<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): JUNE 23, 1997
-------------------
BAY VIEW CAPITAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-17901 94-3078031
- --------------------------------------------------------------------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification
incorporation) No.)
2121 SOUTH EL CAMINO REAL, SAN MATEO, CALIFORNIA 94403
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 573-7300
--------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 5. Other Events.
------------
On May 8, 1997, Bay View Capital Corporation (the "Company" or "Bay View"),
a Delaware corporation and the holding company for Bay View Bank ("BVB"), Bay
View Securitization Corporation, California Thrift & Loan, Concord Growth
Corporation and Regent Financial Corporation, announced the execution of a
definitive agreement to acquired America First Eureka Holdings, Inc. ("AFEH")
and AFEH's wholly owned subsidiary, EurekaBank, A Federal Savings Bank
("EurekaBank"). The acquisition will be accounted for using the purchase method
of accounting and is expected to be completed on or about December 31, 1997.
Under the terms of the definitive agreement, America First Financial Fund
1987-A Limited Partnership (the "Partnership"), the sole shareholder of AFEH,
will receive shares of Bay View common stock valued at approximately $210
million (subject to possible adjustment) and $90 million in cash. Pursuant to
the agreement, AFEH will be merged into the Company, with the Company as the
surviving corporation, and EurekaBank will be merged into BVB, with BVB as the
surviving institution. Consummation of the transaction is subject to the
satisfaction of a number of conditions set forth in the agreement, including
approval by the Company's stockholders and the beneficial unit certificate
holders and the limited partners of the Partnership and the regulatory approval
of the Office of Thrift Supervision.
Attached as Exhibit 99 hereto are the consolidated financial statements of
AFEH prepared in accordance with Rule 3.05 of Regulation S-X of the Securities
and Exchange Commission.
Item 7. Financial Statements and Exhibits
---------------------------------
(c) Exhibits
23 Consent of Independent Accountants
99 Consolidated Financial Statements of AFEH
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
Date: June 23, 1997 By:/s/ DAVID A. HEABERLIN
---------------------------------
David A. Heaberlin
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
23 Consent of Independent Accountants
99 Consolidated Financial Statements of AFEH
<PAGE>
EXHIBIT 23
<PAGE>
EXHIBIT 23
The Board of Directors
America First Eureka Holdings Inc.:
We consent to the inclusion of our report dated January 27, 1997, except as to
note 24 to the consolidated financial statements which is as of May 8, 1997,
with respect to the consolidated balance sheets of America First Eureka
Holdings, Inc. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholder's equity and cash flows for each
of the years in the three-year period ended December 31, 1996, which report
appears in Form 8-K of Bay View Capital Corporation dated June 23, 1997.
/s/ KPMG Peat Marwick, LLP
San Francisco, California
June 23, 1997
<PAGE>
EXHIBIT 99
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(with Independent Auditors' Report Thereon)
<PAGE>
Independent Accountants' Report
-------------------------------
The Board of Directors
America First Eureka Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of America First
Eureka Holdings, Inc. and Subsidiary (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of America First Eureka
Holdings, Inc. and Subsidiary as of December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick, LLP
San Francisco, California
January 27, 1997, except as to Note 24 to the consolidated
financial statements, which is as of May 8, 1997
1
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 28,266 $ 25,286
Federal funds sold 20,000 24,700
Securities purchased under agreements to resell 5,300 20,500
Investments held to maturity - 39,996
Mortgage-backed securities, net
Held to maturity 630,106 763,770
Available for sale 44,489 52,032
Loans receivable, net 1,403,483 1,431,179
Loans held for sale 370 403
Accrued interest receivable 12,206 13,493
Premises and equipment, net 8,888 9,535
Federal Home Loan Bank stock, at cost 21,827 21,509
Real estate held for sale or investment, net 1,328 2,386
Real estate owned, net 1,438 2,543
Deferred tax assets, net 22,643 1,277
Other assets 6,121 6,494
---------- ----------
Total Assets $2,206,465 $2,415,103
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Customer deposits $1,840,485 $1,704,466
Securities sold under agreements to repurchase 44,353 206,856
Other borrowings 106,998 310,087
Other liabilities and accrued expenses 22,166 24,004
---------- ----------
Total Liabilities 2,014,002 2,245,413
Redeemable Preferred Stock; Series A, no par value:
200,000 shares issued; $20 million liquidation value 17,748 15,542
Common stock; par value $1.00; 100 shares issued and outstanding - -
Additional paid in capital 102,189 102,189
Retained earnings 72,526 51,959
---------- ----------
Total Shareholder's Equity 174,715 154,148
---------- ----------
Total Liabilities and Shareholder's Equity $2,206,465 $2,415,103
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $107,157 $105,199 $ 93,390
Interest on mortgage-backed securities 50,161 53,818 38,820
Interest and dividends on investments 4,565 4,538 3,795
-------- -------- --------
Total interest income 161,883 163,555 136,005
-------- -------- --------
INTEREST EXPENSE:
Interest on customer deposits 81,982 75,772 63,799
Interest on other borrowings 19,689 31,830 20,394
-------- -------- --------
Total interest expense 101,671 107,602 84,193
-------- -------- --------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 60,212 55,953 51,812
Provision for loan losses 965 793 1,246
-------- -------- --------
NET INTEREST INCOME AFTER 59,247 55,160 50,566
PROVISION FOR LOAN LOSSES -------- -------- --------
NON-INTEREST INCOME:
Deposit related fees 1,900 2,157 2,148
Loan related fees 1,379 1,601 1,929
Gain on disposition of loans, net 307 67 117
Other 4,814 5,598 5,797
-------- -------- --------
Total non-interest income 8,400 9,423 9,991
-------- -------- --------
NON-INTEREST EXPENSE:
Compensation and benefits 21,550 19,648 21,168
Occupancy and equipment 8,349 8,918 10,203
FDIC premiums and special assessments 15,089 4,210 4,288
Professional services 1,380 880 1,098
Advertising and promotion 1,107 1,285 1,569
Provision for loss (recovery) on interest rate
exchange agreements (332) 1,934 (4,274)
Other 9,657 10,138 10,968
-------- -------- --------
Total non-interest expense 56,800 47,013 45,020
-------- -------- --------
INCOME BEFORE INCOME TAXES 10,847 17,570 15,537
Income tax benefit 20,870 - -
-------- -------- --------
NET INCOME $ 31,717 $ 17,570 $ 15,537
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
---------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1993 $ - $102,189 $40,503 $142,692
Net income - - 15,537 15,537
Dividends paid or accrued - - (10,800) (10,800)
Reduction of Pension Plan additional minimum liability - - 993 993
Net unrealized losses on mortgage-backed securities available for sale,
net of tax - - (5,093) (5,093)
--------- --------- ---------- ---------
BALANCE AS OF DECEMBER 31, 1994 - 102,189 41,140 143,329
Net income - - 17,570 17,570
Dividends paid or accrued - - (10,800) (10,800)
Net unrealized gain on mortgage-backed securities available for sale,
net of tax - - 4,049 4,049
--------- --------- ---------- ---------
BALANCE AS OF DECEMBER 31, 1995 - 102,189 51,959 154,148
Net income - - 31,717 31,717
Dividends paid or accrued - - (10,800) (10,800)
Net unrealized losses on mortgage-backed securities available for sale,
net of tax - - (350) (350)
--------- --------- --------- ---------
BALANCE AS OF DECEMBER 31, 1996 $ - $102,189 $72,526 $174,715
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,717 $ 17,570 $ 15,537
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of:
Investments and mortgage-backed securities net premium 2,455 751 1,681
Loan premium (discount) 686 (1,562) (571)
Intangibles 1,213 1,340 1,340
Proceeds from sales of loans originated and held for sale 18,567 6,663 26,753
Originations of loans held for sale (18,227) (6,847) (21,795)
Gain on disposition of mortgage loans held for sale (307) (67) (117)
Provision for loan losses 965 793 1,246
Provision for loss (recovery) on interest rate exchange agreements (332) 1,934 (4,274)
Decrease (increase) in accrued interest receivable 1,286 (1,872) (746)
Increase (decrease) in accrued interest payable (1,875) 36 836
Depreciation and amortization of premises and equipment 1,699 1,992 2,268
Decrease (increase) in other assets (1,260) (486) 784
Increase (decrease) in other liabilities 369 (4,477) (7,180)
Income tax expense 5,315 7,655 7,085
Deferred tax asset valuation adjustment (26,185) (7,655) (7,085)
Other, net 1,838 169 96
--------- --------- ---------
Net cash provided by operating activities 17,924 15,937 15,858
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated and held for investment (236,900) (173,904) (193,703)
Purchases of investment securities held to maturity - - (42,986)
Purchases of mortgage-backed securities held to maturity (53,118) (164,910) (308,059)
Purchases of real estate loans (23,527) (92,709) (59,086)
Purchases of premises and equipment (1,082) (888) (647)
Principal payments on mortgage-backed securities 191,516 143,301 139,994
Principal payments on loans 280,966 252,001 354,018
Proceeds from the maturities of investment securities 40,000 3,000 10,000
Proceeds from sales of Federal Home Loan Bank stock 911 - 1,781
Proceeds from sales of real estate held for sale - 1,684 6,579
Proceeds from sales of real estate owned 5,593 7,437 9,614
Proceeds from sale of consumer loans - 12,959 -
Other, net 1,170 1,558 11
--------- --------- ---------
Net cash provided by (used in) investing activities 205,529 (10,471) (82,484)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in checking and savings accounts 132,385 3,058 (62,699)
Proceeds from issuance of certificates of deposit 225,553 249,060 253,850
Payments for maturing or early withdrawal of certificates of deposit (221,919) (243,943) (208,067)
Net increase (decrease) in short-term repurchase agreements (162,503) (255,629) 45,898
Increase (decrease) in Federal Home Loan Bank advances (203,089) 259,809 25,000
Dividends (10,800) (10,800) (8,100)
--------- --------- ---------
Net cash provided by (used in) financing activities (240,373) 1,555 45,882
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (16,920) 7,021 (20,744)
Cash and cash equivalents at beginning of period 70,486 63,465 84,209
--------- --------- ---------
Cash and cash equivalents at end of period $ 53,566 $ 70,486 $ 63,465
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non cash investing and financing activities:
Additions to real estate acquired through foreclosure $ 4,803 $ 4,768 $ 8,050
Loans made to facilitate the sale of real estate $ 6,822 $ 11,900 $ 7,466
Dividends accrued $ - $ - $ 2,700
Cash paid for interest (including interest credited) $ 103,546 $ 106,056 $ 82,125
Cash paid for alternative income and minimum franchise taxes $ 545 $ 445 $ 149
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Organization
------------
Company Formation
-----------------
America First Eureka Holdings, Inc. (the "Company") is a wholly owned
subsidiary of America First Financial Fund 1987-A Limited Partnership (the
"Partnership"), and was formed for the purpose of owning and managing one or
more acquired financial institutions. The Company acquired EurekaBank
("Eureka") on May 27, 1988 (the "Acquisition"). See Note 3 of Notes to
Consolidated Financial Statements, below.
