======== ========
Net income (loss) $ 0.90 $ (0.32)
======== ========
</TABLE>
65
<PAGE>
NOTE 3. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995
----------------------------- --------
(DOLLARS IN THOUSANDS) BVFB CTL BVCC (1)
--------- ----- ---------
<S> <C> <C> <C> <C>
Noninterest-earning deposits due from
depository institutions $ 22,405 $605 $ 22,608 $24,144
Interest-earning deposits 220 - 220 2,366
Short-term investments 84,000 - 84,000 16,250
-------- ---- -------- -------
Total $106,625 $605 $106,828 $42,760
======== ==== ======== =======
</TABLE>
(1) Intercompany depository accounts have been eliminated.
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. The Company has no
compensating balance arrangements or lines of credit with banks. Cash balances
for BVFB required to be held at the Federal Reserve Bank totaled approximately
$5.5 million and $5.7 million at December 31, 1996 and 1995, respectively.
There were no similar cash balance reserve requirements for CTL.
NOTE 4. INVESTMENT SECURITIES
A summary of the Company's investment securities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS (LOSSES) VALUE
--------- ----- ---------- -------
<S> <C> <C> <C> <C>
Available-for-Sale
U. S. Treasury Bills $12,792 $ - $ - $12,792
Federal Home Loan Mortgage
Corporation preferred stock 1,000 10 - 1,010
------- --- ---- -------
Total $13,792 $10 $ - $13,802
======= === ==== =======
Held-to-Maturity
Federal Home Loan Mortgage Corporation
debentures $ 5,004 $ - $(27) $ 4,977
Federal Home Loan Mortgage Corporation
notes 5,000 - (19) 4,981
Federal Farm Credit Bank callable note 5,000 - (46) 4,954
U. S. Treasury Bills 200 - - 200
------- --- ---- -------
Total $15,204 $ - $(92) $15,112
======= === ==== =======
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS (LOSSES) VALUE
--------- ----- ---------- -------
<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
------- --- ---- -------
Total $ 8,000 $35 $ - $ 8,035
======= === ==== =======
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
------- --- ---- -------
Total $39,928 $45 $ (4) $39,969
======= === ==== =======
</TABLE>
The weighted average yield of investment securities available-for-sale and
held-to-maturity at December 31, 1996 was 5.29% and 6.67%, respectively. 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.
There were no sales of investment securities during 1996 and 1995. During
1994, proceeds from sales of investment securities available-for-sale were $5.3
million and gross gains of $171,000 were realized on those sales.
In conjunction with the pending securitization of CTL's auto loan
portfolio, during the fourth quarter of 1996, CTL entered into a short sale of
Treasury securities to hedge the valuations from movements in interest rates. A
loss of $293,000 in accordance with generally accepted principles was recorded
in the fourth quarter associated with this short sale of Treasury securities.
67
<PAGE>
The following table sets forth the contractual maturities and amortized
cost of the Company's investment securities as of December 31, 1996:
<TABLE>
<CAPTION>
ONE YEAR THROUGH
WITHIN ONE YEAR FIVE YEARS TOTAL
------------------ ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale
U. S. Treasury Bills $12,792 5.29% $ - - $12,792 5.29%
======= ===== ======= ==== ======= =====
Fair value $12,792 $ - $12,792
======= ======= =======
Held-to-Maturity
Federal Home Loan Mortgage
Corporation debentures $ - $ 5,004 6.81% $ 5,004 6.81%
Federal Home Loan Bank
callable note - 5,000 6.52 5,000 6.52
Federal Farm Credit Bank
callable note - 5,000 6.75 5,000 6.75
U. S. Treasury Bills 200 4.75% - 200 4.75
------- ----- ------- ------- ------- ------
Total $ 200 4.75% $15,004 6.69% $15,204 6.67%
======= ===== ======= ==== ======= =====
Fair value $ 200 $14,912 $15,112
======= ======= =======
</TABLE>
The Company's investment in FHLMC preferred stock of $1.01 million has no
scheduled maturity and is redeemable in whole or in part after June 30, 1997 at
the option of FHLMC.
NOTE 5. MORTGAGE-BACKED SECURITIES
A summary of the Company's mortgage-backed securities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS (LOSSES) VALUE
--------- ----- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-Sale
Federal National Mortgage Association $ 84,401 $ - $ (1,247) $ 83,154
======== ==== ======== ========
Held-to-Maturity
Federal Home Loan Mortgage Corporation $202,402 $ 77 $ (4,805) $197,674
Federal National Mortgage Association 285,495 104 (6,754) 278,845
Government National Mortgage
Association 660 22 - 682
Financial institutions and financial
intermediaries 5,902 358 - 6,260
-------- ---- -------- --------
Total $494,459 $561 $(11,559) $483,461
======== ==== ======== ========
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS (LOSSES) VALUE
--------- ----- ---------- ---------
<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
======== ==== ======= ========
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 2,650 75 2,725
-------- ---- ------- --------
$581,600 $981 $(7,260) $575,321
======== ==== ======= ========
</TABLE>
The weighted average yield of mortgage-backed securities available-for-sale
and held-to-maturity at December 31, 1996 was 6.61% and 6.44%, respectively.
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.
Adjustable rate mortgage-backed securities included above totaled $664,000
at December 31, 1996 and $725,000 at December 31, 1995. The Company uses
mortgage-backed securities as full or partial collateral for borrowings. The
total amount of pledged mortgage-backed securities at December 31, 1996 and 1995
was $560.0 million and $551.1 million, respectively.
Proceeds from sales of mortgage-backed securities ("MBS") available-for-
sale during 1996 were $54.5 million. Gross gains of $411,000 and gross losses
of $918,000 were realized on those sales. Proceeds from the sale of MBS held-
to-maturity (scheduled to mature three months from sale date) during 1996 was
$2.6 million and there was no gain or loss on this sale. 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 $2.9 million were realized on those
sales. There were no sales of mortgage-backed securities in 1994.
69
<PAGE>
The following table sets forth the remaining contractual terms to maturity
of the Company's mortgage-backed securities portfolio as of December 31, 1996
which is held exclusively by BVFB:
<TABLE>
<CAPTION>
OVER OVER
ONE YEAR THROUGH FIVE YEARS THROUGH
WITHIN ONE YEAR FIVE YEARS TEN YEARS
----------------- ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ -------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale
FNMA $ - $ - $ -
====== ======= ======
Fair Value $ - $ - $ -
====== ======= ======
Held-to-Maturity
FHLMC, FNMA
and GNMA $3,614 5.12% $27,852 5.09% $5,167 7.45%
Financial
institutions and
intermediaries - 131 8.88% -
------ ------- ------- ------ ------ ----
Total amortized
cost $3,614 5.12% $27,983 5.11% $5,167 7.45%
====== ======= ======= ====== ====== ====
Fair Value $3,590 $27,590 $5,159
====== ======= ======
<CAPTION>
OVER TEN YEARS TOTAL
------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Available-for-Sale
FNMA $ 84,401 6.61% $ 84,401 6.61%
======== ===== ======== =====
Fair Value $ 83,154 $ 83,154
======== ========
Held-to-Maturity
FHLMC, FNMA
and GNMA $451,924 6.47% $488,557 6.39%
Financial
institutions and
intermediaries 5,771 10.22% 5,902 10.19%
-------- ----- -------- -----
Total amortized
cost $457,695 6.52% $494,459 6.44%
======== ===== ======== =====
Fair Value $447,121 $483,461
======== ========
</TABLE>
70
<PAGE>
NOTE 6. LOANS RECEIVABLE
The Company originates loans for the purpose of enabling borrowers to
purchase or refinance multifamily (five or more units) and nonresidential real
estate through its wholly owned subsidiary, BVFB. During 1996, management re-
directed its business lending practices whereas it de-emphasized its focus on
single family real estate lending. As a result, the Company discontinued its
loan origination operations for those specific products. BVFB'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 BVFB has a diversified loan portfolio, the geographic
concentration of its borrowers implies a dependence on the regional economy and
local real estate markets. The loan portfolio for CTL consists primarily of
consumer loans. CTL's auto loans are classified as held-for-sale because they
are expected to be sold to BVSC for subsequent securitization. The following is
a summary of the Company's loans receivable which includes loans held-for-sale
at December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995
-------------------------------------- ----------
(DOLLARS IN THOUSANDS) BVFB CTL BVCC
---------- -------- ----------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential
Single family (one to four units) $ 610,607 $ 81,479 $ 692,086 $ 731,310
Multifamily (five or more units) 1,033,252 15,039 1,048,291 995,038
Nonresidential 367,104 14,718 381,822 333,236
---------- -------- ---------- ----------
2,010,963 111,236 2,122,199 2,059,584
Consumer loans:
Auto loans 21,703 293,736 315,439 2,367
Home equity and other 36,058 31,960 68,018 32,482
---------- -------- ---------- ----------
57,761 325,696 383,457 34,849
---------- -------- ---------- ----------
Gross loans receivable 2,068,724 436,932 2,505,656 2,094,433
Advances to borrowers 1,173 - 1,173 607
Less:
Net deferred loan origination fees (2,405) - (2,405) (1,009)
Unearned discounts and premiums (694) - (694) (1,749)
Allowance for loan losses (26,681) (2,332) (29,013) (30,014)
---------- -------- ---------- ----------
(29,780) (2,332) (32,112) (32,772)
---------- -------- ---------- ----------
$2,040,117 $434,600 $2,474,717 $2,062,268
========== ======== ========== ==========
</TABLE>
BVFB has historically sold (none in 1996 and 1995) mortgage loans to the
secondary market and usually retained responsibility for servicing the loans.
At December 31, 1996, 1995 and 1994, BVFB serviced participating interests in
loans sold of $412.4 million, $466.5 million, and $541.0 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 (see Note 1) 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 $509,000 and $15.6 million at December 31, 1996 and 1995,
respectively. Under their original terms, interest income with respect to these
loans would not have been significant in 1996 and would have been
71
<PAGE>
$1.1 million in 1995 and $863,000 in 1994. Actual interest recognized by the
Company on these modified loans was not significant in 1996 and was $1.1 million
in 1995 and $920,000 in 1994.
At December 31, 1996 and 1995, nonaccrual loans totaled $16.1 million and
$10.8 million, respectively. Interest on nonaccrual loans that was not recorded
in income was $735,000, $623,000 and $2.8 million for years ended December 31,
1996, 1995, and 1994, respectively. Actual interest recognized by the Company
on these nonaccrual loans was not significant in 1996 or 1995. At December 31,
1996, the Company had no commitments to lend additional funds to these
borrowers.
