<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registation No. 333-29757
PROSPECTUS SUPPLEMENT
- ---------------------
(To Prospectus dated June 30, 1997)
$100,000,000
[LOGO OF BAYVIEW CAPITAL CORPORATION APPEARS HERE]
9 1/8% SUBORDINATED NOTES DUE 2007
---------------
The 9 1/8% Subordinated Notes due 2007 (the "Notes") are being offered by
Bay View Capital Corporation (the "Company"). The Notes will mature on August
15, 2007 and interest on the Notes will be payable semi-annually in arrears on
February 15 and August 15 of each year, commencing February 15, 1998. The
Notes will be redeemable, in whole or in part, at the option of the Company at
any time on or after August 15, 2002 at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption. In
addition, at any time prior to August 15, 2002, upon the occurrence of a
Change of Control (as defined) or a Regulatory Event (as defined) the Notes
will be redeemable, in whole or in part, at the option of the Company, within
180 days of the occurrence of such Change of Control or Regulatory Event, at a
redemption price equal to the sum of (x) the principal amount thereof, plus
(y) accrued and unpaid interest, if any, to the applicable date of redemption,
plus (z) the Applicable Premium (as defined). The Company will not be required
to make any sinking fund payments with respect to the Notes. Payment of the
principal of the Notes may be accelerated only in the case of certain events
involving the bankruptcy, insolvency or reorganization of the Company or any
Major Bank Subsidiary (as defined) of the Company, and no right of
acceleration will exist in the case of default in the payment of the principal
of, or premium, if any, or interest on the Notes or in the performance of any
other covenant of the Company.
The Notes will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company. On a pro forma basis after giving
effect to the issuance of the Notes and the consummation of the Company's
proposed acquisition of America First Eureka Holdings, Inc. ("AFEH"), as of
June 30, 1997 the Company (excluding its subsidiaries) would have had
approximately $50.0 million of Senior Indebtedness outstanding. The Notes will
be effectively subordinated to all existing and future liabilities, including
indebtedness, customer deposits, trade payables, guarantees and lease
obligations, of the Company's subsidiaries, including Bay View Bank (the
"Bank"). On a pro forma basis after giving effect to the Company's proposed
acquisition of AFEH, as of June 30, 1997 the Company's subsidiaries would have
had approximately $5.0 billion of total liabilities (including approximately
$3.5 billion of customer deposits but excluding intercompany liabilities).
The Notes will be represented by one or more global notes (the "Global
Notes") registered in the name of a nominee of The Depository Trust Company
("DTC"), as depositary. Beneficial interests in the Notes will be shown on,
and transfers thereof will be effected only through, records maintained by DTC
and its participants. Except in the limited circumstances described herein,
Notes in certificated form will not be issued in exchange for interests in the
Global Notes.
SEE "RISK FACTORS" BEGINNING ON PAGE S-15 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT IN THE NOTES.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THESE SECURITIES ARE UNSECURED OBLIGATIONS OF THE COMPANY AND ARE NOT DEPOSITS
OR SAVINGS ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY OR INSTRUMENTALITY.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................................. 99.35% 2.75% 96.6%
- --------------------------------------------------------------------------------
Total..................................... $99,350,000 $2,750,000 $96,600,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from August 28, 1997.
(2) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $500,000.
---------------
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued by the Company and delivered to and accepted by them,
subject to approval of certain legal matters by counsel for the Underwriters
and subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the Notes offered hereby will be made
through the facilities of The Depository Trust Company in New York, New York
on or about August 28, 1997.
---------------
MERRILL LYNCH & CO.
KEEFE, BRUYETTE & WOODS, INC.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
---------------
The date of this Prospectus Supplement is August 22, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF NOTES TO COVER
SYNDICATE SHORT POSITIONS. SUCH ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference herein and in the
accompanying Prospectus constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and are subject to a number of risks and
uncertainties. Any such forward-looking statements contained or incorporated
by reference herein or in the accompanying Prospectus should not be relied
upon as predictions of future events. Certain such forward-looking statements
can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "are expected to," "will," "will allow," "will
continue," "will likely result," "should," "would be," "seeks,"
"approximately," "intends," "plans," "projects," "pro forma," "estimates" or
"anticipates" or similar expressions or the negative thereof or other
variations thereof or comparable terminology, or by discussions of strategy,
plans or intentions. In addition, all information included or incorporated by
reference herein or in the accompanying Prospectus with respect to projected
or future results of operations, financial condition, financial performance or
other financial or statistical matters constitute such forward-looking
statements. Such forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and that may
be incapable of being realized and in some instances are based on consensus
estimates of analysts not affiliated with the Company. In that regard, the
following factors, among others and in addition to the matters discussed below
under "Risk Factors" and elsewhere in this Prospectus Supplement, the
accompanying Prospectus and the documents incorporated or deemed to be
incorporated by reference herein or therein, could cause actual results and
other matters to differ materially from those in such forward-looking
statements: increases in defaults by borrowers and other loan delinquencies;
increases in the provision for loan losses; failure to consummate the proposed
merger (the "Merger") of AFEH into the Company; failure by the Company to
realize expected cost savings or revenue enhancements from the Merger; deposit
attrition, customer loss or revenue loss following the Merger; costs or
difficulties related to the integration of the businesses of the Company and
AFEH and their respective subsidiaries following the Merger; changes in the
terms of the Merger, including the possibility that the Company may have to
increase the number of shares of its common stock issued to consummate the
Merger; the risk that, as a result of the Merger, the Company and its
subsidiaries (including subsidiaries acquired pursuant to the Merger) will
become or remain subject to a capital maintenance agreement and an assistance
agreement with bank regulatory authorities to which AFEH and its subsidiary,
EurekaBank, a Federal Savings Bank, are currently subject; the Company's
ability to sustain or improve the performance of its subsidiaries following
the Merger; the ability to identify suitable future acquisition candidates;
changes in interest rates which may, among other things, adversely affect
margins; competition in the banking, financial services and related
industries; government regulation and tax matters; the outcome of pending or
threatened legal or regulatory disputes and proceedings; credit and other
risks of lending and investment activities; changes in conditions in the
securities markets including the value of the Company's common stock and the
ability to repurchase such securities; and changes in regional and national
business and economic conditions and inflation. As a result of the foregoing,
no assurance can be given as to future results of operations or financial
condition or as to any other matters covered by any such forward-looking
statements, and the Company wishes to caution prospective investors not to
rely on any such forward-looking statements. The Company does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements, which speak only as of the date made.
As described above, certain of the information included in or incorporated
by reference into this Prospectus Supplement and the accompanying Prospectus
contains projections of the Company's future results of operations, financial
condition, financial performance and other financial and statistical matters.
All such projections constitute forward-looking statements within the meaning
of the preceding paragraph. Such projections were not prepared in compliance
with the published guidelines of the Securities and Exchange Commission or the
guidelines of the American Institute of Certified Public Accountants regarding
projections. Neither the Company nor the Underwriters nor any of their
respective directors, partners, officers, employees, affiliates, controlling
persons, agents or representatives assumes any responsibility for the accuracy
of such projections. The Company's independent auditors have not examined or
compiled such projections and, accordingly, assume no responsibility for them.
In addition, because the projections are based upon numerous assumptions, data
or methods that may be incorrect or imprecise and that may be incapable of
being realized and are subject to significant economic and other uncertainties
and contingencies which are beyond the Company's control and difficult or
impossible to predict, there can be no assurance that such projections will be
realized. It is expected that there will be differences, which could be
material, between actual and projected results, and actual results may be
worse than those reflected in such projections. As a result, no assurance can
be given as to projected or future results of operation, financial condition,
financial performance, financial or statistical matters or as to any other
matters covered by any such projections and the Company wishes to caution
prospective investors not to rely on any such projections. The Company does
not undertake, and specifically disclaims any obligation, to update any such
projections, which speak only as of the date made.
S-2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in or incorporated by
reference in this Prospectus Supplement or the accompanying Prospectus.
Prospective investors should carefully consider the information under the
headings "Forward-Looking Statements" and "Risk Factors." As used in this
Prospectus Supplement and the accompanying Prospectus, all references to the
"Company" mean Bay View Capital Corporation and its consolidated subsidiaries
unless otherwise expressly stated or the context otherwise requires, all
references to "AFEH" mean America First Eureka Holdings, Inc. and its
consolidated subsidiaries unless otherwise expressly stated or the context
otherwise requires, and all references to the "Merger" mean the proposed merger
of AFEH into the Company as described below under "--The Company--Acquisition
of AFEH and EurekaBank." All share and per share data relating to the Company
in this Prospectus Supplement has been restated to give effect to the 2-for-1
stock split in the form of a 100% common stock dividend effected by the Company
on June 2, 1997.
THE COMPANY
GENERAL
Bay View Capital Corporation, a Delaware corporation (the "Company"), is a
diversified financial services company which has as its primary wholly owned
subsidiaries (i) Bay View Bank (the "Bank"), a federally chartered capital
stock savings bank, (ii) California Thrift & Loan ("CTL"), a California
industrial loan company operating a consumer finance company, (iii) Concord
Growth Corporation ("CGC"), a California corporation operating a commercial
finance company, and (iv) Bay View Securitization Corporation ("BVSC"), a
Delaware corporation formed for the purpose of issuing asset-backed securities
through a trust. On a consolidated basis at June 30, 1997, the Company had
assets of approximately $3.1 billion, deposits of approximately $1.6 billion
and stockholders' equity of approximately $196 million. On May 8, 1997, the
Company signed a definitive agreement to acquire AFEH and AFEH's wholly owned
subsidiary, EurekaBank, A Federal Savings Bank ("EurekaBank"). On a
consolidated pro forma basis assuming the Merger and the issuance of the Notes
had both occurred on June 30, 1997, the Company would have had assets of
approximately $5.5 billion, deposits of approximately $3.5 billion and
stockholders' equity of approximately $406 million. The Company believes that,
after giving pro forma effect to the Merger as if it had occurred on June 30,
1997, the Company would have had the largest amount of customer deposits of any
financial institution that accepts deposits exclusively in the San Francisco
Bay Area. See "--Acquisition of AFEH and EurekaBank," "--Selected Unaudited Pro
Forma Financial Information" and "Unaudited Pro Forma Condensed Combined
Financial Information."
HISTORY
In the early 1990's, the Company's previous management implemented a number
of strategic initiatives designed to transform the Company into a community
banking organization. These initiatives did not yield the results desired by
the Company. During this timeframe, the Company primarily focused its asset
origination on loans secured by multi-family and single family properties. As a
result, the Bank's performance was negatively impacted by weak retail asset
origination (which consisted primarily of Eleventh District Cost of Funds Index
("COFI")-indexed, multi-family and single family loans), high general and
administrative expenses and unfavorable interest rate risk exposures. In
addition, the Bank purchased mortgage-backed securities ("MBS"), which
generally had lower yields than mortgage loans, when the Company was unable to
acquire sufficient mortgage loans.
In the second half of 1995, the Company's Board of Directors hired new
management personnel to improve the Company's financial performance. Leading
the new management team was Edward H. Sondker, the Company's and Bank's
President and Chief Executive Officer, and David A. Heaberlin, the Company's
and Bank's Chief Financial Officer and the Chief Operating Officer for the
Bank. Messrs. Sondker and Heaberlin immediately initiated an aggressive
restructuring of the Bank's balance sheet designed to reduce wholesale
S-3
<PAGE>
activities (which was primarily composed of a large MBS portfolio primarily
funded by borrowings from the Federal Home Loan Bank of San Francisco
("FHLBSF")), reduce interest rate risk through the prepayment of selected high
cost borrowings and the execution of interest rate swaps, and expand the retail
deposit franchise by focusing on the growth of "transaction" (i.e. checking,
savings and money market) accounts instead of higher cost certificates of
deposit as a source of financing. The Company also began to evaluate
opportunities to enhance shareholder value through selected acquisitions
designed to redeploy excess capital. In addition, the Company initiated a
program to significantly reduce its operating costs.
MISSION STATEMENT/STRATEGIES
In 1996, under the leadership of Messrs. Sondker and Heaberlin, the Company
adopted a mission statement focused on creating a diversified financial
services company by investing in and creating niche asset generating companies
that originate high yielding assets and maximizing per share market value. The
Company believes that the ongoing effort to implement this mission statement
has contributed to a significant improvement in its results of operations as
evidenced by record core earnings for 1996 and the first half of 1997. (Core
earnings are defined as net income adjusted to eliminate the effect of special
mention items and by adding back the Savings Association Insurance Fund
("SAIF") recapitalization assessment incurred in 1996. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations--
Results of Operations--Special Mention Items.") Further, the Company has
successfully increased its percentage of lower cost transaction accounts in
relation to total customer deposits to approximately 30% as of June 30, 1997 as
compared to approximately 21% as of December 31, 1995, which has contributed to
a lower cost of funds. To help achieve this performance, management initiated
the following strategies:
. De-emphasizing the less profitable elements of the Company's activities by
(i) causing the Bank to cease originating new residential mortgage loans,
(ii) reducing the Bank's wholesale activities and (iii) selling the
business equipment leasing portfolio of CTL, the Company's consumer
finance subsidiary.
. Enhancing the Bank's deposit base through the reduction of higher cost
deposits and expansion of lower cost transaction accounts by emphasizing
relationship banking and capitalizing on cross-sell opportunities with
loan customers.
. Maintaining the capital of the Bank at or above the minimum "well-
capitalized" (as defined for bank regulatory purposes) level and returning
any excess capital to the Company.
. Redeploying such excess capital in businesses intended to generate assets
with higher yields than those typically provided by mortgage loans.
. Increasing the velocity of capital utilization through the origination of
shorter duration assets.
ACQUISITION OF AFEH AND EUREKABANK
Under the terms of the definitive merger agreement (the "Merger Agreement"),
America First Financial Fund 1987-A Limited Partnership (the "Partnership"),
the sole stockholder of AFEH, is to receive shares of common stock of the
Company valued at approximately $210 million (subject to possible adjustment)
plus $90 million in cash. The Company intends to finance the cash portion of
the Merger consideration with available funds and approximately $10 million of
the net proceeds from the sale of the Notes offered hereby. See "Risk Factors--
Acquisition of AFEH and EurekaBank" and "Use of Proceeds." Pursuant to the
Merger Agreement, AFEH will be merged into the Company or a subsidiary of the
Company, and EurekaBank will be merged into the Bank.
This transaction, upon and subject to completion of the Merger, is expected
to significantly enhance the Company's depositor base in Northern California.
Including EurekaBank's branches and after giving effect to seven planned branch
consolidations which are expected to take place following the Merger, the
Bank's branch network will expand from 27 to 56. Virtually all the EurekaBank
and Bank branches are located in the San Francisco Bay Area. The Company
believes that, after giving pro forma effect to the Merger as if it had
S-4
<PAGE>
occurred on June 30, 1997, the Company would have had the largest amount of
customer deposits of any financial institution that accepts deposits
exclusively in the San Francisco Bay Area. In addition, after giving effect to
the merger of EurekaBank into the Bank on a pro forma basis, as of June 30,
1997 the Bank would have had approximately $3.5 billion in deposits, including
approximately $1.1 billion of lower cost transaction accounts. The acquisition
is expected to provide the Company with an enhanced and expanded lower cost
funding base for its higher yielding consumer and commercial finance
portfolios. See also "--Other Acquisitions" and "--Business Platforms."
The acquisition of the EurekaBank deposit franchise is expected to allow the
Bank to continue its efforts to reduce its risk profile. This expanded lower
cost deposit base is expected to provide a better match for the Bank's COFI-
indexed single-family and multi-family mortgage assets. Both EurekaBank and the
Bank have ceased the origination of COFI-indexed assets. As of June 30, 1997,
approximately 41% of the Bank's assets were comprised of COFI-indexed assets
(while EurekaBank, which ceased the origination of COFI-indexed assets in the
early 1990's, had approximately 17% of its assets in COFI-indexed assets at
such date). After giving effect to the merger of EurekaBank into the Bank on a
pro forma basis, as of June 30, 1997 the Bank would have had approximately 31%
of its assets tied to this index. Following the Merger, the Bank's management
intends to accelerate its efforts to further reduce its wholesale borrowings.
Consummation of the Merger is subject to the satisfaction of a number of
conditions set forth in the Merger Agreement, including approval by the
Company's stockholders and the beneficial unit certificate holders of the
Partnership, and the approval of the Office of Thrift Supervision (the "OTS").
In addition, the Merger Agreement may also be terminated by AFEH in the event
that the Average Company Stock Price (as defined) is less than $21.00 per share
unless the Company agrees to increase the number of shares of its common stock
to be issued in the Merger. Accordingly, no assurance can be given that the
Merger will be consummated on currently anticipated terms or at all. The
acquisition of AFEH/EurekaBank will be accounted for as a purchase and is
expected to be completed on January 2, 1998. See "Risk Factors--Acquisition of
AFEH and EurekaBank."
OTHER ACQUISITIONS
The Company has begun to diversify its asset origination capabilities through
selected acquisitions of niche asset generating companies with strong
management and a verifiable historical performance record. Specifically, the
Company acquired CTL, a consumer finance company, in June 1996 for $62 million
in cash, and CGC, a factoring and asset-based lending company, in March 1997
for $19.8 million in cash and potential future cash payments, dependent on the
future financial performance of CGC, of up to $34 million. In addition, the
Bank recently executed a letter of intent to acquire Ultra Funding Ltd.
("Ultra"), an originator of motor vehicle loans, for approximately $750,000 in
cash. The acquisition of Ultra is expected to close in the third quarter of
1997. The consummation of the Ultra acquisition is subject to the satisfaction
of a number of conditions, and there can be no assurance that the Company will
complete the acquisition. CTL and CGC were acquired to provide the Company with
consumer and commercial finance platforms. The Company intends to grow these
business platforms internally and through additional acquisitions (such as the
proposed acquisition of Ultra). This diversification has also enhanced the
Company's ability to deliver a stable revenue stream and has provided limited
geographic diversification for its asset portfolio.
BUSINESS PLATFORMS
The Company operates from three distinct business platforms:
. A Banking/Depository/Wholesale Platform ("Banking Platform"), which is
comprised primarily of mortgage loans, home equity loans, lines of
credit and MBS.
. A Consumer Finance Platform, which is comprised of motor vehicle loans
originated by CTL and motor vehicle loans purchased from Ultra. See "--
Other Acquisitions."
. A Commercial Finance Platform, which is comprised of loans attributable
to asset-based lending and transactional lending (including factoring)
activities of CGC.
S-5
<PAGE>
Net income for the six months ended June 30, 1997 by business platform is
summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------
NET INCOME % OF CONSOLIDATED NET
(DOLLARS IN THOUSANDS) INCOME OF THE COMPANY
---------------------- ---------------------
<S> <C> <C>
Banking Platform(1)................ $8,559 87.6%
Consumer Platform.................. 865 8.9
Commercial Finance Platform(2)..... 342 3.5
------ -----
Consolidated Net Income............ $9,766 100.0%
====== =====
</TABLE>
- --------
(1) The acquisition of EurekaBank, expected to be completed on January 2, 1998,
will increase the size of the Company's Banking Platform.
(2) CGC, which comprises the Commercial Finance Platform, was acquired by the
Company on March 17, 1997 (see "--Commercial Finance Platform"). This
acquisition was recorded under the purchase method of accounting effective
April 1, 1997.
BANKING PLATFORM
The Banking Platform is comprised primarily of the operations of the Bank,
which at June 30, 1997 had 27 branches serving primarily the San Francisco Bay
Area. The Bank's principal business consists of attracting deposits from the
general public and using those deposits, together with borrowings and other
funds, to originate loans secured by real estate. The Bank provides its banking
customers with the following services:
.Savings and checking accounts
.Certificates of deposit
.Mutual funds and annuities (through its wholly-owned subsidiary,
MoneyCare, Inc.)
.Individual retirement accounts
.24-hour automated teller machines (STAR System and CIRRUS System Networks)
The Banking Platform's loan portfolio consists primarily of multi-family,
single family and commercial real estate loans. Substantially all of the Bank's
real estate loan portfolio is secured by properties located in California,
primarily Northern California. As of June 30, 1997, multi-family loans,
totaling $1.05 billion, represented 45.2% of the Company's consolidated loan
portfolio, single family loans, totaling $638 million, represented 27.4% of the
Company's consolidated loan portfolio and commercial real estate loans,
totaling $372 million, represented 16.0% of the Company's consolidated loan
portfolio. The balance of the Banking Platform's loan portfolio consists
primarily of home equity loans, lines of credit and business loans. The Bank
intends to increase its portfolio of home equity loans and lines of credit. In
this regard, the Bank recently purchased a $70 million portfolio of home equity
loans secured by properties located throughout the United States. During 1996,
the Bank discontinued origination of its single family mortgage loan products
and all COFI-indexed loans. See "Risk Factors--Concentration of Loan Portfolio"
and "--Increased Credit Risk of Diversified Lending Activities."
The following is a brief summary of the characteristics of the primary loan
products contained in the Bank's portfolio:
Multi-Family Loans (five or more units). The Bank's multi-family loans are
generally originated as adjustable rate mortgages ("ARMs") with terms of 30
years, although some of these loans have monthly payments calculated on a 30-
year amortization period with a balloon payment due at maturity, typically 15
years. The majority of the ARMs originated by the Bank prior to 1996 were
indexed to the COFI. The Bank currently utilizes the London Interbank Offered
Rate ("LIBOR") and the prime rate as its variable interest rate indices for new
originations. The Bank generally does not lend more than 75% of the appraised
value of multi-family
S-6
<PAGE>
properties on a first mortgage loan. The property's net income available for
loan payments is also a limiting factor on the approved loan amount. Properties
securing multi-family loans are required to generate cash flow sufficient to
cover loan payments and anticipated property expenditures. See "Risk Factors--
Concentration of Loan Portfolio."
Single Family Mortgage Loans (one to four units). The Bank's single family
mortgage loans are generally ARMs with terms of 30 years indexed to COFI and
secured by single family residential properties. These loans are generally
limited to loan-to-value ("LTV") ratios of 80% calculated by dividing the loan
amount by the appraised value of the property. Where loans were made with LTV
ratios in excess of 80%, the Bank's policy was to require private mortgage
insurance on the excess. During 1996, the Bank de-emphasized its focus on
single family mortgage loans and discontinued its single family loan
origination operations. Single family loans are currently offered to the Bank's
customers through third parties.
Commercial Real Estate Lending. Substantially all of the Bank's commercial
real estate loans are ARMs. ARMs secured by commercial real estate generally
have the same terms and conditions as ARMS secured by multi-family properties.
Most of the commercial real estate loans consist of loans secured by improved
properties such as office buildings, warehouses and retail sales facilities. A
majority of these loans are in amounts ranging from $250,000 to $1 million. The
Bank generally does not originate commercial real estate loans that exceed an
LTV of 70%. The property's cash flow available for loan payments is a criteria
on the approved loan amount. Properties securing commercial real estate loans
are required to generate cash flow sufficient to cover anticipated property
expenditures as well as loan payments. Currently, the Bank utilizes LIBOR and
the prime rate as its variable interest rate indices for the majority of its
new commercial real estate loan originations.
CONSUMER FINANCE PLATFORM
The Consumer Finance Platform is comprised of motor vehicle loans originated
by CTL and motor vehicle loans purchased from Ultra. At June 30, 1997, the
consolidated motor vehicle loan portfolio of the Company totaled $139 million,
representing 6.0% of the Company's consolidated loan portfolio at that date.
CTL underwrites and purchases motor vehicle loans and has successfully carved
out a niche in the increasingly competitive motor vehicle finance industry. CTL
is headquartered in Covina, California and operates 19 offices throughout
California and the western United States. The Company is currently in the
process of reorganizing CTL such that it will become a subsidiary of the Bank.
CTL's business strategy is to originate motor vehicle loans at rates which
generally exceed those offered by conventional financing sources (such as
commercial banks) while applying its traditional underwriting criteria on a
case-by-case basis to mitigate any potential loan losses. CTL underwrites
fixed-rate loans secured by new and used motor vehicles. CTL's typical motor
vehicle loan borrower desires a higher relative loan amount and/or longer term
than is offered by many other motor vehicle financing sources. In return for
the flexibility of the product it offers, CTL has been able to charge interest
rates approximately 200 to 300 basis points higher than those typically offered
by traditional sources of motor vehicle financing, such as banks and captive
finance companies. Management's primary focus is on the credit quality of the
customer rather than on the value of the collateral, and CTL will accordingly
finance the full retail sales price of the automobile plus taxes, licensing
fees, insurance, dealer preparation fees and extended warranty. CTL uses a
custom credit scoring system and other technology to process approval decisions
typically within three hours of receipt of information from a dealer.
CTL began offering 84-month motor vehicle loan financing in December 1994.
Prior to this time, CTL's typical motor vehicle loan had a term of 48 to 72
months. Management believes the 84-month financing, combined with strict
underwriting criteria, will allow CTL to further distinguish its motor vehicle
loan product without significantly increasing charge-offs or delinquencies,
although there can be no assurance in this regard. The average duration of this
84-month product has not materially exceeded that of the 48 or 72 month
product.
S-7
<PAGE>
In late 1996 the Company's management began implementing a significant
restructuring of CTL's balance sheet. The following is a summary of the actions
taken:
Sale of Non-Core Business Equipment Leasing Portfolio. In December 1996, CTL
sold its entire equipment leasing portfolio for $60 million in cash. This sale
enabled CTL to return $15 million of capital to the Company for redeployment on
December 31, 1996.
Sale and Securitization of Motor Vehicle Loan Portfolio. During the first
quarter of 1997, $253 million of CTL's motor vehicle loans were sold and
securitized, with the premium from the sale having been recorded as part of
purchase accounting. This transaction enabled the Company to significantly
reduce the goodwill associated with the CTL acquisition and return an
additional $26 million of capital to the Company for redeployment during the
first quarter of 1997. In addition, a gain of $925,000 was realized from the
improvement in the fair value of the motor vehicle loans sold due to a change
in market interest rates.
The Company intends to discontinue the sale and securitization of CTL's motor
vehicle loans. The Company believes that the proposed merger of the Bank with
EurekaBank will enhance the Company's access to lower-cost sources of funding,
which is expected to allow the Company to keep motor vehicle loans in its
portfolio rather than selling them through securitization.
Redemption of High Cost Customer Deposits. CTL's customer deposits are
primarily comprised of thrift certificates, which are similar to certificates
of deposit with the exception that they are callable by CTL at par plus accrued
interest. When customers purchased thrift certificates, CTL reserved the right
to repurchase the certificates at any time upon 30 days notice. Utilizing this
call provision, CTL redeemed the higher cost component (higher than the Bank's
incremental borrowing cost) of these deposits at face value (approximately $267
million) as of December 31, 1996. The remainder of CTL customer deposits,
approximately $64 million (which typically have a lower cost than the Bank's
incremental borrowing cost) were sold to the Bank during the second quarter of
1997.
Ultra Funding Alliance and Proposed Acquisition. In November 1996, the
Company entered into a strategic alliance with Ultra, under which the Company
has a right of first refusal to purchase all of the motor vehicle installment
contracts originated by Ultra which meet the Company's underwriting criteria.
These motor vehicle installment contracts are serviced by CTL. During the six
months ended June 30, 1997, the Bank acquired an average of $7.6 million of
motor vehicle loans per month from Ultra, and management expects Ultra to be a
significant component of its expanding consumer finance strategy. The Bank has
recently executed a letter of intent to acquire Ultra. See "--Other
Acquisitions."
COMMERCIAL FINANCE PLATFORM
The Commercial Finance Platform is comprised of CGC's asset-based lending and
transactional lending activities. At June 30, 1997, the commercial loan
portfolio of the Company totaled $48 million, representing 2.0% of the
Company's total loan portfolio.
CGC's corporate vision is to become a preeminent nationwide provider of asset
based financing to small businesses. Management believes that meaningful
Commercial Finance Platform expansion opportunities exist due to the highly
fragmented nature of the segment of the commercial finance industry which
serves small businesses. Although there can be no assurance, the fragmented
nature of the industry may allow the Company to expand its market share through
internal growth and future acquisitions.
CGC has two primary product lines:
Transaction Lending. CGC's transaction lending includes accounts receivable
factoring and accounts receivable portfolio financing. At June 30, 1997, these
loan products represented approximately one-third of the total Commercial
Finance Platform portfolio and had average yields approximating 38%.
S-8
<PAGE>
Asset-Based Lending. CGC's asset-based lending includes lending secured by
accounts receivable, inventory, machinery and equipment. At June 30, 1997,
these loan products represented approximately two-thirds of total Commercial
Finance Platform portfolio and had average yields approximating 17%.
ADDITIONAL INFORMATION
For additional information, see "--Selected Consolidated Financial Data," "--
Selected Unaudited Pro Forma Financial Data," "Risk Factors," "Use of
Proceeds," "Consolidated Ratios of Earnings to Fixed Charges," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Unaudited Pro Forma Condensed Combined Financial Information" herein and the
financial statements of the Company included elsewhere herein and in the
documents incorporated and deemed to be incorporated by reference in the
accompanying Prospectus. The Company's executive offices are located at
1840 Gateway Drive, San Mateo, California 94404, and its telephone number is
(650) 573-7300.
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth and incorporated by reference herein and in the accompanying Prospectus
and, in particular, should evaluate the specific risk factors and other matters
discussed herein under "Forward-Looking Statements" and "Risk Factors" before
purchasing any of the Notes.