2. Summary of Significant Accounting Policies
------------------------------------------
(A) Principles of Accounting and Consolidation
------------------------------------------
The consolidated financial statements of the Company include the accounts
of the Company and its wholly owned subsidiary, Eureka and its
subsidiaries. The consolidated financial statements are prepared on the
accrual method of accounting in accordance with generally accepted
accounting principles ("GAAP") and industry practices applicable to
savings and loan associations. The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and income and expenses during the
reporting period. Actual results could differ from those estimates. All
significant intercompany transactions have been eliminated. Certain
amounts in the consolidated financial statements for prior years have
been reclassified to conform to the current consolidated financial
statement presentation.
(B) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. These include
cash and amounts due from depository institutions, federal funds sold and
securities purchased under agreements to resell.
(C) Investments and Mortgage-Backed Securities
------------------------------------------
Investments and mortgage-backed securities, other than securities
available for sale, are carried at amortized cost. Premiums and discounts
are amortized or accreted as an adjustment of yield using the interest
method over the term of each security, adjusted for actual and
anticipated prepayments. These investments are carried at cost because
management intends and has the ability to hold them to maturity. Gains or
losses on sales of securities available for sale are recognized at the
time of sale using the specific identification method. Interest and
dividends on investments include interest on investments, the
amortization and accretion of related premiums and discounts, and
dividends on Federal Home Loan Bank ("FHLB") stock.
(D) Loans Receivable
----------------
Loans receivable originated subsequent to Eureka's acquisition by the
Company are stated at the unpaid principal balance. Loans receivable held
by Eureka at Acquisition were stated at unpaid principal balance
discounted to the fair market value at the date of Acquisition. The
Acquisition fair market value discount is being accreted as an adjustment
of yield using the interest method over the expected lives of the
underlying mortgage loans adjusted for actual and anticipated
prepayments. Loans receivable is shown net of deferred loan origination
fees, premiums, unearned discounts and the allowance for losses.
Management intends and has the ability to hold until maturity all loans
which are not designated as held for sale. If a decision is made to
dispose of loans designated as held to maturity, or should the Company
become unable to hold loans until maturity, the loans would be
reclassified to held for sale at the lower of amortized cost or market
value.
All non-refundable loan origination fees, net of certain direct loan
origination costs, are deferred and accreted or amortized using a method
that approximates the interest method over the term of the loan or until
the loan is sold. Interest is not accrued on loans which are 90 days or
more delinquent.
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," in 1993. SFAS No. 114 was amended during 1994 by
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," and was adopted by the Company on December
31, 1994. The adoptions of SFAS No. 114 and SFAS No. 118 did not have a
material effect on the Company's financial statements. A loan is impaired
when it is probable that the Company will be unable to collect all
6
<PAGE>
amounts due according to the original contractual terms of the loan
agreement. Impairment is measured based on the present value of expected
future cash flows discounted at the loan's original effective interest
rate, or the fair value of the collateral less estimated selling costs if
the impaired loan is collateral dependent. If the present value of
expected future cash flows, or the fair value of the collateral less
estimated selling costs, is less than the recorded investment, a
valuation allowance is created by a charge to the provision for loan
losses or by adjusting an existing valuation allowance. Interest income
on impaired loans 90 days or more delinquent was recorded on a cash
basis. Interest income was recognized on the cash basis for restructured
loans performing under the terms of the restructured agreement.
(E) Loans Held for Sale
-------------------
Loans held for sale are recorded at the lower of amortized cost or market
value. Gains or losses from sales of mortgage loans are recognized at the
time of sale by comparing the net sales proceeds to the net carrying
value of the asset sold. For loans sold with servicing retained, normal
servicing fees are included in non-interest income.
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which requires that enterprises such as
commercial banks and thrift institutions that conduct operations that are
substantially similar to the primary operations of a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans
for others, however those servicing rights are acquired. The total cost
of originating or purchasing mortgage loans is allocated between the loan
and the servicing rights, based on their relative fair values. The
recorded value of mortgage servicing rights is amortized over the
estimated life of the loans, based on market factors. The carrying value
of mortgage servicing rights is periodically measured based on the actual
prepayment experience and market factors; an allowance is booked when an
impairment is indicated. The adoption did not have a material effect on
the Company's financial statements.
(F) Provisions for Possible Loan Losses
-----------------------------------
Provisions for losses are charged to operations based upon management's
periodic evaluation of potential losses in the loan portfolio. In
addition to providing valuation allowances on specific assets, Eureka
establishes a general valuation allowance and evaluates the adequacy of
the allowance based on Eureka's past loan loss experience, known and
inherent risks in the portfolio, estimated value of any underlying
collateral and current and prospective economic conditions. However, the
allowance for losses is subjective and may be adjusted in the future
depending upon economic conditions. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically
review Eureka's allowance for losses on loans. Such agencies may require
Eureka to recognize additions to the allowance based on their judgment
and information available to them at the time of their examination.
Management believes that the allowance for losses on loans is adequate.
(G) Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of premises and equipment is generally
computed using the straight-line method over the estimated useful lives
of the assets except for leasehold improvements which is computed using
the shorter of the straight-line method over the remaining terms of the
leases or the estimated useful life of the asset. The estimated useful
life is 32 years or less for premises and leasehold improvements, and
seven years or less for equipment. Improvements are capitalized and
maintenance and repairs are charged to expense.
(H) Real Estate
-----------
Real estate held for investment is recorded at the lower of cost or net
realizable value. Real estate acquired through foreclosure and real
estate held for sale are recorded at the lower of cost or estimated fair
market value, less estimated disposition costs. Costs related to the
development and improvement of the properties are capitalized.
Valuations, based on market information, are performed periodically by
management and an allowance for losses is established by a charge to
operations, if determined necessary.
(I) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-----------------------------------------------------------------------
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. The adoption did not have a material effect on the Company's
financial statements.
7
<PAGE>
(J) Income Taxes
------------
The consolidated financial statement provision (benefit) for income taxes
relates to the Company and its subsidiary. The Company and its subsidiary
file calendar year consolidated federal income and combined California
franchise tax returns. Deferred tax assets and liabilities are recorded
for estimated future tax consequences attributable to temporary
differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the year in which the
temporary differences giving rise to such assets and liabilities are
expected to be realized or settled. A valuation allowance is recorded if
it is more likely than not that some portion or all of the deferred tax
assets will not be realized based on a review of available evidence. The
allowance is subject to ongoing adjustments based on changes in
circumstances that affect management's assessment of the realizability of
the deferred tax assets. Adjustments to increase or decrease the
valuation allowance are charged or credited, respectively, to income tax
expense (benefit).