The average investment in impaired loans during 1996 and 1995 was $15.1
million and $38.5 million, respectively. Impaired loans recorded in accordance
with SFAS 114 consist of nonperforming loans (see Note 1) and troubled debt
restructurings as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
---------------------------- -------
BVFB CTL BVCC
------- ------ -------
<S> <C> <C> <C> <C>
Nonperforming loans $14,033 $2,092 $16,125 $10,755
Troubled debt restructurings 509 - 509 15,641
------- ------ ------- -------
$14,542 $2,092 $16,634 $26,396
======= ====== ======= =======
</TABLE>
The following table summarizes the changes in the allowance for loan losses
for the periods indicated (including CTL effective June 1, 1996):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
------------------------------ ------- -------
BVFB CTL BVCC
------- ------ -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $30,014 $2,860 $32,874 $29,115 $33,790
Charge-offs:
Mortgage (5,706) (221) (5,927) (4,727) (8,428)
Consumer (8) (466) (474) (152) (86)
------- ------ ------- ------- -------
(5,714) (687) (6,401) (4,879) (8,514)
Recoveries:
Mortgage 522 - 522 1,424 1,337
Consumer 59 61 120 70 135
------- ------ ------- ------- -------
581 61 642 1,494 1,472
Net charge-offs (5,133) (626) (5,759) (3,385) (7,042)
Provision for loan losses 1,800 98 1,898 4,284 2,367
------- ------ ------- ------- -------
Balance at end of year $26,681 $2,332 $29,013 $30,014 $29,115
======= ====== ======= ======= =======
Allowance for loans by category:
Mortgage $26,157 $1,812 $27,969 $29,541 $28,560
Consumer 524 520 1,044 473 555
------- ------ ------- ------- -------
Total: $26,681 $2,332 $29,013 $30,014 $29,115
======= ====== ======= ======= =======
</TABLE>
Allowance for loan losses was provided for all impaired loans at December
31, 1996 and 1995. The portion of the total allowance for loan losses that was
attributable to impaired loans was $1.9 million and $5.1 million at December 31,
1996 and 1995, respectively. Provision for loan losses, charge-offs and
recoveries relating to impaired loans were $1.9 million, $6.4 million and $0.6
million for the year
72
<PAGE>
ended December 31, 1996 and $4.3 million, $4.9 million and $1.5 million for the
year ended December 31, 1995, respectively.
To facilitate the sale of real estate loans, the Company has in the past
occasionally offered a recourse guaranty on loans sold whereas the Company
agreed to repurchase or substitute loans that became 90 days delinquent. In
addition, the Company on occasion subordinated its retained participation
interest in sold loans. At December 31, 1996 and 1995, the Company had
outstanding recourse and subordination contingencies relating to principal of
$54.3 million and $56.0 million, respectively, on sold mortgage loans.
At December 31, 1996 and 1995, mortgage loans aggregating $1.13 billion and
$1.24 billion respectively, were pledged as collateral for advances from the
FHLBSF.
NOTE 7. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------- --------
BVFB CTL BVCC
-------- ------- --------
<S> <C> <C> <C> <C>
Land $ 214 $ - $ 214 $ 4,777
Buildings 336 - 336 10,237
Capitalized leases 3,979 - 3,979 3,979
Leasehold improvements 5,495 1,422 6,917 5,486
Furniture and equipment 10,281 4,455 14,736 12,456
Construction in progress 361 - 361 3,523
-------- ------- -------- --------
20,666 5,877 26,543 40,458
Less:
Accumulated depreciation
and amortization (14,769) (4,869) (19,638) (17,174)
Reserve for write-down on
corporate office complex - - - (7,100)
-------- ------- -------- --------
$ 5,897 $ 1,008 $ 6,905 $ 16,184
======== ======= ======== ========
</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 San Mateo,
California 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. The Company
recorded additional charges of $500,000 as a result of the sale of the complex
in September 1996. During 1996, the Company wrote off $1.2 million of computer
hardware equipment as a result of new specifications relating to the Company's
long-term information services technology agreement with an outside data
processing services vendor. Depreciation and amortization expense for the years
ended December 31, 1996, 1995 and 1994 was $2.2 million, $3.1 million and $3.1
million, respectively.
73
<PAGE>
NOTE 8. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------- --------
BVFB CTL BVCC
---------- -------- ---------
<S> <C> <C> <C> <C>
Core deposit premiums $3,810 $ - $ 3,810 $5,835
Goodwill - 6,387 6,387 -
---------- -------- --------- --------
$3,810 $6,387 $10,197 $5,835
========== ======== ========= ========
</TABLE>
Core deposit premiums of $274,000 were written off during 1996 due to a
branch closure. 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 was subsequently amortized over its remaining useful life.
There were no core deposit premiums written off during 1994. Amortization
expense for core deposit premiums was $1.8 million, $1.9 million and $2.0
million for the years ended December 31, 1996, 1995 and 1994, respectively.
During the fourth quarter of 1995, BVFB explored the sale and/or exchange
of certain of its acquired branches which had purchased goodwill dating from
1981. Based on offers received and management's estimate of undiscounted future
cash flows, it was determined that the recovery of the goodwill associated with
these branches was no longer recoverable. Correspondingly, related unamortized
goodwill of $758,000 was written off in 1995. Amortization expense for goodwill
was $581,000 for the year ended December 31, 1996 and $396,000 for each of the
years ended December 31, 1995 and 1994.
NOTE 9. CUSTOMER DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
% OF WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AVERAGE RATE
---------------- --------- ------------------
<S> <C> <C> <C>
BVFB:
Passbook accounts $ 189,279 12.0% 2.38%
Checking accounts 111,699 7.1 0.78
Money market accounts 176,799 11.2 3.90
--------------- --------- ------------------
Transaction accounts 477,777 30.3 2.57
Certificates of deposit 1,100,559 69.7 5.48
--------------- --------- ------------------
$ 1,578,336(1) 100.0% 4.60%
=============== ========= ==================
CTL:
Money market accounts $ 16,057 8.6% 4.16%
Thrift certificates 169,837 91.4 5.55
--------------- --------- ------------------
$ 185,894 100.0% 5.43%
=============== ========= ==================
BVCC:
Passbook accounts $ 189,279 10.7% 2.38%
Checking accounts 111,436 6.3 0.78
Money market accounts 192,856 10.9 3.92
--------------- --------- ------------------
Transaction accounts 493,571 27.9 2.62
Certificates of deposit 1,100,559 62.4 5.48
Thrift certificates 169,837 9.7 5.55
--------------- --------- ------------------
$ 1,763,967 (1) 100.0% 4.69%
=============== ========= ==================
</TABLE>
(1) Intercompany deposit accounts have been eliminated
74
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
% OF WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AVERAGE RATE
------------ --------- ----------------
<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
------------ --------- ----------------
Transaction accounts 387,610 21.3 2.38
Certificates of deposit 1,432,230 78.7 6.02
------------ --------- ----------------
$1,819,840 100.0% 5.24%
============ ========= ================
</TABLE>
Noninterest bearing deposits were $24.6 million and $13.3 million as of
December 31, 1996 and 1995, respectively. Customer deposits at December 31,
1996 included certificates of deposit scheduled to mature as follows:
<TABLE>
<CAPTION>
BVFB CTL BVCC
------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1997 $ 878,878 $ 122,404 $1,001,282
1998 179,045 33,949 212,994
1999 27,830 8,353 36,183
2000 11,139 3,311 14,450
2001 3,667 1,820 5,487
------------ ---------- -----------
Total $1,100,559 $ 169,837 $1,270,396
============ ========== ===========
</TABLE>
Interest expense on customer deposits by deposit type is as follows
(including CTL effective June 1, 1996):
<TABLE>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
------------------------------------- ---------- ---------
BVFB CTL BVCC
--------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Passbook accounts $ 5,335 $ - $ 5,335 $ 3,777 $ 3,673
Checking and money market accounts 5,726 393 6,095 4,468 4,625
Certificates of deposit 73,429 - 73,429 85,153 57,274
Brokered retail certificates - - - - 852
Thrift certificates - $15,366 15,366 - -
--------- --------- --------------- ---------- ---------
$84,490 $15,759 $ 100,225 (1) $93,398 $66,424
========= ========= =============== ========== =========
</TABLE>
(1) Intercompany amounts have been eliminated
75
<PAGE>
NOTE 10. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF SAN FRANCISCO
At December 31, 1996 and 1995, BVFB had the following advances outstanding
with the following maturities and rates:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
PRINCIPAL AMOUNTS INTEREST RATES
----------------------- ------------------
(DOLLARS IN THOUSANDS) 1996 1995 1996 1995
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
1996 $ - $486,940 - 6.69%
1997 774,480 96,580 5.69% 5.63
1998 108,270 108,270 5.87 5.88
1999 35,000 35,000 5.84 5.84
2000 20,000 20,000 5.88 5.88
2001 40,000 20,000 7.18 8.66
--------- --------- ----- -----
$977,750 $766,790 5.78% 6.43%
========= ========= ===== =====
</TABLE>
FHLBSF advances at December 31, 1996 included $25 million of borrowings
maturing in 1997 and 1998 at interest rates that reset monthly based on the
Eleventh District Cost of Funds Index and $20 million of borrowings maturing in
2001 at interest rates that reset semi-annually based on the 6-month LIBOR rate.
The advances were collateralized by loans and mortgage-backed securities
totaling $1.70 billion and $1.61 billion at December 31, 1996 and 1995,
respectively.
BVFB is a member of the Federal Home Loan Bank System. As a member, BVFB
is required to purchase stock in the FHLBSF at an amount equal to the greater of
1% of BVFB'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.
BVFB records its investment in FHLBSF stock at cost (par value). At December
31, 1996, BVFB's investment was $49.6 million and its minimum required
investment was $48.9 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, 1996, 1995 and 1994 was $2.5 million, $2.2 million, and $2.3 million,
respectively.
As part of its asset/liability management strategy to reduce interest rate
risk exposure, the Company prepaid $45 million of its advances from the FHLBSF,
and during the fourth quarter of 1995, committed to prepay $145 million of its
FHLBSF advances in February 1996. Accordingly, the Company incurred a
prepayment charge of $2.5 million (net of applicable income taxes) in connection
with the early retirement of FHLBSF advances which was reported as an
extraordinary item in 1995.
NOTE 11. 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, 1996 and 1995 were $210.6 million and
$166.7 million, respectively. The weighted average interest rate on reverse
repurchase agreements at December 31, 1996 and 1995 were 5.53% and 6.13%,
respectively.
These borrowings have maturities of one year or less and are collateralized
by mortgage-backed securities aggregating $218.2 million and $172.2 million
respectively, at December 31, 1996 and 1995.
76
<PAGE>
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, 1996 and 1995 was $218.7 million
and $174.8 million, respectively.
NOTE 12. SENIOR DEBENTURES
In May 1996, Bay View Capital Corporation issued $50 million of Senior
Debentures of which a portion was used to partially finance the acquisition of
CTL. The Senior Debentures are due June 1, 1999 and pay interest semi-annually
at a rate of 8.42%.
NOTE 13. 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>
(DOLLARS IN THOUSANDS) FEDERAL STATE TOTAL
---------- ---------- ---------
<S> <C> <C> <C>
1996:
Current $ 3,007 $ 352 $ 3,359
Deferred 3,046 1,872 4,918
---------- ---------- -------
$ 6,053 $ 2,224 $ 8,277
========== ========== =======
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
========== ========== =======
</TABLE>
Following is a summary of current and deferred income taxes included in
other assets (liabilities):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(DOLLARS IN THOUSANDS) 1996 1995
---------- --------
<S> <C> <C>
Current receivable (payable) $ 2,735 $(6,248)
Deferred asset (liability) (4,698) 11,683
---------- --------
$(1,963) $ 5,435
======== ========
</TABLE>
77
<PAGE>
The differences between the effective tax rates and the federal statutory
rates were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Federal tax expense, computed at
statutory rate of 35% for 1996,
1995 and 1994 $6,736 $(999) $7,819
Revision of prior year estimates - - (2,100)
State tax expense, net of federal tax 2,439 (192) 1,587
benefit
Other, net (898) 483 522
--------- ---------- ----------
$8,277 $(708) $7,828
========= ========== ==========
Effective tax rate, as a percentage of
income before income tax expense
(benefit) and extraordinary items 43.0% (24.8%) 35.0%
========= ========== ==========
</TABLE>
The components of the net deferred tax assets as of December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
----------- ----------
<S> <C> <C>
Deferred tax assets:
Provision for loan losses $ 10,579 $ 12,508
Real estate joint ventures 1,130 1,090
Depreciation 1,947 1,476
State income taxes 830 235
Intangible assets 3,327 3,505
Unrealized loss on securities available-for-sale 532 504
Leases 1,347 787
Prepayment penalties - 1,815
Write-down of corporate office complex 996 2,823
Other 3,776 2,579
----------- ----------
Gross deferred tax assets 24,464 27,322
----------- ----------
Deferred tax liabilities:
Excess over base year reserves (993) (914)
Unrealized gain on loans available-for-sale (12,745) -
Loan fees (7,213) (8,411)
FHLBSF stock dividends (6,677) (5,405)
Capitalized excess servicing fees (263) (456)
Other (1,271) (453)
----------- ----------
Gross deferred tax liabilities (29,162) (15,639)
----------- ----------
Net deferred tax asset (liability) $ (4,698) $ 11,683
=========== ==========
</TABLE>
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, 1996 and 1995, the
amount of these reserves was approximately $17.0 million.