S-9
<PAGE>
THE OFFERING
Securities Offered.......... $100,000,000 aggregate principal amount of the
Company's 9 1/8% Subordinated Notes due 2007 (the
"Notes").
Maturity Date............... August 15, 2007.
Interest Payment Dates...... February 15 and August 15 of each year,
commencing February 15, 1998.
Optional Redemption; No
Sinking Fund................ The Notes will be redeemable, in whole or in
part, at the option of the Company (upon
obtaining the prior approval of the Board of
Governors of the Federal Reserve System (the
"Federal Reserve Board"), if required, in the
event the Company becomes a bank holding company)
at any time on or after August 15, 2002 at the
redemption prices set forth herein, plus accrued
and unpaid interest to but excluding the relevant
date of redemption. In addition, at any time
prior to August 15, 2002, upon the occurrence of
a Change of Control (as defined) or a Regulatory
Event (as defined) the Notes will be redeemable,
in whole or in part, at the option of the
Company, within 180 days of the occurrence of
such Change of Control or Regulatory Event, at a
redemption price equal to the sum of (x) the
principal amount thereof, plus (y) accrued and
unpaid interest, if any, to the applicable date
of redemption, plus (z) the Applicable Premium
(as defined). The Company will not be required to
make any sinking fund payments with respect to
the Notes.
Ranking..................... The Notes will be unsecured obligations of the
Company and will be subordinated in right of
payment to all existing and future Senior
Indebtedness (as defined in the accompanying
Prospectus) of the Company. On a pro forma basis
after giving effect to the issuance of the Notes
and the consummation of the proposed Merger, as
of June 30, 1997 the Company (excluding its
subsidiaries) would have had approximately $50.0
million of Senior Indebtedness outstanding. See
"Unaudited Pro Forma Condensed Combined Financial
Information." The Indenture (as defined herein)
under which the Notes will be issued will not
limit the incurrence by the Company of additional
Senior Indebtedness or other liabilities. See
"Risk Factors--Absence of Limitation on
Indebtedness and Liens; Absence of Event Risk
Protection" herein and "Description of Debt
Securities--Subordination" in the accompanying
Prospectus.
The Notes will be effectively subordinated to all
existing and future liabilities, including
indebtedness, customer deposits, trade payables,
guarantees and lease obligations, of the
Company's subsidiaries, including the Bank. On a
pro forma basis after giving effect to the
issuance of the Notes and the consummation of the
proposed Merger, as of June 30, 1997 the
Company's subsidiaries would have had
approximately $5.0 billion of total liabilities
(including approximately $3.5 billion of customer
deposits but excluding intercompany liabilities).
See "Unaudited Pro Forma Condensed Combined
Financial Information." The Indenture will not
limit the amount of
S-10
<PAGE>
indebtedness and other liabilities which may be
incurred by the Company's subsidiaries. See "Risk
Factors--Absence of Limitation on Indebtedness
and Liens; Absence of Event Risk Protection" and
"Risk Factors--Subordination of Notes; Holding
Company Structure; Restrictions on Ability of
Bank to Pay Dividends" herein and "Description of
Debt Securities--Ranking of Debt Securities;
Holding Company Structure" in the accompanying
Prospectus."
Certain Covenants........... The Indenture will contain covenants that will
limit, subject to certain significant exceptions,
the ability of the Company and its Subsidiaries
(as defined herein) to pay dividends or make
certain other distributions and to enter into
certain transactions with affiliates of the
Company, and the ability of the Company to enter
into certain mergers or consolidations or to sell
or otherwise transfer all or substantially all of
its assets. See "Description of Notes--Certain
Covenants."
Limited Right of
Acceleration Upon Event of
Default..................... Payment of the principal of the Notes may be
accelerated only in the case of certain events
involving the bankruptcy, insolvency or
reorganization of the Company or any Major Bank
Subsidiary (as defined herein) of the Company,
and no right of acceleration will exist in the
case of default in the payment of principal of,
or premium, if any, or interest on the Notes or
the performance of any other covenant of the
Company in the Indenture or the Notes. See "Risk
Factors--Limited Rights of Acceleration Upon
Event of Default" herein and "Description of Debt
Securities--Events of Default; Limited Rights of
Acceleration" in the accompanying Prospectus.
Tier 2 Capital.............. The Notes have been structured to qualify, in the
event the Company were to become a bank holding
company, as Tier 2 Capital under the guidelines
established by the Federal Reserve Board. See
"Description of Debt Securities--Debt Securities
Intended to Qualify as Tier 2 Capital" in the
accompanying Prospectus.
Use of Proceeds............. The Company intends to use the net proceeds from
the sale of the Notes offered hereby for general
corporate purposes, which may include, among
other things, the repayment of outstanding
indebtedness, investments in or extensions of
credit to its subsidiaries, the financing of
acquisitions (including the anticipated use of
approximately $10 million to fund a portion of
the cash consideration to be paid in the Merger)
and repurchases from time to time of the
Company's common stock. See also "Risk Factors--
Acquisition of AFEH and EurekaBank" and "Use of
Proceeds."
Absence of Market for the The Notes will be a new issue of securities for
Notes....................... which there currently is no market. Although the
Underwriters have informed the Company that they
each currently intend to make a market in the
Notes, they are not obligated to do so and any
such market making may be discontinued at any
time without notice. Accordingly, there can be no
assurance as to the liquidity of or development
of any market for the Notes. The Company does not
intend to apply for listing of the Notes on any
securities exchange or for quotation thereof
through the National Association of Securities
Dealers Automated Quotation System.
S-11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and
for each of the years in the five year period ended December 31, 1996 (other
than certain ratios set forth below) have been derived from the consolidated
financial statements of the Company, which have been audited by Deloitte &
Touche LLP, independent auditors. The following selected consolidated financial
data of the Company as of and for the six months ended June 30, 1997 and 1996
(other than certain ratios set forth below) have been derived from the
unaudited consolidated financial statements of the Company which, in the
opinion of management of the Company, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of such
information. Data for the six months ended June 30, 1997 does not purport to be
indicative of the results to be expected for the fiscal year ending December
31, 1997. The following selected financial data should be read in conjunction
with, and is qualified by reference to, the Company's financial statements and
the related notes thereto which are included and incorporated by reference
herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED AS OF OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET
INFORMATION:
Total assets........... $3,096,213 $3,388,847 $3,300,262 $3,004,496 $3,166,529 $2,663,542 $2,586,775
Investment securities.. 22,906 33,767 29,006 47,963 32,841 11,399 23,231
Mortgage-backed
securities............ 536,719 651,389 577,613 731,378 921,680 718,696 457,215
Loans receivable....... 2,294,246 2,521,824 2,474,717 2,062,268 2,054,563 1,776,820 1,943,346
Customer deposits...... 1,578,206 2,201,604 1,763,967 1,819,840 1,707,376 1,694,263 1,488,252
Borrowings............. 1,291,676 946,181 1,245,537 941,465 1,219,958 741,414 884,479
Stockholders' equity... 196,196 206,177 200,062 207,977 217,315 210,976 196,869
SELECTED RESULTS OF
OPERATIONS INFORMATION:
Interest income........ $ 117,495 $ 110,503 $ 241,755 $ 216,463 $ 197,326 $ 191,526 $ 219,834
Interest expense....... (74,672) (75,452) (160,773) (160,547) (130,401) (121,850) (148,295)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 42,823 35,051 80,982 55,916 66,925 69,676 71,539
Provision for losses on
loans................. (1,177) (1,418) (1,898) (4,284) (2,367) (7,031) (24,953)
Gain (loss) on loans
and securities........ 925 (262) (1,453) (2,510) (1,081) 1,091 378
Other noninterest
income................ 6,406 4,594 10,017 8,652 8,619 8,465 6,708
Equity in loss of real
estate joint ventures. -- -- -- -- -- -- (1,275)
Provision for (recovery
of) losses on real
estate................ 526 123 103 (749) (145) (819) (1,872)
SAIF recapitalization
assessment............ -- -- (11,750) -- -- -- --
General and
administrative
expenses.............. (30,831) (23,968) (58,955) (57,016) (47,287) (46,871) (39,087)
Income (expense) from
real estate owned..... 91 1,662 4,806 1,081 95 (1) (162)
Amortization of
intangibles........... (1,630) (1,404) (2,606) (3,944) (2,418) (2,104) (1,585)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income tax expense.... 17,133 14,378 19,246 (2,854) 22,341 22,406 9,691
Income tax (expense)
benefit............... (7,367) (6,169) (8,277) 708 (7,828) (9,765) (3,596)
Cumulative effect of
accounting change..... -- -- -- -- -- -- 4,197
Extraordinary items,
net of tax............ -- -- -- (2,544) -- (132) (265)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ 9,766 $ 8,209 $ 10,969 $ (4,690) $ 14,513 $ 12,509 $ 10,027
========== ========== ========== ========== ========== ========== ==========
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR
THE
SIX MONTHS
ENDED AS OF OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OTHER
INFORMATION(1):
Net interest margin.... 2.79% 2.37% 2.57% 1.86% 2.34% 2.74% 2.84%
Ratio of general and
administrative
expenses to average
assets................ 2.00 1.58 1.84 1.84 1.59 1.78 1.51
Efficiency ratio--The
Company(2)............. 61.47 60.46 64.79 88.30 62.60 59.98 49.95
Efficiency ratio--The
Bank(2)................ 52.20 60.88 63.84 89.51 61.94 59.98 49.95
Return on average
assets(3).............. 0.63 0.54 0.34 (0.15) 0.49 0.47 0.38
Return on average
equity(3).............. 10.00 7.98 5.39 (2.11) 6.79 6.14 5.10
Return on average
tangible assets(4)..... 0.76 0.61 0.43 (0.06) 0.55 0.51 0.42
Return on average
tangible equity(5)..... 12.86 9.41 7.04 (0.81) 8.03 7.08 5.81
Ratio of equity to
total assets(6)........ 6.34 6.08 6.06 6.92 6.86 7.92 7.61
Ratio of tangible
equity to tangible
assets(7)............. 5.37 5.58 5.77 6.74 6.57 7.50 7.34
Nonperforming assets
("NPA")(8)............. $23,948 $31,588 $24,310 $38,811 $50,577 $72,365 $69,301
Ratio of NPA to total
assets................. 0.77% 0.93% 0.74% 1.29% 1.60% 2.72% 2.68%
Troubled debt
restructurings
("TDRs")(8)............ $ 502 $ 650 $ 509 $15,641 $13,948 $14,188 $20,791
Ratio of TDRs to total
assets................. 0.02% 0.02% 0.02% 0.52% 0.44% 0.53% 0.80%
</TABLE>
- --------
(1) The selected other information is based upon data as of the end of and for
the respective periods, except that average assets, average intangible
assets and average equity have been calculated by averaging the relevant
month-end amounts for the respective periods.
(2) The efficiency ratios of the Company and the Bank were computed by dividing
general and administrative expense by the sum of net interest income and
recurring noninterest income. The Company's efficiency ratio was computed
on a consolidated basis and the Bank's efficiency ratio was computed on a
consolidated basis by including the Bank and its subsidiaries. The
efficiency ratios set forth in the above table reflect the effect of
special mention items. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--
Special Mention Items." Excluding the effect of special mention items, the
Company's efficiency ratio was 61.17%, 58.12%, 58.05%, 73.48% and 62.60%
for the six months ended June 30, 1997 and 1996 and years ended
December 31, 1996, 1995 and 1994, respectively, and the Bank's efficiency
ratio was 51.85%, 58.31%, 55.59%, 74.32% and 61.94% for the six months
ended June 30, 1997 and 1996 and years ended December 31, 1996, 1995 and
1994, respectively. The ratios excluding the effect of special mention
items for the years ended December 31, 1993 and 1992 are not available
because the Company did not separately identify special mention items
during these periods.
(3) The return on average assets and average equity was computed by dividing
net income (loss) by average assets and average equity, respectively. See
note (1) above. In computing these percentages, net income for the six
months ended June 30, 1997 and 1996 has been annualized.
(4) Return on average tangible assets was calculated by dividing tangible cash
earnings by average tangible assets. Tangible cash earnings are defined as
net income excluding charges tied to the market value of the Company's
common stock related to management incentive plans and the Employee Stock
Ownership Plan and charges associated with the amortization of intangibles.
Average tangible assets are defined as average assets less average
intangible assets. For purposes of such computation, tangible cash earnings
for the six months ended June 30, 1997 and 1996 have been annualized.
(5) Return on average tangible equity was calculated by dividing tangible cash
earnings by average tangible equity. Tangible cash earnings are defined in
note (4) above and average tangible equity is defined as average equity
less average intangible assets. For purposes of such computation, tangible
cash earnings for the six months ended June 30, 1997 and 1996 have been
annualized.
(6) Ratio of equity to total assets was calculated by dividing equity by total
assets.
(7) Ratio of tangible equity to tangible assets was calculated by dividing
tangible equity by tangible assets. Tangible equity is defined as equity
less intangible assets. Tangible assets are defined as total assets less
intangible assets.
(8) For a definition of nonperforming assets and troubled debt restructurings,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Balance Sheet Analysis--Credit Quality."
S-13
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following selected unaudited pro forma financial information combines
statement of financial condition information of the Company and AFEH as if the
Merger and the issuance of the Notes had both occurred on June 30, 1997. The
Merger will be accounted for under the purchase method of accounting.
Consummation of the Merger is subject to a number of conditions, and no
assurance can be given that the Merger will be consummated on the currently
anticipated terms or at all. Accordingly, the selected unaudited pro forma
financial information does not purport to be indicative of the actual financial
condition that would have been achieved had the transactions reflected herein
in fact occurred on the date indicated, nor does it purport to be indicative of
the financial condition that may be achieved in the future. See "Risk Factors--
Acquisition of AFEH and EurekaBank." The following selected unaudited pro forma
financial information should be read in conjunction with, and is qualified by
reference to, the historical consolidated financial statements and notes
thereto of the Company and AFEH, which are included or incorporated by
reference herein and in the accompanying Prospectus, and the information set
forth herein under "Unaudited Pro Forma Condensed Combined Financial
Information."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------------
THE PRO FORMA
COMPANY AFEH COMBINED
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total Assets............................... $3,096,213 $2,187,695 $5,453,828
========== ========== ==========
Investment Securities Portfolio............ $ 22,906 $ -- $ 22,906
========== ========== ==========
MBS Portfolio.............................. $ 536,719 $ 591,491 $1,128,210
========== ========== ==========
LOAN COMPOSITION:
Banking Platform:
Single family mortgages................... $ 638,144 $1,354,812 $1,992,956
Multi-family mortgages.................... 1,053,315 64,940 1,118,255
Commercial mortgages...................... 371,643 61,218 432,861
---------- ---------- ----------
2,063,102 1,480,970 3,544,072
Home equity loans, lines of credit and
other..................................... 79,861 3,771 83,632
---------- ---------- ----------
2,142,963 1,484,741 3,627,704
Consumer Finance Platform:
Motor vehicle loans....................... 139,330 256 139,586
Commercial Finance Platform:
Commercial loans.......................... 47,613 -- 47,613
---------- ---------- ----------
Gross loans receivable..................... $2,329,906 $1,484,997 $3,814,903
========== ========== ==========
ASSET QUALITY:
Loans 60 days or more delinquent........... $ 23,047 $ 4,569 $ 27,616
As a % of Gross Loans Receivable.......... 0.99% 0.31% 0.72%
Nonperforming Loans(1)..................... $ 14,955 $ 3,790 $ 18,745
As a % of Gross Loans Receivable.......... 0.64% 0.26% 0.49%
Nonperforming Assets(1).................... $ 23,948 $ 5,028 $ 28,976
As a % of Total Assets.................... 0.77% 0.23% 0.54%
Allowance for Loan Losses as % of
Nonperforming Loans....................... 234.63% 190.01% 225.59%
Allowance for Loan Losses as % of Gross
Loans Receivable.......................... 1.51 0.49 1.11
DEPOSIT COMPOSITION:
Transaction accounts....................... $ 472,904 $ 619,022 $1,091,926
Certificates of deposit greater than
$100,000.................................. 187,492 210,539 398,031
Certificates of deposit of $100,000 or
less...................................... 917,810 1,059,404 1,977,214
---------- ---------- ----------
Total.................................... $1,578,206 $1,888,965 $3,467,171
========== ========== ==========
EQUITY INFORMATION:
Total equity............................... $ 196,196 $ 182,101 $ 406,196
Total tangible equity(2)................... 164,657 179,829 274,913
Ratio of equity to total assets............ 6.34% 8.32% 7.45%
Ratio of tangible equity to tangible
assets(2)................................. 5.37 8.23 5.17
</TABLE>
- --------
(1) For a definition of nonperforming loans and nonperforming assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Balance Sheet Analysis--Credit Quality."
(2) See note 7 on page S-13 for definitions of tangible equity and tangible
assets.
S-14
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, among other matters, the
following risk factors in connection with a decision to purchase the Notes
offered hereby and should also consider the matters discussed above under
"Forward-Looking Statements." As discussed above under "Summary--The Company--
Acquisition of AFEH and EurekaBank," it is contemplated that following the
Merger, EurekaBank will be merged into the Bank, with the Bank as the
surviving entity. As a result, to the extent that the risk factors discussed
below relate to the Bank, they generally will also relate to the business of
EurekaBank to be conducted by the Bank after the Merger.
SUBORDINATION OF NOTES; HOLDING COMPANY STRUCTURE; RESTRICTIONS ON ABILITY OF
BANK TO PAY DIVIDENDS
The Notes will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined in the accompanying Prospectus) of the Company. On a
pro forma basis after giving effect to the issuance of the Notes and the
consummation of the proposed Merger as of June 30, 1997 the Company (excluding
its subsidiaries) would have had approximately $50.0 million of Senior
Indebtedness outstanding. See "Unaudited Pro Forma Condensed Combined
Financial Information." The Indenture will not limit the incurrence by the
Company of additional Senior Indebtedness or other liabilities. See "--Absence
of Limitation on Indebtedness and Liens; Absence of Event Risk Protection"
herein and "Description of Debt Securities--Subordination" in the accompanying
Prospectus.
The Notes will be obligations exclusively of the Company. The Company is a
holding company substantially all of whose consolidated assets are held by its
subsidiaries. Accordingly, the cash flow of the Company and the consequent
ability to service its debt, including the Notes, are primarily dependent upon
the results of operations of such subsidiaries and upon the ability of such
subsidiaries to provide funds to the Company. Various statutory and regulatory
restrictions, however, limit directly or indirectly the amount of dividends
the Company's subsidiaries (including the Bank and CTL) can pay, and also
limit the Bank and CTL from making investments in or loans to the Company. In
particular, savings associations, such as the Bank, which before and after a
proposed capital distribution meet their regulatory capital requirements, may
make capital distributions during any calendar year equal to the greater of
(i) 100% of net income for the year-to-date plus 50% of the lowest of the
amounts by which the savings association's tangible, core or risk-based
capital exceeds its regulatory capital requirements for such capital
component, as measured at the beginning of the calendar year, or (ii) 75% of
its net income for the most recent four quarter period. The Bank currently may
pay dividends in accordance with this general authority. However, a savings
association deemed to be in need of more than normal supervision by the OTS
may have its dividend authority restricted by the OTS, and no savings
association may pay a dividend if it does not meet its minimum regulatory
capital requirements prior to, or as a result of, such dividend unless it
receives prior regulatory approval. In general, savings associations proposing
to make any capital distribution need only submit written notice to the OTS 30
days prior to such distribution. The OTS may object to the distribution during
that 30-day period notice based on safety and soundness concerns. At June 30,
1997, the Bank would have been permitted to make approximately $22.5 million
of capital distributions to the Company under the foregoing regulations.
The Company intends to reorganize CTL, currently a direct subsidiary of the
Company, as a direct subsidiary of the Bank. Accordingly, upon such
reorganization, any dividends to be paid by CTL will be paid to the Bank, and
any such dividends will be indirectly subject to the OTS capital distributions
regulations. EurekaBank, as a federal savings bank, is subject to limitations
on dividends and loans to, and investments in, its parent company which are
generally similar to those which are applicable to the Bank. In addition,
EurekaBank is subject to a limitation, pursuant to an agreement with the FDIC,
on its ability to pay dividends. See "--Acquisition of AFEH and EurekaBank."
Because the Company is a holding company, the Notes will be effectively
subordinated to all existing and future liabilities, including indebtedness,
customer deposits, trade payables, guarantees and lease obligations, of the
Company's subsidiaries, including the Bank. Therefore, the Company's rights
and the rights of its creditors,
S-15
<PAGE>
including the holders of the Notes, to participate in the assets of any
subsidiary upon the latter's liquidation or reorganization will be subject to
the prior claims of such subsidiary's creditors and, if applicable, its
depositors, except to the extent that the Company may itself be a creditor
with recognized claims against the subsidiary, in which case the claims of the
Company would still be effectively subordinate to any security interest in, or
mortgages or other liens on, the assets of such subsidiary and would be
subordinate to any indebtedness of such subsidiary senior to that held by the
Company. In that regard, in the event that a receiver or conservator is
appointed for any subsidiary of the Company whose deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC"), such as the Bank, the
Federal Deposit Insurance Act recognizes a priority in favor of the holders of
withdrawable deposits (including the FDIC as subrogee or transferee) over
general creditors. Thus, in the event of a conservatorship or receivership of
such a subsidiary, claims for customer deposits would have a priority over any
claims the Company may itself have as a creditor of such subsidiary. On a pro
forma basis after giving effect to the issuance of the Notes and the
consummation of the proposed Merger, as of June 30, 1997 the Company's
subsidiaries would have had approximately $5.0 billion of total liabilities
(including approximately $3.5 billion of customer deposits but excluding
intercompany liabilities). See "Unaudited Pro Forma Condensed Combined
Financial Information." The Indenture will not limit the amount of
indebtedness or other liabilities that may be incurred by the Company and its
subsidiaries. See "--Absence of Limitation on Indebtedness and Liens; Absence
of Event Risk Protection" "--Limited Rights of Acceleration Upon Event of
Default" herein and "Description of Debt Securities--Events of Default;
Limited Rights of Acceleration" in the accompanying Prospectus.
ABSENCE OF LIMITATION ON INDEBTEDNESS AND LIENS; ABSENCE OF EVENT RISK
PROTECTION
The Indenture will not limit the amount of indebtedness, guarantees and
other liabilities that may be incurred or assumed by the Company and its
subsidiaries and will not prohibit the Company and its subsidiaries from
creating or assuming liens on their property (including capital stock of the
Bank and other subsidiaries of the Company). The Indenture will not require
the maintenance of any financial ratios by, or specified levels of revenues,
income, cash flow or liquidity of, the Company. The Indenture will not contain
provisions which would give holders of the Notes the right to require the
Company to repurchase their Notes or otherwise afford holders of the Notes
protection in the event of (i) a highly leveraged or similar transaction
involving the Company, (ii) a change in control of or in the management of the
Company, or (iii) a reorganization, restructuring, merger or similar
transaction involving the Company that may adversely affect the holders of the
Notes. In addition, subject to the limitations set forth below under
"Description of Notes--Certain Covenants--Limitation on Consolidation, Merger
and Sale of Assets," the Company may, in the future, enter into certain
transactions, such as the sale of all or substantially all of its assets or
the merger or consolidation of the Company with another entity, that could
increase the amount of the Company's indebtedness or otherwise adversely
affect its financial condition or results of operations, and which may have an
adverse effect on the Company's ability to service its indebtedness, including
the Notes.
LIMITED RIGHTS OF ACCELERATION UPON EVENT OF DEFAULT
There is no right of acceleration of payment of principal of the Notes in
the case of default in the payment of principal of or premium, if any, or
interest on the Notes or in the performance of any covenant of the Company
under the Indenture. If such an event of default were to occur, the only
remedy available to holders of the Notes would be for the Trustee, provided
certain conditions were met, to institute a judicial proceeding to protect the
rights of holders of the Notes. Only upon certain events of bankruptcy,
insolvency or reorganization of the Company or any Major Bank Subsidiary of
the Company may the holders of the Notes act to accelerate the payment of the
principal of the Notes. See "Description of Debt Securities--Events of
Default; Limited Rights of Acceleration" in the accompanying Prospectus.
ACQUISITION OF AFEH AND EUREKABANK
As discussed under "Summary--The Company--Acquisition of AFEH and
EurekaBank," on May 8, 1997, the Company entered into the Merger Agreement to
acquire AFEH and EurekaBank. The Merger, if
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consummated, will substantially increase the size of the Company, which in
turn will substantially increase the demands placed upon the Company's
management, including demands resulting from the need to integrate the
accounting systems, management information systems and other operations of
EurekaBank with those of the Bank. Failure to effectively integrate the
operations of the acquired business with those of the Company could have a
material adverse effect on the Company. In addition, a number of other factors
may cause the actual results of the Merger to differ materially from the
currently expected impact of the transaction, including, among other things,
the factors discussed under "Forward-Looking Statements" and "Unaudited Pro
Forma Condensed Combined Financial Information" and the possibility that (i)
expected cost savings or revenue enhancements from the Merger will not be
realized; (ii) deposit attrition, customer loss or revenue loss following the
Merger will be greater than expected; (iii) competitive pressure in the
banking, financial services and related industries will increase
significantly; (iv) changes in the interest rate environment will adversely
affect results of operations; (v) costs or difficulties related to the
integration of the businesses of the Company and AFEH and their respective
subsidiaries will be greater than expected; (vi) the adverse impact of
regulatory or tax law changes will be greater than expected; (vii) there will
be changes in business conditions in a manner unfavorable to the Company;
(viii) there will be changes in the securities markets in a manner unfavorable
to the Company; (ix) there will be changes in the terms of the Merger,
including the possibility that the Company may have to increase the number of
shares of common stock issued to consummate the Merger; (x) the Merger will
fail to qualify as a reorganization under Section 368 of the Internal Revenue
Code of 1986, as amended, and as a result, the Company will not be entitled to
utilize certain tax attributes (including net operating losses) of EurekaBank;
and (xi) there will be adverse changes in general economic conditions, either
nationally or in the state of California. In addition, the Company expects to
record restructuring charges in 1997 associated with the Merger of
approximately $5.0 million ($2.9 million after taxes or $0.22 per share).
These charges represent primarily severance, facilities, relocation,
consulting and debt restructuring costs directly related to the Merger.
Accordingly, there can be no assurance that any of the foregoing factors will
not have a material adverse effect on the Company.
Consummation of the Merger is subject to a number of conditions, including,
among others, approval of the Merger by (i) the shareholders of the Company,
(ii) the beneficial unit certificate holders of the Partnership and (iii) the
OTS. There can be no assurance as to whether or when the necessary approvals
will be obtained or, even if obtained, whether or when the Merger will be
consummated. Likewise, there can be no assurance that the OTS or other
governmental authorities will not impose conditions or restrictions on the
Merger or on the businesses to be conducted by the Company following the
Merger. The Merger Agreement may also be terminated by AFEH in the event that
the Average Company Stock Price (as defined below) is less than $21.00 per
share unless the Company agrees to increase the number of shares of its common
stock to be issued in the Merger. Accordingly, no assurance can be given that
the Merger will be consummated on currently anticipated terms or at all.
Failure to consummate the Merger on currently anticipated terms or at all, or
a significant delay in consummating the Merger, or conditions or restrictions
placed upon the Merger or the businesses to be conducted following the Merger,
could have a material adverse effect on the Company.
In connection with the Company's application to the OTS to approve the
Merger, the Bank sought authorization for the payment of a $63 million cash
dividend to the Company to be used by the Company for payment of a portion of
the Merger consideration. To the extent the OTS does not approve this
dividend, the Company will have to seek alternative sources of funding for
payment of the cash portion of the Merger consideration, including possibly
using more than the approximately $10 million of the net proceeds from the
sale of the Notes offered hereby currently anticipated to be used for such
purpose. See "Use of Proceeds." The Company has no reason to believe the OTS
will not approve the dividend; however, there can no assurance that this
approval will be granted.
The Partnership acquired EurekaBank from the Federal Savings and Loan
Insurance Corporation (the "FSLIC"), predecessor of the FDIC. In connection
with that acquisition, the Partnership, AFEH and EurekaBank entered into an
assistance agreement and a capital maintenance agreement with the FSLIC.
Pursuant to the capital maintenance agreement, EurekaBank is subject to
certain restrictions, including restrictions on the
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amount of dividends it is permitted to pay, until all obligations to the FDIC
(as successor to the FSLIC) pursuant to the assistance agreement are satisfied
and the preferred stock of EurekaBank issued to the FDIC is redeemed. It is
anticipated that all obligations to the FDIC pursuant to the assistance
agreement will be satisfied and the preferred stock of EurekaBank will be
redeemed upon the consummation of the Merger and that the restrictions under
the capital maintenance agreement, including the dividend restrictions, will
thereby be removed. In addition, under the capital maintenance agreement the
Company may be deemed, as a result of the Merger, to succeed to, and therefore
may become subject to, the obligations of AFEH to maintain the capital of
EurekaBank in compliance with applicable regulatory capital requirements. It
is expected that this obligation will be terminated upon consummation of the
Merger. However, termination of the obligations and restrictions under the
foregoing agreements is not a condition to the Merger. Accordingly, no
assurance can be given that the restrictions on dividends, the assistance
agreement, the capital maintenance agreement and other obligations will be
terminated prior to or upon the consummation of the Merger or that such
restrictions and obligations, if continued after the Merger, would not have a
material adverse effect on the Company. See "--Subordination of Notes; Holding
Company Structure; Restrictions on Ability of Bank to Pay Dividends."