(K) Interest Rate Exchange Agreements
---------------------------------
The Company adopted SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," on December 31,
1994. The adoption of SFAS No. 119 did not have a material effect on the
Company's financial statements. Eureka uses interest rate exchange
agreements ("swaps") for purposes other than trading, which are intended
to reduce the impact of future fluctuations in interest rates on fixed
rate loans funded by variable rate liabilities. A swap is an agreement
between two parties in which one party exchanges cash payments based on a
floating rate of interest for a counterparty's cash payment based on a
fixed rate or a different indexed floating rate of interest calculated on
a notional principal amount. The net interest received or paid on these
contracts is reflected as an adjustment to interest income on loans
receivable.
(L) Goodwill
--------
The cost in excess of net assets from branch acquisitions is recorded as
goodwill and amortized using the straight-line method over a period of
seven years, which represents the estimated period of benefit.
(M) Recent Accounting Pronouncements
--------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 (SFAS No. 125),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement establishes standards
under which, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and
shall be applied prospectively. However, in December 1996, the FASB
issued Statement of Financial Accounting Standards No. 127 (SFAS No. 127)
"Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125," which defers the effective date of certain provisions of SFAS
No. 125 for one year. Management does not expect the adoptions of SFAS
No. 125 and SFAS No. 127 to have a material effect on the Company's
financial statements.
3. Assistance Agreement
--------------------
Under the terms of the Assistance Agreement between Eureka and the Federal
Deposit Insurance Corporation ("FDIC") entered into in 1988 in connection
with the assisted acquisition of the assets and liabilities of Eureka Federal
Savings and Loan Association, $50 million in preferred stock was issued to
the FDIC. In 1990, $30 million of the preferred stock was redeemed by the
FDIC. The $20 million in non-voting Series A Preferred Stock which remains
outstanding is mandatorily redeemable in 1997 and 1998 in the amount of $10
million each year, and has a liquidation value of $100 per share. The holder
of this preferred stock is not entitled to dividends. The preferred stock is
being accreted through the redemption dates of 1997 and 1998, and the
accretion is recorded as interest expense on other borrowings. The accretion
for the years ended December 31, 1996, 1995 and 1994 totaled $2.2 million,
$1.9 million and $1.6 million, respectively, and is included in interest
expense.
Under the terms of the Assistance Agreement, after May 27, 1998, the FDIC
may engage an independent appraiser to perform a fair value valuation of
Eureka to determine if a final participation payment is due to the FDIC.
Management believes that a liability for the final participation payment due
under the terms of the
8
<PAGE>
Assistance Agreement is not required as of December 31, 1996. The Assistance
Agreement also contains provisions for the distribution of any net sales
proceeds among AFCA-5, Beneficial Unit Certificate ("BUC") holders and the
FDIC.
4. Cash and Investments
--------------------
The Company is not required to maintain compensating cash balances for
agreements with other financial institutions. Federal funds sold represent
short-term instruments which are generally held overnight. At December 31,
1996, cash and amounts due from depository institutions included $1.0 million
which is held on behalf of the FDIC according to the terms of the Assistance
Agreement.
Securities purchased under agreements to resell identical securities are
carried at cost which approximates market value and are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Balance at December 31, 5.3 milion 20.5 milion
Average balance during year 13.7 milion 12.8 milion
Maximum balance at any month-end 44.4 milion 22.5 milion
Weighted average days to maturity at December 31, 27 days 9 days
Weighted average interest rate 5.41% 5.92%
</TABLE>
As of December 31, 1996, all of these repurchase agreements had original
maturities of three months or less and were considered cash and cash
equivalents. The underlying collateral for these agreements, which is held
by a third party custodian, consisted of U. S. Treasury Notes and mortgage-
backed securities.
Investments held to maturity are as follows at December 31, 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Notes $39,996 $ - $ 283 $39,713
======= ======== ====== =======
</TABLE>
5. Mortgage-Backed Securities
--------------------------
The following table summarizes mortgage-backed securities held at December
31, (dollars in thousands):
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
HELD TO MATURITY
- ----------------
FHLMC $112,868 $ 897 $ 80 $113,685
FNMA 139,422 1,965 1,951 139,436
Collateralized mortgage obligations 42,209 12 309 41,912
Other non-agency 335,607 1,395 1,645 335,357
-------- ------ ------ --------
$630,106 $4,269 $3,985 $630,390
======== ====== ====== ========
Weighted average yield 7.02%
========
AVAILABLE FOR SALE
- ------------------
GNMA $ 30,157 $ 510 $ - $ 30,667
Collateralized mortgage obligations 14,570 - 748 13,822
-------- ------ ------ --------
$ 44,727 $ 510 $ 748 $ 44,489
======== ====== ====== ========
Weighted average yield 6.81%
========
<CAPTION>
1995
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
HELD TO MATURITY
- ----------------
FHLMC $ 93,546 $ 378 $ 15 $ 93,909
FNMA 162,599 3,536 1,195 164,940
Collateralized mortgage obligations 61,430 69 485 61,014
Other non-agency 446,195 3,050 1,115 448,130
-------- ------ ------ ---------
$763,770 $7,033 $2,810 $767,993
======== ====== ====== =========
Weighted average yield 7.15%
========
AVAILABLE FOR SALE
- -------------------
GNMA $ 37,103 $ 634 $ - $ 37,737
Collateralized mortgage obligations 14,818 - 523 14,295
-------- ------ ------ ---------
$ 51,921 $ 634 $ 523 $ 52,032
======== ====== ====== ========
Weighted average yield 6.77%
========
</TABLE>
9
<PAGE>
The following table sets forth the contractual maturities, amortized costs,
market values and weighted average yields for the Company's mortgage-backed
securities at December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
--------------------------------- ---------------------------------
Weighted Weighted
Amortized Market average Amortized Market average
cost value yield cost value yield
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Due within one year through five years $ 65,781 $ 65,780 6.53% $ - $ - -
Due after five years through ten years 5,868 5,970 7.50% - - -
Due after ten years through twenty years 68,178 67,741 6.80% 14,570 13,822 6.22%
Due after twenty years 490,279 490,899 7.75% 30,157 30,667 7.10%
-------- -------- ------- -------
$630,106 $630,390 7.02% $44,727 $44,489 6.81%
======== ======== ======= =======
</TABLE>
The following table summarizes mortgage-backed securities pledged as
collateral at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------- --------------------------
Amortized Market Amortized Market
cost value cost value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities pledged for:
Securities sold under agreements to repurchase $ 47,839 $ 46,472 $215,459 $217,338
Interest rate exchange agreements 11,578 12,143 15,902 16,653
FHLB advances 84,297 83,818 277,948 278,145
-------- -------- -------- --------
$143,714 $142,433 $509,309 $512,136
======== ======== ======== ========
</TABLE>
6. Loans Receivable
----------------
The following table summarizes loans receivable at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Real estate loans:
1-4 family residential $1,254,293 $1,284,282
Second mortgage 24,700 17,983
Multi-family residential 67,122 54,595
Commercial property and land loans 59,574 75,022
---------- ----------
Total real estate loans 1,405,689 1,431,882
========== ==========
Consumer loans:
Revolving credit and overdrafts 744 781
Other installment loans 2,522 3,205
Loans secured by savings accounts 599 615
Timeshare 633 1,254
---------- ----------
Total consumer loans 4,498 5,855
---------- ----------
Total loans 1,410,187 1,437,737
Less: Unearned loan fees (deferred costs) (1,284) (1,231)
Discounts and premiums, net 567 508
Allowance for losses 7,051 6,878
---------- ----------
Total loans, net 1,403,853 1,431,582
Less: Loans held for sale 370 403
---------- ----------
Loans receivable, net $1,403,483 $1,431,179
========== ==========
Weighted average interest rate 7.78% 7.70%
========== ==========
</TABLE>
The above classifications are net of participation interests sold and loans
serviced for others. Eureka was servicing mortgage loans for others with
principal balances totaling approximately $246 million, $263 million and $253
million at December 31, 1996, 1995 and 1994, respectively. Servicing fee
income from loans serviced for others totaled $613,000, $663,000 and $659,000
for the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996, mortgage loans with principal balances approximating $318
million were pledged to the FHLB of San Francisco as collateral for other
borrowings with the FHLB and as collateral for future additional borrowings.
Credit Risk and Concentration
-----------------------------
Eureka's loan portfolio consists principally of mortgage loans secured by
residential property in California and consumer loans extended to Eureka's
retail customers within Northern California. Eureka's lending activities are
focused primarily on loans secured by 1-4 family residential properties
located primarily in Northern California. Beginning in 1990, Eureka purchased
fixed and adjustable rate residential mortgage loans which met Eureka's
credit and underwriting standards from mortgage banks and savings
institutions. These purchases supplemented Eureka's internal loan
production. Eureka's wholesale loan origination system was established
during 1995, and enables Eureka to add assets that meet its credit quality
guidelines within its market area.
As of December 31, 1996, Eureka's portfolios of multi-family and commercial
real estate loans are highly seasoned and have a very low delinquency rate.
Concentration risk is also limited as the average loan size is approximately
$282,000 for multi-family and $359,000 for commercial loans.