The amount of unrecognized deferred tax liability at December 31, 1996 and
1995 was approximately $6.1 million. The deferred tax liability could be
recognized if in the future there is a change in federal tax law, 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.
78
<PAGE>
During 1996, the Company and the Internal Revenue Service ("IRS") reached a
final 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 reaching a tentative agreement in 1994, 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 tax liabilities (including the estimated effect of the IRS agreement on
the Company's California franchise tax returns).
The acquisition of CTL during 1996 increased deferred income tax
liabilities by $7.3 million.
NOTE 14. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
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 was
required to pay a one-time special assessment of $11.7 million pre-tax ($6.7
million after tax or $.485 per share). The legislation had no effect on CTL, as
its deposits are insured under the Bank Insurance Fund.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, BVFB and CTL must meet specific capital guidelines that
involve quantitative measures of BVFB's or CTL's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. BVFB's and CTL's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. Failure to meet minimum capital requirements can initiate
certain mandatory, and possible additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements.
Bay View Federal Bank
- ---------------------
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, 1996, BVFB's fully phased-in regulatory
capital exceeds the minimum requirements of each regulatory capital standard in
effect on such date as follows:
<TABLE>
<CAPTION>
ACTUAL MINIMUM REQUIRED EXCESS
-------------------- --------------------- ------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Tangible $165,110 5.52% $ 44,860 1.50% $120,250 4.02%
Core (Leverage) $168,782 5.64% $ 89,829 3.00% $ 78,953 2.64%
Risk-based $190,981 10.74% $142,308 8.00% $ 48,673 2.74%
</TABLE>
79
<PAGE>
The following table is a reconciliation of BVFB'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, 1996:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) TANGIBLE CORE RISK-BASED
---------- ---------- ------------
<S> <C> <C> <C>
BVFB stockholder's equity (GAAP) $170,847 $170,847 $170,847
Increase (decrease):
Unrealized loss on securities 713 713 713
Core deposit premiums (3,810) (138) (138)
Nonincludable investments in subsidiary (2,640) (2,640) (2,640)
Nonqualifying equity investments - - (124)
Qualifying general loan loss allowances - - 22,323
---------- ---------- ------------
BVFB regulatory capital $165,110 $168,782 $190,981
========== ========== ============
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 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 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 Tier II risk-based capital ratio is 10% or greater, its Tier I 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, Tier II
risk-based capital ratio means the ratio of Tier II risk-based capital to risk-
weighted assets, Tier I 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. As of December 31, 1996 and 1995, the most recent notification
from the OTS categorized BVFB as well capitalized. There are no conditions or
events since that notification that management believes have changed BVFB's
category.
Under capital guidelines enacted by FDICIA, BVFB met the criteria for the
"well capitalized" standard at December 31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Leverage $168,782 5.64% $149,716 5.00% $19,066 0.64%
Tier I risk-based $168,782 9.49% $106,731 6.00% $62,051 3.49%
Tier II risk-based $190,981 10.74% $177,885 10.00% $13,096 0.74%
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
-------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- --------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Leverage $158,378 5.28% $150,030 5.00% $ 8,348 0.28%
Tier I risk-based $158,378 9.25% $102,693 6.00% $55,685 3.25%
Tier II risk-based $179,865 10.51% $171,155 10.00% $ 8,710 0.51%
</TABLE>
80
<PAGE>
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, 1996, if the interest
rate risk component regulation had been implemented, BVFB would not have been
subject to an interest rate risk capital deduction for risk-based capital
purposes.
The Company is a legal entity separate and distinct from BVFB. The
Company's principal source of funds on an unconsolidated basis is expected
dividends from its wholly owned subsidiaries. Dividends declared by BVFB to the
Company were $0 in 1996, $29.4 million in 1995 and $4.4 million in 1994. There
are various statutory and regulatory limitations on the extent to which BVFB can
pay dividends to, make investments in or loans to, or otherwise supply funds to
the Company. Based on the current financial status of BVFB, the Company
believes that such limitations and restrictions will not impair the Company's
ability to continue to pay the current level of dividends.
California Thrift & Loan
- ------------------------
As of December 31, 1996, the most recent notification from the FDIC
categorized CTL as well capitalized. There are no conditions or events since
that notification that management believes have changed CTL's category. CTL's
capital ratios at December 31, 1996 are 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 $43,462 9.50% $22,885 5.00% $20,577 4.50%
Tier I Risk-based $43,462 9.97% $26,164 6.00% $17,298 3.97%
Tier II Risk-based $48,913 11.33% $43,179 10.00% $ 5,734 1.33%
</TABLE>
CTL declared and paid a dividend of $15 million in 1996 to return excess
capital to the Company.
NOTE 15. STOCK REPURCHASE PROGRAM
During 1995, the Company's Board of Directors authorized a stock repurchase
program enabling the Company to purchase up to 1,200,000 shares of the Company's
common stock which was subsequently increased in 1996 to a total of 1,600,000
shares authorized for repurchase. As of December 31, 1996, the Company had
completed its previously announced stock buy back of 1,600,000 shares (610,000
shares in 1995 and 990,000 in 1996) which were repurchased at an average cost of
$15.985.
On January 22, 1997, the Company announced that its Board of Directors has
authorized the repurchase of an additional $25 million of shares of the
Company's common stock.
81
<PAGE>
NOTE 16. 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 1,759,430 and 1,000,000 shares of common stock,
respectively. The Company has also adopted a Non-Employee Director Stock Option
Plan which authorizes the issuance of up to 550,000 additional shares of common
stock. The stock option plans were approved by the Company's stockholders.
<TABLE>
<CAPTION>
NON-EMPLOYEE
1986 STOCK 1995 STOCK DIRECTOR
OPTION PLAN OPTION PLAN OPTION PLAN TOTAL
--------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Shares reserved for issuance 1,759,430 1,000,000 550,000 3,309,430
Granted (2,048,816) (602,000) (456,000) (3,106,816)
Canceled 290,074 20,000 20,000 330,074
Expired (688) - - (688)
--------------- ------------- -------------- -----------
Total available for grant 0 418,000 114,000 532,000
=============== ============= ============== ===========
</TABLE>
At December 31, 1996, the Company had outstanding non-qualified options for
all three plans with expiration dates from 1997 to 2006, as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE AVERAGE PRICE
OPTION SHARES RANGE PER SHARE
----------------- --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 1,232,592 $ 6.97-11.87 $ 8.94
Granted 52,000 10.75-11.94 10.84
Exercised (225,422) 6.97- 9.81 8.47
----------------- --------------- --------------
Outstanding at December 31, 1994 1,059,170 6.97-11.94 9.14
Granted 434,000 9.37-13.31 12.28
Exercised (477,232) 6.97-11.06 9.00
Canceled (38,844) 8.75-12.50 11.46
----------------- --------------- --------------
Outstanding at December 31, 1995 977,094 6.97-13.31 10.51
Granted 424,000 13.47-18.87 16.01
Exercised (202,204) 6.97-12.50 9.20
Canceled (44,000) 12.50-12.81 12.78
----------------- --------------- --------------
Outstanding at December 31, 1996 1,154,890 $ 7.28-18.87 $12.67
================= =============== ==============
Options exercisable
at December 31, 1996 756,890 $ 7.28-18.87 $11.19
================= =============== ==============
</TABLE>
82
<PAGE>
Statement of Financial Accounting Standard (SFAS) No. 123 Pro Forma Disclosure
The Company accounts for its stock option grants in accordance with APB
Opinion No. 25 "Accounting for Stock Issued to Employees". Had compensation
cost been recorded based on SFAS No. 123, the Company's net income (loss) and
earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995
----------- ----------
<S> <C> <C>
Net income (loss):
Actual $10,969 $(4,690)
Pro forma $10,255 $(5,239)
Primary net income (loss) per share:
Actual $ 0.79 $ (0.32)
Pro forma $ 0.73 $ (0.35)
</TABLE>
The fair value of options granted was estimated as of the date of grant
based on the Black-Scholes option pricing model given the following weighted-
average assumptions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995
------------- ------------
<S> <C> <C>
Dividend yield 2.0% 2.50%
Volatility .30 .30
Risk-free interest 5.21% 7.78%
Expected term (years) 4.84 4.84
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------------------------------------- --------------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, REMAINING LIFE AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 (IN YEARS) EXERCISE PRICE 1996 EXERCISE PRICE
- ----------------- ------------------ -------------------- -------------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 7.28 - 10.75 414,890 4.83 $ 9.34 414,890 $ 9.34
$ 11.87 - 15.62 552,000 8.81 $13.70 282,000 $12.77
$ 16.56 - 18.87 188,000 9.47 $16.97 60,000 $16.56
------------------ ----------------
1,154,890 756,890
================== ================
</TABLE>
NOTE 17. 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, 1996, 1995 and 1994
were $435,000, $483,000, and $526,000 respectively.
83
<PAGE>
Effective December 31, 1995, the Company modified its non-qualified defined
benefit retirement plan for non-employee members of its Board of Directors and
terminated its non-qualified supplemental retirement plan for executive officers
(collectively, the "Plans"). As of December 31, 1996, the Company had a $1.1
million liability to certain non-employee members of its Board of Directors
payable in 66,114 shares of the Company's common stock in satisfaction of the
retirement plan liability. Such shares were repurchased in the market and are
held in treasury and restricted as to issuance until paid out. The liability is
included in additional paid in capital. As of December 31, 1996, the Company
had a $2.0 million liability to certain retired Directors and executive officers
(relating to the remaining benefits owed pursuant to the terminated supplemental
retirement plan for executive officers).
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 were based on years of
service and the participants' compensation. The amounts charged to income for
the pension benefits, including the charges relating to the modification and
termination of these plans, during 1996, 1995 and 1994 were $42,000, $637,000,
and $860,000, respectively.
Net pension cost for these Plans included the following components for
1994:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1994
---------------------
<S> <C>
Service cost-benefits earned during the year $285
Interest cost on projected benefit obligation 492
Net amortization and deferral 83
-----------
Net periodic pension cost $860
===========
</TABLE>
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, 1996 and 1995, the ESOP held 314,190 and 353,178 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 $362,000, $407,000 and $352,000, respectively, for the years ended
December 31, 1996, 1995 and 1994. The interest expense recorded by the Company
was $289,000, $254,000, and $199,000, for the years ended December 31, 1996,
1995 and 1994, 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 $674,000 for 1996, $609,000 for 1995, and $508,000 for 1994.