As provided in the Merger Agreement, upon consummation of the Merger, the
Partnership, as the sole stockholder of AFEH, will be entitled to receive in
exchange for all of the outstanding AFEH common stock (i) $90 million in cash
and (ii) a number of shares of Company common stock having a market value of
$210 million, subject to adjustment as described below, based upon a formula
that values the Company common stock for this purpose on the basis of its
trading price during a defined pricing period. Specifically, the number of
shares of Company common stock to be issued in the Merger will be determined
by dividing $210 million by the Average Company Stock Price. The "Average
Company Stock Price" is the average (rounded to four decimal points) of the
average closing sale price of one share of Company common stock on the Nasdaq
Stock Market for the 20 consecutive full trading days ending on the fifth
business day immediately prior to the Merger closing date (currently
anticipated to be January 2, 1998), but not in excess of $26.00 or less than
$21.00 unless (i) the Average Company Stock Price is less than $21.00, (ii)
AFEH has given notice of its intention to terminate the Merger Agreement (as
permitted by the Merger Agreement upon such an event) and (iii) the Company
has made an Adjustment Election, as described in the next paragraph.
As discussed above, if the Average Company Stock Price is less than $21.00,
AFEH shall have the right to terminate the Merger Agreement unless the Company
shall make an Adjustment Election. Pursuant to an "Adjustment Election," the
Company shall agree that the Average Company Stock Price shall be calculated
without regard to the $21.00 floor, which would increase, perhaps
substantially, the number of shares issued in the Merger. For example, if the
Average Company Stock Price is $20.00 and an Adjustment Election is made, the
number of shares of Company common stock to be issued in the Merger will be
determined by dividing $210 million by $20.00 (10,500,000 shares).
The lower the Average Company Stock Price, the greater the number of shares
of Company common stock that will be issued in the Merger. The greater the
number of shares of Company common stock that are issued in the Merger, the
more dilutive the transaction will be to the Company's existing stockholders
and to the Company's future earnings per share. In addition, in the event that
the Average Company Stock Price were less than $21.00, there can be no
assurance that the Company would agree to make an Adjustment Election, which
could result in the termination of the Merger Agreement. Moreover, although
the Average Company Stock Price may not exceed $26.00 per share regardless of
the value of the Company's common stock at the time of the Merger, any
increase above $26.00 per share will increase the amount of goodwill generated
by the Merger. For example, for every $1.00 increase in the price per share of
the Company's common stock over $26.00, goodwill created by the Merger will
reduce the Company's net income by approximately $540,000 per year for the
anticipated 15-year goodwill amortization period following the Merger.
INCREASED CREDIT RISK OF DIVERSIFIED LENDING ACTIVITIES
One of the Company's principal strategies is to increase the volume of its
higher yielding assets such as transactional loans (i.e., factoring) and
asset-based loans to small businesses, motor vehicles loans, and other
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business and consumer finance products, as well as continued growth in its
commercial and multi-family real estate loan portfolio. In addition, the Bank
recently acquired a $70 million portfolio of home equity loans. The majority
of these loans have loan to value ratios in excess of 90% and a substantial
portion have loan to value ratios in excess of 100%. Many of these home equity
loans are to "credit impaired" borrowers at rates substantially higher than
single family residential mortgage loans. Although assets of these types
typically provide higher yields than single-family residential mortgage loans,
these assets also involve a greater degree of risk, and in some cases a
substantially greater degree of risk, than single family loans.
Commercial real estate loans and multi-family residential loans are
generally considered to involve a higher degree of risk than single-family
residential lending because such loans typically involve larger loan balances
to a single borrower or group of related borrowers. In addition, the payment
experience on multi-family residential and commercial real estate loans
typically is dependent on the successful operation of the project (as opposed
to a desire by the borrower to continue to occupy the residence) and thus such
loans may be adversely affected to a greater extent by adverse conditions in
the real estate markets or in the economy generally.
Motor vehicle, high loan to value home equity loans and consumer finance
loans entail greater risk than do single family residential mortgage loans
since collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances.
Unlike single family mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, transactional loans and asset based loans are of
higher risk and typically are made on the basis of the borrower's ability to
make repayment from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of such loans may be substantially
dependent on the success of the business itself. Further, the collateral
securing the loans may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the business. Accordingly,
there can be no assurance that the Bank's transactional, asset-based, motor
vehicle, commercial business, and commercial real estate and multi-family
residential loans will not be adversely affected by these and the other risks
related to such loans or that they will not have a material adverse effect on
the Company. See "--Concentration of Loan Portfolio."
CONCENTRATION OF LOAN PORTFOLIO
Most of the Bank's loan portfolio consists of multi-family residential real
estate and commercial real estate loans. At June 30, 1997, loans secured by
multi-family real estate and commercial real estate totaled $1.05 billion and
$638 million, respectively, representing approximately 45.2% and 27.4% of the
Company's total loan portfolio, respectively. Loans secured by multi-family
and commercial real estate properties are generally larger and involve a
greater degree of risk than single family residential mortgage loans. Because
payments on loans secured by multi-family and commercial real estate
properties are often dependent on the successful operation or management of
the properties, repayment of such loans may be adversely affected by adverse
conditions in the real estate market or the economy. If the cash flow from the
project is reduced (for example, if leases are not obtained or renewed), the
borrower's ability to repay the loan may be impaired.
CTL's assets consist mainly of loans secured by motor vehicles. At June 30,
1997, loans secured by motor vehicles totaled $139 million, representing
approximately 6.0% of the Company's loan portfolio. Because motor vehicles
generally depreciate rapidly in value, the borrower's continuing financial
stability, rather than the value of the vehicle, is generally relied upon for
the repayment of a motor vehicle loan. This is especially true for CTL because
its underwriting procedures are primarily based on the ability of the borrower
to repay. As a result, CTL often permits the origination of motor vehicle
loans in excess of the manufacturer's suggested retail price, in the case of
new vehicles, or the value established by used car reference publications, and
also offers vehicle loans with terms of up to 84 months, which is
significantly longer than the term of vehicle loans typically offered by many
other lenders. As a result, it is unlikely that a repossessed vehicle will
provide an adequate source of repayment of the outstanding loan balance and an
increase in delinquencies in CTL's motor vehicle loans,
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whether as a result of CTL's failure to adequately assess the creditworthiness
of borrowers or otherwise, could have a material adverse effect on the
Company.
CTL's typical motor vehicle loan customer desires a higher relative loan
amount and/or longer term than is offered by many automobile financing
sources. As a result, CTL has historically been able to charge interest rates
of approximately 200 to 300 basis points over the rates typically offered by
traditional sources of motor vehicle financing such as banks and captive
finance companies. The higher interest rate and longer maturity of the loans
increase the risk that the borrower will be unable to repay the loan.
CGC's assets consist mainly of loans to small businesses which are generally
considered to be of high credit risk. At June 30, 1997, such loans totaled $48
million, representing approximately 2.0% of the Company's loan portfolio. CGC
generally charges much higher rates of interest than those imposed by
traditional small business lenders (such as commercial banks) to compensate
for the greater risk that its borrowers will be unable to repay their loans.
The higher interest rates charged on these loans increases the risk that the
borrower will be unable to repay the loan.
The current loan portfolio of both the Bank and EurekaBank is concentrated
in certain geographical regions, particularly Northern California. The
performance of such loans may be affected by changes in local economic and
business conditions. The California economy has in the recent past experienced
a significant economic recession. Unfavorable or worsened economic conditions
in Northern California could have a material adverse effect on the Company. In
addition, Northern California has been, and may in the future be, subject to
earthquakes and neither the Bank nor EurekaBank typically requires that
borrowers maintain earthquake insurance on property securing mortgage loans.
Accordingly, earthquake damage to properties securing mortgage loans or to
properties owned by the Company could have a material adverse effect on the
Company.
IMPLEMENTATION OF BUSINESS PLAN
In the early 1990's, the Company's management implemented a number of
strategic initiatives designed to transform the Company into a community
banking organization. These initiatives did not yield the results desired by
the Company.
During the second half of 1995, the Company's Board of Directors hired new
management personnel to improve the Company's financial performance. Leading
the new management team was Edward H. Sondker, the Company's and the Bank's
President and Chief Executive Officer, and David A. Heaberlin, the Company's
and the Bank's Chief Financial Officer and the Bank's Chief Operating Officer,
who began implementing the strategies described under "Summary--The Company--
Mission Statement/Strategies." There can be no assurance that these strategies
will be successfully implemented, or even if successfully implemented, whether
the Company's objectives will be achieved. Failure to successfully implement
the Company's business plan may have a material adverse effect on the Company.
Further, the Company's consideration of its business strategy is ongoing, and
its current business strategy may be altered or abandoned at any time.
LITIGATION
On February 7, 1993, Consolidated Electrical Distributors, Inc. and
Northbrook Properties, Inc. (collectively, the "Plaintiffs") filed an action
in San Diego County, California Superior Court (Case No. N61430) against,
among others, CGC and USL, Inc. ("USL"), a former borrower of CGC, alleging,
among other things, damages to the Plantiffs' property as a result of
environmental contamination that migrated from property leased by USL, as
lessee. Plaintiffs contend that as a lender, CGC is liable for such alleged
contamination because CGC allegedly influenced or had the capacity to
influence hazardous materials management decisions of USL. CGC's motion for
summary judgment was denied and a jury trial is scheduled to commence
September 3, 1997. While the Company believes that CGC will ultimately
prevail, no assurance can be given in this regard or as to the amount of
damages that the Company may be required to pay in the event that CGC is found
liable. Accordingly, there can be no assurance that this matter will not have
a material adverse effect on the Company.
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The Securities and Exchange Commission (the "SEC") is currently conducting
an informal investigation into possible violations of the Investment Company
Act of 1940 (the "1940 Act") and the Securities Act by CGC, an executive
officer of CGC, and certain other parties, regarding the activities of such
parties concerning the Target Income Fund, Inc. ("TIF"), a closed end
investment company registered under the 1940 Act. TIF had participated with
CGC in certain loans with respect to which CGC acted as master servicer.
Specifically, the SEC is reviewing whether the services of such executive
officer as a director of TIF resulted in impermissible transactions between
CGC and TIF for 1940 Act purposes and whether TIF properly disclosed the
nature of its relationship with CGC under the Securities Act. While the
Company does not believe, after consultation with counsel, that the
disposition of the investigation will have a material adverse effect on the
Company, no assurance can be given in this regard.
Under the terms of the definitive agreement pursuant to which the Company
acquired CGC in March 1997, the securityholders of CGC's former parent are
entitled to future payments, dependent on the level of earnings of CGC, of up
to $34 million. The potential future payments, if any, will be reduced by the
amount of all expenses incurred by CGC in connection with the SEC proceedings
and the aforementioned environmental litigation (including, without
limitation, attorney's fees and damages).
The Company is currently involved in a number of other legal proceedings
which have arisen in the ordinary course of business. Management believes
these other proceedings will not, in the aggregate, have a material adverse
effect on the Company. However, the Company is unable to predict whether the
outcome of such proceedings may or may not have a material adverse effect on
the Company's results of operations in any particular future period as the
timing and amount of any resolution of such actions and their relationship to
future results of operations are not known.
VULNERABILITY TO CHANGES IN INTEREST RATES
The Company's results of operations depend to a large extent upon its net
interest income, which is the difference between interest income on interest-
earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
given period, a significant increase in market rates of interest could
materially adversely affect net interest income. Similarly, when interest-
earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a material decrease in net
interest income. Interest rates are highly sensitive to many factors,
including governmental monetary policies and domestic and international
economic and political conditions. Conditions such as inflation, recession,
unemployment, money supply, international disorders and other factors beyond
the control of the Company may affect interest rates. There can be no
assurance that changes in interest rates will not have a material adverse
effect on the Company.
Although the Company pursues an asset-liability management strategy designed
to control its risk from changes in market interest rates, the Company's
liabilities generally have shorter terms and are more interest-sensitive than
its assets. At June 30, 1997, the one-year interest-sensitivity "gap" (the sum
of all interest earning assets to be re-priced within one year minus all
interest-bearing liabilities to be re-priced within one year, as a percentage
of total assets) was 1.37%. As a result of its gap position, the Company's net
interest income and operating results will be adversely affected during
periods of rising market interest rates if the Company is unable to reduce its
gap. There can be no assurance that the Company will be able to adjust its gap
sufficiently to offset any negative effect of changing market interest rates.
COMPETITION
The Company faces significant competition from competitors which have
greater financial and other resources. There can be no assurance that
competition will not have a material adverse effect on the Company.
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The Bank and EurekaBank face strong competition both in originating loans
and in attracting deposits. Competition in originating multi-family and
commercial real estate mortgage loans comes primarily from other savings
institutions, commercial banks and mortgage bankers located in Northern
California. The Bank and EurekaBank compete for mortgage loans principally on
the basis of interest rates, types of products, loan fees charged and the
quality of customer service they provide to borrowers. Competition in
attracting deposits comes primarily from other savings institutions,
commercial banks, brokerage firms, mutual funds, credit unions and other types
of investment companies. The competition faced by the Bank and EurekaBank
could have a material adverse effect on the Company.
The Company's Commercial Finance Platform, CGC, faces strong competition in
originating and retaining loans for both its factoring and asset based lending
business. Competition for factoring clients comes primarily from small local
factors or factors specializing in a specific industry segment, such as
trucking or personnel agencies. The factoring market is experiencing pressure
on yields and margins. Competition for asset-based loans under $1.5 million
comes primarily from small local commercial finance companies, while
competition for asset-based loans greater than $1.5 million comes from large
national commercial finance companies and banks. The asset-based market is
experiencing strong pressure from increased competition reducing yields and
margins. Moreover, new entrants are offering more favorable terms than in
prior years.
CTL has experienced substantially increased competition, particularly for
its motor vehicle loan programs. This competition comes primarily from large
well-capitalized lending institutions and finance companies, as well as
financing provided directly by automobile manufacturers.
As a result of this increasing competition, the Company may be required to
relax its underwriting standards in order to maintain or to increase its loan
origination volume. Any such relaxation in underwriting standards could result
in an increased risk of default by borrowers, which could have a material
adverse effect on the Company.
REGULATION
Both the Company, as a savings and loan holding company, and the Bank, as a
federal stock savings bank, are subject to significant regulation. Statutes
and regulations now affecting the Company and the Bank, respectively, may be
changed at any time, and the interpretation of these statutes and regulations
by examining authorities is also subject to change. There can be no assurance
that future changes in the regulations or in their interpretation will not
adversely affect the Company. As a savings and loan holding company, the
Company is subject to examination from time to time by the OTS. As a federal
savings bank, the Bank is subject to examination from time to time by the OTS,
its primary regulator, and by the FDIC, as administrator of the Savings
Association Insurance Fund (the "SAIF") of which the Bank is a member. There
can be no assurance that the OTS or the FDIC will not, as a result of such
examinations or otherwise, impose various requirements or regulatory sanctions
upon the Bank or the Company which could, among other things, limit the
ability of the Bank to provide funds to the Company and therefore materially
adversely affect the Company's ability to pay the Notes and its other
obligations.
If the Company were to become a bank holding company (which would occur if
the Bank were to convert from a federal savings bank to a commercial bank or
if the Company were to acquire control of a commercial bank, and could also
occur under the circumstances described below under "--Proposed Federal
Legislation"), it would be regulated by the Federal Reserve Board and as a
result, would become subject to capital requirements and limitations on the
types of business activities in which it may engage that are not currently
applicable to it as a savings and loan holding company. If this were to occur,
the Company believes that it would be permitted to continue its activities and
operations substantially as currently conducted and that the Notes may qualify
as Tier 2 Capital under the guidelines established by the Federal Reserve
Board, although there can be no assurance in this regard. See "Description of
Debt Securities--Debt Securities Intended to Qualify as Tier 2 Capital" in the
accompanying Prospectus. Likewise, the capital requirements which would be
imposed on the Company if it
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were to become a bank holding company could adversely affect its ability to
pay the Notes and its other obligations in the event that the Company's
failure to meet such capital requirements results in the imposition of
regulatory restrictions. Specifically, these capital requirements would
require the Company to maintain, on a consolidated basis, (i) a minimum level
of Tier 1 Capital to total assets of 4% and (ii) a minimum ratio of qualifying
total capital to risk-weighted assets of 8%, of which at least 4% must be in
the form of Tier 1 Capital.
EurekaBank is a federal savings bank and is subject to the same governmental
regulation as the Bank.
PROPOSED FEDERAL LEGISLATION
The United States Congress is considering legislation that would require all
federal thrift institutions, such as the Bank, to either convert to a national
bank or a state chartered financial institution by a specified date to be
determined. In addition, under the proposed legislation, the Company would not
be regulated as a thrift holding company, but rather as a bank holding company
or a financial services holding company, a new type of holding company created
by the proposed legislation. Certain aspects of the legislation remain to be
resolved and therefore no assurance can be given as to whether or in what form
the legislation will be enacted or its effect on the Company. However, there
can be no assurance that such legislation or any similar legislation, if
enacted, would not have a material adverse effect on the Company.
RELIANCE ON KEY EXECUTIVE OFFICERS
The successful operation of the Company depends heavily upon the active
involvement of Messrs. Sondker and Heaberlin and the failure of either of them
to continue in the employment of the Company could have a material adverse
effect on the Company. The Company does not maintain key person insurance for
either Mr. Sondker or Mr. Heaberlin. The primary mechanisms used by the
Company to induce Messrs. Sondker and Heaberlin to remain in the employ of the
Company are the Company's Amended and Restated 1995 Stock Option and Incentive
Plan, Senior Management Incentive Plan, Long-Term Incentive Plan and a split
dollar life insurance program.
On January 1, 1997, the Company entered into new employment agreements with
each of Messrs. Sondker and Heaberlin. Each agreement provides for an initial
term of one year, with automatic renewal for an additional year unless the
Company or the executive gives prior written notice that the agreement is not
to be renewed. The agreements may be terminated prior to their expiration
dates by such executives or the Company. Accordingly, the length of Messrs.
Sondker's and Heaberlin's tenure with the Company cannot be determined at this
time.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Notes will be a new issue of securities for which there currently is no
market. There can be no assurance as to the liquidity of any market for the
Notes that may develop, the ability of holders of the Notes to sell the Notes,
or the prices at which holders of the Notes may be able to sell their Notes.
If such market were to exist, the Notes could trade at prices higher or lower
than their initial public offering price, depending on a variety of factors,
including prevailing interest rates, the Company's operating results and the
market for similar securities. The Underwriters have advised the Company that
they currently intend to make a market in the Notes. However, the Underwriters
are not obligated to do so, and any market making activity with respect to the
Notes may be suspended or discontinued at any time without notice. The Company
does not intend to apply for listing of the Notes on any securities exchange
or for quotation thereof through the National Association of Securities
Dealers Automated Quotation System.
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USE OF PROCEEDS
The net proceeds from the sale of the Notes offered hereby are estimated to
be approximately $96.1 million (after deducting underwriting discounts and
estimated expenses). The Company intends to use the net proceeds from the sale
of the Notes offered hereby for general corporate purposes, which may include,
among other things, the repayment of outstanding indebtedness, investments in
or extensions of credit to its subsidiaries, the financing of acquisitions and
repurchases from time to time of the Company's common stock.
As discussed above under "Summary--The Company--Acquisition of AFEH and
EurekaBank," the purchase price payable by the Company to acquire AFEH
consists of shares of its common stock valued at approximately $210 million
(subject to possible adjustment) plus $90 million in cash. The Company
currently intends to fund the cash portion of the purchase price with (i)
approximately $10 million from the net proceeds of the sale of the Notes
offered hereby, (ii) approximately $63 million anticipated to be provided to
the Company by the Bank through a dividend concurrent with the acquisition of
EurekaBank and (iii) other available funds. The Bank has sought OTS
authorization for the payment of the cash dividend to the Company. To the
extent that the OTS does not approve this dividend, the Company will have to
seek alternative sources of funding for payment of the cash portion of the
Merger consideration, including possibly using a larger portion of the net
proceeds from the sale of the Notes for that purpose. See "Risk Factors--
Acquisition of AFEH and EurekaBank."
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to fixed
charges for the Company for the periods indicated. Earnings represent income
from continuing operations before income taxes, fixed charges and
extraordinary items. Fixed charges include interest expense and the portion of
rental expense which approximates the interest component of lease payments.
Such information is qualified in its entirety by the more detailed financial
information set forth in the financial statements and notes thereto included
and incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. See "Incorporation of Certain Documents by Reference"
in the accompanying Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------- --------------------------------
1997 1996 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges:
Including interest on customer
deposits....................... 1.23x 1.19x 1.12x 0.98x(1) 1.17x 1.18x 1.07x
Excluding interest on customer
deposits....................... 1.46x 1.51x 1.31x 0.96x(1) 1.35x 1.41x 1.14x
</TABLE>
- --------
(1) For the year ended December 31, 1995, earnings were insufficient to cover
fixed charges. The amount of the deficiency was $2,853,710.
S-24
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization and certain
ratios of the Company and the Bank's regulatory capital ratios (i) at June 30,
1997, (ii) as adjusted to give effect to the sale of the Notes offered hereby
and (iii) as further adjusted for the Merger on a pro forma basis as if it had
occurred as of June 30, 1997.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------------------
AS FURTHER
AS ADJUSTED FOR ADJUSTED
ACTUAL NOTES OFFERING FOR THE MERGER
-------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term borrowings:
FHLB advances....................... $209,810 $209,810 $259,310
Senior Debentures due 1999.......... 50,000 50,000 50,000
Subordinated Notes due 2007(1)...... -- 99,350 99,350
-------- -------- --------
Total long-term borrowings............ $259,810 $359,160 $408,660
======== ======== ========
Stockholders' equity:
Common stock ($.01 par value)....... $ 151 $ 151 $ 231
Additional paid-in capital.......... 101,318 101,318 311,238
Retained earnings (substantially
restricted)........................ 139,011 139,011 139,011
Treasury stock, at cost............. (38,847) (38,847) (38,847)
Unrealized loss on securities
available for sale, net of tax..... (1,220) (1,220) (1,220)
Debt of Employee Stock Ownership
Plan............................... (4,217) (4,217) (4,217)
-------- -------- --------
Total stockholders' equity............ 196,196 196,196 406,196
-------- -------- --------
Total capitalization.................. $456,006 $555,356 $814,856
======== ======== ========
Ratio of equity to assets............. 6.34% 6.14% 7.45%
Ratio of tangible equity to tangible
assets............................... 5.37% 5.20% 5.17%
Bank regulatory capital ratios:
Leverage............................ 5.54% 5.54% (2)
Tier 1 risk-based................... 9.01% 9.01% (2)
Tier 2 risk-based................... 10.26% 10.26% (2)
</TABLE>
- --------
(1) Balance is net of $650,000 of unamortized debt discount.
(2) The Bank intends to maintain the capital of the Bank at or above "well
capitalized" (as defined for bank regulatory purposes) upon consummation
of the Merger and after payment of the anticipated concurrent $63 million
dividend to fund a portion of the cash portion of the Merger
consideration. See "Use of Proceeds."
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The results of operations and the balance sheet analysis include the effects
of the acquisition of CTL effective June 1, 1996 and the acquisition of CGC
effective April 1, 1997. The analysis reflects the Company's restructuring of
its reporting for its operations based on business platforms. Reference is
also made to the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in the Company's 1996 Form 10-K, as
amended, incorporated herein by reference.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1997 was $9.8 million, as
compared with $8.2 million for the same period in 1996. The improvement in
earnings was primarily due to higher net interest income arising from the
impact of higher yielding assets related to the Consumer Finance and
Commercial Finance Platforms combined with lower cost of retail deposits.
Net income for the year ended December 31, 1996 was $11.0 million as
compared to a net loss of $4.7 million for the year ended December 31, 1995
and net income of $14.5 million for the year ended December 31, 1994.
Operating results for 1996 included a one-time charge of $6.7 million ($11.7
million pre-tax) relating to a special assessment to recapitalize the SAIF.
Operating results for 1995 included certain nonrecurring charges of $11.3
million after tax ($18.0 million pre-tax). Excluding the impact of the SAIF
recapitalization assessment in 1996 and the nonrecurring charges in 1995, the
increase in earnings for 1996 over 1995 was primarily due to an improvement in
net interest margin and lower general and administrative expenses.
The decrease in net income in 1995 compared with 1994 was primarily
attributable to lower net interest income, nonrecurring charges relating to
losses on the sale of MBS available-for-sale, severance payments relating to
workforce reductions, fixed assets written-off, write-down of corporate office
complex, write-down of intangibles and prepayment penalties on FHLBSF
advances.
The Company expects to record restructuring charges in 1997 associated with
the Merger of approximately $5.0 million ($2.9 million after taxes or $0.22
per share). These charges represent primarily severance, facilities,
relocation, consulting and debt restructuring costs directly related to the
Merger.
SPECIAL MENTION ITEMS
The net income for the periods indicated below contained certain items which
deserve special mention. All special mention items are set forth below on a
pre-tax basis. The following special mention items increased net income by a
total of $150,000 for the first six months of 1997:
. $650,000 benefit associated with the decision to cease the systems conversion
with BISYS Group, Inc. ("BISYS") and remain with Fiserv, Inc. (the current
data processor for the Bank and EurekaBank).
. $415,000 recovery related to a real estate joint venture previously written-
off.
. $800,000 expense accrual for Long-Term Incentive Plan awards due to an
increase in the Company's stock price.
The following special mention items for the year ended December 31, 1996
essentially offset each other:
. $4.8 million gain from the sale of and income received from certain real
estate owned properties.
. $2.4 million contribution to pretax net income resulting from purchase
accounting valuations associated with the CTL assets being held-for-sale.
. $2.8 million accrual for termination of data processing contracts and write-
down for computer hardware relating to the Company's long-term information
services technology agreement with BISYS.
. $1.3 million loss accrual for lease obligations in excess of related
sublease rentals resulting from unfavorable lease agreement terms.
S-26
<PAGE>
. $1.2 million expense accrual for Long-Term Incentive Plan awards.
. $800,000 loss on sale of MBS and short sale of Treasury securities.
. $500,000 additional write-down due to the sale of the corporate office complex
which closed in 1996. The Company had provided a write-down of $7.1 million on
this property in 1995.
. $350,000 write-off of core deposit intangibles and fixed assets due to a
branch closure.
. $300,000 accrual for downsizing loan operations, relocation of administrative
functions and other items.
The following special mention items negatively impacted operations by a
total of $11.3 million after-tax for the year ended December 31, 1995:
. $4.4 million prepayment penalties on FHLBSF advances.
. $7.6 million write-down related to the corporate office complex, fixed
assets and refurbishment expenses.
. $2.0 million related to a provision for loan losses on one loan and write-
down related to foreclosed properties.
. $1.2 million related to charges for severance payments arising from
workforce reductions and pension plans.
. $3.8 million related to impairment of intangible assets and capitalized
excess servicing and other special mention items.
The special mention items for the year ended December 31, 1994 were not
significant.
TANGIBLE CASH EARNINGS
Tangible cash earnings are based on earnings for each period and exclude
charges tied to the market value of the Company's common stock related to
management incentive plans and the Employee Stock Ownership Plan and charges
associated with the amortization of intangibles. The following table shows the
components of tangible cash earnings for each of the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JUNE 30, JUNE 30,
1997 1996
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net income....................................... $ 9,766 $ 8,209
Adjustments:
Amortization of intangibles.................... 1,267 907
ESOP........................................... 120 112
Management incentive plans..................... 465 --
----------- ----------
Tangible cash earnings........................... $11,618 $9,228
=========== ==========
</TABLE>
S-27
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)..................... $10,969 $(4,690) $14,513
Adjustments:
Amortization of intangibles......... 1,746 2,758 1,560
ESOP................................ 222 203 187
Management incentive plans.......... 690 -- --
------- ------- -------
Tangible cash earnings (loss)......... $13,627 $(1,729) $16,260
======= ======= =======
</TABLE>
NET INTEREST INCOME
Net interest income for the first six months of 1997 was $42.8 million, an
increase of $7.7 million as compared to net interest income for the same
period in 1996 of $35.1 million. The net interest margin for the first six
months of 1997 was 2.79%, up 42 basis points as compared to 2.37% for the same
period in the prior year. The improvement in the net interest margin was
primarily due to the impact of the higher yielding assets from the Consumer
Finance Platform (which was acquired in June 1996) and the Commercial Finance
Platform combined with lower cost of retail deposits.
Net interest income was $81.0 million for 1996 as compared to $55.9 million
and $66.9 million for 1995 and 1994, respectively. The increase in net
interest income for 1996 as compared to 1995 was primarily due to an
improvement in net interest margin, which increased to 2.57% in 1996 from
1.86% in 1995, and also the impact of the acquisition of CTL in 1996. The
decrease in net interest income in 1995 from 1994 was primarily attributable
to a lower net interest margin, which declined to 1.86% in 1995 from 2.34% in
1994.