10
<PAGE>
The following table shows Eureka's investment in loans for which impairment
has been recognized or restructured in accordance with SFAS No. 114 and SFAS
No. 118 at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- --------------------------------------
Recorded Average Interest Recorded Average Interest
Investment Investment Recognized Investment Investment Recognized
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Impaired loans without valuation
allowances:
1-4 family $2,410 $1,692 $38 $3,388 $2,400 $ 18
Multi-family - - - - - -
Commercial real estate - 271 - 1,767 1,880 92
------ ------ --- ------ ------ ----
2,410 1,963 38 5,155 4,280 110
Impaired loans with valuation
allowances:
1-4 family 586 393 - 45 125 -
Commercial real estate - 1,028 - 1,145 574 -
Allowance for credit loss (115) (199) - (311) (246) -
------ ------ --- ------ ------ ----
471 1,222 - 879 453 -
------ ------ --- ------ ------ ----
Total $2,881 $3,185 $38 $6,034 $4,733 $110
====== ====== === ====== ====== ====
<CAPTION>
1994
--------------------------------------
Recorded Average Interest
Investment Investment Recognized
----------- ----------- ----------
<S> <C> <C> <C>
Impaired loans without valuation
allowances:
1-4 family $5,239 $4,183 $51
Multi-family - 67 -
Commercial real estate 2,377 1,445 6
------ ------ ---
7,616 5,695 57
Impaired loans with valuation
allowances:
1-4 family 390 195 -
Commercial real estate - - -
Allowance for credit loss (125) (79) -
------ ------ ---
265 116 -
------ ------ ---
Total $7,881 $5,811 $57
====== ====== ===
</TABLE>
The allowance for credit losses for impaired loans was included in the
total allowance for loan losses at December 31, 1996, 1995 and 1994. Non-
accrual loans were $4.4 million, $6.4 million and $8.3 million at December
31, 1996, 1995 and 1994, respectively. Interest income which was not
recognized on non-accrual loans totaled $216,000, $394,000 and $790,000 for
1996, 1995 and 1994, respectively.
7. Allowance for Loan Losses
-------------------------
The following table summarizes the activity in the allowance for losses on
loans (dollars in thousands):
<TABLE>
<CAPTION>
Real Estate Loans Timeshare Loan Consumer Loans Total Loans
--------------------- ---------------------- ---------------------- --------------------
Amount % of Total Amount % of Total Amount % of Total Amount % of Total
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993 $ 5,944 .39% $1,653 45.60% $ 1,859 7.50% $ 9,456 .61%
=== ===== ==== ===
Provision for losses 540 60 646 1,246
Charge-offs (1,029) (151) (1,395) (2,575)
Recoveries 30 64 272 366
Transfers (133) - (25) (158)
Reductions/(1)/ - (515) - (515)
------- ------ ----- ------- --------
December 31, 1994 5,352 .38% 1,111 50.29% 1,357 6.46% 7,820 .54%
=== ===== ==== ===
Provision for losses 370 5 418 793
Charge-offs (312) (100) (1,331) (1,743)
Recoveries 6 91 500 597
Transfers 690 - (811) (121)
Reductions/(1)/ - (468) - (468)
------- ------ ----- ------- --------
December 31, 1995 6,106 .43% 639 50.94% 133 2.93% 6,878 .48%
=== ===== ==== ===
Provision for losses 962 3 - 965
Charge-offs (518) (46) (57) (621)
Recoveries - 33 52 85
Transfers 71 (3) (68) -
Reductions/(1)/ - (256) - (256)
------- ------ ----- ------- --------
December 31, 1996 $ 6,621 .47% $ 370 58.49% $ 60 1.56% $ 7,051 .50%
======= === ====== ===== =========== ==== ======== ===
Ratio of net
charge-offs
to average gross
loans
during 1996 .04% 1.33% .11% .04%
=== ===== === ===
</TABLE>
- -----------------------------
(1) Reductions are due to principal payoffs and remittances of preacquisition
originated loans.
11
<PAGE>
8. Accrued Interest Receivable
---------------------------
The following table summarizes accrued interest receivable at December 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Investments $ 30 $ 324
Mortgage-backed securities 4,511 5,464
Loans 7,665 7,705
------- -------
$12,206 $13,493
======= =======
</TABLE>
9. Premises and Equipment
----------------------
Premises and equipment are summarized as follows at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Land $ 1,444 $ 1,444
Buildings and improvements 6,563 6,556
Leasehold improvements 4,463 4,366
Furniture and equipment 9,664 9,505
------- -------
22,134 21,871
Less accumulated depreciation and amortization (13,246) (12,336)
------- -------
$ 8,888 $ 9,535
======= =======
</TABLE>
10. Federal Home Loan Bank Stock
----------------------------
Eureka is required to own capital stock in the FHLB of San Francisco in an
amount at least equal to the greater of 1% of the aggregate principal amount
of its unpaid single family mortgage loans and similar obligations at the end
of each calendar year, or 5% of its advances (borrowings) from the FHLB of San
Francisco. Eureka was in compliance with this requirement at December 31,
1996 and 1995, respectively.
11. Real Estate Held for Sale or Investment
---------------------------------------
Real estate held for sale or investment includes the following at December 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Real estate held for sale or investment $1,628 $2,686
Allowance for loss on real estate held
for sale or investment (300) (300)
------ ------
$1,328 $2,386
====== ======
</TABLE>
The operating income (loss) for real estate held for sale or investment was
($245,416), ($812,471) and $246,942 in 1996, 1995 and 1994, respectively.
Activity in the allowance for losses on real estate held for sale or
investment is as follows for the years ended December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- -------- ------
<S> <C> <C> <C>
Balance at January 1, $300 $ 1,005 $ 880
Provision for losses - 700 125
Charge-offs - (1,405) -
---- ------- ------
Balance at December 31, $300 $ 300 $1,005
==== ======= ======
</TABLE>
12. Real Estate Owned
-----------------
At December 31, 1996 and 1995, net real estate owned through foreclosure
amounted to $1.4 million and $2.5 million, respectively. Activity in the
allowance for losses on real estate owned is as follows for the years ended
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at January 1, $ 198 $ 745 $ 1,031
Provision for losses 282 90 742
Net charge-offs (363) (637) (1,028)
----- ----- -------
Balance at December 31, $ 117 $ 198 $ 745
===== ===== =======
</TABLE>
12
<PAGE>
13. Customer Deposits
--------------------
Customer deposits were comprised of the following at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------- --------------------------------------
Weighted Weighted
% of Average % of Average
Amount Total Interest Rate Amount Total Interest Rate
---------- --------- -------------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Interest checking
accounts 1.00% to 4.00% $ 145,591 7.91% 1.67% $ 119,480 7.01% 1.12%
Non-interest checking
accounts 5,805 0.32 - 4,249 0.25 -
Money market accounts
2.05% to 4.27% 426,757 23.19 3.87% 321,159 18.84 3.40%
Passbook accounts 2.00% 39,326 2.13 2.00% 40,206 2.36 2.00%
---------- ------ ---------- ------
617,479 33.55 485,094 28.46
---------- ------ ---------- ------
Time certificates:
4.00% or less 84,669 132,088
4.01 to 6.00% 997,753 814,442
6.01 to 8.00% 125,281 257,054
8.01 to 10.00% 14,914 15,438
10.01 to 12.00% 8 7
12.01 to 14.00% 202 181
14.01 to 16.00% 179 162
---------- ------ ---------- ------
Total time certificates 1,223,006 66.45 5.35% 1,219,372 71.54 5.40%
---------- ------ ---------- ------
$1,840,485 100.00% 4.63% $1,704,466 100.00% 4.63%
========== ====== ========== ======
</TABLE>
There were no brokered deposits at December 31, 1996 and 1995. The aggregate
amounts of time certificates of $100,000 or more were $273.2 million and
$250.0 million at December 31, 1996 and 1995, respectively. Accrued interest
on deposits at December 31, 1996 and 1995 amounted to $1.1 million and $1.3
million, respectively.
The following table summarizes customer deposits by remaining maturity at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
No contractual maturity $ 617,479 $ 485,094
Maturity within one year 934,486 853,558
1 to 2 years 222,701 278,141
2 to 3 years 41,764 59,591
3 to 4 years 11,091 16,229
4 to 5 years 11,670 10,491
Thereafter 1,294 1,362
---------- ----------
$1,840,485 $1,704,466
========== ==========
</TABLE>
Interest expense is summarized as follows for the period ending December 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Checking $ 1,599 $ 1,302 $ 1,435
Money market/passbook 14,293 10,122 9,228
Time certificate 66,090 64,348 53,136
---------- ---------- ----------
$ 81,982 $ 75,772 $63,799
========== ========== ==========
</TABLE>
14. Securities Sold Under Agreements to Repurchase
----------------------------------------------
Securities sold under agreements to repurchase identical securities are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Balance at December 31, 44.4 milion 206.9 milion
Market value at December 31, 44.4 milion 206.9 milion
Average balance during year 109.7 milion 404.4 milion
Maximum balance at any month-end 164.5 milion 484.1 milion
Weighted average days to maturity at December 31, 36 days 36 days
Weighted average interest rate at December 31, 5.50% 5.74%
Weighted average interest rate for the year 5.41% 6.04%
</TABLE>
The collateral for these agreements, which is held with a third party
custodian, consisted of mortgage-backed securities with carrying values of
$48.1 million and $217.1 million (including accrued interest of $0.3 million
and $1.6 million) and market values of $46.5 million and $217.3 million at
December 31, 1996 and 1995, respectively.