84
<PAGE>
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Exchange Agreements (Swaps)
At December 31, 1996 and 1995 the Company was party to interest rate swap
agreements with notional principal amounts of $421.0 million and $150.0 million,
respectively. The information presented below is based on interest rates at
December 31, 1996 and 1995. To the extent that rates change, variable interest
rate information will change. The following schedule represents the maturities
and weighted average interest rates for swap agreements outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
MATURITIES OF DERIVATIVES INSTRUMENTS
------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 2000 2001 2002+ TOTAL
--------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Pay fixed generic swaps
Notional amount $39,500 $100,000 $104,000 $177,500 $421,000
Weighted average receive rate (3-month LIBOR) 5.55% 5.56% 5.53% 5.53% 5.54%
Weighted average pay rate (fixed) 6.67% 6.10% 6.72% 6.41% 6.44%
</TABLE>
The following schedule represents the maturities and weighted average
interest rates for swap agreements outstanding as of December 31, 1995:
<TABLE>
<CAPTION>
MATURITIES OF DERIVATIVES
INSTRUMENTS
-----------------------------------
(DOLLARS IN THOUSANDS) 2001 2001+ TOTAL
---------- ---------- ---------
<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 (fixed) 6.10% 6.03% 6.08%
Forward starting swap
Notional amount $ - $150,000 $150,000
Weighted average receive rate (3-month LIBOR) - 5.63% 5.63%
Weighted average pay rate (fixed) - 6.35% 6.35%
</TABLE>
The interest rate swaps at December 31, 1996 and 1995 were collateralized
by loans and mortgage-backed securities totaling $10.4 million and $14.6
million, respectively. The effect of interest rate swap agreements for the
years ended December 31, 1996, 1995 and 1994 was to increase interest expense by
$2.6 million, $40,000, and $80,000, respectively.
Treasury Rate Lock Agreement
At December 31, 1996, CTL entered into a $210 million treasury rate lock
agreement to hedge its auto loan portfolio pending sale to BVSC and subsequent
securitization and sale of asset-backed securities by BVSC. The treasury rate
lock agreement guarantees a stated interest rate for a stated period of time and
CTL will receive/pay the difference between the lock rate and the effective
treasury rate on settlement date. Gains and losses on the hedge are deferred
and recognized in income upon settlement of the hedge or sale of the underlying
assets being hedged.
85
<PAGE>
NOTE 19. 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 which has been accounted for as a capital
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 totaled $389,000, $385,000, and $389,000 during the years ended December
31, 1996, 1995 and 1994, respectively. During the years ended December 31,
1996, 1995 and 1994, depreciation on the capital lease was $303,000 for each
year. Accumulated depreciation at December 31, 1996 and 1995 was $2.9 million
and $2.6 million, respectively.
Certain banking center locations and the Company's administrative corporate
office are leased by the Company under operating type lease arrangements
expiring at various dates through 2012. Lease rental expense for the years
ended December 31, 1996, 1995 and 1994 totaled $3.5 million, $2.4 million, and
$2.5 million, respectively.
Future minimum payments under lease obligations at December 31, 1996 are
included in the following table:
<TABLE>
<CAPTION>
CAPITAL LEASE OPERATING LEASE
(DOLLARS IN THOUSANDS) PAYMENTS PAYMENTS
------------- ---------------
<S> <C> <C>
1997 $ 872 $ 4,982
1998 924 4,634
1999 978 3,870
2000 508 3,028
2001 - 2,771
2002 and thereafter - 20,543
------ -------
3,282 $39,828
=======
Less amount representing interest (773)
------
Net capital lease obligation $2,509
======
</TABLE>
Mortgage Loans
As of DECEMBER 31, 1996 the Company had outstanding commitments to
originate $7.4 million of mortgage loans. The Company has outstanding recourse
and subordination contingencies relating to $54.3 million of sold loans at
December 31, 1996 (see Note 6).
Litigation
The Company is 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 consolidated financial condition or
results of operations.
86
<PAGE>
NOTE 20. 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, 1996 and 1995. 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------------
BVFB CTL BVCC (2)
--------------------------- ------------------------ ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 106,623 $ 106,623 $ 605 $ 605 $ 106,828 $ 106,828
Loans held for sale 1,213 1,213 293,736 294,636 294,949 295,849
Investment securities 15,004 14,912 12,792 12,792 29,006 28,914
Mortgage-backed securities 577,613 566,615 - - 577,613 566,615
Loans receivable (1): 2,038,904 2,055,394 140,864 144,252 2,179,768 2,199,646
Investment in stock of the FHLBSF 49,571 49,571 2,320 2,320 51,891 51,891
Capitalized excess servicing 575 8,001 - - 575 8,001
Liabilities
Transaction accounts 479,258 479,258 16,057 16,057 493,571 493,571
Fixed maturity deposits 1,100,559 1,103,744 169,837 169,837 1,270,396 1,273,581
Advances from the FHLBSF 977,750 980,775 - - 977,750 980,775
Securities sold under
agreements to repurchase 210,640 211,341 - - 210,640 211,341
Senior Debentures 50,000 50,166
<CAPTION>
DECEMBER 31, 1995
----------------------
CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE
--------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 42,760 $ 42,760
Loans held for sale - -
Investment securities 47,963 48,004
Mortgage-backed securities 731,378 725,099
Loans receivable (1): 2,062,268 2,079,818
Investment in stock of the FHLBSF 39,450 39,450
Capitalized excess servicing 985 6,520
Liabilities
Transaction accounts 387,610 387,610
Fixed maturity deposits 1,432,230 1,439,214
Advances from the FHLBSF 766,790 775,567
Securities sold under
agreements to repurchase 166,738 166,854
</TABLE>
(1) Carrying amounts are net of allowance for losses
(2) Intercompany accounts have been eliminated
87
<PAGE>
<TABLE>
<CAPTION>
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
-----------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
-----------------------------------------------------------
CARRYING UNREALIZED CARRYING UNREALIZED
(DOLLARS IN THOUSANDS) AMOUNT GAIN/(LOSS) AMOUNT LOSS
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
BVFB:
- ----
Interest rate swaps $549 $(3,335) $15 $(4,353)
==== ======= === =======
CTL:
- ----
Treasury rate lock $ - $ 33 $ - $ -
==== ======= === =======
</TABLE>
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 transactions accounts (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 for BVFB
was estimated using the rates currently offered for certificates of deposit with
similar remaining maturities and for CTL at carrying amount due to the call
feature.
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 Senior Debentures.
The unrealized loss on interest rate 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. The unrealized gain on the
Treasury rate lock is the estimated amount that the Company would receive to
terminate the agreement with the counterparty.
NOTE 21. 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.
88
<PAGE>
The Parent Company's statements of financial condition and related
statements of operations and cash flows are as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(DOLLARS IN THOUSANDS) 1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash in Bank $ 795 $ 2,047
Demand note due from BVFB (interest at
prime rate) 24,817 24,361
Investment securities 1,210 1,035
Investment in and advances to
subsidiaries 221,603 162,129
Dividend receivable from subsidiaries - 25,000
Other assets 2,899 823
-------- --------
Total Assets $251,324 $215,395
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 1,262 $ 7,418
Senior Debentures 50,000 -
Stockholders' equity 200,062 207,977
-------- --------
Total Liabilities and Stockholders'
Equity $251,324 $215,395
======== ========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 3,029 $ 29,400 $ 4,400
Interest income 1,548 1,529 1,135
Other income - - 13
------- -------- -------
4,577 30,929 5,548
------- -------- -------
Expense:
Interest on Senior Debentures 2,623 - -
General and administrative expense 1,234 582 502
Income tax expense (benefit) (997) 383 158
------- -------- -------
2,860 965 660
------- -------- -------
Income before undistributed net income
(loss) of subsidiaries 1,717 29,964 4,888
Undistributed net income (loss) of
subsidiaries 9,252 (34,654) 9,625
------- -------- -------
Net income (loss) $10,969 $ (4,690) $14,513
======= ======== =======
</TABLE>
89
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 10,969 $ (4,690) $14,513
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Undistributed net (income) loss of subsidiaries (9,252) 34,654 (9,625)
Dividends received (receivable) 25,000 (25,000) -
Increase in other assets (2,076) - -
Increase in other liabilities 1,829 - -
Other (312) (48) 1,098
-------- -------- -------
Net cash provided by operating activities 26,158 4,916 5,986
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of California Thrift & Loan, net of
cash and cash equivalents received (61,505) - -
Purchase of investment securities held-to-maturity (200) - -
Net change in advances to subsidiaries 6 15 4
Return of investment from subsidiary 11,971 - -
Demand note due from BVFB (456) (1,661) (3,700)
-------- -------- -------
Net cash used in investing activities (50,184) (1,646) (3,696)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to stockholders (4,137) (4,374) (4,266)
Issuance of Senior Debentures, net of costs 49,406 - -
Repurchase of common stock (24,359) (2,279) -
Proceeds from issuance of common stock 1,864 4,294 1,906
-------- -------- -------
Net cash provided by (used in) financing
activities 22,774 (2,359) (2,360)
-------- -------- -------
Net increase (decrease) in cash (1,252) 911 (70)
Cash at beginning of year 2,047 1,136 1,206
-------- -------- -------
Cash at end of year $ 795 $ 2,047 $ 1,136
======== ======== =======
</TABLE>
90
<PAGE>
NOTE 22. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (1)
------------------------------------------------------
(DOLLARS IN THOUSANDS FIRST SECOND THIRD FOURTH
EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER (2) QUARTER
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $53,409 $57,094 $66,028 $65,224
Net interest income 16,214 18,837 22,878 23,053
Provision for losses on loans 600 498 400 400
Net income (loss) 3,993 4,216 (2,108) 4,868
Primary earnings per share:
Net income (loss) 0.28 0.30 (0.15) 0.36
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
(DOLLARS IN THOUSANDS FIRST SECOND THIRD FOURTH
EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER
------------------------------------------------------
<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 on loans 900 900 900 1,584
Income (loss) before extraordinary item 2,443 (749) 2,276 (6,116)
Extraordinary item, net of tax - - - (2,544)
Net income (loss) 2,443 (749) 2,276 (8,660)
Primary earnings per share
Income (loss) before extraordinary
item 0.17 (0.05) 0.15 (0.41)
Net income (loss) 0.17 (0.05) 0.15 (0.59)
</TABLE>
(1) Including CTL effective June 1, 1996
(2) Includes SAIF recapitalization assessment (see note 14)
NOTE 23. SIGNIFICANT FOURTH QUARTER 1995 ADJUSTMENTS
The following significant fourth quarter adjustments were recorded in the
1995 Consolidated Statement of Operations:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) AMOUNT
--------
<S> <C>
Write-down of corporate office complex (see Note 7) $ 7,100
Prepayment penalties on FHLBSF advances, pretax (see Note 10) 4,422
Severance payments related to work force reductions and pension plans 1,449
Core deposit premiums written-off (see Note 8) 854
Goodwill written-off (see Note 8) 758
-------
$14,583
=======
</TABLE>
91
<PAGE>
NOTE 24. SUBSEQUENT EVENTS
On January 21, 1997, the Company executed a definitive agreement to acquire
EXXE Data Corporation ("EXXE") and its wholly owned subsidiary Concord Growth
Corporation ("CGC"), a nationwide commercial finance company. The acquisition
will be accounted for as a purchase and is expected to be completed during March
1997. Under the terms of the definitive agreement, shareholders of EXXE capital
stock, warrants and options will receive an initial aggregate payment of $19.8
million at closing and will be entitled to potential future payments, dependent
on the future financial performance of CGC, of up to $34 million. The
transaction is subject to the approval of EXXE shareholders and all applicable
regulatory authorities.