The following table sets forth the net interest income and net interest
margin for each of the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------
JUNE 30, 1997 JUNE 30, 1996
----------------- -----------------
NET NET NET NET
INTEREST INTEREST INTEREST INTEREST
INCOME MARGIN INCOME MARGIN
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform......................... $36,166 2.50% $33,490 2.30%
Consumer Finance Platform................ 4,105 5.34 1,561 6.75
Commercial Finance Platform.............. 2,552 20.41 -- --
------- ----- ------- ----
Total.................................... $42,823 2.79% $35,051 2.37%
======= ===== ======= ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
NET NET NET NET NET NET
INTEREST INTEREST INTEREST INTEREST INTEREST INTEREST
INCOME MARGIN INCOME MARGIN INCOME MARGIN
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform........................... $70,331 2.36% $55,916 1.86% $66,925 2.34%
Consumer Finance
Platform................................... 10,651 5.80 -- -- -- --
------- ---- ------- ---- ------- ----
Total...................................... $80,982 2.57% $55,916 1.86% $66,925 2.34%
======= ==== ======= ==== ======= ====
</TABLE>
S-28
<PAGE>
BANKING PLATFORM
The net interest margin for the first six months of 1997 was 2.50%, an
increase of 20 basis points as compared to net interest margin of 2.30% for
the same period in 1996. The improvement in net interest margin was primarily
due to a lower cost of funds related to retail deposits.
The net interest margin for 1996 was 2.36%, an increase of 50 basis points
as compared to net interest margin of 1.86% for 1995. The improvement in net
interest margin was primarily due to higher yields on mortgage loans combined
with a lower cost of funds related to retail deposits. The net interest margin
for 1994 was 2.34% as compared to the net interest margin of 1.86% in 1995.
The decrease in the net interest margin between 1995 and 1994 was due to the
lag factor arising from interest rate movements related to COFI.
A significant portion of the ARM loan portfolio is indexed to COFI which
typically lags market interest rate movements. Generally, the net interest
margin is favorably affected during periods of declining interest rates as the
cost of the interest-bearing liabilities may adjust to market rates more
quickly than the yield on its interest-earning assets. Conversely, during
periods of rising interest rates, net interest margin is unfavorably affected
by this lag factor. The Federal Reserve Board began increasing the discount
rate and/or federal funds rates in 1994 and as a result, the general interest
rate environment was higher in 1995 and 1996. The net interest margin in 1995
was adversely affected by the movements in the COFI as a result of the rising
interest rates. Management actions in late 1995 and early 1996 which
significantly reduced exposure to interest rates and favorably affected the
net interest margin during 1996 (see "--Asset and Liability Management").
CONSUMER FINANCE PLATFORM
The Consumer Finance Platform was acquired in June 1996. The net interest
margin for the first six months of 1997 was 5.34%. The net interest margin for
the first six months of 1996 was 6.75%, which represented the net interest
income from the motor vehicle loan portfolio for one month only (i.e. since
the acquisition date of CTL in June 1996). The net interest margin for 1996
was 5.80%. The decrease in the net interest margin as compared with the prior
year period was primarily due to the effects of the securitization of the $253
million motor vehicle loan portfolio in January 1997.
COMMERCIAL FINANCE PLATFORM
The net interest margin for the first six months of 1997 was 20.41%. This
platform was created as a result of the acquisition of CGC in March 1997 and
was accounted for as a purchase effective April 1, 1997.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and reflects the average annual
yields on interest-earning assets and average rates paid on interest-bearing
liabilities for the periods indicated. Such yields and rates are derived by
dividing interest income or expense by the average balances of interest-
earning assets or interest-bearing liabilities, respectively, for the periods
shown (which amounts are also reflected in such table). Average balances of
interest-earning assets and interest-bearing liabilities were derived
primarily from daily average balances. The yields for the periods indicated
include the amortization of deferred loan origination fees, net of costs,
which were considered adjustments to yield.
S-29
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES PAID
-------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------------------------ ------------------------------
AVERAGE ACTUAL AVERAGE AVERAGE ACTUAL AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
- ------
Interest-earning assets:
Loans receivable...... $2,338,768 $ 95,070 8.13% $2,143,647 $ 85,328 7.96%
Mortgage-backed secu-
rities (1)............ 556,726 18,079 6.49 685,473 21,963 6.41
Investments........... 142,139 4,346 6.14 111,982 3,212 5.76
---------- -------- ---- ---------- -------- ----
Total interest-earning
assets.................. 3,037,633 117,495 7.74 2,941,102 110,503 7.52
-------- ---- -------- ----
Other assets............ 49,466 91,946
---------- ----------
Total assets............ $3,087,099 $3,033,048
========== ==========
Liabilities and
Stockholders' Equity
- --------------------
Interest-bearing
liabilities:
Customer deposits..... $1,662,160 38,139 4.63 $1,863,687 47,711 5.15
Borrowings (2)........ 1,181,770 36,533 6.22 906,356 27,741 6.09
---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities............. 2,843,930 74,672 5.29 2,770,043 75,452 5.46
-------- ---- -------- ----
Other liabilities....... 47,778 57,482
---------- ----------
Total liabilities....... 2,891,708 2,827,525
Stockholders' equity.... 195,391 205,523
---------- ----------
Total liabilities and
stockholders' equity.... $3,087,099 $3,033,048
========== ==========
Net interest income/net
interest spread......... $ 42,823 2.45% $ 35,051 2.06%
======== ==== ======== ====
Net interest earning as-
sets.................... $ 193,703 $ 171,059
========== ==========
Net interest margin (3). 2.79% 2.37%
==== ====
</TABLE>
- ----
(1) Average balances and yields for MBS available-for-sale are based on
historical amortized cost.
(2) Interest expense for borrowings includes interest expense on interest rate
swaps of $1.6 million and $975,000 for the six months ended June 30, 1997
and 1996, respectively.
(3) Annualized net interest income divided by average interest-earning assets.
S-30
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES PAID
--------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
AVERAGE ACTUAL AVERAGE AVERAGE ACTUAL AVERAGE AVERAGE ACTUAL AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- -------- ---------- ---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
- ------
Interest-earning
assets:
Loans receivable... $2,370,501 $192,443 8.12% $2,083,700 $155,853 7.48% $1,840,742 $131,783 7.16%
Mortgage-backed se-
curities (1)....... 654,671 42,081 6.43 810,982 54,236 6.69 933,334 61,111 6.55
Investments........ 126,056 7,231 5.74 110,720 6,374 5.76 81,243 4,432 5.46
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-
earning assets....... 3,151,228 241,755 7.67 3,005,402 216,463 7.20 2,855,319 197,326 6.91
-------- ---- -------- ---- -------- ----
Other assets......... 48,323 94,340 125,446
---------- ---------- ----------
Total assets......... $3,199,551 $3,099,742 $2,980,765
========== ========== ==========
Liabilities and
Stockholders' Equity
- --------------------
Interest-bearing
liabilities:
Customer deposits.. $1,971,128 100,225 5.08 1,805,517 93,398 5.17 1,655,535 66,424 4.01
Borrowings (2)..... 979,069 60,548 6.18 1,049,107 67,149 6.40 1,088,495 63,977 5.88
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-
bearing liabilities.. 2,950,197 160,773 5.45 2,854,624 160,547 5.62 2,744,030 130,401 4.75
-------- ---- -------- ---- -------- ----
Other liabilities.... 45,677 22,886 23,132
---------- ---------- ----------
Total liabilities.... 2,995,874 2,877,510 2,767,162
Stockholders' equity. 203,677 222,232 213,603
---------- ---------- ----------
Total liabilities and
stockholders' equity. $3,199,551 $3,099,742 $2,980,765
========== ========== ==========
Net interest
income/net interest
spread............... $ 80,982 2.22% $ 55,916 1.58% $ 66,925 2.16%
======== ==== ======== ==== ======== ====
Net interest earning
assets............... $ 201,031 $ 150,778 $ 111,289
========== ========== ==========
Net interest margin
(3).................. 2.57% 1.86% 2.34%
==== ==== ====
</TABLE>
- ----
(1) Average balances and yields for MBS available-for-sale are based on
historical amortized cost.
(2) Interest expense for borrowings includes interest expense on interest rate
swaps of $2.6 million, $40,000 and $80,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
(3) Net interest income divided by average interest-earning assets.
S-31
<PAGE>
INTEREST INCOME
Interest Income on Loans Receivable
Interest income on the Company's loans was $95.1 million and $85.3 million
for the first six months of 1997 and 1996, respectively. Interest income on
loans was $192.4 million for 1996 as compared to $155.9 million and $131.8
million for the years 1995 and 1994, respectively. The following table is a
summary of interest income on loans:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 30, 1997 JUNE 30, 1996
---------------- ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNTS YIELD AMOUNTS YIELD
------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform........................ $84,420 7.79% $82,574 7.88%
Consumer Finance Platform............... 7,476 10.29 2,754 11.84
Commercial Finance Platform............. 3,174 25.39 -- --
------- ----- ------- -----
Total................................... $95,070 8.13% $85,328 7.96%
======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNTS YIELD AMOUNTS YIELD AMOUNTS YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform......... $172,370 7.88% $155,853 7.48% $131,783 7.16%
Consumer Finance
Platform................. 20,073 10.91 -- -- -- --
-------- ----- -------- ---- -------- ----
Total.................... $192,443 8.12% $155,853 7.48% $131,783 7.16%
======== ===== ======== ==== ======== ====
</TABLE>
BANKING PLATFORM
The decrease in loan yields (primarily mortgage loans) of nine basis points
in the first six months of 1997 as compared to the prior year period was
primarily due to the repricing of a significant portion of loans indexed to
the COFI and partially offset, to a lesser extent, by the repricing of loans
indexed to the one-year Treasury note. The average monthly COFI decreased by
25 basis points which impacted the adjustable rate mortgages indexed to the
COFI.
Loan yields increased by 40 basis points between 1996 and 1995. The average
monthly COFI for the years ended December 31, 1996 and 1995, which impacted
ARMs, increased by 16 basis points. The average loan balances for 1996 and
1995 were essentially the same at $2.07 billion and $2.08 billion,
respectively.
Loan yields increased by 32 basis points between 1995 and 1994. The average
monthly COFI for the years ended December 31, 1995 and 1994, which impacted
ARMs, increased by 101 basis points. This increase was partially offset,
however, by slower repricing of loans which adjust other than on a monthly
basis and a higher amortization of deferred fees under SFAS 91 due to higher
level of loan prepayments.
CONSUMER FINANCE PLATFORM
The decrease in motor vehicle loan yields for the first six months of 1997
as compared to the prior year period was primarily due to the sale of a $253
million motor vehicle loan portfolio in January 1997 to BVSC
S-32
<PAGE>
and the impact of motor vehicle loans purchased from Ultra which were at lower
average yields than the motor vehicle loans originated by CTL. The loan yields
for the prior year period represented the interest income from the motor
vehicle loan portfolio for seven months only (i.e. since the acquisition date
of CTL in June 1996).
COMMERCIAL FINANCE PLATFORM
The commercial loan yields for the first six months of 1997 were 25.39%.
This platform was created as a result of the acquisition of CGC in March 1997
and was accounted for as a purchase effective April 1, 1997.
Interest Income on Mortgage-backed Securities
Interest income on the Company's MBS was $18.1 million and $22.0 million for
the first six months of 1997 and 1996, respectively. The decrease in interest
income on MBS was primarily attributable to lower average balances due to
sales and principal amortization. There were no MBS purchased in 1996 or 1997.
Management's strategic focus has been on restructuring the balance sheet and
de-emphasizing the Company's wholesale investment and borrowing activities.
Interest income on the Company's MBS was $42.1 million for the year ended
December 31, 1996 as compared to $54.2 million and $61.1 million for the years
ended December 31, 1995 and 1994, respectively. The decrease in interest
income on MBS was primarily attributable to lower average balances resulting
from principal amortization and sale of MBS available-for-sale in 1996 and
1995. The sale of MBS was due to management's strategic focus on restructuring
the wholesale balance sheet and reduction of interest rate risk exposure.
There were no MBS purchased in 1996 and 1995.
Interest and Dividends on Investments
Interest and dividend income from the Company's investment portfolio was
$4.3 million and $3.2 million for the first six months of 1997 and 1996,
respectively. Interest and dividend income from the Company's investment
portfolio was $7.2 million for the year ended December 31, 1996 as compared to
$6.4 million and $4.4 million for the years 1995 and 1994, respectively. The
increase in interest and dividend income from investments as compared to the
prior year periods was primarily due to the impact of higher average balances
and higher yields on investments.
INTEREST EXPENSE
Interest Expense on Customer Deposits
Interest expense on the Company's customer deposits was $38.1 million and
$47.7 million for the first six months of 1997 and 1996, respectively. The
decrease in interest expense as compared to the prior year period was due to
lower average customer deposit balances and lower cost of retail deposits. The
lower average customer deposit balances as compared to the prior year period
was a result of pricing strategies and the redemption of the higher cost
component of CTL deposits (approximately $267 million) at year-end 1996.
The decrease in the Company's cost of retail deposits was primarily due to
favorable repricing of certificates of deposit and an increase in transaction
accounts which are typically at lower rates than certificates of deposit. The
cost of retail deposits at June 30, 1997 in the Bank, which reflects the
Bank's purchase of CTL's retail deposits in June 1997, was 4.63% compared with
4.89% at June 30, 1996. The cost of retail deposits was twenty three basis
points below the COFI at June 30, 1997 as compared to seven basis points above
COFI at June 30, 1996. Also, CTL redeemed the higher cost component (higher
than the Bank's incremental borrowing cost at the time) of these deposits
(approximately $267 million) at face value at year-end 1996. Transaction
accounts as a percentage of total deposits were 30.0% at June 30, 1997 as
compared to 25.8% and 21.3% at June 30, 1996 and December 31, 1995,
respectively.
S-33
<PAGE>
Interest expense on the Company's customer deposits was $100.2 million for
the year ended December 31, 1996 as compared to $93.4 million and $66.4
million for the years ended December 31, 1995 and 1994, respectively. The
increase in interest expense on customer deposits between 1996 and 1995 was
due to higher average balances due to the impact of the acquisition of CTL
partially offset by lower cost of deposits. The increase in interest expense
from 1994 to 1995 was primarily due to higher average rates and customer
deposit balances (primarily higher average balances in certificates of
deposits).
The cost of retail deposits in the Bank at December 31, 1996 was 4.60%, 24
basis points below COFI of 4.84%. The cost of retail deposits decreased by 64
basis points as compared to December 31, 1995. The decrease in the cost of
retail deposits was primarily due to favorable repricing of certificates of
deposit and an increase in transaction accounts which were typically at lower
interest rates than certificates of deposit. As of December 31, 1996,
transaction accounts as a percentage of total deposits increased to 30.3% from
21.3% and 22.2% at December 31, 1995 and 1994, respectively. The following
table is a summary of cost of retail deposits for the Bank versus COFI as of
the dates indicated:
<TABLE>
<CAPTION>
AT JUNE
30, AT DECEMBER 31,
------------ ------------------
1997 1996 1996 1995 1994
----- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Cost of retail deposits..................... 4.63% 4.89% 4.60% 5.24% 4.53%
COFI........................................ 4.86 4.82 4.84 5.12 4.37
----- ---- ----- ---- ----
Spread above (below) COFI................... (0.23)% 0.07% (0.24)% 0.12% 0.16%
===== ==== ===== ==== ====
</TABLE>
Interest Expense on Borrowings
Interest expense on the Company's borrowings was $36.5 million and $27.7
million for the first six months of 1997 and 1996, respectively. The increase
in interest expense on borrowings was primarily due to higher average balances
arising from a decrease in average customer deposits. The interest expense on
borrowings for the first six months of 1996 reflects the impact of the
prepayment of $190 million of higher cost borrowings in the fourth quarter of
1995, which were replaced with short-term lower cost borrowings. In
conjunction with the prepayment of these borrowings, the Company entered into
interest rate swap agreements to provide interest rate risk protection for the
short-term lower cost borrowings by matching the floating interest rate
characteristics and lengthening their maturities. Also, in May 1996, the
Company issued $50 million of Senior Debentures yielding 8.42% (all-in cost
was 8.91% annualized).
Interest expense on the Company's borrowings for the years 1996, 1995 and
1994 were $60.6 million, $67.1 million and $64.0 million, respectively. The
decrease in interest expense on borrowings between 1996 and 1995 was primarily
due to lower average balances arising from lower borrowing requirements
consistent with the level of interest-earning assets maintained combined with
the prepayment of higher cost borrowings in late 1995. The increase in
interest expense on borrowings between 1995 and 1994 was primarily due to
higher cost of borrowings.
The following table sets forth the changes in net interest income due to
changes in the rate and volume of the Company's interest-earning assets and
interest-bearing liabilities. The variances include the effects of the
acquisition of CTL beginning June 1996 and CGC beginning April 1997. Changes
in rate and volume which cannot be segregated (changes in weighted average
interest rate multiplied by average portfolio balance) have been allocated
proportionately to the change in rate and the change in volume.
S-34
<PAGE>
<TABLE>
<CAPTION>
RATE VOLUME TOTAL
VARIANCE VARIANCE VARIANCE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 VS. 1996
----------------------------
<S> <C> <C> <C>
Interest income:
Loans.......................................... $ 1,842 $ 7,900 $ 9,742
Mortgage-backed securities..................... 301 (4,185) (3,884)
Investments.................................... 223 911 1,134
-------- ------- --------
Total......................................... 2,366 4,626 6,992
-------- ------- --------
Interest expense:
Customer deposits.............................. (4,686) (4,886) (9,572)
Borrowings..................................... 281 8,511 8,792
-------- ------- --------
Total......................................... (4,405) 3,625 (780)
-------- ------- --------
Net interest income.............................. $ 6,771 $ 1,001 $ 7,772
======== ======= ========
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 VS. 1995
----------------------------
<S> <C> <C> <C>
Interest income:
Loans.......................................... $ 6,463 $30,127 $ 36,590
Mortgage-backed securities..................... (2,039) (10,116) (12,155)
Investments.................................... 104 753 857
-------- ------- --------
Total......................................... 4,528 20,764 25,292
-------- ------- --------
Interest expense:
Customer deposits.............................. (692) 7,519 6,827
Borrowings..................................... (2,169) (4,432) (6,601)
-------- ------- --------
Total......................................... (2,861) 3,087 226
-------- ------- --------
Net interest income.............................. $ 7,389 $17,677 $ 25,066
======== ======= ========
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 VS. 1994
----------------------------
<S> <C> <C> <C>
Interest income:
Loans.......................................... $ 6,095 $17,975 $ 24,070
Mortgage-backed securities..................... 1,283 (8,158) (6,875)
Investments.................................... 257 1,685 1,942
-------- ------- --------
Total......................................... 7,635 11,502 19,137
-------- ------- --------
Interest expense:
Customer deposits.............................. 20,541 6,433 26,974
Borrowings..................................... 5,547 (2,375) 3,172
-------- ------- --------
Total......................................... 26,088 4,058 30,146
-------- ------- --------
Net interest income.............................. $(18,453) $ 7,444 $(11,009)
======== ======= ========
</TABLE>
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans was $1.2 million for the first half of
1997 as compared to $1.4 million for the same period in 1996. The provision
for losses on loans was $1.9 million for the year ended December 31, 1996 as
compared to $4.3 million and $2.4 million for the years 1995 and 1994,
respectively. See "--Balance Sheet Analysis--Allowance for Losses on Loans"
for a more detailed discussion.
S-35
<PAGE>
NONINTEREST INCOME
Noninterest income for the Company for the first six months of 1997 was $7.3
million as compared to $4.3 million for the same period in the prior year. The
increase in noninterest income as compared to the prior year was primarily due
to an increase in loan fees attributable to commercial finance assets due to
the acquisition of CGC effective April 1, 1997. Also, during the first quarter
of 1997, CTL sold $253 million of motor vehicle loans to BVSC and the premium
arising from the sale of the motor vehicle loans to BVSC was recorded as part
of the purchase accounting valuations related to the acquisition of CTL. A
gain of $925,000 was recorded in the statement of operations due to the
improvement in the fair value of the motor vehicle loans as a result of
changes in market interest rates between the acquisition date and the sale
date of the motor vehicle loans. During the first quarter of 1996, the Bank
sold $24.2 million of its MBS from its available for sale portfolio and
recorded a loss of $262,000.
Noninterest income for the Company was $8.6 million, $6.1 million and $7.5
million for the years 1996, 1995 and 1994, which includes losses on securities
of $0.8 million for 1996, $2.5 million for 1995, and $1.1 million for 1994.
During 1996, total MBS sold from the available-for-sale portfolio were $55.0
million and aggregated a loss of $507,000. The Company's interest rate risk
profile has been favorably impacted by the sale of these securities. In
conjunction with the then pending securitization of CTL's motor vehicle loan
portfolio, during the fourth quarter of 1996, CTL entered into a short sale of
Treasury securities to hedge the valuations from movements in interest rates.
A loss of $293,000 in accordance with generally accepted accounting principles
was recorded in the fourth quarter of 1996 associated with this short sale of
Treasury securities.
Sale and Securitization of Motor Vehicle Loans
In November 1996, BVSC filed with the SEC a shelf registration statement on
Form S-3 for $500 million of automobile receivable-backed securities. During
the first quarter of 1997, $253 million of motor vehicle loans were sold and
securitized with the premium from the sale having been recorded as part of
purchase accounting. A gain of $925,000 was realized arising from the
improvement in the fair value of the motor vehicle loans sold due to changes
in market interest rates. As a result of the Company's plans to acquire
EurekaBank (see discussion elsewhere herein), the Company intends to
discontinue the sale and securitization of CTL's motor vehicle loan portfolio.
NONINTEREST EXPENSE
General and Administrative Expense
General and administrative expenses of the Company were $30.8 million and
$24.0 million for the first six months of 1997 and 1996, respectively, and
included certain special mention items (see "--Special Mention Items" above).
Excluding special mention items, general and administrative expenses were
$30.7 million as compared to $23.0 million for the same period a year ago. The
higher general and administrative expenses were primarily attributable to the
impact of the acquisition of CTL and CGC.
The following is a summary of general and administrative expenses (excluding
special mention items) for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
The Company and the Bank.............. $21,389 $21,415
CTL................................... 7,285 1,628
CGC................................... 2,007 --
------- -------
Total................................. $30,681 $23,043
======= =======
</TABLE>
S-36
<PAGE>
General and administrative expenses of the Company for the years 1996, 1995
and 1994 were $59.0 million, $57.0 million and $47.3 million. General and
administrative expenses for 1996 included special mention items which totaled
$6.1 million. General and administrative expenses in 1995 included special
mention items which totaled $9.6 million. The special mention items for the
year ended December 31, 1994 were not significant. Excluding special mention
items, general and administrative expenses for 1996 were lower than 1995
primarily due to lower compensation and benefit expense and other cost
reduction initiatives. General and administrative expenses for 1995 (excluding
special mention items) and 1994 were essentially the same.
The following is a summary of general and administrative expenses (excluding
special mention items) for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
The Company and the Bank............................... $42,649 $47,446 $47,287
CTL.................................................... 10,172 -- --
------- ------- -------
Total.................................................. $52,821 $47,446 $47,287
======= ======= =======
</TABLE>
The following table summarizes the ratio of general and administrative
expenses (exclusive of special mention items) to average assets (including
securitized assets).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Banking Platform (includes the Company)....................... 1.70% 1.48%
Consumer Finance Platform..................................... 2.41 3.91
Commercial Finance Platform................................... 10.36 --
----- ----
Total......................................................... 1.87% 1.52%
===== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Banking Platform (includes the Company)....................... 1.56% 1.53% 1.59%
Consumer Finance Platform..................................... 3.11 -- --
---- ---- ----
Total......................................................... 1.65% 1.53% 1.59%
==== ==== ====
</TABLE>
The consolidated efficiency ratio (excluding special mention items) for the
first six months of 1997 was 61.2% as compared with 58.1% for the same period
in 1996. The increase in the general and administrative expense ratio and the
efficiency ratio in the first six months of 1997 was primarily due to the
effects of the acquisition of Consumer Finance and Commercial Finance
Platforms. The consolidated efficiency ratios (excluding special mention
items) for the years 1996, 1995 and 1994 were 58.0%, 73.5% and 62.6%,
respectively.
SAIF Recapitalization Assessment
Federal legislation to recapitalize and fully fund the SAIF was signed into
law on September 30, 1996. Customer deposits for the Bank are primarily SAIF-
insured, and as a result of the legislation, the Bank paid a one-time special
assessment of $11.7 million pre-tax ($6.7 million after tax). The legislation
had no effect on CTL, as its deposits are insured under the Bank Insurance
Fund.
Income from Real Estate Owned and Net Provision/Recovery of Losses
Income from real estate owned operations and net recoveries of losses on
real estate owned were $617,000 and $1,785,000 in the first six months of 1997
and 1996, respectively. The decrease was primarily due to gains from the sale
of and higher income received from real estate owned properties in the prior
year period.
S-37
<PAGE>
Income from operations of real estate owned and net provision/recovery of
losses on real estate owned were $4.9 million for the year ended December 31,
1996 as compared to $332,000 and ($50,000) for the years 1995 and 1994,
respectively. The increase between 1996 and 1995 was primarily due to gains
from the sale of and higher income received from real estate owned properties.
The increase in income from real estate owned operations during 1995 as
compared to 1994 was primarily due to income received from one large property
foreclosed upon in April 1995. Prior to foreclosure, the income received was
reported as interest income on loans.
Amortization and Write-down of Intangibles
The amortization and write-down of intangible assets were $1.6 million and
$1.4 million for the first six months of 1997 and 1996, respectively. The
higher amortization of intangibles was due to the amortization of goodwill
arising from the acquisition of CTL and CGC.
The amortization and write-down of intangible assets were $2.6 million, $3.9
million and $2.4 million for 1996, 1995 and 1994, respectively. The
amortization and write-down of intangibles in 1996 includes core deposit
intangible write-offs of $270,000 due to a decision to close one of the Bank's
branches. In 1995, core deposit premiums of $854,000 were written-off due to
an impairment in the value of core deposit premiums attributable to higher
than expected decay rates in the customer deposits acquired. The balance of
the core deposit premiums was subsequently amortized over the remaining useful
life.
Also, in 1995, the Bank decided to sell or exchange certain of its acquired
branches for which goodwill was recorded in 1981. Based on the offers received
and management's estimates of the undiscounted future cash flows, the
remaining unamortized goodwill was written-off because management believed
that the goodwill could no longer be assured of recovery. As a result,
goodwill of $758,000 was written-off in the fourth quarter of 1995.
INCOME TAXES
The effective tax rates for the first six months of 1997 and 1996 were 43.0%
for both periods. The effective tax rates for 1996, 1995 and 1994 were 43.0%,
(24.8%) and 35.0%, respectively. The decrease in the effective tax rate in
1995 was due to the net loss of the Bank partially offset by the net income of
the Company and a subsidiary of the Bank.
Income tax expense for 1994 included a $2.1 million reduction to reflect a
revision of the Company's estimated tax liabilities resulting from a tentative
agreement with the Internal Revenue Service for the taxable years 1987 through
1989. The agreement resolved certain disputed savings and loan industry tax
issues which the Company was contesting.
EXTRAORDINARY ITEM
As part of its asset/liability management strategy to reduce interest rate
risk exposure, during the fourth quarter of 1995, the Company prepaid $45.0
million of its short-term FHLBSF advances. In addition, the Company committed
to prepay an additional $145.0 million of its short-term FHLBSF advances in
February 1996. As a result, the Company incurred a prepayment charge of $2.5
million (net of applicable income taxes) in 1995. In accordance with generally
accepted accounting principles, the prepayment penalties were reported as an
extraordinary charge (net of applicable income taxes). There were no
prepayment penalties in 1994. For further discussion of the Company's
asset/liability management strategies, see "-- Asset and Liability
Management."
BALANCE SHEET ANALYSIS
The consolidated assets of the Company were $3.1 billion and $3.3 billion as
of June 30, 1997 and December 31, 1996, respectively. The decrease in total
assets was primarily due to the sale and securitization of $253 million of
motor vehicle loans. The Company's total assets at December 31, 1995 and 1994
were $3.0 billion and $3.2 billion, respectively. The increase in total assets
between 1996 and 1995 was primarily due to the acquisition of CTL. The
decrease in total assets between 1995 and 1994 was primarily due to sale of
MBS available for sale.
S-38
<PAGE>
MORTGAGE-BACKED SECURITIES
The Company has historically purchased securities to maintain appropriate
interest-earning asset levels when sufficient loan production was not
available. There were no purchases in the first six months of 1997 or in 1996
and 1995. Management's focus has been on restructuring the balance sheet and
de-emphasizing the Company's wholesale investment and borrowing activities.
The majority of the securities purchased are high quality MBS, primarily
issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA"). Since MBS are collateralized by mortgages, these assets
qualify under the OTS regulations requiring the Bank to hold certain levels of
mortgage-related assets.
The following table reflects the composition of MBS portfolio as of the
dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
----------- --------------------------
1997 1996 1995 1994
----------- -------- -------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available-for-sale
FHLMC, FNMA, and GNMA............... $ 78,030 $ 83,154 $149,778 $108,561
Financial institutions and
intermediaries...................... -- -- -- 295
-------- -------- -------- --------
Total.............................. $ 78,030 $ 83,154 $149,778 $108,856
======== ======== ======== ========
Held-to-maturity
FHLMC, FNMA, and GNMA............... $453,054 $488,557 $572,822 $802,893
Financial institutions and
intermediaries...................... 5,635 5,902 6,128 6,497
Other nonrated, nonresidential...... -- -- 2,650 3,434
-------- -------- -------- --------
Total.............................. $458,689 $494,459 $581,600 $812,824
======== ======== ======== ========
</TABLE>
The principal balances of MBS purchased and sold for the six months ended
June 30, 1997 and 1996 and for the years ended December 31, 1996, 1995, and
1994 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER
JUNE 30, 31,
----------------- --------------------
1997 1996 1996 1995 1994
-------- -------- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Purchased.............................. $ -- $ -- $ -- $ -- $400.7
Sold................................... -- 27.7 57.6 103.5 --
</TABLE>
The sale of the MBS in 1996 and 1995 was consistent with management's
strategic focus to restructure the wholesale balance sheet.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
"A Guide to Implementation of Statement of Financial Accounting Standards No.