Securities sold under agreements to repurchase had the following maturities
at December 31, 1996: $19.3 million in 0 to 30 days; and $25.1 million in 31
to 60 days.
13
<PAGE>
15. Other Borrowings
----------------
The unused borrowing capacity with the FHLB of San Francisco at December 31,
1996 and 1995 was $226 million and $274 million, respectively. The following
table summarizes FHLB advances at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
Interest Interest
1996 Rate 1995 Rate
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Short-term fixed rate advances
(maturing within one year) $ 49,298 5.61% $277,706 5.73%
Long-term fixed rate advances
(maturing through 2002) $ 57,700 5.73% $ 32,381 5.99%
Average balance during year $201,775 $ 85,117
Maximum balance at any month-end $305,878 $340,500
Mortgage-backed securities pledged as collateral
for other borrowings $ 85,000 $280,000
Weighted average interest rate at December 31, 5.67% 5.76%
Weighted average interest rate for the year 5.60% 5.97%
</TABLE>
16. Interest Rate Exchange Agreements
---------------------------------
The Company has entered into interest rate exchange agreements to reduce the
impact of future fluctuations in interest rates on fixed rate loans funded by
variable rate liabilities. The floating rates to be received by the Company
under the terms of the above agreements are reset monthly, quarterly or semi-
annually and are indexed to the FHLB Eleventh District cost of funds index or
the three or six month London Interbank Offered Rate ("LIBOR"). Interest rate
exchange agreements outstanding per contractual terms are as follows at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ------------------------------
Weighted Average Interest Rate Weighted Average Interest Rate
------------------------------ ------------------------------
Notional Pay Receive Notional Pay Receive
Year of Maturity Amount (Fixed) (Floating) Amount (Fixed) (Floating)
---------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 $ - -% -% $45,000 8.12% 5.72%
1997 40,000 8.87% 5.21% 40,000 8.87% 5.58%
1998 10,000 8.57% 5.56% 10,000 8.57% 5.83%
1999 30,000 7.89% 5.56% 30,000 7.89% 5.90%
------- ------
80,000 8.47% 5.39% 125,000 8.34% 5.73%
Pay Receive Pay Receive
(Floating) (Floating) (Floating) (Floating)
---------- --------- --------- ---------
1997 20,000 5.52% 5.39% 20,000 5.91% 5.66%
------- ------
20,000 5.52% 5.39% 20,000 5.91% 5.66%
-------- ------
$100,000 7.86% 5.39% $145,000 8.00% 5.72%
======== ========
</TABLE>
In 1993, Eureka established a liability and recorded a charge to earnings of
$20.4 million related to interest rate exchange agreements that were no longer
deemed effective as hedges. During the year ended December 31, 1996, a net
credit of $0.3 million to non-interest expense was recorded to decrease the
interest rate exchange agreements liability for the effect of interest rate
fluctuations throughout the year on the market value of obligations deemed
ineffective as hedges. During the year ended December 31, 1995, Eureka
recorded a provision of $1.9 million to increase the interest rate exchange
agreements liability to reflect the effect of interest rate decreases on the
market value of obligations. The exchange agreements liability totaled $1.2
million and $3.4 million at December 31, 1996 and 1995, respectively. Net
interest payable on exchange agreements was $0.6 million and $0.7 million at
December 31, 1996 and 1995, respectively, and was included in other
liabilities and accrued expenses.
Net interest paid or accrued on interest rate exchange agreements of
approximately $0.8 million, $2.4 million and $6.3 million was included as an
adjustment to interest income on loans for the years ended December 31, 1996,
1995, and 1994, respectively.
The Company's credit exposure associated with non-performance of
counterparties is controlled by the Company's credit policies. All agreements
are with primary government securities dealers. The Company does not require
collateral to support the credit exposure related to these financial
instruments.
17. Income Taxes
------------
The consolidated financial statement provisions for income tax for the years
ended December 31, 1996, 1995 and 1994 relate to the Company and its
subsidiary. The Company and its subsidiary file calendar year
14
<PAGE>
consolidated federal income and combined California franchise tax returns.
Eureka determined its bad debt deduction using the experience method in
1995 and 1994. Effective 1996, Eureka is allowed a bad debt deduction equal to
actual net charge-offs for federal tax purposes and continues to use the
experience method for California tax purposes.
The income tax provisions for the years ended December 31, 1996, 1995 and 1994
consist of (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------- -------------------------- -------------------------
Federal State Total Federal State Total Federal State Total
-------- ------- -------- ------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ 364 $ 132 $ 496 $ 353 $ 143 $ 496 $ 77 $ 72 $ 149
Deferred (19,649) (1,717) (21,366) (353) (143) (496) (77) (72) (149)
-------- ------- -------- ----- ----- ----- ---- ---- -----
$(19,285) $(1,585) $(20,870) $ - $ - $ - $ - $ - $ -
======== ======= ======== ===== ===== ===== ==== ==== =====
</TABLE>
The Company's expected income tax rate for 1996, 1995 and 1994 differs from the
actual effective income tax rate as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
Tax at statutory rate 34.00% 35.00% 35.00%
State tax net of federal benefits 8.10 7.35 7.35
Increases (reductions)
Non-deductible amortization 3.80 2.30 2.50
Change in valuation allowance (242.00) (43.60) (45.60)
Other, net 4.10 (1.05) 0.75
------- ------ ------
Effective income tax rate (192.00%) 0.00% 0.00%
======= ====== ======
</TABLE>
Deferred tax assets are initially recognized for net operating loss and tax
credit carryforwards and differences between the financial statements carrying
amount and the tax bases of assets and liabilities which will result in future
deduction amounts. A valuation allowance is established to reduce the deferred
tax assets to the level at which it is more likely than not that the tax
benefits will be recognized.
Components of net deferred tax assets at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Purchase accounting adjustments $ 2,165 $ 2,654
Excess book accumulated depreciation and amortization 937 697
Unrecognized built-in losses 168 30
Alternative minimum tax credit 1,382 1,277
Investment tax credit 667 667
Net operating loss carryovers 72,299 77,475
Other accrued expenses not deducted for tax purposes 1,976 1,614
Provision for loss on interest rate exchange agreements 508 1,407
-------- --------
Total gross deferred tax assets 80,102 85,821
Less valuation allowance (48,724) (74,909)
-------- --------
Deferred tax assets 31,378 10,912
-------- --------
Deferred tax liabilities:
Tax bad debt reserves in excess of book 4,022 4,490
Deferred income 4,713 5,145
-------- --------
Deferred tax liabilities 8,735 9,635
-------- --------
Net deferred tax assets $ 22,643 $ 1,277
======== ========
</TABLE>
Net operating loss carryforwards and investment tax credits generated by
Eureka and its subsidiaries through the date Eureka was acquired by the Company
are available to offset future taxable income or income taxes of Eureka and its
subsidiaries, but may not be used to offset future taxable income or income
taxes of any other new member of the consolidated group. At December 31, 1996,
pre-acquisition net operating loss carryforwards for federal income tax purposes
amounted to $102 million and will expire in various years through 2002. At
December 31, 1996, post-acquisition net operating loss carryforwards for federal
income and state franchise tax purposes amounted to approximately $107 million
and approximately $29 million, respectively, and will expire in various years
through 2007 and 1997, respectively.
At December 31, 1996, the Company has alternative minimum tax credit
carryovers of $1.4 million and investment tax credit carryovers aggregating
approximately $667,000 which expire in years 1998 through 2000. Such investment
tax credit carryovers are subject to a 35% reduction under the Tax Reform Act of
1986.
15
<PAGE>
18. Benefit and Compensation Plans
------------------------------
Benefit Plans
-------------
Eureka has a qualified, noncontributory defined benefit retirement plan (the
"Plan") covering substantially all of its employees. Eureka "froze" the Plan
effective January 1, 1994. Prior to that date, the benefits were based on the
average of the highest five consecutive annual salaries of the ten years
preceding age 65. An employee became fully vested upon completion of five
years of qualifying service. It is the policy of Eureka to fund the minimum
amount required.
Due to the Plan's frozen status, no additional benefits will accrue in the
Plan after January 1, 1994. All Plan participants became fully vested in
their accrued benefits on this date. Eureka may elect to terminate the frozen
Plan at some point in the future according to its rights under the Plan. The
Plan assets consist primarily of a well-diversified portfolio of equities and
fixed income securities.