On January 24, 1997, the Company securitized and sold $253 million of
asset-backed securities through its wholly owned subsidiary BVSC pursuant to a
previously filed shelf registration statement on Form S-3 for $500 million of
automobile receivable-backed securities. The securities consisted of 6.29%
Class A-1 Automobile Receivable Backed Certificates in aggregate principal
amount of $200,979,000, 6.59% Class A-2 Automobile Receivable Backed
Certificates in the aggregate principal amount of $52,245,989, and other
Interest Only Automobile Receivable Backed Certificates that will not receive
distributions of principal. The premium arising from the sale of the automobile
loans has been recorded as part of the purchase accounting valuations related to
the acquisition of CTL. A gain of approximately $900,000 will be realized in
the income statement due to the improvement in the fair value of the automobile
loans as a result of changes in market interest rates between June 1, 1996 and
the sale of the automobile loans on January 24, 1997. The underlying automobile
loans collaterizing the certificates will be serviced by CTL.
On April 14, 1997, the Company declared a 2 for 1 stock split in the form
of a 100% stock dividend to stockholders of record as of the close of business
on May 9, 1997 which was paid on June 2, 1997. All share and per share amounts
have been restated to reflect this stock split.
On May 8, 1997, the Company signed a definitive agreement to acquire
America First Eureka Holdings, Inc. ("AFEH") and its wholly owned bank
subsidiary, EurekaBank ("Eureka"). Under the terms of the definitive agreement,
America First Financial Fund 1987-A Limited Partnership (Nasdaq: "AFFFZ"), the
shareholder of AFEH capital stock, will receive approximately $300 million
comprised of Bay View Common stock valued at $210 million (subject to possible
adjustment) and cash of $90 million. The acquisition of AFEH/Eureka will be
accounted for as a purchase and is expected to be completed on or about December
31, 1997 or January 1, 1998. The purchase price is currently estimated to exceed
the fair value of the net assets acquired by approximately $112 million, which
Bay View anticipates amortizing over a 15 year period.
On May 22, 1997, shareholders approved an amendment to the Company's
restated Certificate of Incorporation to increase the authorized shares of
common stock to 60,000,000.
92
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
---------------------------------------------------------------------------
PARENT CO
(DOLLARS IN THOUSANDS) BVFB CTL & OTHER SUBS(1) ELIMINATIONS CONSOLIDATED
------------ --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 106,623 $ 605 $ 1,480 $ (1,880) $ 106,828
Loans held for sale 1,213 293,736 - - 294,949
Securities available-for-sale:
Investment securities - 12,792 1,010 - 13,802
Mortgage-backed securities 83,154 - - - 83,154
Securities held-to-maturity:
Investment securities 15,004 - 200 - 15,204
Mortgage-backed securities 494,459 - - - 494,459
Loans receivable held for investment, net 2,038,904 140,864 - - 2,179,768
Investment in stock of the FHLBSF 49,571 2,320 - - 51,891
Real estate owned 4,896 2,491 - - 7,387
Premises and equipment, net 5,897 1,008 - - 6,905
Investment in subsidiaries/due from
affiliates 163,183 - 246,420 (409,603) -
Intangibles 3,810 6,387 - - 10,197
Other assets 29,179 3,891 3,353 (705) 35,718
---------- -------- -------- --------- ----------
Total Assets $2,995,893 $464,094 $252,463 $(412,188) $3,300,262
========== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits $1,579,817 $185,894 $ - $ (1,744) $1,763,967
Advances from the FHLBSF 977,750 - - - 977,750
Securities sold under agreements to
repurchase 210,640 - - - 210,640
Senior Debentures - - 50,000 - 50,000
Other borrowings 30,871 163,220 - (186,944) 7,147
Other liabilities 25,968 65,132 1,553 (1,957) 90,696
---------- -------- -------- --------- ----------
Total Liabilities 2,825,046 414,246 51,553 (190,645) 3,100,200
Stockholders' equity:
Common stock - 4,000 150 (4,000) 150
Additional paid-in capital 74,187 42,819 101,446 (118,016) 100,436
Retained earnings (substantially
restricted) 102,011 3,029 125,811 (99,527) 131,324
Treasury stock at cost - - (26,497) - (26,497)
Unrealized loss on securities
available-for-sale (net of tax) (713) - - - (713)
Debt of Employee Stock Ownership Plan (4,638) - - - (4,638)
---------- -------- -------- --------- ----------
Total Stockholders' Equity 170,847 49,848 200,910 (221,543) 200,062
---------- -------- -------- --------- ----------
Total Liabilities and
Stockholders' Equity $2,995,893 $464,094 $252,463 $(412,188) $3,300,262
========== ======== ======== ========= ==========
</TABLE>
(1) Includes Bay View Securitization Corporation and Regent Financial
Corporation, wholly owned subsidiaries of the Company, which are not
material for separate financial statement disclosure for the periods
presented.
93
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
PARENT CO.
(DOLLARS IN THOUSANDS) BVFB CTL(1) & OTHER SUBS(2) ELIMINATIONS CONSOLIDATED
------------ --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest on loans receivable $161,149 $31,294 - - $192,443
Interest on mortgage-backed securities 42,081 - 42,081
Interest and dividends on investments 6,428 761 $ 1,564 $ (1,522) 7,231
-------- ------- ------- -------- --------
209,658 32,055 1,564 (1,522) 241,755
Interest expense:
Interest on customer deposits 84,490 15,759 (24) 100,225
Interest on Senior Debentures - 2,623 2,623
Interest on borrowings 59,349 74 (1,498) 57,925
-------- ------- ------- -------- --------
143,839 15,833 2,623 (1,522) 160,773
Net interest income 65,819 16,222 (1,059) - 80,982
Provision for losses on loans 1,800 98 1,898
-------- ------- ------- -------- --------
Net interest income after provision for
losses 64,019 16,124 (1,059) - 79,084
Noninterest income:
Loan fees and charges 3,858 1,072 - - 4,930
Loss on loans and securities (507) (946) - - (1,453)
Rental income from premises 534 - - - 534
Equity in earnings of subsidiaries - 12,281 (12,281) -
Other, net 4,287 284 - (18) 4,553
-------- ------- ------- -------- --------
8,172 410 12,281 (12,299) 8,564
Noninterest expense:
General and administrative expenses 47,560 10,172 1,241 (18) 58,955
SAIF recapitalization assessment 11,750 - - - 11,750
Real estate owned operations, net (5,001) 195 - - (4,806)
Recovery of losses on real estate (103) - - - (103)
Amortization and write-down of
intangible assets 2,025 581 - - 2,606
-------- ------- ------- -------- --------
56,231 10,948 1,241 (18) 68,402
Income before income taxes 15,960 5,586 9,981 (12,281) 19,246
Income tax expense (benefit) 6,717 2,557 (997) - 8,277
-------- ------- ------- -------- --------
Net income $ 9,243 $ 3,029 $10,978 $(12,281) $ 10,969
======== ======= ======= ======== ========
</TABLE>
(1) Reflects operating results beginning on June 1, 1996, the effective date of
acquisition.
(2) Includes Bay View Securitization Corporation and Regent Financial
Corporation, wholly owned subsidiaries of the Company, which are not
material for separate financial statement disclosure for the periods
presented.
94
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
PARENT CO.
(DOLLARS IN THOUSANDS) BVFB CTL(1) & OTHER SUBS(2) ELIMINATIONS CONSOLIDATED
------------ --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,243 $ 3,029 $ 10,978 $(12,281) $ 10,969
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed net income of subsidiaries - - (9,252) 9,252 -
Write-down on disposal of premises and equipment 1,767 - - - 1,767
Write-down and amortization of intangible assets 2,025 581 - - 2,606
Proceeds from loans sold 9,668 - - - 9,668
Provision for losses on loans and real estate owned 1,697 98 - - 1,795
Depreciation and amortization of premises and equipment 1,876 334 - - 2,210
Amortization of deferred loan costs 1,396 - - - 1,396
Decrease in capitalized excess servicing fees 411 - - - 411
Amortization of premiums, net of discounts 3,815 1,345 - - 5,160
Dividends received - - 25,000 (25,000) -
Loss on loans and securities 507 653 - - 1,160
(Increase) decrease in other assets 4,097 (78) (2,380) 227 1,866
Increase (decrease) in other liabilities (2,301) 49,602 2,120 (1,488) 47,933
Other, net (3,509) (63) 14 - (3,558)
-------- ------- -------- -------- --------
Net cash provided by operating activities 30,692 55,501 26,480 (29,290) 83,383
-------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of CTL, net of cash and cash equivalents
received - 314 (61,819) - (61,505)
Return of investment from subsidiary - - 11,971 (11,971) -
Net decrease in loans resulting from
originations net of principal payments 59,007 11,131 - - 70,138
Purchase of loans (56,909) (7,812) - - (64,721)
Principal payments on mortgage-backed securities 91,748 - - - 91,748
Purchase of mortgage-backed securities held-to-maturity 2,602 - - - 2,602
Proceeds from sale of mortgage-backed securities
available-for-sale 54,458 - - - 54,458
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF CASH FLOWS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
PARENT CO.
(DOLLARS IN THOUSANDS) BVFB CTL(1) & OTHER SUBS(2) ELIMINATIONS CONSOLIDATED
------------ --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (Cont'd)
Proceeds from maturities of investment
securities held-to-maturity 24,493 - - - 24,493
Proceeds from maturities of investment
securities available-for-sale 7,000 8,000 - - 15,000
Purchase of investment securities held-to-maturity - (2,841) (200) - (3,041)
Proceeds from sale of real estate 31,435 1,255 - - 32,690
Proceeds from sale of leasing portfolio held for sale - 59,848 - - 59,848
Proceeds from sale of premises and equipment 8,054 2,594 - - 10,648
Additions to premises and equipment (1,410) (167) - - (1,577)
Increase in stock of FHLBSF (10,121) (437) - - (10,558)
Investment in subsidiaries/Due from affiliates (163,183) - (450) 163,633 -
----------- --------- -------- --------- -----------
Net cash provided by (used in) investing activities 47,174 71,885 (50,498) 151,662 220,223
----------- --------- -------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit inflows (outflows) (242,746) (3,501) 979 (245,268)
Redemption of CTL deposits - (267,500) - - (267,500)
Proceeds from advances from FHLBSF 1,644,226 - - - 1,644,226
Repayment of advances from FHLBSF (1,433,266) - - - (1,433,266)
Repurchase of common stock - - (24,359) - (24,359)
Issuance of Senior Debentures, net of issuance costs - - 49,406 - 49,406
Proceeds from reverse repurchase agreements 373,272 - - - 373,272
Repayment of reverse repurchase agreements (329,370) - - - (329,370)
Net change in other borrowings (26,119) 159,220 - (137,507) (4,406)
Proceeds from issuance of common stock - - 1,864 - 1,864
Dividends paid to stockholders - (15,000) (4,137) 15,000 (4,137)
----------- --------- -------- --------- -----------
Net cash provided by (used in) financing activities (14,003) (126,781) 22,774 (121,528) (239,538)
----------- --------- -------- --------- -----------
Net increase (decrease) in cash and cash equivalents 63,863 605 (1,244) 844 64,068
Cash and cash equivalents at beginning of year 42,760 - 2,724 (2,724) 42,760
----------- --------- -------- --------- -----------
Cash and cash equivalents at end of year $ 106,623 $ 605 $ 1,480 $ (1,880) $ 106,828
=========== ========= ======== ========= ===========
</TABLE>
(1) Reflects cash flows beginning on June 1, 1996, the effective date of
acquisition.
(2) Includes Bay View Securitization Corporation and Regent Financial
Corporation, wholly owned subsidiaries of the Company, which are not
material for separate financial statement disclosure for the periods
presented.