115 ("SFAS 115") on Accounting for Certain Investments in Debt and Equity
Securities--Questions and Answers" ("Special Report"). The Special Report was
issued as an aid in understanding and implementing SFAS 115. For companies
that adopted SFAS 115 in financial statements issued prior to the issuance of
this Special Report, if the effects of initially adopting this implementation
guidance resulted in reclassification of securities between categories, the
Special Report requires that such transfers be accounted for as transfers in
accordance with SFAS 115. As a result, concurrent with the initial adoption of
this implementation guidance, the Company reassessed the appropriateness of
the classifications of all securities held at that time and, in December 1995,
reclassified $147.7 million in MBS from held-to-maturity to available-for-
sale. The transfer of the MBS was recorded at a fair value of $146.0 million
with $981,000 of unrealized losses (net of tax) recorded as a separate
component of stockholders' equity.
S-39
<PAGE>
LOANS AND REAL ESTATE OWNED
Loan Portfolio Composition
The following table shows the composition of the Company's loan portfolio
(before deductions for net deferred loan origination fees, discounts and
allowance for loan losses) by type of loan at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE AT DECEMBER 31,
30, --------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BANKING PLATFORM:
Single family mortgages........... $ 638,144 $ 692,086 $ 731,310 $ 733,265
Multi-family mortgages............ 1,053,315 1,048,291 995,038 980,849
Commercial mortgages.............. 371,643 381,822 333,236 337,483
---------- ---------- ---------- ----------
2,063,102 2,122,199 2,059,584 2,051,597
Home equity loans, lines of credit
and other........................ 79,861 68,018 34,453 30,357
---------- ---------- ---------- ----------
2,142,963 2,190,217 2,094,037 2,081,954
CONSUMER FINANCE PLATFORM:
Motor vehicle loans............... 139,330 315,439 396 1,126
COMMERCIAL FINANCE PLATFORM:
Commercial loans.................. 47,613 -- -- --
---------- ---------- ---------- ----------
Gross loans receivable............. $2,329,906 $2,505,656 $2,094,433 $2,083,080
========== ========== ========== ==========
</TABLE>
Banking Platform
A major portion of the Banking Platform loan portfolio consists of loans
collateralized by income-producing properties, all of which are located in
California, principally Northern California. Construction loans have been
insignificant. During 1996, the Bank de-emphasized its focus on single family
mortgage lending and discontinued its loan origination operations for this
category. The Company believes that income property lending affords an
opportunity to receive interest income at yields higher than those obtainable
from single family lending. Nevertheless, loans on income properties,
particularly nonresidential properties, generally present a higher risk than
do single family residential loans due to the sensitivity of the underlying
property to changes in economic conditions. Management takes such risks into
account when it establishes the loan rates, underwriting standards, loss
allowances and decisions regarding portfolio mix. See "Risk Factors--
Concentration of Loan Portfolio."
ARMs comprise a significant portion of the Bank's loan portfolio. The
interest rates on the ARMs may periodically rise or fall (generally based on
monthly or semi-annual adjustment periods) in accordance with an independent
index. The indices most commonly used by the Bank are the COFI, the one-year
Constant Maturity Treasury Index and the six-month LIBOR rate.
Consumer Finance Platform
The Consumer Finance Platform loan portfolio consists of motor vehicle loans
originated by CTL and motor vehicle loans purchased from Ultra. CTL sold $253
million of its motor vehicle loan portfolio to BVSC in January 1997 which was
subsequently securitized and sold by BVSC.
Commercial Finance Platform
The Commercial Finance Platform loan portfolio consists of loans related to
transactional lending and asset-based lending.
Loan Originations and Purchases
Management's strategy is to supplement its loan production with purchases of
higher yielding loans. For each of the years indicated, loans originated and
purchased were as follows:
S-40
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
----------------- --------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan Originations
Real Estate........................ $ 69,234 $109,400 $249,046 $244,480 $555,230
Motor Vehicle...................... 82,847 11,539 97,833 -- --
Commercial......................... 4,693 -- -- -- --
Other.............................. 15,893 8,882 29,594 13,950 9,060
-------- -------- -------- -------- --------
Total Originations................. $172,667 $129,821 $376,473 $258,430 $564,290
======== ======== ======== ======== ========
Loan Purchases
Real Estate........................ $ 45,709 $ 37,755 $ 64,850 $ 12,928 $ 5,352
Motor Vehicle...................... 45,812 -- -- -- --
-------- -------- -------- -------- --------
Total Purchases.................... $ 91,521 $ 37,755 $ 64,850 $ 12,928 $ 5,352
======== ======== ======== ======== ========
Total Originations and Purchases... $264,188 $167,576 $441,323 $271,358 $569,642
======== ======== ======== ======== ========
</TABLE>
The motor vehicle loan purchases were from Ultra. The Company recently
executed a letter of intent to acquire Ultra. The acquisition is expected to
close in the third quarter of 1997.
CREDIT QUALITY
The Company defines nonperforming assets ("NPA") as nonperforming loans,
defaulted mortgage-backed securities, real estate owned and other repossessed
assets. The Company defines nonperforming loans as loans 90 days or more
delinquent (excluding accruing loans delinquent 90 days or more) and loans
less than 90 days delinquent designated as nonperforming when the Company
determines that the full collection of principal and/or interest is doubtful.
Nonperforming assets are placed on nonaccrual status. Troubled debt
restructurings ("TDRs") are real estate loans that have been modified (due to
borrower financial difficulties) to allow a stated interest rate and/or a
monthly payment rate lower than those prevailing in the market. The following
table summarizes the Company's nonperforming assets and troubled debt
restructurings:
<TABLE>
<CAPTION>
AT AT AT
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
-------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans............................. $14,955 $16,125 $10,755
Real estate owned............................ 8,369 7,387 24,476
Mortgage-backed securities................... -- -- 3,580
Other repossessed assets..................... 624 798 --
------- ------- -------
Total NPAs.................................. 23,948 24,310 38,811
TDRs......................................... 502 509 15,641
------- ------- -------
Total....................................... $24,450 $24,819 $54,452
======= ======= =======
</TABLE>
The following table is a summary by platform of NPAs and NPAs as a
percentage of consolidated total assets:
<TABLE>
<CAPTION>
NPAS AS A PERCENTAGE OF CONSOLIDATED TOTAL ASSETS
-------------------------------------------------------
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform........ $ 20,818 0.67% $ 23,323 0.71% $ 38,811 1.29%
Consumer Finance
Platform................ 964 0.03 987 0.03 -- --
Commercial Finance
Platform................ 2,166 0.07 -- -- -- --
-------- ----- ---------- ------- ---------- -------
Total................... $ 23,948 0.77% $ 24,310 0.74% $ 38,811 1.29%
======== ===== ========== ======= ========== =======
</TABLE>
S-41
<PAGE>
<TABLE>
<CAPTION>
LOANS DELINQUENT 60 DAYS OR MORE
AS A PERCENTAGE OF CONSOLIDATED LOANS
----------------------------------------------------
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform.......... $19,724 0.85% $ 22,460 0.90% $ 20,166 0.96%
Consumer Finance Platform. 782 0.03 548 0.02 -- --
Commercial Finance
Platform.................. 2,541 0.11 -- -- -- --
------- ----- --------- ------- --------- -------
Total..................... $23,047 0.99% $ 23,008 0.92% $ 20,166 0.96%
======= ===== ========= ======= ========= =======
</TABLE>
ALLOWANCE FOR LOSSES ON LOANS
The Company conducts an ongoing review of its asset categories to assess the
adequacy of the allowance for loan losses which are maintained at levels that
the Company believes are sufficient to cover estimated possible losses in the
portfolios. In determining the necessary level of the allowance for loan
losses, the Company considers prevailing and anticipated economic conditions,
historical loss experience, the levels of classified, nonperforming and
delinquent assets, weighting by property type, loan portfolio trends and other
factors. The allowance for losses at June 30, 1997 was $35.1 million as
compared to $36.4 million and $30.9 million at December 31, 1996 and 1995,
respectively.
The following table is a summary of the allowance for losses and the
allowance for losses as a percentage of nonperforming loans, NPAs, gross loans
and total assets, respectively:
<TABLE>
<CAPTION>
AT AT
AT DECEMBER 31, DECEMBER 31,
JUNE 30, 1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonperforming Loans............. $ 14,955 235% $ 16,125 226% $ 10,755 288%
NPAs............................ 23,948 147 24,310 150 38,811 80
Gross Loans..................... 2,329,906 1.51 2,505,656 1.46 2,094,433 1.48
Total Assets.................... 3,096,213 1.13 3,300,262 1.10 3,004,496 1.03
</TABLE>
The following is a summary of changes in the allowance for loan losses for
the periods indicated (the beginning balance for 1997 and 1996 reflects the
effects of the acquisition of CTL and CGC):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995 1994
---------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance........................ $37,583 $32,874 $29,115 $33,790
Charge offs:
Real estate and other................... (2,186) (6,401) (4,879) (8,514)
Motor vehicle........................... (1,818) -- -- --
Commercial.............................. (202) -- -- --
------- ------- ------- -------
(4,206) (6,401) (4,879) (8,514)
Recoveries:
Real estate and other................... 121 642 1,494 1,472
Motor vehicle........................... 414 -- -- --
------- ------- ------- -------
535 642 1,494 1,472
Net charge-offs.......................... (3,671) (5,759) (3,385) (7,042)
Provision for loan losses................ 1,177 1,898 4,284 2,367
------- ------- ------- -------
Ending balance........................... $35,089 $29,013 $30,014 $29,115
======= ======= ======= =======
Ratio of net charge-offs to average
loans.................................... 0.31% 0.24% 0.16% 0.38%
======= ======= ======= =======
</TABLE>
S-42
<PAGE>
The provision for losses on loans was $1.2 million for the first six months
of 1997 as compared to $1.4 million for the same period in 1996. The provision
for losses on loans was $1.9 million for the year ended December 31, 1996 as
compared to $4.3 million and $2.4 million for the years 1995 and 1994,
respectively.
Management believes that the allowance for loan losses is adequate to cover
estimated losses in its asset portfolios, although there can be no assurance
in this regard. Future adjustments may be necessary and earnings could be
significantly adversely affected if circumstances differ substantially from
the assumptions used in making such determinations. Management will continue
to monitor the adequacy of the allowance for losses related to problem assets.
Management monitors the impact of the economic environment on its lending
activities on a periodic basis. If real estate markets weaken in future
periods, no assurance can be given that the Company's future loss experience
will approximate its current estimates. In addition, various regulatory
agencies review the Company's allowance for losses as an integral part of
their examination process. Such agencies may require the Company to recognize
additions to this allowance based on their judgment relating to information
available to them at the time of their examinations.
CUSTOMER DEPOSITS
As a primary part of the Company's business, deposits are gathered for
purposes of funding loans and purchasing securities. A summary of the retail
customer deposits follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
---------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Transaction accounts........................... $ 472,904 30.0% 2.75%
Certificates of deposit........................ 1,105,302 70.0 5.45
---------- ------- -------
Total......................................... $1,578,206 100.0% 4.63%
========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
---------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Transaction accounts........................... $ 493,571 27.9% 2.62%
Certificates of deposit........................ 1,270,396 72.1 5.49
---------- ------- -------
Total......................................... $1,763,967 100.0% 4.69%
========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
---------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Transaction accounts........................... $ 387,610 21.3% 2.38%
Certificates of deposit........................ 1,432,230 78.7 6.02
---------- ------- -------
Total......................................... $1,819,840 100.0% 5.24%
========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
--------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
---------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Transaction accounts........................... $ 379,424 22.2% 2.01%
Certificates of deposit........................ 1,327,952 77.8 5.25
---------- ------- -------
Total......................................... $1,707,376 100.0% 4.53%
========== ======= =======
</TABLE>
S-43
<PAGE>
Increasing the value of the Company's retail branch franchise is one of
management's primary objectives. Management believes that a gradual expansion
of its retail deposit base, particularly transaction accounts in Northern
California, will enhance its results of operation by lowering its cost of
funds, increasing fee income and expanding opportunities for cross-selling
products and services, although there can be no assurance in this regard.
Throughout 1996 and 1997, management continued to emphasize the development
and marketing of new products and as a result has successfully increased the
Company's percentage of transaction accounts in relation to total deposits
which has contributed to lower cost of funds.
The customer deposits held by CTL are primarily thrift certificates which
are similar to certificates of deposit with the exception that they are
callable at par plus accrued interest. When thrift certificates are purchased
by customers, CTL has, as thrift certificates have been issued, reserved the
right to repurchase the certificates at any time upon thirty days notice.
Utilizing this call provision, CTL redeemed the higher cost component (higher
than the Bank's incremental borrowing cost) of its deposits at face value
(approximately $267 million) at December 31, 1996. Substantially all of its
remaining deposits (approximately $64 million) were sold to the Bank in June
1997. The Company is currently in the process of reorganizing CTL such that it
will become a subsidiary of the Bank (at which time CTL will continue to
operate as a consumer finance company).
BORROWINGS
The Company utilizes collateralized advances from the FHLBSF for purposes of
funding loans. In addition, the Company utilizes other borrowings, on a
collateralized and noncollateralized basis, such as securities sold under
agreements to repurchase (also known as reverse repurchase agreements). The
following table sets forth certain information as to the Company's borrowings
as of the dates indicated:
<TABLE>
<CAPTION>
AT JUNE
30, AT DECEMBER 31,
---------- ------------------------------
1997 1996 1995 1994
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Advances from FHLBSF................. $1,092,730 $ 977,750 $766,790 $ 956,310
Securities sold under agreements to
repurchase.......................... 142,461 210,640 166,738 255,106
Senior Debentures due 1999........... 50,000 50,000 -- --
---------- ---------- -------- ----------
Total................................ $1,285,191 $1,238,390 $933,528 $1,211,416
========== ========== ======== ==========
</TABLE>
As discussed elsewhere herein, in 1996, management redirected the Bank's
strategic focus to restructure the wholesale borrowings (beginning in late
1995) in conjunction with the efforts to enhance its retail deposit franchise.
The average balances for borrowings at the Bank decreased from $1.05 billion
in 1995 to $977.7 million in 1996. In the fourth quarter of 1995 and the first
quarter of 1996, the Bank prepaid $190 million of higher cost borrowings and
replaced them with short-term lower cost borrowings. In conjunction with the
prepayment of these borrowings, the Company entered into interest rate swap
agreements to provide interest rate risk protection for the short-term lower
cost borrowings by matching the floating interest rate characteristics and
lengthening their maturities. The increase in borrowings at December 31, 1996
as compared to 1995 was due to borrowings from the FHLBSF used to fund the
redemption of CTL's higher cost thrift certificates as discussed elsewhere
herein.
In May 1996, the Company issued $50 million of Senior Debentures due June 1,
1999 yielding 8.42% (all-in cost was 8.91% annualized) and $26 million of the
proceeds were used to finance the acquisition of CTL.
S-44
<PAGE>
ASSET AND LIABILITY MANAGEMENT
GENERAL
The objective of the Company's asset/liability management activities is to
improve results of operations by adjusting the type and mix of assets and
liabilities to effectively address changing conditions and risks. Through
overall management of its balance sheet and initiatives designed to control
various risks, the Company seeks to enhance its financial returns within safe
and sound parameters. The Company's operating strategies for attaining this
objective include:
. Managing net interest margin through appropriate risk/return pricing of
assets and liabilities
. Utilizing interest rate swap agreements and other hedging strategies to
reduce exposure to fluctuations in interest rates
. Controlling noninterest expense and enhancing noninterest income, utilizing
improved information systems to facilitate the analysis of the
profitability of individual business units and products
. Increasing retail deposits as a percentage of interest-bearing liabilities
and reducing the Company's cost of funds
. Utilizing the Company's strong capital position to enhance the results
through acquisition of higher yielding assets
Enhancing internal analysis capability for measuring, evaluating and
monitoring risk
INTEREST RATE RISK
Financial institutions are subject to interest rate risk to the degree that
interest-bearing liabilities reprice or mature on a different basis and at
different times than interest-earning assets. The Company's strategy has been
to reduce the sensitivity of its earnings to interest rate fluctuations by
more closely matching the effective maturities or repricing characteristics of
its assets and liabilities. Certain assets and liabilities, however, may react
in different degrees to changes in market interest rates. Further, interest
rates on certain types of assets and liabilities may fluctuate prior to or
concurrently with market interest rates, while rates on other types may lag
behind. Additionally, certain assets, such as adjustable rate mortgages, have
features, including payment and rate caps, which restrict changes in their
interest rates. The Company considers the anticipated effects of these factors
when implementing its interest rate risk management objectives.
The Company pursues balance sheet strategies that it believes should, in the
long run, help mitigate its exposure to rising interest rates. The Company
also considers other strategies to reduce the variability of the net interest
margin including off-balance sheet activities. The Company initiated numerous
actions in late 1995 and throughout 1996 which significantly reduced the
Company's exposure to fluctuations in interest rates. These actions include:
Sale of MBS
In 1997 and 1996, the Company sold $24 million and $55 million of fixed-rate
MBS available-for-sale, respectively. The purpose of the sales was to reduce
the Company's exposure to interest rate increases. During the fourth quarter
of 1995 the Company reclassified $148 million of its MBS from held-to-maturity
to available-for-sale as a result of adopting the implementation guide to SFAS
115. This reclassification allowed the Company to position these securities
for potential sale, which assisted in the reduction of its interest rate risk
exposure without tainting its remaining held-to-maturity portfolio.
Interest Rate Swaps
The Company uses interest rate swap agreements to reduce the interest rate
fluctuation risk related to certain assets and liabilities. Interest rate
swaps involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying notional principal amounts.
As of June 30, 1997, December 31, 1996 and 1995, the total notional amount of
interest rate swaps were $452 million, $421 million and $150 million,
respectively.
S-45
<PAGE>
The following schedule sets forth the maturities and weighted average rates
of interest rate swaps outstanding as of June 30, 1997, based on interest
rates at June 30, 1997. To the extent that interest rates change, variable
interest rate information will change.
<TABLE>
<CAPTION>
MATURITIES OF DERIVATIVE INSTRUMENTS
-----------------------------------------------
1999 2000 2001 2002 TOTAL
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Notional amount............... $70,000 $100,000 $104,000 $177,500 $451,500
Weighted average receive rate
(three-month LIBOR)......... 6.27% 5.89% 5.88% 5.88% 5.94%
Weighted average pay rate
(fixed)....................... 6.33% 6.10% 6.72% 6.41% 6.40%
</TABLE>
During the fourth quarter of 1995, the Company prepaid $45 million of its
short-term higher cost borrowings. In addition, the Company committed to
prepay another $145 million of its short-term higher cost borrowings in
February 1996. As a result, the Company incurred a prepayment charge of $2.5
million (net of applicable income taxes) in 1995. In conjunction with the
prepayment of these borrowings, the Company entered into interest rate swap
agreements with notional principal amounts of $200 million. The impact of
these actions was a reduction of the Company's interest rate risk exposure by
prepaying its short-term higher cost borrowings and replacing the prepayments
with short-term lower cost borrowings. The interest rate swap agreements were
used to provide interest rate risk protection for the short-term borrowings by
matching the floating interest rate characteristics and lengthening their
maturities.
Treasury Rate Lock Agreements
At June 30, 1997, the Company entered into $90 million of Treasury rate lock
agreements to hedge the anticipated issuance of the Notes. The Treasury rate
lock agreements guarantee a stated interest rate for a stated period of time
and the Company will receive/pay the difference between the lock rate and the
effective Treasury rate on settlement date. The Treasury rate lock agreements
at June 30, 1997 included a total of $60 million of participating Treasury
rate locks which allow the Company to cap its maximum potential payout on the
lock if interest rates decline significantly. Gains and losses on the hedge
are deferred and recognized in income as an adjustment of net interest expense
on the Notes beginning in the period of issuance.
Hedging Auto Loans Pending Securitization
As discussed elsewhere herein, in conjunction with the decision to sell
CTL's motor vehicle loans and their subsequent securitization by BVSC,
management entered into a short sale of Treasury securities that has
materially insulated the purchase accounting valuations from movements in
interest rates. The short sale transaction was paired-off in December 1996
with a loss of $293,000 recorded as a loss on securities. At December 31,
1996, a Treasury rate lock transaction with a notional principal amount of
$210 million was entered into to hedge the motor vehicle loans pending sale by
CTL and securitization by BVSC.
INTEREST RATE SENSITIVITY
The Company's interest rate risk policies are established and monitored by
its Asset/Liability Committee ("ALCO"). The ALCO reviews the sensitivity of
the Company's net interest income and market value of equity to interest rate
changes. The objective of the Company's ALCO activities is to improve results
of operations by adjusting the types of assets and liabilities to effectively
address changing conditions and risks. Management believes that its
asset/liability activities have improved earnings within safe and sound
parameters. To measure the Company's interest rate sensitivity, a cumulative
gap measure can be used to assess the impact of potential changes in interest
rates on the net interest income. The repricing gap represents the net
position of assets and liabilities subject to repricing in specified time
periods. Assets and liabilities are categorized according to the expected
repricing time frames based on management's judgment. A cumulative gap measure
alone cannot be
S-46
<PAGE>
used to evaluate interest rate sensitivity because interest rate changes do
not affect all categories of assets and liabilities equally or simultaneously.
In measuring interest rate sensitivity, the Company also uses simulation
modeling to estimate the potential effects of movements in interest rates.
Interest rate risk sensitivity estimated by management, as measured by the
change in the net portfolio value of equity as a percentage of the present
value of assets from an immediate 200 basis point increase/decrease in
interest rates, was 0.59% at June 30, 1997. The Bank's sensitivity measure of
0.86% as of March 31, 1997 was better than 85% of all thrift institutions
based on data provided by the OTS. Interest rate risk sensitivity was 1.15%
and 0.79% at December 31, 1996 and 1995 as compared to 3.02% at December 31,
1994. Calculation of this interest rate sensitivity is subject to a number of
assumptions and uncertainties, and no assurance can be given that actual
interest rate sensitivity will not be greater or less than these percentages.
Management has also estimated, based on interest rate risk analyses as of
June 30, 1997, that an increase in market interest rates of 100 and 200 basis
points would result in an annualized decrease in net interest income of
approximately $0.3 million and $2.3 million, respectively. However, the
foregoing estimate is based upon a number of uncertainties and assumptions,
and no assurance can be given that the decrease in net interest income as a
result of increases in market interest rates will not be greater than the
foregoing amounts.
The following table sets forth information regarding combined asset and
liability repricing of the Bank and CTL as of June 30, 1997:
<TABLE>
<CAPTION>
REPRICING PERIOD
-----------------------------------------------------------
UNDER OVER OVER
ONE ONE TO THREE THREE TO FIVE FIVE
YEAR YEARS YEARS YEARS TOTAL
---------- ------------ ------------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and investments
(1)..................... $ 124,008 $ 5,000 $ 10,000 $ -- $ 139,008
Loans and mortgage-
backed securities
(1)(2).................. 1,951,464 307,865 190,251 404,147 2,853,727
---------- -------- -------- -------- ----------
Total interest-rate
sensitive assets........ $2,075,472 $312,865 $200,251 $404,147 $2,992,735
========== ======== ======== ======== ==========
LIABILITIES:
Deposits:
Certificates of
deposit............... $ 911,916 $180,946 $ 12,440 $ -- $1,105,302
Money market accounts.. 205,745 -- -- -- 205,745
Checking accounts...... 111,258 -- -- -- 111,258
Passbook accounts...... 155,901 -- -- -- 155,901
Borrowings.............. 1,036,866 164,810 40,000 -- 1,241,676
---------- -------- -------- -------- ----------
Total interest-rate
sensitive liabilities... $2,421,686 $345,756 $ 52,440 $ -- $2,819,882
========== ======== ======== ======== ==========
Repricing gap-positive
(negative) before
impact of interest-rate
swaps.................. $ (346,214) $(32,891) $147,811 $404,147 $ 172,853
Impact of interest-rate
swaps................... 387,250 (22,250) (212,500) (152,500) --
---------- -------- -------- -------- ----------
$ 41,036 $(55,141) $(64,689) $251,647 $ 172,853
========== ======== ======== ======== ==========
Cumulative repricing
gap-positive (negative). $ 41,036 $(14,105) $(78,794) $172,853
========== ======== ======== ========
Cumulative repricing gap
as a percentage of
interest-rate sensitive
assets at June 30,
1997................... 1.37% (0.47)% (2.63)% 5.78%
========== ======== ======== ========
</TABLE>
- --------
(1)Investments and MBS are at amortized cost.
(2) Based on assumed annual prepayment and amortization rates which
approximate the Company's historical experience.
S-47
<PAGE>
The following table sets forth information regarding the combined asset and
liability repricing of the Bank and CTL as of December 31, 1996:
<TABLE>
<CAPTION>
REPRICING PERIOD
-------------------------------------------------------------
UNDER OVER OVER
ONE ONE TO THREE THREE TO FIVE FIVE
YEAR YEARS YEARS YEARS TOTAL
---------- ------------ ------------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and investments
(1)..................... $ 171,876 $ 5,004 $ 10,000 $ -- $ 186,880
Loans and MBS (1) (2)... 2,171,372 311,191 178,822 414,397 3,075,782
---------- --------- --------- --------- ----------
Total interest-rate
sensitive assets........ $2,343,248 $ 316,195 $ 188,822 $ 414,397 $3,262,662
========== ========= ========= ========= ==========
LIABILITIES:
Deposits:
Certificates of depos-
it.................... $1,001,282 $ 249,177 $ 19,937 $ -- $1,270,396
Money market accounts.. 192,856 -- -- -- 192,856
Checking accounts...... 113,180 -- -- -- 113,180
Passbook accounts...... 189,279 -- -- -- 189,279
Borrowings.............. 1,060,991 118,270 40,000 -- 1,219,261
---------- --------- --------- --------- ----------
Total interest-rate
sensitive liabilities... $2,557,588 $ 367,447 $ 59,937 $ -- $2,984,972
========== ========= ========= ========= ==========
Repricing gap-positive
(negative) before
impact of interest-rate
swaps.................. $ (214,340) $ (51,252) $ 128,885 $ 414,397 $ 277,690
Impact of interest-rate
swaps................... 421,000 (164,500) (154,000) (102,500) --
---------- --------- --------- --------- ----------
$ 206,660 $(215,752) $ (25,115) $ 311,897 $ 277,690
========== ========= ========= ========= ==========
Cumulative repricing
gap-positive (negative). $ 206,660 $ (9,092) $ (34,207) $ 277,690
========== ========= ========= =========
Cumulative repricing gap
as a percentage of
interest-rate sensitive
assets at December 31,
1996................... 6.33% (.28)% (1.05)% 8.51%
========== ========= ========= =========
</TABLE>
- --------
(1)Investments and MBS are at amortized cost.
(2) Based on assumed annual prepayment and amortization rates which approximate
the Company's historical experience.
LIQUIDITY AND REGULATORY CAPITAL
LIQUIDITY
The Company's primary sources of funds include:
. Cash flow from operations
. Loan and MBS repayments
. Customer deposits
. Advances from the FHLBSF
. Reverse repurchase agreements
The Company uses its liquidity resources principally as follows:
. Origination and purchases of loans
. Funding the withdrawal of certificates of deposits and other deposit
products
. Repayment and/or refinancing of maturing FHLBSF advances and reverse
repurchase agreements
S-48
<PAGE>
The Company expects the foregoing sources of funds, together with the net
proceeds from the issuance of the Notes, will satisfy its liquidity
requirements through the end of 1997. However, to the extent that the Company
seeks to make additional acquisitions, it may be required to seek additional
sources of outside financing.
OTS regulations require savings institutions to maintain a specified
liquidity ratio (presently 5.00%) of cash and specified securities to total
customer deposits and borrowings due in one year or less. Historically, the
Bank has maintained its liquid assets above the minimum requirements imposed
by the OTS regulations and at a level believed adequate to meet requirements
of normal banking activities, repayment of maturing debt and potential deposit
outflows. The Bank maintained liquidity ratios of 5.19%, 5.39% and 5.26% for
the month ended June 30, 1997, December 31, 1996 and 1995, respectively.
REGULATORY CAPITAL
The Bank
The Bank's regulatory capital at June 30, 1997 exceeded the minimum
requirements of each OTS regulatory capital standard on a fully phased-in
basis as follows:
<TABLE>
<CAPTION>
ACTUAL MINIMUM REQUIREMENT EXCESS
---------------- ------------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- ------------------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible.............. $164,299 5.45% $ 45,195 1.50% $119,104 3.95%
Core (Leverage)....... 167,161 5.54 90,476 3.00 76,685 2.54
Risk-based............ 190,256 10.26 148,388 8.00 41,868 2.26
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each Federal banking agency, including the OTS, to implement prompt
corrective actions for institutions that it regulates. Under capital
guidelines established by FDICIA, the Bank met the criteria for the "well
capitalized" standard at June 30, 1997 as follows:
<TABLE>
<CAPTION>
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
-------------- ----------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- --------- ------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leverage....................... $167,161 5.54% $ 150,793 5.00% $16,368 0.54%
Tier 1 risk-based.............. 167,161 9.01 111,291 6.00 55,870 3.01
Tier 2 risk-based.............. 190,256 10.26 185,485 10.00 4,771 0.26
</TABLE>
California Thrift & Loan
Under capital guidelines established by FDICIA, CTL met the criteria for the
"adequately capitalized" standard at June 30, 1997.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which
requires that an enterprise report, any major components and as a single
total, the change in its net assets during the period from nonowner sources;
and SFAS No. 131 (Disclosures about Segments of an Enterprise and Related
Information), which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and
S-49
<PAGE>
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms
of historical dollars, without considering changes in the relative purchasing
power of money over time, due to the fact that almost all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than general levels of inflation. Interest rates do not
necessarily move in the same direction or magnitude as the prices of goods and
services.