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated balance sheet at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of accumulated benefit obligation (all vested) $6,093 $6,260
Fair value of Plan assets at December 31, 6,387 6,261
-------- --------
Plan assets in excess of projected benefit obligation 294 1
Unrecognized net loss from past experience different
from that assumed, and effects of changes in assumptions 664 954
Unrecognized prior service cost (189) (209)
Unrecognized net transition asset (7) (10)
-------- --------
Total pension prepayment $ 762 $ 736
======== ========
Weighted average discount rate 7.5% 7%
Expected long-term rate of return on assets 8% 8%
</TABLE>
The components of net pension expense (recovery) for the years ended December
31, (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ --------
<S> <C> <C> <C>
Interest cost on projected benefit obligation $ 439 $ 497 $ 511
Actual return on Plan assets (676) (918) 63
Net amortization and deferral 211 425 (524)
------ ------ --------
Total pension expense (recovery) $ (26) $ 4 $ 50
====== ====== ========
</TABLE>
Beginning January 1, 1994, Eureka introduced a new retirement plan, the
EurekaBank Service Investment Plan ("ESIP"), which covers substantially all of
its employees. Through this plan, Eureka makes an annual retirement
contribution to an ESIP account based on the participant's length of service
which equals one percent of eligible pay per year up to a maximum contribution
of four percent for four or more years of service provided that the
participant must be employed on the last day of the year. Participants become
100% vested in their account after five years of service. The amount recorded
as contribution expense for the ESIP totaled $478,200, $505,000 and $487,000
for 1996, 1995 and 1994, respectively, and was included in other liabilities
at December 31, 1996 and 1995.
Eureka also has a qualified 401(k) plan effective as of July 1, 1989,
covering substantially all employees. Eureka's matching contributions to the
401(k) plan for the years ended December 31, 1996, 1995 and 1994 amounted to
$433,484, $415,415 and $438,454, respectively. In addition, Eureka has a post
retirement medical plan, and the expense totaled approximately $65,000,
$59,500 and $45,000 for 1996, 1995 and 1994, respectively.
Compensation Plans
------------------
At December 31, 1996, the Company had two incentive compensation plans: the
Long Term Incentive Plan ("LTIP") and the Equity Appreciation Plan
("EAP").
The LTIP agreement provides current and deferred compensation to full-time
or part-time employees or directors, as approved by the board of directors of
Eureka. The compensation is determined annually based on Eureka's return on
average equity for the year. The compensation is paid over three subsequent
years of which one-half is cash and one-half is BUCs. Calculation of the
awards, the form and timing of payments and forfeitures are described in the
LTIP.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," which
established the accounting and reporting
16
<PAGE>
requirements for stock-based employee compensation plans. SFAS No. 123
specifies that stock-based compensation awards be recognized using the fair
value of the equity instrument issued. SFAS No. 123 also permits an enterprise
to continue to account for its stock-based compensation awards under the
provisions of Accounting Principles Board Opinion No. 25 ("APBO No. 25"),
"Accounting for Stock Issued to Employees."
The Company has elected to continue to account for its LTIP under APBO No.
25. Compensation expense related to the LTIP amounted to $686,000, $784,000
and $591,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The compensation expense recorded in accordance with APBO No.
25 approximates the amount which would have been recorded in accordance with
SFAS No. 123, therefore no pro forma information is presented.
At December 31, 1996, there were 45,827 BUCs awarded under the LTIP that
were not fully vested. There were no forfeitures for the 1996 and 1995
awards. A summary of cash and BUCs awards under the LTIP for 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
BUCs BUCs
------------------- -------------------
Cash Number Avg. Price Cash Number Avg. Price
-------- ------ ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Awards granted $662,497 21,769 $30.425 $365,750 12,854 $28.44
Weighted average price of BUCs
granted during the year $30.425 $28.44
========== ==========
</TABLE>
During 1996, the EAP was implemented and eligible participants include
Eureka officers, directors and select employees of Eureka and the Company, as
approved by the board of directors of Eureka. Participants receive cash
compensation based on the appreciation in Eureka's equity from April 1, 1996
through March 31, 1999. Only participants that remain as employees or
directors as of March 31, 1999 are eligible to receive awards. The cash
awards may be paid between March 31, 1999 and March 31, 2006. Based on the
provisions of the EAP and Eureka's equity appreciation, compensation expense
for 1996 for the EAP was $983,000.
19. Capital
-------
Capital Requirements
--------------------
The Office of Thrift Supervision ("OTS") requires that savings institutions
satisfy three separate capital requirements: a leverage ratio of core capital
to total adjusted assets of 3%, a tangible capital to total adjusted assets
ratio of 1.5% and a risk-based capital to risk-weighted assets ratio of 8%.
At December 31, 1996, Eureka's regulatory capital ratios exceeded the
requirements and were as follows: 6.96% leverage ratio, 6.96% tangible
capital ratio and 15.95% risk-based ratio.
The most recent notification from the OTS categorized Eureka as well
capitalized under the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") regulatory framework for prompt corrective action. This capital
classification is solely for purposes of federal regulatory capital adequacy
purposes, and the administration of federal "prompt corrective action"
requirements, and is not necessarily indicative of Eureka's actual financial
condition. To be categorized as well capitalized, the institution must
maintain the following: a leverage ratio of core capital to total adjusted
assets of 5%, a Tier 1 risk-based capital to risk-weighted assets ratio of 6%
and a risk-based capital to risk-weighted assets ratio of 10%. There are no
conditions or events since that notification that management believes have
changed Eureka's capital category.
Dividend Restrictions
---------------------
The Capital Maintenance Agreement, which expires when the FDIC Preferred Stock
is redeemed, also contains certain restrictions on disposition of the
ownership of Eureka and the Company and dividend payments by Eureka. The
Company's primary source of funds is dividends paid by (or accrued from)
Eureka. These dividends provide the funds for distributions to the
Partnership. Dividend payments by Eureka are subject to the following
limitations under the Capital Maintenance Agreement:
- No dividends may be paid if regulatory capital is less than required
levels.
- Aggregate dividends paid subsequent to the Acquisition may not exceed
50% of the capital contributed upon and after the Acquisition, plus 50%
of aggregate net income earned subsequent to the Acquisition.
- Dividends in any calendar year may not exceed the greater of $12 million
or 50% of net income for that year.
The payment of dividends to the Company from Eureka is subject to OTS
regulations requiring thirty days prior notice of the intent to declare
dividends. Additionally, the OTS has the authority to preclude the
declaration of any dividends.
17
<PAGE>
20. Commitments and Contingencies
-----------------------------
The following lending and investment commitments were outstanding at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Commitments to originate fixed rate mortgage loans $ 4,159 $ 2,857
Commitments to originate adjustable rate mortgage loans $43,368 $27,548
Commitments to purchase mortgage loans $ 6,145 $21,300
Commitments to sell mortgage loans $ 500 $ 1,328
</TABLE>
There were no other outstanding commitments to purchase or sell securities
at December 31, 1996 and 1995.
Eureka is involved in various legal actions arising in the normal
course of business. It is the opinion of management, after consultation with
counsel, that resolution of these matters would not have a material adverse
effect on the Company's consolidated financial condition or operations.
Certain branch and office locations are leased by the Company or
Eureka under operating type leases expiring at various dates through the
year 2008, except for one lease which expires in the year 2040. Related
rental expense during 1996, 1995 and 1994 amounted to $4.8 million, $4.7
million and $4.9 million, respectively. Future minimum lease payments under
terms of existing operating leases at December 31, 1996 are $4.8 million in
1997, $4.3 million in 1998, $3.7 million in 1999, $1.8 million in 2000, $1.2
million in 2001 and $7.2 million thereafter.
At December 31, 1996, loans of approximately $10.2 million had been
sold with recourse to repurchase if loans become 120 days delinquent or upon
completion of the foreclosure process. These loans, which are secured by 1-4
family residential mortgages, are seasoned and were sold by Eureka prior to
its acquisition by the Company. Repurchases of loans sold with recourse
amounted to less than $25,000 for the years ended December 31, 1996, 1995
and 1994. There were no foreclosures of these loans.