96
<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, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The supplemental
consolidating schedules of financial information on pages 93 - 96 are presented
for the purpose of additional analysis of the basic consolidated financial
statements rather than to present the financial position, results of operations,
and cash flows of the individual companies, and are not a required part of the
basic consolidated financial statements. These schedules are the responsibility
of the Company's management. Such schedules have been subjected to the auditing
procedures applied in our audits of the basic consolidated financial statements
and, in our opinion, are fairly stated in all material respects when considered
in relation to the basic consolidated financial statements taken as a whole.
/s/ Deloitte & Touche LLP
San Francisco, California
January 24, 1997
(June 2, 1997 as to paragraphs
3, 4, and 5 of Note 24)
97
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTS 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 14 herein.
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 22, 1997, 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 22, 1997, 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 22, 1997, 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 22, 1997, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
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 not applicable or has been included in the Notes to Consolidated
Financial Statements.
98
<PAGE>
(a) (3) Exhibits:
- ------------------
<TABLE>
<CAPTION>
Reference to prior
Regulation filing or exhibit
S-K number attached
Exhibit Number Document hereto
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation
or succession None
3 Articles of Incorporation 3a
Bylaws 3b
4 Instruments defining the rights of security holders, including
indentures:
Articles of Incorporation 3a
Bylaws 3b
Specimen of common stock certificate 4a
Stockholder Protections Rights Agreement, dated July 31, 1990
(the "Rights Agreement") 4b
First Amendment to the Rights Agreement, dated February 26,
1993 4c
Form of Rights Certificate and of Election to Exercise
pursuant to the Rights Agreement 4d
9 Voting trust agreement None
10 Material contracts:
Supplemental Executive Retirement Plan 10a
Senior Management Incentive Plan 10b
Senior Management Long-Term Incentive Plan 10c
1986 Stock Option and Incentive Plan 10d
Amended and Restated 1989 Non-Employee Director Stock Option
Plan 10e
Employment Contracts with Edward H. Sondker 10f
Employment Contracts with Robert J. Flax 10g
Employment Contracts with David A. Heaberlin 10h
Employment Contracts with John N. Buckley 10i
Employment Contracts with Cynthia L. Hart 10j
Amended Outside Directors' Retirement Plan 10k
Stock in Lieu of Cash Compensation Plan for Non-Employee
Directors 10l
Deferred Compensation Plan 10m
Amended and Restated 1995 Stock Option and Incentive Plan 10.9
11 Statement re computation of per share earnings Not required
12 Statements re computation of ratios Not required
13 Annual Report to security holders Not required
16 Letter re change in certifying accountant Not required
18 Letter re change in accounting principles None
21 Subsidiaries of the registrant 21a
22 Published report regarding matters submitted to vote of
security holders None
23 Consent of Deloitte & Touche LLP 23
24 Power of attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits None
</TABLE>
99
<PAGE>
(References to Prior Filings)
3a Filed as exhibit 4(a) to the Registrant's Registration Statement on Form
S-3 filed June 20, 1997 (File No. 333-29757)
3b Filed as exhibit I 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 I 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-c Filed as exhibits 10.6 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)
10d Filed as exhibit 4 to the Registrant's Registration Statement on Form S-8
filed August 11, 1995 (File No. 33-95724)
10e Filed as exhibit 4.4 to the Registrant's Registration Statement on Form
S-8 filed July 26, 1991 (File No. 33-41924)
10f-j Filed as exhibits 10.1 to 10.5 respectively, to the Registrant's Annual
Report on Form 10-K filed February 18, 1997 for the year ended December
31, 1996 (File No. 0-17901).
10k Filed as exhibit 10.6 to the Registrant's Annual Report on Form 10-K
filed February 18, 1997 for the year ended December 31, 1996 (File No.
0-17901).
10l Filed as exhibit 10.7 to the Registrant's Annual Report on Form 10-K
filed February 18, 1997 for the year ended December 31, 1996 (File No.
0-17901).
10m Filed as exhibit 10.8 to the Registrant's Annual Report on Form 10-K
filed February 18, 1997 for the year ended December 31, 1996 (File No.
0-17901).
21a Filed as exhibit 21 to the Registrant's Annual Report on Form 10-K filed
February 18, 1997 for the year ended December 31, 1996 (File No. 0-
17901).
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, 1996.
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.
DATE: June 27, 1997 BAY VIEW CAPITAL CORPORATION
By: /s/ David A. Heaberlin
----------------------------
David A. Heaberlin
Executive Vice President and
Chief Financial Officer
100
<PAGE>
EXHIBIT 10.9
BAY VIEW CAPITAL CORPORATION
AMENDED AND RESTATED 1995 STOCK OPTION AND INCENTIVE PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
------------
interests of the Corporation and its stockholders by providing a means for
attracting and retaining officers and employees of the Corporation and its
Affiliates. The Plan is intended to be an incentive stock option plan within
the meaning of Section 422 of the Code but not all Options granted hereunder are
required to be Incentive Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
-----------
"Affiliate" -- means any "parent corporation" or "subsidiary
corporation" of the Corporation as such terms are defined in Section 425(e) and
(f), respectively, of the Code.
"Award" -- means the grant by the Committee of an Incentive Stock
Option, a Non-Qualified Stock Option, a Stock Appreciation Right, a Limited
Stock Appreciation Right, or of Restricted Stock, or any combination thereof, as
provided in the Plan.
"Code" -- means the Internal Revenue Code of 1986, as amended.
"Committee" -- means the Committee referred to in Section 3 hereof.
"Continuous Service" -- shall mean the absence of any interruption or
termination of service as an officer or employee of the Corporation or an
Affiliate, except that when used with respect to persons granted an Incentive
Stock Option means the absence of any interruption or termination of service as
an employee of the Corporation or an Affiliate. Service shall not be considered
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Corporation or in the case of transfers between payroll
locations of the Corporation or between the Corporation, its parent, its
subsidiaries or its successor.
"Corporation" -- means Bay View Capital Corporation, a Delaware
Corporation and any successor thereto.
1
<PAGE>
"Early Retirement" -- means retirement from employment with the
Corporation prior to the Participant either (i) having reached the age of 55 or
(ii) having maintained Continuous Service for at least three years.
"Employee" -- means any person, including an officer, who is employed
by the Corporation or any Affiliate.
"ERISA" -- means the Employee Retirement Income Security Act of 1974,
as amended.
"Exercise Price" -- means (i) in the case of an Option, the price per
Share at which the Shares subject to such Option may be purchased upon exercise
of such Option and (ii) in the case of a Right, the price per Share (other than
the Market Value per Share on the date of exercise and the Offer Price per Share
as defined in Section 10 hereof) which, upon grant, the Committee determines
shall be utilized in calculating the aggregate value which a Participant shall
be entitled to receive pursuant to Sections 9, 10 or 13 hereof upon exercise of
such Right.
"Incentive Stock Option" -- means an option to purchase Shares granted
by the Committee pursuant to Section 6 hereof which is subject to the
limitations and restrictions of Section 8 hereof and is intended to qualify
under Section 422 of the Code.
"Limited Stock Appreciation Right" -- means a stock appreciation right
with respect to Shares granted by the Committee pursuant to Sections 6 and 10
hereof.
"Market Value" -- means the average of the high and low quoted sales
price on the date in question (or, if there is no reported sale on such date, on
the last preceding date on which any reported sale occurred) of a Share on the
Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not quoted on the Composite Tape, on the New York Stock
Exchange, or if the Shares are not listed or admitted to trading on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which the Shares are listed or admitted
to trading, or, if the Shares are not listed or admitted to trading on any such
exchange, the mean between the closing high bid and low asked quotations with
respect to a Share on such date on the Nasdaq Stock Market, or any similar
system then in use, or, if no such quotations are available, the fair market
value on such date of a Share as the Committee shall determine.
"Non-Employee Director" -- means a director who (i) is not currently
an Employee; (ii) does not receive compensation from the Corporation or any
Affiliate in any capacity other than as a director (except for an amount that
does not exceed the dollar amount for which disclosure would be required
pursuant to Item 404(a) of Regulation S-K); and (iii) does not possess an
interest in any other transactions and is not engaged in a business
relationship for which disclosure would be required pursuant to Item 404(a) or
(b) of Regulations S-K.
"Non-Qualified Stock Option" -- means an option to purchase Shares
granted by the Committee pursuant to Section 6 hereof, which option is not
intended to qualify under Section 422(b) of the Code.
"Normal Retirement" -- means retirement from employment with the
Corporation after the Participant has (i) reached the age of 55 and (ii)
maintained Continuous Service for at least three years.
"Option" -- means an Incentive Stock Option or a Non-Qualified Stock
Option.
2
<PAGE>
"Participant" -- means any officer or employee of the Corporation or
any Affiliate who is selected by the Committee to receive an Award.
"Plan" -- means the 1995 Stock Option and Incentive Plan of the
Corporation.
"Related" -- means (i) in the case of a Right, a Right which is
granted in connection with, and to the extent exercisable, in whole or in part,
in lieu of, an Option or another Right and (ii) in the case of an Option, an
Option with respect to which and to the extent a Right is exercisable, in whole
or in part, in lieu thereof has been granted.
"Reload Option" -- means an Option to purchase Shares that is granted
pursuant to Section 6 hereof and is subject to the limitations and restrictions
of Section 7(g) hereof.
"Restricted Period" -- means the period of time selected by the
Committee for the purpose of determining when restrictions are in effect under
Section 11 hereof with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" -- means Shares which have been contingently
awarded to a Participant by the Committee subject to the restrictions referred
to in Section 11 hereof, so long as such restrictions are in effect.
"Right" -- means a Limited Stock Appreciation Right or a Stock
Appreciation Right.
"Shares" -- means the shares of common stock of the Corporation.
"Stock Appreciation Right" -- means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Sections 6 and 9 hereof.
"Ten Percent Beneficial Owner" -- means the beneficial owner of more
than ten percent of any class of the Corporation's equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
3. Administration. The Plan shall be administered by a Committee
--------------
consisting of two or more members, each of whom shall be a Non-Employee
Director. The members of the Committee shall be appointed by the Board of
Directors of the Corporation. Except as limited by the express provisions of the
Plan, the Committee shall have sole and complete authority and discretion to (i)
select Participants and grant Awards; (ii) determine the number of Shares to be
subject to types of Awards generally, as well as to individual Awards granted
under the Plan;
3
<PAGE>
(iii) determine the terms and conditions upon which Awards shall be granted
under the Plan; (iv) prescribe the form and terms of instruments evidencing such
grants; and (v) establish from time to time regulations for the administration
of the Plan, interpret the Plan, and make all determinations deemed necessary or
advisable for the administration of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
4. Participation. The Committee may select from time to time
-------------
Participants in the Plan from those officers and employees of the Corporation or
its Affiliates who, in the opinion of the Committee, have the capacity for
contributing to the successful performance of the Corporation or its Affiliates.
5. Shares Subject to Plan. Subject to adjustment by the operation of
----------------------
Section 12 hereof, the maximum number of shares with respect to which Awards may
be made under the Plan is 1,000,000 shares. The Shares with respect to which
Awards may be made under the Plan may be either authorized and unissued shares
or issued shares heretofore or hereafter reacquired and held as treasury shares.
Shares which are subject to Related Rights and Related Options shall be counted
only once in determining whether the maximum number of Shares with respect to
which Awards may be granted under the Plan has been exceeded. An Award shall
not be considered to have been made under the Plan with respect to any Option or
Right which terminates or with respect to Restricted Stock which is forfeited,
and new Awards may be granted under the Plan with respect to the number of
Shares as to which such termination or forfeiture has occurred.