S-50
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Financial Information
is based on the historical financial statements of the Company and AFEH and
has been prepared to illustrate the effect of the Merger and the issuance of
the Notes. Consummation of the Merger is subject to a number of conditions,
and no assurance can be given that the Merger will be consummated on the
currently anticipated terms or at all. See "Risk Factors--Acquisition of AFEH
and EurekaBank."
The following unaudited Pro Forma Condensed Combined Balance Sheet as of
June 30, 1997 is based on the historical consolidated statements of financial
condition of the Company and AFEH giving effect to the accounting for the
Merger using the purchase method of accounting and assuming the Merger and the
issuance of the Notes both occurred as of June 30, 1997.
The unaudited Pro Forma Condensed Combined Statements of Operations for the
year ended December 31, 1996 and for the six months ended June 30, 1997 are
based on the historical consolidated statements of operations of the Company
and AFEH for the respective periods, giving effect to the accounting for the
Merger using the purchase method of accounting and assuming the Merger and the
issuance of the Notes both occurred as of January 1, 1996.
The unaudited Pro Forma Condensed Combined Balance Sheet and Statements of
Operations should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements and notes thereto of the Company and AFEH,
which are included or incorporated by reference herein. See "Incorporation of
Certain Documents by Reference" in the accompanying Prospectus.
As noted above, the Merger will be accounted for using the purchase method
of accounting. Accordingly, the pro forma adjustments are based upon certain
assumptions and estimates regarding the amount of goodwill (which represents
the excess of the acquisition costs over the fair value of assets acquired and
liabilities assumed) which will arise from the Merger and the period over
which such goodwill will be amortized. Certain purchase accounting adjustments
have been made to specific assets and liabilities. There is no material effect
on the amount of goodwill recorded for the unallocated purchase price based on
information available as of this date. The amount of goodwill to be recorded
as of the Merger date is expected to be $112 million and represents the best
estimate of the excess of the acquisition costs over the fair value of assets
acquired and liabilities assumed based on information available as of the date
hereof. The actual goodwill arising from the acquisition will be based on the
acquisition cost over the fair value of the assets and liabilities on the date
the Merger is consummated. No assurance can be given that actual goodwill will
not be more or less than the estimated amount reflected in the pro forma
financial statements or that the period over which such goodwill is amortized
will not differ from the period used in the accompanying pro forma financial
statements. In this regard, the amount of goodwill arising from the Merger
could increase, perhaps substantially, in the event the market price of the
Company's common stock increases beyond a certain level. See "Risk Factors--
Acquisition of AFEH and EurekaBank."
The Unaudited Pro Forma Condensed Combined Financial Information is based
upon a number of other assumptions and estimates, and is subject to a number
of other uncertainties, relating to the Merger and related matters, including,
among other things, estimates, assumptions and uncertainties regarding (i) the
amount of accruals for direct acquisition costs and the amount of expenses
associated with branch closings, settlement of existing contracts and
severance pay, (ii) the interest rate on the Notes, (iii) the amount of the
deferred tax assets resulting from AFEH's tax loss carryforwards and (iv) as
noted above, the actual amount of goodwill which will result from the Merger.
The Unaudited Pro Forma Condensed Combined Financial Information also assumes
that the Company will issue 8,077,000 shares of its common stock to the
Partnership in connection with the Merger. However, the actual number of
shares issued will depend upon the market price of the Company's common stock
prior to the Merger and the number of shares issued therefore may be more or
less than the foregoing amount. Accordingly, the Unaudited Pro Forma Condensed
Combined Financial Information does not purport to be indicative of the actual
results of operations or financial condition that would have been achieved had
the Merger and the issuance of the Notes in fact occurred on the dates
indicated, nor does it purport to be indicative of the results of operations
or financial condition that may be achieved in the future. In addition, the
consummation of the Merger is subject to satisfaction of a number of
conditions, and no assurance can be given that the Merger will be consummated
on the currently anticipated terms or at all.
S-51
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------
THE PRO FORMA PRO FORMA
COMPANY AFEH ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
------
<S> <C> <C> <C> <C>
Cash and cash equivalents....... $ 95,053 $ 45,399 $ (3,504)(1) $ 136,948
Loans held for sale............. -- 495 -- 495
Securities available-for-sale:
Investment securities......... 7,803 -- -- 7,803
Mortgage-backed securities.... 78,030 42,001 -- 120,031
Securities held-to-maturity:
Investment securities......... 15,103 -- -- 15,103
Mortgage-backed securities.... 458,689 549,490 -- 1,008,179
Loans receivable, net........... 2,294,246 1,477,903 -- 3,772,149
Investment in stock of the
FHLBSF......................... 59,290 19,906 -- 79,196
Real estate owned, net.......... 8,818 1,237 -- 10,055
Premises and equipment, net..... 10,095 8,592 -- 18,687
Intangible assets............... 31,539 2,272 97,472 (2) 131,283
Other assets.................... 37,547 40,400 75,302 (3) 153,249
---------- ---------- -------- ----------
Total assets.................. $3,096,213 $2,187,695 $169,270 $5,453,178
========== ========== ======== ==========
<CAPTION>
LIABILITIES AND
---------------
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C>
Customer deposits............... $1,578,206 $1,888,965 $ -- $3,467,171
Advances from FHLBSF............ 1,092,730 75,181 -- 1,167,911
Securities sold under agreements
to repurchase.................. 142,461 15,522 -- 157,983
Senior Debentures due 1999...... 50,000 -- -- 50,000
Subordinated Notes due 2007..... -- -- 99,350 (4) 99,350
Other borrowings................ 6,485 -- -- 6,485
Other liabilities............... 30,135 17,072 50,875 (5) 98,082
---------- ---------- -------- ----------
Total liabilities............. 2,900,017 1,996,740 150,225 5,046,982
Redeemable preferred stock...... -- 8,854 (8,854)(5) --
Stockholders' equity............ 196,196 182,101 27,899 (6) 406,196
---------- ---------- -------- ----------
Total liabilities and
stockholders' equity........... $3,096,213 $2,187,695 $169,270 $5,453,178
========== ========== ======== ==========
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Information."
S-52
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
----------------------------------------------
THE PRO FORMA PRO FORMA
COMPANY AFEH ADJUSTMENTS COMBINED
---------- ------- ----------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans
receivable............... $ 95,070 $54,519 $ -- $ 149,589
Interest on mortgage-
backed securities........ 18,079 22,024 -- 40,103
Interest and dividends on
investments.............. 4,346 1,404 -- 5,750
---------- ------- -------- ----------
117,495 77,947 -- 195,442
Interest expense:
Interest on customer
deposits................. 38,139 43,453 -- 81,592
Interest on Senior
Debentures due 1999...... 2,228 -- -- 2,228
Interest on Subordinated
Notes due 2007........... -- -- 4,795 (7) 4,795
Other interest expense.... 34,305 3,967 -- 38,272
---------- ------- -------- ----------
74,672 47,420 4,795 126,887
Net interest income......... 42,823 30,527 (4,795) 68,555
Provision for losses on
loans...................... 1,177 502 -- 1,679
---------- ------- -------- ----------
Net interest income after
provision for losses on
loans...................... 41,646 30,025 (4,795) 66,876
Noninterest income:
Loan fees and charges..... 2,903 608 -- 3,511
Gain on sale of loans and
securities............... 925 167 -- 1,092
Other..................... 3,503 4,443 -- 7,946
---------- ------- -------- ----------
7,331 5,218 -- 12,549
Noninterest expense:
General and
administrative........... 30,831 21,324 -- 52,155 (8)
Real estate owned......... (617) -- -- (617)
Amortization of
intangibles.............. 1,630 580 2,813 (9) 5,023
---------- ------- -------- ----------
31,844 21,904 2,813 56,561
Income before income tax
expense.................... 17,133 13,339 (7,608) 22,864
Income tax expense.......... 7,367 640 2,548 (10) 10,555
---------- ------- -------- ----------
Net income................ $ 9,766 $12,699 $(10,156) $ 12,309 (11)
========== ======= ======== ==========
Primary earnings per share.. $ 0.73 $ 0.57 (11)
========== ==========
Average shares outstanding
(including common stock
equivalents)............... 13,440,000 21,517,000
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Information."
S-53
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
THE PRO FORMA PRO FORMA
COMPANY AFEH ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans
receivable............. $ 192,443 $107,157 $ -- $ 299,600
Interest on mortgage-
backed securities...... 42,081 50,161 -- 92,242
Interest and dividends
on investments......... 7,231 4,565 -- 11,796
---------- -------- -------- ----------
241,755 161,883 -- 403,638
Interest expense:
Interest on customer
deposits............... 100,225 81,982 -- 182,207
Interest on Senior
Debentures due 1999.... 2,623 -- -- 2,623
Interest on Subordinated
Notes due 2007......... -- -- 9,590 (7) 9,590
Other interest expense.. 57,925 19,689 -- 77,614
---------- -------- -------- ----------
160,773 101,671 9,590 272,034
Net interest income....... 80,982 60,212 (9,590) 131,604
Provision for losses on
loans.................... 1,898 965 -- 2,863
---------- -------- -------- ----------
Net interest income
after provision for
losses on loans........ 79,084 59,247 (9,590) 128,741
Noninterest income:
Loan fees and charges... 4,930 1,379 -- 6,309
Gain (loss) on sale of
loans and securities... (1,453) 307 -- (1,146)
Other................... 5,087 6,714 -- 11,801
---------- -------- -------- ----------
8,564 8,400 -- 16,964
Noninterest expenses:
General and
administrative......... 58,955 44,317 -- 103,272 (8)
SAIF recapitalization
assessment............. 11,750 11,000 -- 22,750
Real estate owned....... (4,909) 270 -- (4,639)
Amortization of
intangibles............ 2,606 1,213 5,573 (9) 9,392
---------- -------- -------- ----------
68,402 56,800 5,573 130,775
Income before income tax
expense.................. 19,246 10,847 (15,163) 14,930
Income tax expense
(benefit)................ 8,277 (20,870) 22,122 (10) 9,529
---------- -------- -------- ----------
Net income.............. $ 10,969 $ 31,717 $(37,285) $ 5,401 (11)
========== ======== ======== ==========
Primary earnings per
share.................... $ 0.79 $ 0.25 (11)
========== ==========
Average shares outstanding
(including common stock
equivalents)............. 13,900,000 21,977,000
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Information."
S-54
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. The adjustment reflects (i) receipt by the Company of the estimated net
proceeds from the issuance of the Notes offered hereby, (ii) the redemption of
$8.9 million of the preferred stock of EurekaBank held by the FDIC and (iii)
the $90 million payment for the cash portion of the Merger consideration. See
"Use of Proceeds."
2. The adjustment represents the excess of acquisition cost over the
estimated fair value of net assets acquired (i.e. goodwill) net of the AFEH
pre-acquisition goodwill written-off as of June 30, 1997. Goodwill is
preliminarily assumed to be amortized on a straight-line basis over a period
of 15 years. The goodwill amount reflected herein is not necessarily
indicative of the amount which will be recorded when the Merger is
consummated. Based on the Company's acquisition analysis, management has
estimated that the goodwill to be recorded as of the Merger date will be
approximately $112 million. The actual goodwill arising from the Merger will
be based on the fair values of the assets and liabilities on the date the
Merger is consummated and may be more or less than the estimated amount
reflected herein.
3. These adjustments represent deferred taxes arising from the tax loss
carryforwards of AFEH, deferred issuance costs of the Notes and tax receivable
related to expense accruals described in Note 5 below. As of June 30, 1997,
AFEH maintained a valuation allowance for deferred tax assets. The pro forma
adjustment for deferred tax assets is based on a revaluation of the expected
realizability of the estimated benefits from tax loss carryforwards based on
the operating results of the combined companies resulting from the Merger.
4. This adjustment represents the issuance of the Notes offered hereby.
5. This adjustment represents direct acquisition costs and accruals for
certain estimated expenses associated with branch closings, amounts for
settlement of obligations under existing contracts and severance pay for
involuntary terminations in connection with the Merger and redemption of the
preferred stock of EurekaBank held by the FDIC.
6. This adjustment represents the issuance of $210 million of the Company's
common stock to the Partnership offset by the elimination of AFEH's equity for
consolidation purposes.
7. This adjustment represents the interest rate on the Notes of 9.125% (all-
in cost is expected to be approximately 9.65%) per annum.
8. No adjustments have been made to general and administrative expenses for
expected annualized cost savings which the Company believes will be derived
primarily from the elimination of duplicative administrative functions and
consolidation of loan servicing functions and the cessation of EurekaBank's
residential loan origination activities. However, there can be no assurance
that any such cost savings will in fact be realized.
9. This adjustment reflects the goodwill preliminarily assumed to be
amortized on a straight-line basis over a period of 15 years offset in part by
the reversal of the amortization of pre-acquisition AFEH goodwill. The
goodwill amortization is not necessarily indicative of the amount which will
be recorded when the transaction is consummated. See Note 2 above.
10. This adjustment represents the reversal of tax benefits recognized by
AFEH associated with tax loss carryforwards partially offset by tax benefit
related to the interest expense on the Notes. See Notes 4 and 7 above.
11. The net income and earnings per share amounts reflected herein do not
purport to be indicative of actual results that would have been achieved had
the Merger and the issuance of the Notes in fact occurred on the dates
indicated nor do they purport to be indicative of results of operations that
may be achieved in the future. The historical and pro forma net income and
earnings per share amounts include the impact of a charge relating to a one-
time SAIF recapitalization assessment for both the Bank and EurekaBank (for
the year ended December 31, 1996, $22.7 million pretax; for the six months
ended June 30, 1997, none). In addition, no adjustments have been made to
general and administrative expenses for expected cost savings as described in
Note 8 above.
S-55
<PAGE>
12. The number of shares of the Company's common stock to be issued to the
Partnership is calculated based on the common stock portion of the purchase
price of $210 million divided by an assumed stock price of $26 per share. The
actual number of shares of the Company's common stock issued in the Merger
will be determined by dividing (i) $210 million by (ii) the average closing
sale price of one share of the Company's common stock on The Nasdaq Stock
Market for the 20 consecutive full trading days ending on the fifth business
day immediately prior to the closing date of the Merger (the "Average Company
Stock Price"), not to exceed $26.00 or be less than $21.00 unless (A) the
Average Company Stock Price is less than $21.00, (B) AFEH has given notice of
its intention to terminate the Merger Agreement (as permitted by the Merger
Agreement upon such event); and (C) the Company has made an Adjustment
Election, pursuant to which the Company agrees that the Average Company Stock
Price shall be determined without regard to the $21.00 minimum price. As a
result, the actual number of shares issued in the Merger will depend upon the
market price of the Company's common stock prior to the date of the Merger and
may be more or less than the number of shares reflected herein. See "Risk
Factors--Acquisition of AFEH and EurekaBank."
S-56
<PAGE>
DESCRIPTION OF NOTES
The following description of certain terms of the Notes offered hereby
supplements and, to the extent inconsistent therewith, replaces the
description of the general terms and provisions of the Debt Securities set
forth in the accompanying Prospectus. The following statements relating to the
Notes and the Indenture are summaries of certain provisions contained therein
and do not purport to be complete. Such statements are qualified by reference
to the provisions of the Notes and the Indenture, including the definitions
therein of certain terms. Unless otherwise expressly stated or the context
otherwise requires, all references to the "Company" appearing under this
caption "Description of Notes" and under the caption "Description of Debt
Securities" in the accompanying Prospectus shall mean Bay View Capital
Corporation, excluding its consolidated subsidiaries. Other capitalized terms
used herein but not otherwise defined shall have the meanings given to them in
the accompanying Prospectus or, if not defined in the Prospectus, in the
Indenture.
The Notes constitute Debt Securities (which are more fully described in the
accompanying Prospectus) to be issued pursuant to an Indenture (the
"Indenture," which term, as used herein, includes the Officers' Certificate
establishing the terms of the Notes) between the Company and SunTrust Bank,
Central Florida, National Association, as trustee (the "Trustee"). The terms
of the Notes include those provisions contained in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "TIA"). The Notes are subject to all such terms, and investors
are referred to the Indenture and the TIA for a statement thereof.
GENERAL
The Notes will be a separate series of Debt Securities under the Indenture,
limited in aggregate principal amount to $100 million. Such series may not be
reopened for the issuance of additional Debt Securities of such series.
The Notes will mature on August 15, 2007. The Notes will be subject to
redemption at the option of the Company as described below under "--Optional
Redemption." The Company will not be required to make any sinking fund
payments with respect to the Notes.
The Notes will bear interest at the rate per annum set forth on the cover
page of this Prospectus Supplement from August 28, 1997 or from the most
recent date to which interest has been paid or duly provided for, payable
semi-annually in arrears on February 15 and August 15 (the "Interest Payment
Dates") of each year, commencing February 15, 1998, to the Persons in whose
names the Notes are registered at the close of business on the February 1 or
August 1 (the "Regular Record Dates"), as the case may be, immediately prior
to such Interest Payment Dates, regardless of whether any such Regular Record
Date is a Business Day. Interest on the Notes will be computed on the basis of
a 360-day year of twelve 30-day months.
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and integral multiples thereof. The Notes will be
evidenced by one or more Global Notes in book-entry form, except under the
limited circumstances described below under "--Global Notes." The Global Notes
will be registered in the name of a nominee of DTC, as depositary for the
Notes (the "Depository"). Notices or demands to or upon the Company in respect
of the Notes and the Indenture may be served at the corporate trust office of
the Trustee which on the date hereof was located in Orlando, Florida. In the
event that Notes are issued in definitive certificated form, Notes may be
surrendered for payment, registration of transfer or exchange at the office or
agency of the Company which will be established and maintained for such
purpose in the Borough of Manhattan, The City of New York.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company (upon obtaining
the approval of the Federal Reserve Board, if required, in the event the
Company becomes a bank holding company), in whole or from time
S-57
<PAGE>
to time in part, at any time on or after August 15, 2002, on not less than 30
nor more than 60 days' prior written notice to each holder of Notes to be
redeemed, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest, if any, to the
relevant redemption date, if redeemed during the 12-month period beginning on
August 15 of the years indicated below; provided that installments of interest
on Notes which are due and payable on or prior to the relevant redemption date
shall be payable to the holders of such Notes registered as such at the close
of business on the relevant Regular Record Dates:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2002...................................................... 104.563%
2003...................................................... 103.042%
2004...................................................... 101.521%
2005 and thereafter....................................... 100.000%
</TABLE>
In addition, at any time prior to August 15, 2002, the Notes will be
redeemable at the option of the Company, in whole or in part, within 180 days
of the occurrence of a Change of Control (as defined) or a Regulatory Event
(as defined), on not less than 30 nor more than 60 days' prior written notice
to each holder of Notes to be redeemed, at a redemption price equal to the sum
of (x) the principal amount thereof, plus (y) accrued and unpaid interest, if
any, to the applicable date of redemption, plus (z) the Applicable Premium (as
defined).
If less than all of the outstanding Notes are to be redeemed, the Notes to
be redeemed shall be selected by the Trustee by such method as it deems fair
and appropriate. On and after the relevant redemption date, interest will
cease to accrue on the Notes or portions thereof called for redemption on such
date.
LIMITED RIGHTS OF ACCELERATION
Payment of the principal of the Notes may be accelerated only in the case of
certain events involving the bankruptcy, insolvency or reorganization of the
Company or a Major Bank Subsidiary of the Company, and no right of
acceleration will exist in the case of default in the payment of the principal
of or premium, if any, or interest on the Notes or in the performance of any
other covenants of the Company in the Indenture. See "Risk Factors--Limited
Rights of Acceleration Upon Event of Default" herein and "Description of Debt
Securities--Events of Default; Limited Rights of Acceleration" in the
accompanying Prospectus.
RANKING OF NOTES; HOLDING COMPANY STRUCTURE
The Notes will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined in the accompanying Prospectus) of the Company. On a
pro forma basis after giving effect to the issuance of the Notes and the
consummation of the proposed Merger, as of June 30, 1997 the Company
(excluding its subsidiaries) would have had approximately $50.0 million of
Senior Indebtedness outstanding. See "Unaudited Pro Forma Condensed Combined
Financial Information." The Indenture will not limit the incurrence by the
Company of additional Senior Indebtedness or other liabilities. See "Risk
Factors--Absence of Limitation on Indebtedness and Liens; Absence of Event
Risk Protection" herein and "Description of Debt Securities--Subordination" in
the accompanying Prospectus.
The Notes will be obligations exclusively of the Company. The Company is a
holding company substantially all of whose consolidated assets are held by its
subsidiaries. Accordingly, the cash flow of the Company and the consequent
ability to service its debt, including the Notes, are primarily dependent upon
the results of operations of such subsidiaries and upon the ability of such
subsidiaries to provide funds to the Company. Various statutory and regulatory
restrictions, however, limit directly or indirectly the amount of dividends
the Company's subsidiaries (including the Bank and CTL) can pay, and also
limit the Bank and CTL from making investments in or loans to the Company. In
addition, EurekaBank is subject to statutory and regulatory restrictions
similar to those applicable to the Bank, and is also subject to a limitation,
pursuant to an agreement with the FDIC, on its ability to pay dividends. See
"Risk Factors--Acquisition of AFEH and
S-58
<PAGE>
EurekaBank" and "--Subordination of Notes; Holding Company Structure;
Restrictions on Ability of Bank to Pay Dividends" herein and "Description of
Debt Securities--Ranking of Debt Securities; Holding Company Structure" in the
accompanying Prospectus.
Because the Company is a holding company, the Notes will be effectively
subordinated to all existing and future liabilities, including indebtedness,
customer deposits, trade payables, guarantees and lease obligations, of the
Company's subsidiaries, including the Bank. On a pro forma basis after giving
effect to the issuance of the Notes and the consummation of the proposed
Merger, as of June 30, 1997 the Company's subsidiaries would have had
approximately $5.0 billion of total liabilities (including approximately $3.5
billion of customer deposits but excluding intercompany liabilities). See
"Unaudited Pro Forma Condensed Combined Financial Information." The Indenture
will not limit the amount of indebtedness or other liabilities which may be
incurred by the Company's subsidiaries. See "Risk Factors--Absence of
Limitation on Indebtedness and Liens; Absence of Event Risk Protection" and
"-- Subordination of Notes; Holding Company Structure; Restrictions on Ability
of Bank to Pay Dividends" herein and "Description of Debt Securities--Ranking
of Debt Securities; Holding Company Structure" in the accompanying Prospectus.
ABSENCE OF LIMITATION ON INDEBTEDNESS AND LIENS; ABSENCE OF EVENT RISK
PROTECTION
The Indenture will not limit the amount of indebtedness, guarantees and
other liabilities that may be incurred or assumed by the Company and its
subsidiaries and will not prohibit the Company and its subsidiaries from
creating or assuming liens on their property (including capital stock of the
Bank and other subsidiaries of the Company). The Indenture will not require
the maintenance of any financial ratios by, or specified levels of revenues,
income, cash flow or liquidity of, the Company. The Indenture will not contain
provisions which would give holders of the Notes the right to require the
Company to repurchase their Notes or otherwise afford holders of the Notes
protection in the event of (i) a highly leveraged or similar transaction
involving the Company, (ii) a change in control of or in the management of the
Company, or (iii) a reorganization, restructuring, merger or similar
transaction involving the Company that may adversely affect the holders of the
Notes. In addition, subject to the limitations set forth below under "--
Certain Covenants--Limitation on Consolidation, Merger and Sale of Assets,"
the Company may, in the future, enter into certain transactions, such as the
sale of all or substantially all of its assets or the merger or consolidation
of the Company with another entity, that could increase the amount of the
Company's indebtedness or otherwise adversely affect its financial condition
or results of operations, and which may have an adverse effect on the
Company's ability to service its indebtedness, including the Notes.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Restricted Payments. (a) The Indenture will provide that the
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly:
(i) declare, pay or set apart any funds for the payment of any dividend
on, or make any distribution to holders of, any Capital Stock of the
Company or any Capital Stock of any Subsidiary of the Company (other than
payments to the Company or a Subsidiary of the Company and other than
dividends or distributions to the extent payable in Qualified Capital Stock
of the Company);
(ii) repurchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any Capital Stock of the Company or any Subsidiary
(other than any Wholly Owned Subsidiary) of the Company; or
(iii) prior to any Fixed Maturity of principal or any scheduled mandatory
redemption date or any scheduled sinking fund payment of any Junior
Subordinated Indebtedness, make any principal payments on, or repurchase,
redeem, defease or otherwise acquire or retire for value, directly or
indirectly, any Junior Subordinated Indebtedness;
S-59
<PAGE>
(each of the foregoing actions described in clauses (i) through (iii) above,
other than any such action that is a Permitted Payment (as defined below), is
referred to herein as a "Restricted Payment"), unless immediately after giving
effect to the proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, as determined in good faith by the Board of
Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution), (1) no Default or Event of Default shall
have occurred and be continuing, (2) the Company and each Principal Bank
Subsidiary of the Company will be in compliance with its Regulatory Capital
Requirements and (3) the aggregate amount of all such Restricted Payments by
the Company and its Subsidiaries declared or made after June 30, 1997
(excluding all Restricted Payments declared or made pursuant to and in
compliance with clause (y) or (z) of the proviso to this paragraph (a)) does
not exceed the sum of:
(A) 50% of the Adjusted Consolidated Net Income of the Company accrued on
a cumulative basis during the period commencing on July 1, 1997 and ending
on the last day of the Company's most recent fiscal quarter ending prior to
the date of such Restricted Payment (or, if such Adjusted Consolidated Net
Income shall be a loss, minus 100% of such loss);
(B) the aggregate (without duplication) of the Net Cash Proceeds and the
Fair Market Value of property not constituting Net Cash Proceeds received
by the Company after July 1, 1997 from the issuance or sale (other than to
any of its Subsidiaries) of Qualified Capital Stock of the Company, except,
in each case, to the extent such proceeds or property are used to
repurchase, redeem, defease, make sinking fund payments on or otherwise
acquire or retire Capital Stock of the Company or any Subsidiary (other
than any Wholly Owned Subsidiary and other than Capital Stock of a
Subsidiary of the Company if purchased from such Subsidiary) of the Company
or Junior Subordinated Indebtedness as set forth in clause (b)(i) below and
except, in each case, for Qualified Capital Stock issued in connection with
the Merger; and
(C) the aggregate (without duplication) of the Net Cash Proceeds and the
Fair Market Value of property not constituting Net Cash Proceeds received
by the Company after July 1, 1997 from the issuance or sale (other than to
any of its Subsidiaries) of any debt securities or Redeemable Capital Stock
that is subsequently converted into or exchanged for Qualified Capital
Stock of the Company plus (without duplication) any additional Net Cash
Proceeds and the Fair Market Value of any additional property received by
the Company at the time of such conversion or exchange, except in each case
for any debt securities or Redeemable Capital Stock issued in connection
with the Merger;
provided that (x) the foregoing provisions of this paragraph (a) will not
restrict the payment of any dividend within 60 days after the date of
declaration thereof if, at such date of declaration, such declaration and
payment was permitted by the foregoing provisions of this paragraph (a), (y)
notwithstanding the limitations set forth in clause (3) of this paragraph (a),
but subject to compliance with the conditions set forth in clauses (1) and (2)
of this paragraph (a), the Company and its Subsidiaries may declare and make
Restricted Payments in an aggregate amount not to exceed $15 million in the
period from July 1, 1997 through December 31, 1997 and not to exceed $30
million in any calendar year thereafter (commencing with the calendar year
ending December 31, 1998) and no Restricted Payments declared or made pursuant
to and in compliance with this clause (y) shall be included in calculating the
aggregate amount of Restricted Payments declared or made by the Company and
its Subsidiaries for purposes of clause (3) of this paragraph (a), and (z) the
foregoing provisions of this paragraph (a) will not restrict the repurchase or
redemption of shares of preferred stock of EurekaBank, A Federal Savings Bank,
which are outstanding on the Issue Date and held by the Federal Deposit
Insurance Corporation, so long as the aggregate purchase or redemption price
does not exceed $10 million, such purchase or redemption occurs prior to or
substantially concurrently with the Merger and such preferred stock is retired
following such redemption or repurchase, and no Restricted Payments declared
or made pursuant to and in compliance with this clause (z) shall be included
in calculating the aggregate amount of Restricted Payments declared or made by
the Company and its Subsidiaries for purposes of clause (3) of this paragraph
(a).