21. Parent Company Only Financial Information (dollars in thousands)
----------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS CONDENSED STATEMENTS OF INCOME
------------------------ ------------------------------
December 31, Years Ended December 31,
------------------------ -----------------------------
1996 1995 1996 1995 1994
----------- ---------- -----------------------------
Assets: Income:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 5,667 $ 5,732 Dividends from subsidiary $12,000 $12,000 $12,000
Investment in subsidiary at cost Income from short-term
plus equity in undistributed investments 247 279 165
earnings 170,723 149,985 ------- ------- -------
Other assets 1,243 1,309 12,247 12,279 12,165
-------- -------- Expenses:
Total assets $177,633 $157,026 Operating and administrative 1,692 1,991 1,901
======== ======== Earnings before
undistributed income
Liabilities and shareholder's of subsidiary 10,555 10,288 10,264
equity:
Accounts payable $ 2,918 $ 2,878 Undistributed income
-------- -------- of subsidiary 21,162 7,282 5,273
------- ------- -------
Total liabilities 2,918 2,878 Net income $31,717 $17,570 $15,537
Shareholder's equity 174,715 154,148 ======= ======= =======
------- -------
Total liabilities
and shareholder's equity $177,633 $157,026
======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
Years Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,717 $ 17,570 $ 15,537
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in earnings of subsidiary (33,162) (19,282) (17,273)
Other adjustments 180 318 (28)
-------- -------- --------
Net cash used in operating activities (1,265) (1,394) (1,764)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends from subsidiary 12,000 12,000 12,000
-------- -------- --------
Net cash provided by investing activities 12,000 12,000 12,000
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (10,800) (10,800) (8,100)
-------- -------- --------
Net cash used in financing activities (10,800) (10,800) (8,100)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (65) (194) 2,136
Cash and cash equivalents at beginning of period 5,732 5,926 3,790
-------- -------- --------
Cash and cash equivalents at end of period $ 5,667 $ 5,732 $ 5,926
======== ======== ========
</TABLE>
18
<PAGE>
22. Transactions with Related Parties
---------------------------------
The Partnership and the Company paid or reimbursed AFCA-5 for certain costs
and expenses incurred in connection with the operation of the Company
including legal and accounting fees and other administrative costs. The
amount of such expenses incurred by AFCA-5 and reimbursed by the Partnership
or the Company, was $446,370, $435,416 and $624,705 for the years ended 1996,
1995 and 1994, respectively.
The Company, Eureka and an affiliate of AFCA-5, America First Service
Corporation ("AFSC"), have entered into a licensing agreement through which
AFSC provides services to the Company and Eureka which include economic and
financial advice and consultation services. The Company is committed to pay
an annual fee equal to 0.5% of Eureka's interest income and other income
without deduction for interest expense and other expenses. During 1996, 1995
and 1994, $850,000, $864,000 and $762,000, respectively, of the annual fees
had been paid or accrued.
23. Fair Value of Financial Instruments
-----------------------------------
No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of estimated fair values for financial instruments. Such
estimates are subjective in nature, involving significant judgment
regarding the risk characteristics of various financial instruments at a
discrete point in time. Therefore, such estimates could vary significantly
if assumptions regarding uncertain matters were changed. Major assumptions,
methods, and fair value estimates for Eureka's financial instruments for
1996 and 1995 are set forth below.
Cash and Short-Term Investments - The carrying amount was a reasonable
-------------------------------
estimate of fair value.
Mortgage-Backed Securities - The fair value estimates for mortgage-backed
--------------------------
securities were based on quoted market prices or dealer quotes, and
included the carrying value of accrued interest receivable which was a
reasonable estimate of fair value.
Loans Receivable - Fair value of real estate mortgage loans was estimated
----------------
using a discounted cash flow method, adjusted for differences in credit
risk and liquidity. Fair value estimates for real estate mortgage loans
included the carrying value of accrued interest receivable which was a
reasonable estimate of fair value.
19
<PAGE>
Other Financial Instrument Assets - Other financial instrument assets
---------------------------------
consisted of an investment in FHLB stock, the carrying value of which was
deemed a reasonable estimate of fair value.
Deposit Liabilities - The carrying amount of deposits with no stated maturity
-------------------
date was a reasonable estimate of fair value. The fair value of time deposits
(certificates of deposit) was estimated using a discounted cash flow
methodology based on current market rates for wholesale borrowing
alternatives, and included the carrying value of accrued interest payable
which was a reasonable estimate of fair value.
Borrowings - Borrowings consisted of securities sold under agreements to
----------
repurchase and FHLB advances. The fair value was estimated using a discounted
cash flow method based on current market rates for similar debt and
maturities, and included the carrying value of accrued interest payable which
was a reasonable estimate of fair value.
Other Financial Instrument Liabilities - Other financial instrument
--------------------------------------
liabilities consisted of preferred stock and other financial liabilities, the
carrying values of which were deemed a reasonable estimate of fair value.
Interest Rate Exchange Agreements - The fair value of interest rate exchange
---------------------------------
agreements was estimated using the average of current bid and ask rates for
agreements of similar remaining terms, after considering the creditworthiness
of the exchange agreements' counterparties. The carrying amount included the
liability established based on the estimated fair value of the exchange
agreements that were no longer deemed effective as hedges.
Commitments to Extend Credit - In 1996 and 1995, commitments to extend credit
----------------------------
were related to origination of residential and commercial mortgage loans. The
fair value of such commitments was estimated using current market rates for
loans with similar characteristics versus the committed rates.
Franchise Value and Intangible Assets - The estimated value of Eureka's
-------------------------------------
financial instruments did not include certain material intangible assets.
Management believes that the value of the deposit franchise and customer base
was significant. In addition, the estimated fair values did not include the
value of the portfolio of loans serviced for others.
Estimated fair values of financial instruments at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 53,570 $ 53,570 $ 70,776 $ 70,776
Mortgage-backed securities 679,106 679,859 861,262 867,010
Loans receivable 1,411,519 1,416,826 1,439,290 1,451,495
Other 21,828 21,828 21,509 21,509
Financial liabilities:
Demand deposits 618,091 618,091 485,662 485,662
Time deposits 1,223,464 1,225,196 1,220,707 1,223,090
Borrowings 153,851 153,870 521,052 521,586
Other 18,377 18,377 16,245 16,245
Off-balance sheet financial instruments:
Interest rate exchange agreements liability (1,234) (2,246) (3,385) (5,455)
Commitments to extend credit - 8 - 13
</TABLE>
24. Subsequent Events
-----------------
On May 8, 1997, the Partnership announced a definitive agreement with Bay View
Capital Corporation ("Bay View") to merge the Company with Bay View (the
"Merger Agreement"). Under the terms of the Merger Agreement, the Partnership
will receive $90 million in cash and $210 million in Bay View common stock
(subject to a minimum of 4,038,461 shares and a maximum of 5,000,000 shares)
for its interest in the Company, which owns Eureka. If the market price of Bay
View common stock (based on the average closing prices over a specified
period) is less than $42.00 per share, the Partnership has the right to
terminate the Merger Agreement unless additional shares of Bay View common
stock are issued such that the total value of the shares of Bay View common
stock to be received is $210 million. The transaction is expected to close
either December 31, 1997 or January 1, 1998 and is subject to customary
20
<PAGE>
conditions, including regulatory approval and approval by the BUC holders and
the shareholders of Bay View. Please refer to the Partnership's Form 8-K dated
May 16, 1997 for further information.
The outstanding balance of mandatorily redeemable non-voting Series A Preferred
Stock as of the effective date of the merger will be redeemed at that time prior
to its scheduled maturity of May 1998.
Under the terms of the Assistance Agreement, and as a result of the Merger
Agreement discussed above, the Partnership also expects to pay a final
participation payment to the FDIC of approximately $12.8 million from cash
received at the time of the merger. Further, upon consummation of the merger,
the Company expects to pay additional compensation under the terms of its two
incentive compensation plans of approximately of $25 million.