6. General Terms and Conditions of Options and Rights. The Committee
--------------------------------------------------
shall have full and complete authority and discretion, except as expressly
limited by the Plan, to grant Options and/or Rights and to provide the terms and
conditions (which need not be identical among Participants) thereof. In
particular, the Committee shall prescribe the following terms and conditions:
(i) the Exercise Price of any Option or Right, which shall not be less than the
Market Value per Share at the date of grant of such Option or Right, (ii) the
number of Shares subject to, and the expiration date of, any Option or Right,
which expiration date shall not exceed ten years from the date of grant, (iii)
the manner, time and rate (cumulative or otherwise) of exercise of such Option
or Right, and (iv) the restrictions, if any, to be placed upon such Option or
Right or upon Shares which may be issued upon exercise of such Option or Right.
The Committee may, as a condition of granting any Option or Right, require that
a Participant agree not to thereafter exercise one or more Options or Rights
previously granted to such Participant. Notwithstanding the foregoing, no
individual shall be granted awards in any calendar year with respect to more
than 25% of the total shares subject to the Plan.
4
<PAGE>
7. Exercise of Options or Rights.
-----------------------------
(a) An Option or Right granted under the Plan shall be exercisable
during the lifetime of the Participant to whom such Option or Right was granted
only by such Participant, and except as provided in paragraphs (c), (d), (e) and
(f) of this Section 7, no such Option or Right may be exercised unless at the
time such Participant exercises such Option or Right, such Participant has
maintained Continuous Service since the date of grant of such Option or Right.
(b) To exercise an Option or Right under the Plan, the Participant to
whom such Option or Right was granted shall give written notice to the
Corporation in form satisfactory to the Committee (and, if partial exercises
have been permitted by the Committee, by specifying the number of Shares with
respect to which such Participant elects to exercise such Option or Right)
together with full payment of the Exercise Price, if any and to the extent
required. The date of exercise shall be the date on which such notice is
received by the Corporation. Payment, if any is required, shall be made either
(i) in cash (including check, bank draft or money order) or (ii) by delivering
(A) Shares already owned by the Participant and having a fair market value equal
to the applicable exercise price, such fair market value to be determined in
such appropriate manner as may be provided by the Committee or as may be
required in order to comply with or to conform to requirements of any applicable
laws or regulations, or (B) a combination of cash and such Shares.
(c) If a Participant to whom an Option or Right was granted shall
cease to maintain Continuous Service for any reason (including total and partial
disability and Early Retirement, but excluding Normal Retirement, death and
termination of employment by the Corporation or any Affiliate for cause), such
Participant may, but only within the period of three months immediately
succeeding such cessation of Continuous Service and in no event after the
expiration date of such Option or Right, exercise such Option or Right to the
extent that such Participant was entitled to exercise such Option or Right at
the date of such cessation, provided, however, that such right of exercise after
cessation of Continuous Service shall not be available to a Participant if the
Committee otherwise determines and so provides in the applicable instrument or
instruments evidencing the grant of such Option or Right. If the Continuous
Service of a Participant to whom an Option or Right was granted by the
Corporation is terminated for cause, all rights under any Option or Right of
such Participant shall expire immediately upon the giving to the Participant of
notice of such termination.
(d) If a Participant to whom an Option or Right was granted shall
cease to maintain Continuous Service due to Normal Retirement, such Participant
may, but only within the period of two years immediately succeeding such
cessation of Continuous Service and in no event after the expiration date of
such Option or Right, exercise such Option or Right to the extent that such
Participant was entitled to exercise such Option or Right at the date of such
cessation, provided, however, that such right of exercise after cessation of
Continuous Service
5
<PAGE>
shall not be available to a Participant if the Committee otherwise determines
and so provides in the applicable instrument or instruments evidencing the grant
of such Option or Right.
(e) In the event of the death of a Participant while in the Continuous
Service of the Corporation or an Affiliate or within the three month or two year
periods referred to in paragraphs (c) and (d), respectively, of this Section 7,
the person to whom any Option or Right held by the Participant at the time of
his death is transferred by will or the laws of descent and distribution or in
the case of an Award other than an Incentive Stock Option, pursuant to a
qualified domestic relations order, as defined in the Code or Title I of ERISA
or the rules thereunder may, but only to the extent such Participant was
entitled to exercise such Option or Right immediately prior to his death,
exercise such Option or Right at any time within a period of two years
succeeding the date of death of such Participant, but in no event later than ten
years from the date of grant of such Option or Right. Following the death of
any Participant to whom an Option was granted under the Plan, irrespective of
whether any Related Right shall have theretofore been granted to the Participant
or whether the person entitled to exercise such Related Right desires to do so,
the Committee may, as an alternative means of settlement of such Option, elect
to pay to the person to whom such Option is transferred by will or by the laws
of descent and distribution or in the case of an Option other than an Incentive
Stock Option, pursuant to a qualified domestic relations order, as defined in
the Code or Title I of ERISA or the rules thereunder, the amount by which the
Market Value per Share on the date of exercise of such Option shall exceed the
Exercise Price of such Option, multiplied by the number of shares with respect
to which such Option is properly exercised. Any such settlement of an Option
shall be considered an exercise of such Option for all purposes of the Plan.
(f) Notwithstanding the provisions of subparagraphs (c) through (e) above,
the Committee may, in its sole discretion, establish different terms and
conditions pertaining to the effect of termination to the extent permitted by
applicable federal and state law.
(g) Concurrently with the grant of any Option (an "Underlying Option"), the
Committee may authorize Reload Options permitting the grantee of the Underlying
Option to purchase for cash, Shares or a combination thereof an aggregate number
of Shares not greater than the sum of (i) the number of Mature Shares (as
defined hereinbelow) used in exercises of the Underlying Option and (ii) to the
extent authorized by the Committee, the number of Mature Shares used to satisfy
any tax withholding requirement incident to exercises of the Underlying Option.
The grant of each Reload Option so authorized by the Committee shall become
effective upon the exercise (a "Stock Exercise") of all or part of the
Underlying Option through the use of Shares held by the optionee for at least 12
months prior to such exercise ("Mature Shares"), provided, however, that no
Reload Option shall first become effective after the optionee has ceased to
maintain Continuous Service. Reload Options may be authorized with respect to
Options that are themselves granted as Reload Options. Upon each Stock Exercise
of an Underlying Option, the Exercise Price of the resulting Reload Option, the
number of Shares covered thereby, and, in the discretion of the Committee and
subject to the limitations and restrictions of Section 8 hereof, the
determination that the Reload Option is intended to qualify as an Incentive
Stock Option, shall be evidenced through an amendment to the agreement or other
instrument evidencing the Underlying Option. The Exercise Price of a Reload
Option shall be the Market Value per Share on the date the grant of the Reload
Option becomes effective.
6
<PAGE>
Each Reload Option shall become fully exercisable upon its effective
date. The term of each Reload Option shall be equal to the remaining term of the
Underlying Option.
8. Incentive Stock Options. Any provision of the Plan to the contrary
-----------------------
notwithstanding, (i) no Incentive Stock Option shall be granted more than ten
years from the date the Plan is adopted by the Board of Directors of the
Corporation and no Incentive Stock Option shall be exercisable more than ten
years from the date such Incentive Stock Option is granted, (ii) the Exercise
Price of any Incentive Stock Option shall not be less than the Market Value per
Share on the date such Incentive Stock Option is granted, (iii) any Incentive
Stock Option shall not be transferable by the Participant to whom such Incentive
Stock Option is granted other than by will or the laws of descent and
distribution and shall be exercisable during such Participant's lifetime only by
such Participant, (iv) no Incentive Stock Option shall be granted to any
individual who, at the time such Incentive Stock Option is granted, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Corporation or any Affiliate unless the Exercise Price of such
Incentive Stock Option is at least 110% of the Market Value per Share at the
date of grant and such Incentive Stock Option is not exercisable after the
expiration of five years from the date such Incentive Stock Option is granted,
and (v) the aggregate Market Value (determined as of the time any Incentive
Stock Option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by a Participant in any calendar year
shall not exceed $100,000.
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon its
-------------------------
exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or Market Value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the Exercise
Price of such Stock Appreciation Right, multiplied by the number of Shares with
respect of which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be Related to an Option or may be granted
independently of any Option as the Committee shall from time to time in each
case determine. At the time of grant of an Option the Committee shall determine
whether and to what extent a Related Stock Appreciation Right shall be granted
with respect thereto; provided, however, and notwithstanding any other provision
of the Plan, that if the Related Option is an Incentive Stock Option, the
Related Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Stock Appreciation Right were
an Incentive Stock Option and as if other rights which are Related to Incentive
Stock Options were Incentive Stock Options. In the case of a Related Option,
such Related Option shall cease to be exercisable to the extent of the Shares
with respect to which the Related Stock Appreciation Right was exercised. Upon
the exercise or termination of a Related Option, any Related Stock Appreciation
Right shall terminate to the extent of the Shares with respect to which the
Related Option was exercised or terminated.
10. Limited Stock Appreciation Rights. At the time of grant of an Option
---------------------------------
or Stock Appreciation Right to any Participant, the Committee shall have full
and complete authority and
7
<PAGE>
discretion to also grant to such Participant a Limited Stock Appreciation Right
which is related to such Option or Stock Appreciation Right; provided, however
and notwithstanding any other provision of the Plan, that if the Related Option
is an Incentive Stock Option, the Related Limited Stock Appreciation Right shall
satisfy all the restrictions and limitations of Section 8 hereof as if such
Related Limited Stock Appreciation Right were an Incentive Stock Option and as
if all other Rights which are Related to Incentive Stock Options were Incentive
Stock Options. Notwithstanding any other provision of the Plan, a Limited Stock
Appreciation Right shall be exercisable only during the period beginning on the
first day following the date of expiration of any "offer" (as such term is
hereinafter defined) and ending on the forty-fifth day following such date.
A Limited Stock Appreciation Right shall, upon its exercise, entitle the
Participant to whom such Limited Stock Appreciation Right was granted to receive
an amount of cash equal to the amount by which the "Offer Price per Share" (as
such term is hereinafter defined) or the Market Value on the date of such
exercise, as shall have been provided by the Committee in its discretion at the
time of grant, shall exceed the Exercise Price of such Limited Stock
Appreciation Right, multiplied by the number of Shares with respect to which
such Limited Stock Appreciation Right shall have been exercised. Upon the
exercise of a Limited Stock Appreciation Right, any Related Option and/or
Related Stock Appreciation Right shall cease to be exercisable to the extent of
the Shares with respect to which such Limited Stock Appreciation Right was
exercised. Upon the exercise or termination of a Related Option or Related
Stock Appreciation Right, any Related Limited Stock Appreciation Right shall
terminate to the extent of the Shares with respect to which such Related Option
or Related Stock Appreciation Right was exercised or terminated.
For the purposes of this Section 10, the term "Offer" shall mean any tender
offer or exchange offer for Shares other than one made by the Corporation,
provided that the corporation, person or other entity making the offer acquires
pursuant to such offer either (i) 25% of the Shares outstanding immediately
prior to the commencement of such offer or (ii) a number of shares which,
together with all other shares acquired in any tender offer or exchange offer
(other than one made by the Corporation) which expired within sixty days of the
expiration date of the offer in question, equals 25% of the Shares outstanding
immediately prior to the commencement of the offer in question. The term "Offer
Price per Share" as used in this Section 10 shall mean the highest price per
Share paid in any Offer which Offer is in effect any time during the period
beginning on the sixtieth day prior to the date on which a Limited Stock
Appreciation Right is exercised and ending on the date on which such Limited
Stock Appreciation Right is exercised. Any securities or property which are
part or all of the consideration paid for Shares in the Offer shall be valued in
determining the Offer Price per Share at the higher of (i) the valuation placed
on such securities or property by the corporation, person or other entity making
such Offer or (ii) the valuation placed on such securities or property by the
Committee.