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(b) The Indenture will provide that, so long as no Default or Event of
Default has occurred and is continuing, the provisions of paragraph (a) above
shall not restrict the following actions (each being referred to as a
"Permitted Payment"):
(i) the repurchase, redemption, defeasance or other acquisition or
retirement of any Capital Stock of the Company or any Subsidiary (other
than a Wholly Owned Subsidiary and other than the purchase of Capital Stock
of a Subsidiary of the Company from such Subsidiary) of the Company or
Junior Subordinated Indebtedness in exchange for (including any such
exchange pursuant to the exercise of a conversion right or privilege where,
in connection therewith, cash is paid in lieu of the issuance of fractional
shares or scrip), or out of the Net Cash Proceeds or Fair Market Value of
property not constituting Net Cash Proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary of the Company) of Qualified
Capital Stock of the Company; provided that the Net Cash Proceeds or Fair
Market Value of such property received by the Company from the issuance of
such shares of Qualified Capital Stock shall, to the extent so utilized, be
excluded from clause (B) of paragraph (a) above; and
(ii) the repurchase, redemption, defeasance or other acquisition or
retirement of any Junior Subordinated Indebtedness (other than Redeemable
Capital Stock) in exchange for, or out of the Net Cash Proceeds of, a
substantially concurrent issue and sale (other than to a Subsidiary of the
Company) of new Junior Subordinated Indebtedness of the Company (such a
transaction, a "refinancing;" the term "refinanced" shall have a meaning
correlative to the foregoing); provided that (a) any such new Junior
Subordinated Indebtedness of the Company shall be in a principal amount
that does not exceed an amount equal to the sum of (i) the principal amount
of the Junior Subordinated Indebtedness to be so refinanced, (ii) the
amount of any premium expected to be paid in connection with such
refinancing pursuant to the terms of the Junior Subordinated Indebtedness
to be so refinanced or the amount of any premium reasonably determined by
the Company as necessary to accomplish such refinancing by means of a
tender offer, privately negotiated repurchase or otherwise and (iii) the
amount of expenses of the Company incurred in connection with such
refinancing (provided that for purposes of this clause (a), the principal
amount of any Junior Subordinated Indebtedness shall be deemed to mean the
principal amount thereof or, if such Junior Subordinated Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, such lesser amount as
would be due and payable if such Junior Subordinated Indebtedness were
accelerated as of the date of determination); (b) (x) if such refinanced
Junior Subordinated Indebtedness has an Average Life to Stated Maturity
shorter than that of the Notes or a final Fixed Maturity earlier than the
Final Maturity Date of the Notes, such new Junior Subordinated Indebtedness
shall have an Average Life to Stated Maturity no shorter than the Average
Life to Stated Maturity of such refinanced Junior Subordinated Indebtedness
and a final Fixed Maturity no earlier than the final Fixed Maturity of such
refinanced Junior Subordinated Indebtedness or (y) in all other cases, each
Fixed Maturity of principal (or any required repurchase (other than
pursuant to Permitted Repurchase Provisions), redemption, defeasance or
sinking fund payments) of such new Junior Subordinated Indebtedness shall
be on or after the Final Maturity Date of the Notes; and (c) such new
Junior Subordinated Indebtedness of the Company is expressly subordinate to
the Notes in right of payment to at least substantially the same extent as
the Junior Subordinated Indebtedness being refinanced.
Limitation on Affiliate Transactions. The Indenture will provide that the
Company will not, and will not permit any of its Subsidiaries to, enter into
or permit to exist any transaction (including, without limitation, the
purchase, sale, lease or exchange of any property, any employee compensation
arrangements or the rendering of any service) with any Affiliate of the
Company or any Affiliate of any of the Company's Subsidiaries unless the terms
thereof (i) are no less favorable to the Company or such Subsidiary, as the
case may be, than those that could be obtained at the time of such transaction
in arm's-length dealings with a Person who is not such an Affiliate, (ii) if
such transaction involves an amount in excess of $5.0 million, (a) are set
forth in writing and (b) have been approved by resolution adopted by a
majority of the members of the Company's board of directors having no personal
stake in such transaction and (iii) if such transaction involves an amount in
excess of $15.0 million, have been determined (as set forth in a written
opinion) by a nationally recognized investment banking firm (or, if nationally
recognized investment banking firms do not customarily render opinions with
respect to
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transactions of such type, by a nationally recognized expert with experience
in evaluating the terms and conditions of transactions of such type) to be
fair, from a financial point of view, to the Company or such Subsidiary, as
the case may be; and the Company shall have delivered to the Trustee the
writings, resolutions and/or opinions, as the case may be, required by clauses
(ii) and (iii) of this sentence.
The provisions of the foregoing paragraph shall not apply to (i)
transactions between or among the Company and any of its Subsidiaries or
between or among Subsidiaries of the Company, (ii) any Restricted Payment or
Permitted Payment permitted to be made under the covenant described under "--
Limitation on Restricted Payments," (iii) loans or advances to employees in
the ordinary course of business, (iv) customary directors fees and
indemnities, (v) ordinary course commercial agreements or renewals thereof on
such terms as are in effect as of the Issue Date and which terms are no less
favorable to the Company or such Subsidiary, as the case may be, than those
that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (vi) any issuance of
securities or other payments, compensation, benefits, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors of the Company and (vii) the grant of stock options or similar
rights to employees and directors of the Company or any of its Subsidiaries
pursuant to plans approved by the Board of Directors of the Company.
Reports. The Indenture will provide that the Company will file on a timely
basis with the Commission, to the extent such filings are accepted by the
Commission and whether or not the Company has a class of securities registered
under the Exchange Act, the annual reports, quarterly reports and other
documents that the Company would be required to file if it were subject to
Section 13 or 15(d) of the Exchange Act. The Indenture will also provide that
the Company will (a) file with the Trustee, and mail to each holder of Notes
and, so long as any of the Notes is represented by one or more Global Notes,
mail or otherwise deliver to each beneficial owner of an interest in the
Global Notes (upon written request to the Company by such beneficial owner),
without cost to such holder or beneficial owner, as the case may be, copies of
such reports and documents within 15 days after the date on which the Company
files such reports and documents with the Commission or the date on which the
Company would be required to file such reports and documents if the Company
were so required and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the
Exchange Act, supply at the Company' cost copies of such reports and documents
to any prospective holder of Notes and, so long as any of the Notes is
represented by one or more Global Notes, to each prospective owner of a
beneficial interest in the Global Notes promptly upon written request.
Limitation on Consolidation, Merger and Sale of Assets. The Indenture will
provide that the Company will not, in any transaction or series of related
transactions, consolidate with or merge into any Person or sell, assign,
transfer, lease or otherwise convey all or substantially all its properties
and assets to any Person unless (a) either the Company shall be the continuing
Person, or the successor or transferee Person (if other than the Company) (the
"Successor Person") is a corporation which is organized and existing under the
laws of the United States of America, any state thereof or the District of
Columbia and shall expressly assume the due and punctual payment of the
principal of and premium, if any, and interest on all of the Notes outstanding
under the Indenture and the performance of the Company's other obligations
under the Indenture and the Notes; (b) immediately after giving effect to such
transaction or series of transactions, no Default or Event of Default with
respect to the Notes shall have happened and be continuing; (c) immediately
after giving effect to such transaction or series of transactions on a pro
forma basis, the Company and each of its Principal Bank Subsidiaries or the
Successor Person and each of its Principal Bank Subsidiaries, as the case may
be, shall be in compliance with its Regulatory Capital Requirements; and (d)
certain other conditions are met; provided that clause (c) of this paragraph
shall not be applicable at any time that (1) the Company is subject to the
capital adequacy guidelines of the Federal Reserve Board and (2) the Company
has reasonably determined (as evidenced by an Officers' Certificate delivered
to the Trustee) that there is more than an insubstantial risk that the
continued applicability of such clause (c) would prevent the Company from
treating the Notes as Tier 2 Capital (or the then equivalent thereof, if
applicable) for purposes of the capital adequacy guidelines of the Federal
Reserve Board, as then in effect and applicable to the Company; and provided,
further, that if at any time thereafter (I)
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the Company ceases to be subject to the capital adequacy guidelines of the
Federal Reserve Board or (II) the Company would not at such time be able to
make the determination described in clause (2) above, then the provisions of
such clause (c) shall thereupon automatically again become applicable.
Upon any such merger, consolidation, sale, assignment, transfer, lease or
conveyance in which the Company is not the continuing corporation, the
successor corporation formed by such consolidation or into which the Company
is merged or to which such sale, assignment, transfer, lease or other
conveyance is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture with the same effect
as if such successor corporation had been named as the Company therein and
thereafter (except in the case of a lease) the Company shall be released from
its obligations under the Indenture and the Notes.
The provisions of the two preceding paragraphs will apply with respect to
the Notes instead of, and insofar as such provisions relate to the Notes shall
supersede and replace, the provisions described in the accompanying Prospectus
under "Description of Debt Securities--Consolidation, Merger and Sale of
Assets."
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The discharge, defeasance and covenant defeasance provisions of the
Indenture described under "Description of Debt Securities--Discharge,
Defeasance and Covenant Defeasance" in the accompanying Prospectus will apply
to the Notes, except that the term "Principal Bank Subsidiary" shall be
substituted for the term "Major Bank Subsidiary" appearing in such
description. Such covenant defeasance will be applicable with respect to the
covenants described above under "--Certain Covenants" and, following any such
covenant defeasance, any omission to comply with any such covenants shall not
constitute a Default or Event of Default with respect to the Notes.
CERTAIN DEFINITIONS
"Adjusted Consolidated Net Income" of any Person means, for any period, the
consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (loss), by excluding,
without duplication, (i) all extraordinary gains and losses, less all fees and
expenses relating thereto, net of taxes, (ii) the portion of net income (or
loss) of any Person (other than such Person and any of its consolidated
Subsidiaries) in which such Person or any of its Subsidiaries has an ownership
interest, except to the extent of the amount of dividends or other
distributions actually paid to such Person or its consolidated Subsidiaries in
cash by such other Person during such period, (iii) the net income (or loss)
of any Person combined with such Person or any of its Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (iv) any gain or loss, net of taxes, realized upon the
termination of any employee pension benefit plan, (v) the net income of any
Subsidiary of such Person to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that net income is
not at the time permitted, directly or indirectly, by operation of the terms
of its charter or other organizational documents or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulations (including,
without limitation, any Regulatory Capital Requirements) applicable to that
Subsidiary or its shareholders; provided that, upon the termination or
expiration of such dividend or distribution restrictions, the portion of net
income of such Subsidiary allocable to such Person and previously excluded
shall be included in the computation of Adjusted Consolidated Net Income of
such Person to the extent of the amount of dividends or other distributions
actually paid to such Person in cash by such Subsidiary, (vi) any amortization
of goodwill arising from the Merger, or (vii) any utilization of any tax-loss
carryforward acquired in the Merger.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly Controlling or Controlled by or under direct or
indirect common Control with such specified Person and any legal or beneficial
owner, directly or indirectly, of 20% or more of the total voting power of all
outstanding Voting Stock of such specified Person. Notwithstanding the
foregoing, no Securitization Entity shall be deemed an Affiliate of the
Company.
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"Applicable Premium" means, with respect to a Note, the greater of (i) 1.0%
of the then outstanding principal amount of such Note and (ii) (a) the present
value of all remaining required interest and principal payments due on such
Note and all premium payments relating thereto assuming a redemption date of
August 15, 2002, computed using a discount rate equal to the Treasury Rate
plus 50 basis points minus (b) the then outstanding principal amount of such
Notes minus (c) accrued and unpaid interest paid on the date of redemption.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment (including
any sinking fund or mandatory redemption payments) of such Indebtedness
multiplied by (b) the amount of each such principal payment by (ii) the sum of
all such principal payments.
"Beneficial Owner" has the meaning attributed to it in Rules 13d-3 and 13d-5
(as in effect on the Issue Date) under the Exchange Act, except that a Person
shall be deemed to be the "beneficial owner" of all shares or other securities
that such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time.
"Business Day" means any day, other than a Saturday or Sunday, that is not a
day on which banking institutions in the City of New York are authorized or
required by law, regulation or executive order to close.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any lease which, in accordance with GAAP, is required to be
recorded as a capitalized lease obligation; and the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined
in accordance with GAAP and the final Fixed Maturity of such obligation shall
be the date of the last payment of rent due under such lease prior to the
first date on which such lease may be terminated by the lessee pursuant to the
terms thereof without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations, rights or other equivalents (however designated) in the equity
of such Person (including, without limitation, with respect to a corporation,
common stock, preferred stock and other capital stock, with respect to a
partnership, partnership interests, whether general or limited, and, with
respect to a limited liability company, limited liability company interests)
and any rights (other than debt securities convertible into or exchangeable or
exercisable for equity interests), warrants or options exchangeable or
exercisable for or convertible into an equity interest in such Person.
"Cash Equivalents" means (i) any evidence of indebtedness with a maturity of
180 days or less issued or unconditionally and fully guaranteed or insured
directly by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (ii) deposits, certificates of deposit
or bankers' acceptances with a maturity of 180 days or less of any domestic
financial institution which is a member of the Federal Reserve System having
combined capital and surplus and undivided profits of not less than $500
million; (iii) commercial paper with a maturity of 180 days or less issued by
a corporation (other than an Affiliate of the Company) organized under the
laws of the United States of America, any state thereof or the District of
Columbia and rated at least "A-1" by Standard & Poor's Ratings Group (or any
successor thereto) or "P-1" by Moody's Investors Service, Inc. (or any
successor thereto); and (iv) repurchase agreements and reverse repurchase
agreements relating to marketable direct obligations issued or unconditionally
and fully guaranteed by the United States of America or issued by any agency
thereof and backed by the full faith and credit of the United States of
America, in each case maturing within 180 days from the date of acquisition.
"Change of Control" means (i) any merger or consolidation of the Company
with or into any Person, or any sale, transfer or other conveyance, whether
direct or indirect, of all or substantially all of the assets of the Company
in one transaction or a series of related transactions, if, immediately after
giving effect to such transaction or series of transactions, any "person" or
"group" (as such terms are used for purposes of Sections 13(d) and 14(d) of
the Exchange Act as in effect on the Issue Date, whether or not applicable) is
or becomes the
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Beneficial Owner, directly or indirectly, of more than 40% of the total voting
power of all Voting Stock of the transferee or surviving Person then
outstanding, (ii) any such "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act as in effect on the
Issue Date, whether or not applicable) is or becomes the Beneficial Owner,
directly or indirectly, of more than 40% of the total voting power of all
Voting Stock of the Company then outstanding or (iii) at any time during any
period of 12 consecutive months, individuals who at the beginning of any such
12-month period constituted the Board of Directors of the Company cease for
any reason to constitute a majority of the Board of Directors of the Company
then in office.
"Commission" means the Securities and Exchange Commission or any successor
thereto.
"Control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through ownership of voting securities (or pledge of voting securities
if the pledgee thereof may on the date of determination exercise or control
the exercise of the voting rights of the owner of such voting securities), by
contract or otherwise; and the terms "Controlling" and "Controlled" have
meanings correlative to the foregoing.
"Default" means any event or condition the occurrence of which would, with
the lapse of time or the giving of notice or both, become an Event of Default
with respect to the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor thereto.
"Fair Market Value" means, with respect to any property received by the
Company in connection with the issuance or sale of Capital Stock, or the
conversion or exchange of securities into Capital Stock, the fair market value
of such property as determined in good faith by the Board of Directors of the
Company (as evidenced by a Board Resolution), whose determination shall be
conclusive, net of attorneys' fees, accountants' fees and brokerage,
consulting, underwriting and other fees and expenses actually incurred in
connection with such transaction and net of taxes paid or payable as a result
thereof; provided that there shall be excluded from such computation the fair
market value of any property consisting of deferred payment obligations.
"Federal Reserve Board" means (i) the Board of Governors of the Federal
Reserve System or (ii) any successor thereto for the purpose of regulating
bank holding companies under federal law.
"Final Maturity Date" means August 15, 2007.
"Fixed Maturity," when used with respect to any Indebtedness, means the date
or dates specified in such Indebtedness as the fixed date or dates on which
any principal amount of such Indebtedness is due and payable (including,
without limitation, by reason of any required redemption, purchase, defeasance
or sinking fund payment) and, when used with respect to any installment of
interest on any Indebtedness, means the date on which such installment is due
and payable.
"GAAP" means such accounting principles as are generally accepted in the
United States of America as of the date or time of any computation required
under the Indenture.
"Global Note" means a Note in book-entry form registered in the name of The
Depository Trust Company or its nominee or in the name of any successor
depositary for the Notes or any nominee of such successor.
"Guaranteed Indebtedness" of any specified Person means, without
duplication, all Indebtedness of any other Person guaranteed directly or
indirectly in any manner by such specified Person, or in effect guaranteed
directly or indirectly by such specified Person through an agreement (i) to
pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to
assure the holder of such Indebtedness against loss, (iii) to supply funds to,
or in any other manner invest in, the debtor (including any agreement to pay
for property or services without requiring that such property be received or
such services be rendered), (iv) to maintain working capital or equity capital
of the debtor,
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or otherwise to maintain the net worth, solvency or other financial condition
of the debtor or (v) otherwise to assure a creditor with respect to
Indebtedness against loss; provided that the term "guarantee" shall not
include endorsements for collection or deposit, in either case in the ordinary
course of business.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit issued under letter of
credit facilities, (ii) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments, (iii) all indebtedness of such
Person created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person (even if the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), but excluding
trade payables, (iv) all obligations under Interest Rate Agreements of such
Person, (v) all Capital Lease Obligations of such Person, (vi) all
indebtedness and obligations referred to in clauses (i) through (v) above of
other Persons and all dividends payable by other Persons, the payment of which
is secured by (or for which the holder of such indebtedness or other
obligations or the Person entitled to receive such dividends, as the case may
be, has an existing right, contingent or otherwise, to be secured by) any Lien
upon or with respect to property (including, without limitation, accounts and
contract rights) of such Person, even though such Person has not assumed or
become liable for the payment of such indebtedness, obligations or dividends,
as the case may be (the amount of such Indebtedness under this clause (vi)
being deemed to be the lesser of the fair market value (as determined in good
faith by the Board of Directors of the Company (as evidenced by a Board
Resolution), whose determination shall be conclusive) of such property or
asset or the amount of the indebtedness, obligations or dividends, as the case
may be, so secured), (vii) all Guaranteed Indebtedness of such Person (as
guarantor), (viii) all Redeemable Capital Stock (valued at the greater of book
value and voluntary or involuntary maximum fixed repurchase price plus accrued
and unpaid dividends) of such Person, and (ix) any amendment, supplement,
modification, deferral, renewal, extension, refunding or refinancing or any
liability of the types referred to in clauses (i) through (viii) above. For
purposes hereof, (a) the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the terms of the Notes, and if
such price is based upon, or measured by, the fair market value of such
Redeemable Capital Stock, such fair market value shall be determined in good
faith by the board of directors (or any other duly authorized committee
thereof) of the issuer of such Redeemable Capital Stock, and (b) Indebtedness
is deemed to be incurred pursuant to a revolving credit facility, line of
credit or similar facility each time an advance is made thereunder.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Issue Date" means August 28, 1997, the date on which the Notes are first
issued.
"Junior Subordinated Indebtedness" means any Indebtedness of the Company
which ranks subordinate in right of payment to the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, tangible or
intangible.
"Major Bank Subsidiary" means (i) with respect to the Company, (A) Bay View
Bank and any successor to all or substantially all of the business or assets
of Bay View Bank (each referred to herein as the "Bank"), in each case so long
as the Bank shall be a Subsidiary of the Company and (B) any Subsidiary of the
Company which is a bank, trust company, savings bank, savings and loan
association or other banking or thrift association
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the total assets of which (as determined by such Subsidiary's most recent
statement of financial condition) equal more than 75% of the total assets of
the Company (as determined by the Company's most recent consolidated statement
of financial condition) and (ii) with respect to any Successor Person, (A) the
Bank, so long as the Bank shall be a Subsidiary of such Successor Person and
(B) any Subsidiary of such Successor Person which is a bank, trust company,
savings bank, savings and loan association or other banking or thrift
association the total assets of which (as determined by such Subsidiary's most
recent statement of financial condition) equal more than 75% of the total
assets of the Successor Person (as determined by the Successor Person's most
recent consolidated statement of financial condition).
The foregoing definition of "Major Bank Subsidiary" shall apply with respect
to the Notes instead of, and insofar as it relates to the Notes, shall
supersede and replace the definition of such term set forth in the
accompanying Prospectus under "Description of Debt Securities--Certain
Definitions."
"Merger" means the merger of America First Eureka Holdings, Inc., a Delaware
corporation ("AFEH"), into the Company as contemplated by the Agreement and
Plan of Merger dated as of May 8, 1997 among the Company, AFEH and the other
parties thereto, as the same may be amended or supplemented from time to time.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, or debt securities or Capital Stock that have been converted into or
exchanged for Capital Stock, the proceeds of such issuance or sale in the form
of cash or Cash Equivalents, including payments in respect of deferred payment
obligations when received in the form of cash or cash equivalents, net of
attorney's fees, accountant's fees and brokerage, consulting, underwriting and
other fees and expenses actually incurred in connection with such issuance or
sale and net of taxes paid or payable as a result thereof.
"Person" means any individual, corporation, association, company, business
trust, partnership, joint venture, joint-stock company, limited liability
company, trust, unincorporated organization or government or any agency or
political subdivisions thereof.
"Permitted Repurchase Provisions" means, with respect to any Capital Stock
of the Company or any Indebtedness of the Company, any provisions of such
Capital Stock or Indebtedness, as the case may be, which expressly require
that the Company make an offer to purchase such Capital Stock or Indebtedness,
as the case may be, upon the occurrence of a Change of Control or upon the
sale or other disposition of assets of the Company or any of its Subsidiaries.
As used in the preceding sentence, the term "Change of Control" means (i) any
merger or consolidation of the Company with or into any Person, or any sale,
transfer or other conveyance, whether direct or indirect, of all or
substantially all of the assets of the Company, in one transaction or a series
of related transactions, if, immediately after giving effect to such
transaction or series of transactions, any "person" or "group" (as such terms
are used for purposes of Section 13(d) and 14(d) of the Exchange Act, whether
or not applicable) is or becomes the beneficial owner, directly or indirectly,
of more than a specified percentage (as specified by the terms of the relevant
Capital Stock or Indebtedness, as the case may be) of the total voting power
of all Voting Stock of the transferee or surviving Person then outstanding,
(ii) any such "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or
becomes the beneficial owner, directly or indirectly, of more than a specified
percentage (as specified by the terms of the relevant Capital Stock or
Indebtedness, as the case may be) of the total voting power of all Voting
Stock of the Company then outstanding, (iii) at any time during any specified
period of time, individuals who at the beginning of any such period
constituted the board of directors of the Company cease for any reason to
constitute a majority or other specified percentage (as specified by the terms
of the relevant Capital Stock or Indebtedness, as the case may be) of the
board of directors of the Company then in office, (iv) the Company is
liquidated or dissolves or adopts a plan of liquidation or dissolution, (v)
any sale, disposition or other transfer of all or substantially all or any
substantial part of the assets of the Company and its Subsidiaries, (vi) any
other change of control (as specified by the terms of the relevant Capital
Stock or Indebtedness, as the case may be) with respect to the Company, and
(vii) any event or condition which is similar to any of the foregoing.
S-67
<PAGE>
"Principal Bank Subsidiary" means (i) with respect to the Company, (A) Bay
View Bank and any successor to all or substantially all of the business or
assets of Bay View Bank in each case so long as it shall be a Subsidiary of
the Company and (B) any Significant Subsidiary of the Company which is a bank,
trust company, savings bank, savings and loan association, savings association
or other banking or thrift institution; and (ii) with respect to any Successor
Person, (A) Bay View Bank and any successor to all or substantially all of the
business or assets of Bay View Bank in each case so long as it shall be a
Subsidiary of such Successor Person and (B) any Significant Subsidiary of such
Successor Person which is a bank, trust company, savings bank, savings and
loan association, savings association or other banking or thrift institution.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable
or for which it is exercisable or otherwise, is or upon the happening of an
event or passage of time would be required to be redeemed or repurchased by
the Company prior to the Final Maturity Date or is redeemable at the option of
the holder thereof at any time prior to the Final Maturity Date or is
convertible into or exchangeable for debt securities at any time prior to the
Final Maturity Date at the option of the holder thereof; provided that Capital
Stock shall not be deemed to be Redeemable Capital Stock solely by virtue of
the existence of any Permitted Repurchase Provisions which are applicable to
such Capital Stock.
"Regulatory Capital Requirements" means (i) with respect to the Company or
any Principal Bank Subsidiary of the Company at any time, the minimum amount
of capital required for the Company (assuming for such purpose that the
Company is subject to regulation as a bank holding company under federal law,
whether or not the Company is in fact so subject) or such Principal Bank
Subsidiary, as the case may be, to be deemed to be "well capitalized" (or the
then equivalent category) or, solely for purposes of clause (c) of the first
paragraph under "--Certain Covenants--Limitation on Consolidation, Merger and
Sale of Assets" above, "adequately capitalized" (or the then equivalent
category) under federal banking laws and regulations as then in effect and
applicable to the Company (assuming it is subject to regulation as a bank
holding company as aforesaid) or such Principal Bank Subsidiary, as the case
may be, at such time; and (ii) with respect to any Successor Person or any
Principal Bank Subsidiary of such Successor Person at any time, the minimum
amount of capital required for such Successor Person (assuming for such
purpose that such Successor Person is subject to regulation as a bank holding
company under federal law, whether or not it is in fact so subject) or such
Principal Bank Subsidiary, as the case may be, to be deemed to be "well
capitalized" (or the then equivalent category) or, solely for purposes of
clause (c) of the first paragraph under "--Certain Covenants--Limitation on
Consolidation, Merger and Sale of Assets" above, "adequately capitalized" (or
the then equivalent category) under federal banking laws and regulations as
then in effect and applicable to such Successor Person (assuming it is subject
to regulation as a bank holding company as aforesaid) or such Principal Bank
Subsidiary, as the case may be, at such time.
"Regulatory Event" means the Company is subject to the capital adequacy
guidelines of the Federal Reserve Board and the Federal Reserve Board has
advised the Company in writing that the Notes do not qualify as Tier 2 Capital
(or the then equivalent thereof, if applicable) for purposes of the capital
adequacy guidelines of the Federal Reserve Board, as then in effect and
applicable to the Company.
"Securitization Entity" means any pooling arrangement or entity (except for
any entity in corporate or partnership form) formed or originated for the
purpose of holding, and issuing securities representing interests in, one or
more pools of mortgages, leases, credit card receivables, home equity loan
receivables, automobile loans, leases or installment sales contracts, other
consumer receivables or other financial assets of the Company or any of its
Subsidiaries, and shall include, without limitation, any grantor trust,
owner's trust or real estate mortgage investment conduit.
"Significant Subsidiary" means, with respect to any Person, any Subsidiary
of such Person which is a "significant subsidiary" as defined in Rule 1-02(w)
of Regulation S-X promulgated under the Securities Act of
S-68
<PAGE>
1933, as amended (as in effect on the date of the Indenture), but substituting
50 percent for 10 percent in each instance that 10 percent appears in such
Rule.
"Subsidiary" means, with respect to any Person (the "Subject Person"), any
corporation or other Person at least a majority of the equity ownership
interests or Voting Stock of which is at the time owned, directly or
indirectly, by the Subject Person and/or one or more other Subsidiaries of the
Subject Person. Notwithstanding the foregoing, no Securitization Entity shall
be deemed a Subsidiary of the Company.
"Successor Person" has the meaning set forth under "--Certain Covenants--
Limitation on Consolidation, Merger and Sale of Assets."
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as complied and
published in the most recent Federal Reserve Statistical Release H.15(519)
which has become publicly available at least two Business Days prior to the
date fixed for repayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining term to August 15, 2002; provided, however, that
if the then remaining term to August 15, 2002 is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average
yields of United States Treasury securities for which such yields are given,
except that if the then remaining term to August 15, 2002 is less than one
year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
"Voting Stock" means, with respect to any Person, any class or classes or
series or series of Capital Stock of such Person pursuant to which the holders
thereof have the general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of such
Person (irrespective of whether or not, at the time, Capital Stock of any
other class or classes or series or series shall have, or might have, voting
power by reason of the happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary of the Company all the
outstanding Capital Stock (other than directors' qualifying shares) of which
are owned by the Company and/or one or more other Wholly Owned Subsidiaries of
the Company.
GLOBAL NOTES
The Notes will be issued in the form of one or more Global Notes that will
be deposited with, or on behalf of, DTC. The Company anticipates that the
Global Notes will be registered in the name of Cede & Co., DTC's nominee, and
that the following provisions will apply to the depository arrangements with
respect to the Global Notes.
So long as DTC or its nominee is the registered owner of the Global Notes,
DTC or its nominee, as the case may be, will be considered the sole holder of
the Notes represented by such Global Notes for all purposes under the
Indenture. Except as described below, owners of beneficial interests in a
Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in certificated form and will not be considered the owners
or holders thereof under the Indenture. The laws of some states may require
that certain purchasers of securities take physical delivery of such
securities in certificated form; accordingly, such laws may limit the
transferability of beneficial interests in a Global Note.
Each Global Note will be exchangeable for certificated Notes only if (i) DTC
notifies the Company that it is unwilling or unable to continue as depository
or DTC ceases to be a clearing agency registered under the Exchange Act (if so
required by applicable law or regulation) and, in either case, a successor
depository is not appointed by the Company within 90 days after the Company
receives such notice or becomes aware of such ineligibility, (ii) the Company
in its sole discretion determines that the Global Notes shall be exchangeable
for certificated Notes or (iii) there shall have occurred and be continuing an
Event of Default under the Indenture
S-69
<PAGE>
with respect to the Notes. Upon any such exchange, owners of beneficial
interests in the Global Notes will be entitled to physical delivery of
individual Notes in certificated form, equal in principal amount to such
beneficial interests, and to have such Notes in certificated form registered
in the names of the beneficial owners, which names are expected to be provided
by DTC's relevant Participants (as identified by DTC) to the Trustee. Notes so
issued in certificated form will be issued in denominations of $1,000 or any
integral multiple thereof, and will be issued in registered form only, without
coupons.