21
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
(Unaudited)
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------
March 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and amounts due from depository institutions $ 22,574 $ 28,266
Federal funds sold 14,000 20,000
Securities purchased under agreements to resell 5,300 5,300
Mortgage-backed securities, net
Held to maturity 592,108 630,106
Available-for-sale 43,007 44,489
Loans receivable, net 1,427,635 1,403,483
Loans held for sale 1,404 370
Accrued interest receivable 12,509 12,206
Premises and equipment, net 8,688 8,888
Federal Home Loan Bank stock, at cost 22,180 21,827
Real estate held for sale or investment, net 1,328 1,328
Real estate owned, net 1,996 1,438
Deferred tax assets, net 22,323 22,643
Other assets 5,211 6,121
- --------------------------------------------------------------------------------------------------------------
Total Assets $2,180,263 $2,206,465
- --------------------------------------------------------------------------------------------------------------
Liabilities and Shareholder's Equity
Customer deposits $1,890,504 $1,840,485
Securities sold under agreements to repurchase - 44,353
Other borrowings 75,181 106,998
Other liabilities and accrued expenses 18,410 22,166
- --------------------------------------------------------------------------------------------------------------
Total Liabilities 1,984,095 2,014,002
- --------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock; Series A, no par value;
200,000 shares issued; $20 million liquidation value 18,347 17,748
Common stock; par value $1.00; 100 shares issued and outstanding - -
Additional paid in capital 102,189 102,189
Retained earnings 75,632 72,526
- --------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 177,821 174,715
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $2,180,263 $2,206,465
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
For the For the
Quarter Ended Quarter Ended
March 31, 1997 March 31, 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income
Interest and fees on loans $26,762 $27,215
Interest on mortgage-backed securities 11,320 13,831
Interest and dividends on investment 835 1,175
- --------------------------------------------------------------------------------------------------------------
Total interest income 38,917 42,221
- --------------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 21,490 19,726
Interest on borrowings 2,211 7,043
- --------------------------------------------------------------------------------------------------------------
Total interest expense 23,701 26,769
- --------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 15,216 15,452
Provision for loan losses 252 408
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 14,964 15,044
- --------------------------------------------------------------------------------------------------------------
Non-interest income
Deposit related fees 462 469
Loan related fees 295 326
Gain on disposition of loans, net 62 46
Other income 897 577
- --------------------------------------------------------------------------------------------------------------
Total non-interest income 1,716 1,418
- --------------------------------------------------------------------------------------------------------------
Non-interest expense
Compensation and benefits 5,758 5,355
Occupancy and equipment 1,904 2,225
FDIC premiums and special assessments 380 1,095
Professional services 246 322
Advertising and promotion 235 230
Provision for loss (recovery) on interest
rate exchange agreements (136) (469)
Other 1,825 2,104
- --------------------------------------------------------------------------------------------------------------
Total non-interest expense 10,212 10,862
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 6,468 5,600
Provision for income taxes 320 -
- --------------------------------------------------------------------------------------------------------------
Net income $ 6,148 $ 5,600
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
For the Three Months Ended March 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------ ---------- -------- -----
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 $ -- $102,189 $72,526 $174,715
Net income -- -- 6,148 6,148
Dividends paid or accrued -- -- (2,700) (2,700)
Net unrealized losses on mortgage-backed securities
available for sale, net of tax -- -- (342) (342)
---- -------- ------- --------
Balance as of March 31, 1997 $ -- $102,189 $75,632 $177,821
==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------
For the Three For the Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,148 $ 5,600
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of:
Investments and mortgage-backed securities net premium 633 652
Loan premium 109 214
Intangibles 290 329
Proceeds from sale of loans originated and held for sale 3,431 2,376
Originations of loans held for sale (4,403) (4,137)
(Gain) loss on sale of real estate owned (21) 71
Gain on disposition of mortgage loans (62) (46)
Provision for loan losses 252 408
Provision for loss (recovery) on interest rate exchange agreements (136) (469)
Provision for income taxes 320 -
Increase in accrued interest receivable (303) (349)
Decrease in accrued interest payable (1,685) (1,094)
Depreciation and amortization of premises and equipment 423 440
Decrease (increase) in other assets 707 (962)
Decrease in other liabilities (1,916) (1,729)
Other, net 209 268
- ---------------------------------------------------------------------------------------------------------
Total adjustments (2,152) (4,028)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,996 1,572
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Loans originated and held for investment (76,450) (52,772)
Purchases of mortgage-backed securities - (14,548)
Purchases of real estate loans (4,360) (18,734)
Purchases of premises and equipment (258) (224)
Principal payments on mortgage-backed securities 38,504 55,412
Principal payments on loans 55,279 78,301
Proceeds from sale of Federal Home Loan Bank Stock - 911
Proceeds from sales of real estate owned 360 832
Other, net 89 279
- ---------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 13,164 49,457
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase in checking and saving accounts 13,557 49,487
Proceeds from issuance of certificates of deposits 90,765 38,497
Payments for maturing on early withdrawal
of certificates of deposits (54,304) (39,120)
Net decrease in short-term repurchase agreements (44,353) (51,867)
Decrease in Federal Home Loan Bank advances (31,817) (80,668)
Dividends (2,700) (2,700)
- ---------------------------------------------------------------------------------------------------------
Net cash used by financing activities (28,852) (86,371)
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (11,692) (35,342)
Cash and cash equivalents at beginning of period 53,566 70,486
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $41,874 $35,144
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Non cash investing and financing activities:
Additions to real estate acquired through foreclosure $ 948 $ 734
Loans made to facilitate the sale of real estate $ 6,748 $12,095
Cash paid for interest (including interest credited) $24,405 $27,420
Cash paid for alternative income and minimum
franchise taxes $ 190 $ 210
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. ORGANIZATION
America First Eureka Holdings, Inc. (the "Company") is a wholly owned
subsidiary of America First Financial Fund 1987-A Limited Partnership (the
"Partnership"), and was formed for the purpose of owning and managing one
or more acquired financial institutions. The Company acquired EurekaBank
("Eureka") on May 27, 1988 (the "Acquisition").
2. BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts
of the Company and its wholly-owned subsidiary, Eureka and its
subsidiaries. All significant intercompany transactions have been
eliminated.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (primarily consisting of
normal recurring accruals) necessary for a fair presentation of the
Company's consolidated financial condition as of March 31, 1997, and the
results of its consolidated operations for the quarters ended March 31,
1997 and 1996.
3. ALLOWANCE FOR LOAN LOSSES
The Company recorded loan loss provisions of approximately $252,000 and
$408,000 for the quarters ended March 31, 1997 and 1996, respectively. At
March 31, 1997 and December 31, 1996, the allowance for loan losses was
approximately $7.2 million and $7.1 million, respectively. Management
believes that the allowance for loan losses was adequate given the
composition, credit characteristics and loss experience of the loan
portfolio.
4. INTEREST RATE EXCHANGE AGREEMENTS
The Company entered into interest rate exchange agreements to reduce the
impact of future fluctuations in interest rates on fixed rate mortgages
funded by variable rate liabilities. The floating rates to be received by
the Company under the terms of these agreements are reset monthly,
quarterly or semi-annually and are generally indexed to the FHLB Eleventh
District Cost of Funds index or the one or three month London Interbank
Offered Rate ("LIBOR").
In 1993, the sustained decline in interest rates in the general economy and
the resulting prepayment of mortgage loans associated with the interest
rate exchange agreements caused Eureka to establish a liability based on
the estimated fair value of interest rate exchange agreements that were no
longer deemed effective as hedges. During the quarters ended March 31, 1997
and 1996, Eureka recorded to non-interest expense recoveries on interest
rate exchange agreements of approximately $136,000 and $469,000,
respectively, to reflect the effect of interest rate increases on the
market value of Eureka's related obligations. The recorded liability for
the interest rate exchange agreements totaled approximately $700,000 and
$1.2 million at March 31, 1997 and December 31 1996, respectively. Net
interest payable on interest rate exchange agreements was $409,000 and
$600,000 at March 31, 1997 and December 31, 1996, respectively, and was
included in other liabilities and accrued expenses.
For the quarters ended March 31, 1997 and 1996, net interest expense on
interest rate exchange agreements (after amortization of the interest rate
exchange agreement liability of $397,000 and $658,000, respectively)
totaled approximately $214,000 and $126,000, respectively. Net interest
expense on interest rate exchange agreements is included as an adjustment
to interest income on loans. The notional amount of interest rate exchange
agreements outstanding was $80 million and $125 million at March 31, 1997
and 1996, respectively. The notional amount of interest rate exchange
agreements outstanding at December 31, 1996 was $100 million.
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AMERICA FIRST EUREKA HOLDINGS, INC. AND SUBSIDIARY
5. INCOME TAXES
The consolidated financial statement provisions for income tax for the
quarters ended March 31, 1997 and 1996 relate to the Company and its
subsidiary. The Company and its subsidiary file calendar year consolidated
federal income and combined California franchise tax returns.
Deferred tax assets are initially recognized for net operating loss and tax
credit carryforwards and differences between the financial statements
carrying amount and the tax bases of assets and liabilities which will
result in future deduction amounts. A valuation allowance is established to
reduce the deferred tax assets to the level at which it is more likely than
not that the tax benefits will be recognized.
The deferred tax valuation allowance adjustment is updated quarterly based
on the expected net operating loss carryforwards which are more likely than
not to be utilized.
6. SUBSEQUENT EVENTS
On May 8, 1997, the Partnership announced a definitive agreement with Bay
View Capital Corporation ("Bay View") to merge the Company with Bay View
(the "Merger Agreement"). Under the terms of the Merger Agreement, the
Partnership will receive $90 million in cash and $210 million in Bay View
common stock (subject to a minimum of 4,038,461 shares and a maximum of
5,000,000 shares) for its interest in the Company, which owns Eureka. If
the market price of Bay View common stock (based on the average closing
prices over a specified period) is less than $42.00 per share, the
Partnership has the right to terminate the Merger Agreement unless
additional shares of Bay View common stock are issued such that the total
value of the shares of Bay View common stock to be received is $210
million. The transaction is expected to close on or about December 31, 1997
and is subject to customary conditions, including regulatory approval and
approval by the beneficial unit certificate holders and the shareholders of
Bay View. Please refer to the Partnership's Form 8-K dated May 16, 1997 for
further information.
The outstanding balance of mandatorily redeemable non-voting Series A
Preferred Stock as of the effective date of the merger will be redeemed at
that time prior to its scheduled maturity of May 1998.
Under the terms of the Assistance Agreement, and as a result of the Merger
Agreement discussed above, the Partnership also expects to pay a final
participation payment to the FDIC of approximately $12.8 million from cash
received at the time of the merger. Further, upon consummation of the
Merger, the Company expects to pay additional compensation under the terms
of its two incentive compensation plans of approximately $25 million.
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