11. Terms and Conditions of Restricted Stock. The Committee shall have
----------------------------------------
full and complete authority, subject to the limitations of the Plan, to grant
awards of Restricted Stock and, in addition to the terms and conditions
contained in paragraphs (a) through (f) of this Section 11, to provide such
other terms and conditions (which need not be identical among
8
<PAGE>
Participants) in respect of such Awards, and the vesting thereof, as the
Committee shall determine and provide in the agreement referred to in paragraph
(d) of this Section 11.
(a) At the time of an award of Restricted Stock, the Committee shall
establish for each Participant a Restricted Period during which or at the
expiration of which, as the Committee shall determine and provide in the
agreement referred to in paragraph (d) of this Section 11, the shares awarded as
Restricted Stock shall vest, and subject to any such other terms and conditions
as the Committee shall provide shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered by the Participant,
except as hereinafter provided, during the Restricted Period. Except for such
restrictions, and subject to paragraphs (c), (d) and (e) of this Section 11 and
Section 12 hereof, the Participant as owner of such shares shall have all the
rights of a stockholder including but not limited to the right to receive all
dividends paid on such shares and the right to vote such shares. The Committee
shall have the authority, in its discretion, to accelerate the time at which any
or all of the restrictions shall lapse with respect to any shares of Restricted
Stock prior to the expiration of the Restricted Period with respect thereto, or
to remove any or all of such restrictions, whenever it may determine that such
action is appropriate by reason of changes in applicable tax or other laws or
other changes in circumstances occurring after the commencement of such
Restricted Period.
(b) Except as provided in Section 14 hereof, if a Participant ceases
to maintain Continuous Service for any reason (other than death, total or
partial disability or Normal or Early Retirement) unless the Committee shall
otherwise determine and provide in the agreement referred to in paragraph (d) of
this Section 11, all shares of Restricted Stock theretofore awarded to such
Participant and which at the time of such termination of Continuous Service are
subject to the restrictions imposed by paragraph (a) of this Section 11 shall
upon such termination of Continuous Service be forfeited and returned to the
Corporation. Unless the Committee shall have provided in the agreement referred
to in paragraph (d) of this Section 11 for a ratable lapse of restrictions with
respect to an award of shares of Restricted Stock during the Restricted Period,
if a Participant ceases to maintain Continuous Service by reason of death, total
or partial disability or Normal or Early Retirement, such portion of such shares
of Restricted Stock awarded to such Participant which at the time of such
termination of Continuous Service are subject to the restrictions imposed by
paragraph (a) of this Section 11 as shall be equal to the portion of the
Restricted Period with respect to such shares which shall have elapsed at the
time of such termination of Continuous Service shall be free of restrictions and
shall not be forfeited.
(c) Each certificate in respect of shares of Restricted Stock awarded
under the Plan shall be registered in the name of the Participant and deposited
by the Participant, together with a stock power endorsed in blank, with the
Corporation and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the 1995 Stock Option and Incentive Plan of Bay
View Capital Corporation and an Agreement entered into between the
registered owner and Bay View Capital Corporation. Copies of such Plan and
Agreement are on file in the offices of the Secretary of Bay View Capital
Corporation, 2121 South El Camino Real, San Mateo, California 94403."
9
<PAGE>
(d) At the time of an award of shares of Restricted Stock, the
Participant shall enter into an Agreement with the Corporation in a form
specified by the Committee, agreeing to the terms and conditions of the award
and such other matters as the Committee shall in its sole discretion determine.
(e) At the time of an award of shares of Restricted Stock, the
Committee may, in its discretion, determine that the payment to the Participant
of dividends declared or paid on such shares, or a specified portion thereof, by
the Corporation shall be deferred until the earlier to occur of (i) the lapsing
of the restrictions imposed under paragraph (a) of this Section 11 or (ii) the
forfeiture of such shares under paragraph (b) of this Section 11, and shall be
held by the Corporation for the account of the Participant until such time. In
the event of such deferral, there shall be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of the
year at a rate per annum as the Committee, in its discretion, may determine.
Payment of deferred dividends, together with interest accrued thereon as
aforesaid, shall be made upon the earlier to occur of the events specified in
(i) and (ii) of the immediately preceding sentence.
(f) At the expiration of the restrictions imposed by paragraph (a) of
this Section 11, the Corporation shall redeliver to the Participant (or where
the relevant provision of paragraph (b) of this Section 11 applies in the case
of a deceased Participant, to his legal representative, beneficiary or heir) the
certificate(s) and stock power deposited with it pursuant to paragraph (c) of
this Section 11 and the Shares represented by such certificate(s) shall be free
of the restrictions referred to in paragraph (a) of this Section 11.
12. Adjustments Upon Changes in Capitalization. In the event of any
------------------------------------------
change in the outstanding Shares subsequent to the effective date of the Plan by
reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number and class of shares with respect to which Awards theretofore have been
granted under the Plan and shall be appropriately adjusted by the Committee,
whose determination shall be conclusive. Any shares of stock or other
securities received, as a result of any of the foregoing, by a Participant with
respect to Restricted Stock shall be subject to the same restrictions and the
certificate(s) or other instruments representing or evidencing such shares or
securities shall be legended and deposited with the Corporation in the manner
provided in Section 11 hereof.
13. Effect of Merger on Options or Rights. In the case of any merger,
-------------------------------------
consolidation or combination of the Corporation (other than a merger,
consolidation or combination in which the Corporation is the continuing
corporation and which does not result in the outstanding Shares being converted
into or exchanged for different securities, cash or other property, or any
combination thereof), any Participant to whom an Option or Right has been
granted shall have, in addition to the rights of exercise pursuant to Section 7
hereof, the right (subject to the provisions of the Plan and any limitation
applicable to such Option or Right), thereafter and during the term of each such
Option or Right, to receive upon exercise of any such Option or Right an amount
equal to the excess of the fair market value on the date of such exercise of the
securities, cash or other property, or combination thereof,
10
<PAGE>
receivable upon such merger, consolidation or combination in respect of a Share
over the Exercise Price of such Right or Option, multiplied by the number of
Shares with respect to which such Option or Right shall have been exercised.
Such amount may be payable fully in cash, fully in one or more of the kind or
kinds of property payable in such merger, consolidation or combination, or
partly in cash and partly in one or more of such kind or kinds of property, all
in the discretion of the Committee.
14. Effect of Change in Control. Each of the events specified in the
---------------------------
following clauses (i) through (iii) of this Section 14 shall be deemed a "change
of control": (i) any third person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial
owner of shares of the Corporation with respect to which 25% or more of the
total number of votes for the election of the Board of Directors of the
Corporation may be cast, (ii) as a result of, or in connection with, any cash
tender offer, merger or other business combination, sale of assets or contested
election, or combination of the foregoing, the persons who were directors of the
Corporation shall cease to constitute a majority of the Board of Directors of
the Corporation, or (iii) the stockholders of the Corporation shall approve an
agreement providing either for a transaction in which the Corporation will cease
to be an independent publicly-owned corporation or for a sale or other
disposition of all or substantially all the assets of the Corporation. Upon a
change in control, unless the Committee shall have otherwise provided in the
agreement referred to in paragraph (d) of Section 11 hereof, any Restricted
Period with respect to Restricted Stock theretofore awarded to such Participant
shall lapse upon such termination and all Shares awarded as Restricted Stock
shall become fully vested in the Participant to whom such Shares were awarded.
If a tender offer or exchange offer for Shares (other than such an offer by the
Corporation) is commenced, or if the event specified in clause (iii) above shall
occur, unless the Committee shall have otherwise provided in the instrument
evidencing the grant of an Option or Stock Appreciation Right, all Options and
Stock Appreciation Rights theretofore granted and not fully exercisable shall
become exercisable in full upon the happening of such event; provided, however,
that no Option or Stock Appreciation Right which has previously been exercised
or otherwise terminated shall become exercisable.
15. Assignments and Transfers. No Award nor any right or interest of a
-------------------------
Participant under the Plan in any instrument evidencing any Award under the Plan
may be assigned, encumbered or transferred except, in the event of the death of
a Participant, by will or the laws of descent and distribution, or in the case
of Awards other than Incentive Stock Options pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder.
16. Employee Rights Under the Plan. No officer or employee shall have a
------------------------------
right to be selected as a Participant nor, having been so selected, to be
selected again as a Participant and no officer, employee or other person shall
have any claim or right to be granted an Award under the Plan or under any other
incentive or similar plan of the Corporation or any Affiliate. Neither the Plan
nor any action taken thereunder shall be construed as giving any employee any
right to be retained in the employ of the Corporation or any Affiliate.
11
<PAGE>
17. Delivery and Registration of Stock. The Corporation's obligation to
----------------------------------
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provision of the Securities Act of 1933 or any other federal, state or local
securities legislation. It may be provided that any representation requirement
shall become inoperative upon a registration of the Shares or other action
eliminating the necessity of such representation under such Securities Act or
other securities legislation. The Corporation shall not be required to deliver
any Shares under the Plan prior to (i) the admission of such shares to listing
on any stock exchange on which Shares may then be listed, and (ii) the
completion of such registration or other qualification of such Shares under any
state or federal law, rule or regulation, as the committee shall determine to be
necessary or advisable.
18. Withholding Tax. Upon the termination of the Restricted Period with
---------------
respect to any shares of Restricted Stock (or at any such earlier time, if any,
that an election is made by the Participant under Section 83(b) of the Code, or
any successor provision thereto, to include the value of such shares in taxable
income), the Corporation shall have the right to require the Participant or
other person receiving such shares to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such shares,
or, in lieu thereof, to retain or sell without notice, a sufficient number of
shares held by it to cover the amount required to be withheld. The Corporation
shall have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Corporation is required to
withhold with respect to such dividend payments.
The Corporation shall have the right to deduct from all amounts paid in
cash with respect to the exercise of a Right under the Plan any taxes required
by law to be withheld with respect to such cash payments. Where a Participant
or other person is entitled to receive Shares pursuant to the exercise of an
Option or Right pursuant to the Plan, the Corporation shall have the right to
require the Participant or such other person to pay the Corporation the amount
of any taxes which the Corporation is required to withhold with respect to such
Shares, or, in lieu thereof, to retain, or sell without notice, a number of such
shares sufficient to cover the amount required to be withheld.
19. Amendment or Termination. The Board of Directors of the Corporation
------------------------
may amend, suspend or terminate the Plan or any portion thereof at any time, but
(except as provided in Section 12 hereof) no amendment shall be made without
approval of the stockholders of the Corporation which shall (i) materially
increase the benefits accruing to participants under the Plan; (ii) materially
increase the number of securities which may be issued under the Plan; or (iii)
materially modify the requirements as to eligibility for participation in the
Plan, provided, however, that no such amendment, suspension or termination shall
impair the rights of any Participant, without his consent, in any Award
theretofore made pursuant to the Plan.
12
<PAGE>
20. Effective Date and Term of Plan. The Plan shall become effective upon
-------------------------------
its adoption by the Board of Directors of the Corporation, subject to the
approval of the Plan by the shareholders of the Corporation. It shall continue
in effect for a term of ten years unless sooner terminated under Section 19
hereof.
13
<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 24, 1997,
(June 2, 1997 as to paragraphs 3, 4, and 5 of Note 24), appearing in the Annual
Report on Form 10-K/A of Bay View Capital Corporation for the year ended
December 31, 1996:
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. 1 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
Amendment No. 1 to Registration Statement No. 333-29757 on Form S-3
/s/ Deloitte & Touche LLP
San Francisco, California
June 27, 1997
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