The following is based on information furnished to the Company:
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the DTC system is also available to
others, such as securities brokers and dealers, and banks and trust companies
that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its Participants are on file with the Securities
and Exchange Commission.
Purchases of Notes under the DTC system must be made by or through Direct
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual purchaser of each Note ("beneficial owner")
is in turn recorded on the Direct and Indirect Participants' records. A
beneficial owner does not receive written confirmation from DTC of its
purchase, but is expected to receive a written confirmation providing details
of the transaction, as well as periodic statements of its holdings, from the
Direct or Indirect Participant through which such beneficial owner entered
into the transaction. Transfers of ownership interests in Notes are
accomplished by entries made on the books of Direct and Indirect Participants
acting on behalf of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interests in Notes, except under the
limited circumstances described above.
To facilitate subsequent transfers, the Notes are expected to be registered
in the name of DTC's nominee, Cede & Co. The deposit of the Notes with or on
behalf of DTC and their registration in the name of Cede & Co. will effect no
change in beneficial ownership. DTC has no knowledge of the actual beneficial
owners of the Notes; DTC's records reflect only the identity of the Direct
Participants to whose accounts Notes are credited, which may or may not be the
beneficial owners. The Participants remain responsible for keeping account of
their holdings on behalf of their customers.
Delivery of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants, and by Direct Participants
and Indirect Participants to beneficial owners are governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Neither DTC nor Cede & Co. consents or votes with respect to the Notes.
Under its usual procedures, DTC mails a proxy (an "Omnibus Proxy") to the
issuer as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Notes are credited on the record date (identified on a list
attached to the Omnibus Proxy).
Principal payments, premium payments, if any, and interest payments on the
Global Notes will be made to DTC. DTC's practice is to credit Direct
Participants' accounts on the payment date in accordance with their
S-70
<PAGE>
respective holdings as shown on DTC's records unless DTC has reason to believe
that it will not receive payment on the payment date. Payments by Direct and
Indirect Participants to beneficial owners are governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name" and
are the responsibility of such Direct and Indirect Participants and not of
DTC, the Trustee or the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal,
premium, if any, and interest to DTC is the responsibility of the Company or
the Trustee, disbursement of such payments to Direct Participants is the
responsibility of DTC, and disbursement of such payments to the beneficial
owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Global Notes at any time by giving notice to the Company or the
Trustee. The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository).
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
None of the Company, the Trustee or any applicable paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial interests in a Global Note, or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
S-71
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), Keefe, Bruyette & Woods, Inc. and
Friedman, Billings, Ramsey & Co., Inc. (the "Underwriters"), the Company has
agreed to sell to the Underwriters, and the Underwriters have severally agreed
to purchase, the respective principal amounts of Notes set forth opposite
their names below. The Purchase Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the Notes if any are
purchased.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................... $ 60,000,000
Keefe, Bruyette & Woods, Inc. ................................. 25,000,000
Friedman, Billings, Ramsey & Co., Inc. ........................ 15,000,000
------------
Total..................................................... $100,000,000
============
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes to the public at the public offering price set forth on the
cover page of this Prospectus Supplement and to certain dealers at such price
less a concession not in excess of .25% of the principal amount of the Notes.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of .125% of the principal amount of the Notes to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
The Notes will be a new issue of securities for which there currently is no
market. Although the Underwriters have informed the Company that they each
currently intend to make a market in the Notes, they are not obligated to do
so and any such market making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the liquidity of or development
of any market for the Notes. The Company does not intend to apply for listing
of the Notes on any securities exchange or for quotation thereof through the
National Association of Securities Dealers Automated Quotation System.
The Company has agreed that, during a period of 180 days from the date of
this Prospectus Supplement, it will not, and will not cause or permit any of
its subsidiaries to, without the prior written consent of Merrill Lynch, sell,
offer to sell, grant any option for the sale of, or otherwise dispose of, any
Notes or any other debt securities of the Company or any of its subsidiaries,
or any securities convertible into or exchangeable or exercisable for any
Notes or any such other debt securities, except for Notes sold to the
Underwriters pursuant to the Purchase Agreement and except for certificates of
deposit and repurchase agreements and reverse repurchase agreements entered
into in the ordinary course of business.
Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters to bid for
and purchase the Notes. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes.
If the Underwriters create a short position in the Notes in connection with
the offering, i.e., if they sell more Notes than are set forth on the cover
page of this Prospectus Supplement, the Underwriters may reduce that short
position by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
S-72
<PAGE>
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Notes. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933,
as amended, or to contribute to payments that the Underwriters may be required
to make in respect thereof.
LEGAL MATTERS
Certain legal matters in connection with the offering made hereby will be
passed upon for the Company by Robert J. Flax, Esq., Executive Vice President,
General Counsel and Secretary of the Company, and by Silver, Freedman and
Taff, L.L.P., Washington, D.C. As of June 30, 1997, Mr. Flax owned
approximately 3,540 shares of common stock of the Company, and held options to
acquire approximately 86,000 additional shares. Brown & Wood llp, San
Francisco, California, will act as counsel for the Underwriters.
EXPERTS
The consolidated financial statements and supplemental consolidating
schedules of Bay View Capital Corporation and its subsidiaries as of December
31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994
which are included in this Prospectus Supplement and incorporated in the
accompanying Prospectus and in the Registration Statement by reference from
the Company's 1996 Annual Report on Form 10-K, as amended on Form 10-K/A, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is included herein and incorporated herein and therein by
reference, and have been so included and incorporated in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of America First Eureka Holdings, Inc.
and Subsidiary as of December 31, 1996 and 1995, and for each of the years in
the three-year period ended December 31, 1996, have been incorporated by
reference in the accompanying Prospectus and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
incorporated by reference in the accompanying Prospectus and in the
Registration Statement, and upon the authority of said firm as experts in
accounting and auditing.
S-73
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30,
1997 AND 1996 (UNAUDITED)
Consolidated Statement of Financial Condition as of June 30, 1997.... F-2
Consolidated Statements of Operations for the Six Months Ended June
30, 1997 and 1996................................................... F-3
Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 1997................................................. F-4
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1997 and 1996................................................... F-5
Notes to Consolidated Financial Statements for the Six Months Ended
June 30, 1997 and 1996............................................. F-7
CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT FOR
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Consolidated Statements of Financial Condition as of December 31,
1996 and 1995....................................................... F-9
Consolidated Statements of Operations for the Years Ended December
31, 1996, 1995 and 1994............................................. F-10
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994.................................... F-11
Consolidated Statements of Cash Flows for the Years Ended December
31, 1996, 1995 and 1994............................................. F-12
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1996, 1995 and 1994.................................... F-14
Supplemental Consolidating Schedules as of and for the year ended
December 31, 1996................................................... F-42
Independent Auditors' Report......................................... F-46
</TABLE>
F-1
<PAGE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1997
------ -------------------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C>
Cash and cash equivalents:
Cash and due from depository institutions.......... $ 30,338
Interest-bearing deposits and federal funds sold... 64,715
----------
95,053
Loans held for sale.................................. --
Securities available-for-sale:
Mortgage-backed securities......................... 78,030
Investment securities.............................. 7,803
Securities held-to-maturity:
Mortgage-backed securities......................... 458,689
Investment securities.............................. 15,103
Loans receivable held for investment, net of
allowance for losses................................ 2,294,246
Investment in stock of the FHLB of San Francisco..... 59,290
Real estate owned, net............................... 8,818
Premises and equipment, net.......................... 10,095
Intangible assets.................................... 31,539
Other assets......................................... 37,547
----------
Total assets..................................... $3,096,213
==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Customer deposits:
Transaction accounts............................... $ 472,904
Certificates of deposit............................ 1,105,302
----------
1,578,206
Advances from the FHLB of San Francisco.............. 1,092,730
Securities sold under agreements to repurchase....... 142,461
Senior Debentures.................................... 50,000
Other borrowings..................................... 6,485
Other liabilities.................................... 30,135
----------
Total liabilities................................ 2,900,017
----------
Stockholders' equity:
Serial preferred stock: authorized, 7,000,000
shares; outstanding: none......................... --
Common stock ($.01 par value); authorized,
60,000,000 shares; issued: 15,091,374 shares;
outstanding: 12,979,260 shares; .................. 151
Additional paid-in capital......................... 101,318
Retained earnings (substantially restricted)....... 139,011
Treasury stock at cost, 2,112,114 shares .......... (38,847)
Unrealized loss on securities available-for-sale
(net of tax)...................................... (1,220)
Debt of Employee Stock Ownership Plan.............. (4,217)
----------
Total stockholders' equity....................... 196,196
----------
Total liabilities and stockholders' equity....... $3,096,213
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Interest income:
Interest on loans receivable.......................... $ 95,070 $ 85,328
Interest on mortgage-backed securities................ 18,079 21,963
Interest and dividends on investments................. 4,346 3,212
---------- ----------
117,495 110,503
Interest expense:
Interest on customer deposits......................... 38,139 47,711
Interest on Senior Debentures......................... 2,228 406
Interest on borrowings................................ 34,305 27,335
---------- ----------
74,672 75,452
Net interest income..................................... 42,823 35,051
Provision for losses on loans........................... 1,177 1,418
---------- ----------
Net interest income after provision for loan losses... 41,646 33,633
Noninterest income:
Loan fees and charges................................. 2,903 2,031
Gain (loss) on sale of loans and securities........... 925 (262)
Rental income from premises........................... -- 403
Other, net............................................ 3,503 2,160
---------- ----------
7,331 4,332
Noninterest expense:
General and administrative:........................... 30,831 23,968
Real estate owned operations, net................... (91) (1,662)
Recovery of losses on real estate................... (526) (123)
Amortization and write-down of intangible assets.... 1,630 1,404
---------- ----------
31,844 23,587
Income before income tax expense........................ 17,133 14,378
Income tax expense...................................... 7,367 6,169
---------- ----------
Net income.......................................... $ 9,766 $ 8,209
========== ==========
Primary earnings per share.......................... $ 0.73 $ 0.58
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON DEBT OF
SECURITIES EMPLOYEE
NUMBER ADDITIONAL AVAILABLE STOCK TOTAL
OF COMMON PAID-IN RETAINED TREASURY FOR SALE OWNERSHIP STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS* STOCK (NET OF TAX) PLAN EQUITY
---------- ------ ---------- --------- -------- ------------ --------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 15,005,384 $150 $100,436 $131,324 $(26,497) $ (713) $(4,638) $200,062
Repurchase of common
stock................. (12,350) (12,350)
Exercise of stock
options............... 85,990 1 882 883
Cash dividends declared
($0.16 per share)..... (2,079) (2,079)
Unrealized loss, net of
tax................... (507) (507)
Repayment of debt of
ESOP.................. 421 421
Net income............. 9,766 9,766
---------- ---- -------- -------- -------- ------- ------- --------
Balance at June 30,
1997................... 15,091,374 $151 $101,318 $139,011 $(38,847) $(1,220) $(4,217) $196,196
========== ==== ======== ======== ======== ======= ======= ========
</TABLE>
- --------
*Substantially restricted
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
--------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 9,766 $ 8,209
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization and write-down of intangible assets....... 1,630 1,404
Write-down on disposal of fixed assets................. -- 925
Proceeds from loans sold and securitized............... 265,203 9,668
Provision for losses on loans and real estate owned.... 1,210 1,543
Depreciation and amortization of premises and
equipment............................................. 1,400 1,355
Amortization of deferred loan costs.................... 473 677
Decrease in capitalized excess servicing fees.......... 138 230
Amortization of premiums, net of discounts............. 2,781 1,219
(Gain) loss on loans and securities.................... (1,001) 262
(Increase) decrease in other assets.................... 901 (1,996)
Decrease in other liabilities.......................... (59,623) (7,689)
Other, net............................................. 343 (138)
--------- --------
Net cash provided by operating activities............ 223,221 15,669
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash and cash
equivalents received.................................... (9,924) (60,918)
Decrease in loans resulting from originations net of
principal payments...................................... 46,233 44,051
Purchase of loans........................................ (146,750) (37,950)
Principal payments on mortgage-backed securities......... 38,631 48,204
Proceeds from sale of mortgage-backed securities
available for sale...................................... -- 26,808
Proceeds from maturities of investment securities........ 12,792 32,000
Purchase of investment securities........................ (6,888) (200)
Proceeds from sale of other real estate owned............ 5,332 13,367
Net additions to premises and equipment.................. (3,939) (494)
Increase in stock of FHLBSF.............................. (7,399) (1,268)
Other, net............................................... -- (198)
--------- --------
Net cash provided by (used in) investing activities.. (71,912) 63,402
--------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
----------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit outflows................................... $ (185,761) $ (75,131)
Proceeds from advances from FHLBSF..................... 3,584,032 540,000
Repayment of advances from FHLBSF...................... (3,469,052) (560,740)
Issuance of Senior Debentures, net of issuance costs... -- 49,300
Repurchase of common stock............................. (12,350) (7,562)
Proceeds from reverse repurchase agreements............ 321,017 --
Repayment of reverse repurchase agreements............. (389,196) (29,098)
Decrease in other borrowings........................... (10,578) (1,788)
Proceeds from issuance of common stock................. 883 1,248
Dividends paid to stockholders......................... (2,079) (2,070)
----------- ---------
Net cash used in financing activities.............. (163,084) (85,841)
----------- ---------
Net decrease in cash and cash equivalents.............. (11,775) (6,770)
Cash and cash equivalents at beginning of period....... 106,828 42,760
----------- ---------
Cash and cash equivalents at end of period............. $ 95,053 $ 35,990
=========== =========
Cash paid for:
Interest............................................. $ 46,513 $ 31,900
Income taxes......................................... $ 7,463 $ 4,801
Supplemental noncash investing and financing
activities:
Loans transferred to real estate owned............... $ 6,677 $ 4,470
Loans originated to sell real estate owned........... $ -- $ 4,263
Loans transferred from held for sale to held for
investment.......................................... $ 117,187 $ --
The acquisition of subsidiaries involved the following:
Push-down of the Company's acquisition cost.......... $ 15,000 $ 61,232
Preliminary estimate of liabilities assumed.......... 13,358 469,971
Preliminary estimate of the fair value of assets
acquired, other than cash and cash equivalents...... (1,986) (512,472)
Goodwill............................................. (21,296) (18,417)
----------- ---------
Net cash and cash equivalents received............. $ 5,076 $ 314
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements include
the accounts of Bay View Capital Corporation (the "Company" or "BVCC") and its
subsidiaries, including Bay View Bank ("BVB"), California Thrift & Loan, a
California industrial loan company ("CTL"), Bay View Securitization
Corporation, a Delaware corporation formed for the purpose of issuing asset-
backed securities through a trust and Concord Growth Corporation, a commercial
finance company. All significant intercompany balances and transactions have
been eliminated in consolidation.
The Company completed its acquisition of EXXE Data Corporation ("EXXE") and
its wholly owned subsidiary, Concord Growth Corporation ("CGC") on March 17,
1997. Subsequent to the close of the transaction, EXXE was merged into CGC and
liquidated, such that CGC became a first-tier stand-alone subsidiary of the
Company. The acquisition did not have a significant impact on the consolidated
results of operations in the first quarter of 1997 and was accounted for as a
purchase effective April 1, 1997.
The information provided by these interim financial statements reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the Company's financial condition as of June 30, 1997; the
results of its operations for the six months ended June 30, 1997 and 1996; and
the cash flows for the six months ended June 30, 1997 and 1996. Such
adjustments are of a normal recurring nature unless otherwise disclosed
herein. As necessary, reclassifications have been made to prior period amounts
to conform to the current period presentation. These interim financial
statements have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all the necessary information and footnotes for a
presentation in conformity with Generally Accepted Accounting Principles.
Furthermore, the interim financial results for the six months ended June 30,
1997 are not necessarily indicative of the results that may be expected for
the entire fiscal year or any other interim period.
NOTE 2--EARNINGS PER SHARE
The earnings per share computation for the six months ended June 30, 1997
and 1996 was determined by dividing net income by the weighted average number
of common shares and common stock equivalents outstanding for the given
period. Common stock equivalents consist principally of outstanding stock
options. The average number of shares outstanding (including common stock
equivalents) for the six months ended June 30, 1997 and 1996 were 13,440,000
shares and 14,099,000 shares, respectively. The Company's fully diluted
earnings per share does not differ materially from its primary earnings per
share and therefore it has not been separately reported.
The Company declared a 2 for 1 stock split in the form of a 100% stock
dividend on April 14, 1997 to stockholders of record as of the close of
business on May 9, 1997, payable on June 2, 1997. All share and per share data
have been restated to reflect the stock split.
F-7
<PAGE>
NOTE 3--STOCK OPTIONS
The Company has three stock option plans: the "Amended and Restated 1986
Stock Option and Incentive Plan", the "1995 Stock Option and Incentive Plan"
and the "Non-Employee Director Stock Option Plan", which authorize the
issuance of up to 1,759,430 shares, 2,000,000 shares, and 550,000 shares of
common stock, respectively. The following table summarizes the stock options
available for grant as of June 30, 1997:
<TABLE>
<CAPTION>
NON-
1986 STOCK 1995 STOCK EMPLOYEE
OPTION OPTION DIRECTOR
PLAN PLAN OPTION PLAN TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Shares reserved for issuance.... 1,759,430 2,000,000 550,000 4,309,430
Granted......................... (2,048,816) (1,055,500) (516,000) (3,620,316)
Canceled........................ 290,074 161,500 20,000 471,574
Expired......................... (688) -- -- (688)
---------- ---------- -------- ----------
Total available for grant....... -- 1,106,000 54,000 1,160,000
========== ========== ======== ==========
</TABLE>
At June 30, 1997, the Company had outstanding non-qualified options for all
three plans with expiration dates from 1998 to 2007 as follows:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
OPTION SHARES PRICE RANGE PRICE
------------- ------------- -------
<S> <C> <C> <C>
Outstanding at December 31, 1996............ 1,154,890 $ 7.28-$18.88 $12.67
Granted..................................... 513,500 $24.13-$28.44 $26.36
Exercised................................... (84,490) $ 7.28-$17.50 $10.53
Canceled.................................... (141,500) $17.00-$28.44 $26.01
--------- ------------- ------
Outstanding at June 30, 1997................ 1,442,400 $ 7.88-$28.44 $16.36
========= ============= ======
</TABLE>
NOTE 4--DIVIDEND DECLARATION
The Company declared a quarterly cash dividend of $.08 per share on June 26,
1997, payable to stockholders of record as of July 11, 1997. The dividend
payable, totaling $1.0 million, was accrued as of June 30, 1997 and is
reflected in the accompanying consolidated financial statements.
NOTE 5--ACQUISITION OF AMERICA FIRST EUREKA HOLDINGS, INC./EUREKABANK
On May 8, 1997, the Company signed a definitive agreement to acquire America
First Eureka Holdings, Inc. ("AFEH") and its wholly owned bank subsidiary,
EurekaBank ("Eureka"). Under the terms of the definitive agreement, America
First Financial Fund 1987-A Limited Partnership (Nasdaq: "AFFFZ"), the
shareholder of AFEH capital stock, will receive $300 million comprised of Bay
View common stock valued at $210 million and cash of $90 million. The
acquisition of AFEH/Eureka will be accounted for as a purchase and is expected
to be completed on or about January 2, 1998. The purchase price is currently
estimated to exceed the fair value of the net assets acquired by approximately
$112 million, which Bay View anticipates amortizing over a 15 year period.
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1996 1995
------ ---------- ----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Cash and cash equivalents:
Cash and due from depository institutions............ $ 22,608 $ 24,144
Interest-bearing deposits and short-term investments. 84,220 18,616
---------- ----------
106,828 42,760
Loans held for sale.................................... 294,949 --
Securities available-for-sale:
Investment securities................................ 13,802 8,035
Mortgage-backed securities........................... 83,154 149,778
Securities held-to-maturity:
Investment securities (fair value: 1996, $15,112;
1995, $39,969)...................................... 15,204 39,928
Mortgage-backed securities (fair value: 1996,
$483,461; 1995, $575,321)........................... 494,459 581,600
Loans receivable held for investment, net of allowance
for losses; 1996--$29,013; 1995--$30,014.............. 2,179,768 2,062,268
Investment in stock of FHLBSF.......................... 51,891 39,450
Real estate owned...................................... 7,387 24,476
Premises and equipment, net............................ 6,905 16,184
Intangibles............................................ 10,197 5,835
Other assets........................................... 35,718 34,182
---------- ----------
Total Assets....................................... $3,300,262 $3,004,496
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Customer deposits...................................... $1,763,967 $1,819,840
Advances from FHLBSF................................... 977,750 766,790
Securities sold under agreements to repurchase......... 210,640 166,738
Senior Debentures...................................... 50,000 --
Other borrowings....................................... 7,147 7,937
Other liabilities...................................... 90,696 35,214
---------- ----------
Total liabilities.................................. 3,100,200 2,796,519
---------- ----------
Commitments and contingencies (Note 19)
Stockholders' equity:
Serial preferred stock; authorized, 7,000,000 shares;
outstanding, none................................... -- --
Common stock ($.01 par value); authorized, 20,000,000
shares; issued, 1996--15,005,384 shares and 1995--
14,803,180 shares; outstanding, 1996--13,349,270
shares and 1995--14,203,180 shares.................. 150 148
Additional paid-in capital........................... 100,436 97,484
Retained earnings (substantially restricted)......... 131,324 124,487
Treasury stock at cost, 1996--1,656,114 shares and
1995--600,000 shares................................ (26,497) (8,436)
Unrealized loss on securities available-for-sale, net
of tax.............................................. (713) (683)
Debt of Employee Stock Ownership Plan................ (4,638) (5,023)
---------- ----------
Total stockholders' equity......................... 200,062 207,977
---------- ----------
Total Liabilities and Stockholders' Equity......... $3,300,262 $3,004,496
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Interest on loans receivable................... $192,443 $155,853 $131,783
Interest on mortgage-backed securities......... 42,081 54,236 61,111
Interest and dividends on investments.......... 7,231 6,374 4,432
-------- -------- --------
241,755 216,463 197,326
Interest expense:
Interest on customer deposits.................. 100,225 93,398 66,424
Interest on Senior Debentures.................. 2,623 -- --
Interest on borrowings......................... 57,925 67,149 63,977
-------- -------- --------
160,773 160,547 130,401
Net interest income.............................. 80,982 55,916 66,925
Provision for losses on loans.................... 1,898 4,284 2,367
-------- -------- --------
Net interest income after provision for loan
losses........................................ 79,084 51,632 64,558
Noninterest income:
Loan fees and charges.......................... 4,930 3,691 4,537
Loss on loans and securities................... (1,453) (2,510) (1,081)
Rental income from premises.................... 534 781 809
Other, net..................................... 4,553 4,180 3,273
-------- -------- --------
8,564 6,142 7,538
Noninterest expense:
General and administrative:
Compensation and employee benefits........... 27,956 25,148 25,268
Office occupancy and equipment............... 9,865 8,658 8,436
Write-down of corporate office complex....... 500 7,100 --
Deposit insurance premiums and regulatory
fees........................................ 4,911 4,473 4,813
Data processing service bureau............... 4,243 1,683 1,701
Other, net................................... 11,480 9,954 7,069
-------- -------- --------
58,955 57,016 47,287
SAIF recapitalization assessment............... 11,750 -- --
Real estate owned operations, net.............. (4,806) (1,081) (95)
Provision for (recovery of) losses on real
estate........................................ (103) 749 145
Amortization and write-down of intangible
assets........................................ 2,606 3,944 2,418
-------- -------- --------
68,402 60,628 49,755
Income (loss) before income tax expense (benefit)
and extraordinary item.......................... 19,246 (2,854) 22,341
Income tax expense (benefit)..................... 8,277 (708) 7,828
-------- -------- --------
Income (loss) before extraordinary item...... 10,969 (2,146) 14,513
Extraordinary item, net of tax................... -- (2,544) --
-------- -------- --------
Net income (loss)............................ $ 10,969 $ (4,690) $ 14,513
======== ======== ========
Primary earnings per share:
Income (loss) before extraordinary item........ $ 0.79 $ (0.15) $ 1.01
Extraordinary item............................. -- (0.17) --
-------- -------- --------
Net income (loss) per share.................. $ 0.79 $ (0.32) $ 1.01
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON DEBT OF
SECURITIES EMPLOYEE
NUMBER ADDITIONAL AVAILABLE- STOCK TOTAL
OF COMMON PAID-IN RETAINED TREASURY FOR-SALE OWNERSHIP STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS* STOCK (NET OF TAX) PLAN EQUITY
------ ------ ---------- --------- -------- ------------ --------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 14,109 $141 $ 90,655 $123,394 $ -- $ 2,488 $(5,702) $210,976
Exercise of stock
options............... 226 2 1,904 1,906
Cash dividends declared
($0.30 per share)..... (4,283) (4,283)
Unrealized loss, net of
tax................... (6,122) (6,122)
Repayment of debt...... 325 325
Net income............. 14,513 14,513
------ ---- -------- -------- -------- ------- ------- --------
Balance at December 31,
1994................... 14,335 143 92,559 133,624 -- (3,634) (5,377) 217,315
Repurchase of common
stock................. (8,577) (8,577)
Exercise of stock
options, including tax
benefits.............. 468 5 4,925 (53) 141 5,018
Cash dividends declared
($0.30 per share)..... (4,394) (4,394)
Unrealized gain, net of
tax................... 2,951 2,951
Repayment of debt...... 354 354
Net loss............... (4,690) (4,690)
------ ---- -------- -------- -------- ------- ------- --------
Balance at December 31,
1995................... 14,803 148 97,484 124,487 (8,436) (683) (5,023) 207,977
Repurchase of common
stock................. (16,971) (16,971)
Repurchase of common
stock for retirement
plan.................. 1,090 (1,090) --
Exercise of stock
options............... 202 2 1,862 1,864
Cash dividends declared
($0.305 per share).... (4,132) (4,132)
Unrealized loss, net of
tax................... (30) (30)
Repayment of debt...... 385 385
Net income............. 10,969 10,969
------ ---- -------- -------- -------- ------- ------- --------
Balance at December 31,
1996................... 15,005 $150 $100,436 $131,324 $(26,497) $ (713) $(4,638) $200,062
====== ==== ======== ======== ======== ======= ======= ========
</TABLE>
- --------
* Substantially restricted
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................... $ 10,969 $ (4,690) $ 14,513
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Write-down on disposal of premises and
equipment.................................... 1,767 7,100 --
Write-down and amortization of intangible
assets....................................... 2,606 3,944 2,418
Loans originated for sale..................... -- -- (16,401)
Proceeds from loans sold...................... 9,668 135 11,798
Proceeds from loans securitized and sold...... -- -- 10,034
Provision for losses on loans and real estate
owned........................................ 1,795 5,033 2,512
Depreciation and amortization of premises and
equipment.................................... 2,210 3,079 3,128
Amortization of deferred loan (fees) costs.... 1,396 452 (1,558)
Decrease in capitalized excess servicing fees. 411 853 1,373
Amortization of premiums, net of discounts.... 5,160 4,343 6,220
Loss on loans and securities.................. 1,160 2,510 1,081
(Increase) decrease in other assets........... 1,866 (1,722) (715)
Increase in other liabilities................. 47,933 6,991 4,923
Other, net.................................... (3,558) (867) (4,282)
-------- -------- --------
Net cash provided by operating activities... 83,383 27,161 35,044
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of California Thrift & Loan, net of
cash and cash equivalents received.............. (61,505) -- --
Net (increase) decrease in loans resulting from
originations net of principal payments.......... 70,138 (31,575) (294,592)
Purchase of loans................................ (64,721) (12,928) (5,352)
Principal payments on mortgage-backed securities. 91,748 88,580 203,255
Purchase of mortgage-backed securities........... -- -- (411,269)
Proceeds from sale of mortgage-backed securities
held-to-maturity................................ 2,602 -- --
Proceeds from sale of mortgage-backed securities
available-for-sale.............................. 54,458 101,242 --
Proceeds from maturities of investment securities
held-to-maturity................................ 24,493 17,000 5,000
Proceeds from maturities of investment securities
available-for sale.............................. 15,000 -- --
Purchase of investment securities held-to-
maturity........................................ (3,041) (32,000) (31,843)
Proceeds from sale of investment securities
available-for-sale.............................. -- -- 5,317
Proceeds from sale of real estate................ 32,690 20,435 23,906
Proceeds from sale of leasing portfolio held for
sale............................................ 59,848 -- --
Proceeds from sale of premises and equipment..... 10,648 -- --
Additions to premises and equipment.............. (1,577) (3,155) (5,217)
(Increase) decrease in stock of FHLBSF........... (10,558) 10,196 (11,509)
-------- -------- --------
Net cash provided by (used in) investing
activities................................. 220,223 157,795 (522,304)
-------- -------- --------
</TABLE>
F-12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit inflows (outflows).............. $ (245,268) $ 112,464 $ 13,113
Redemption of CTL deposits.................. (267,500) -- --
Proceeds from advances from FHLBSF.......... 1,644,226 480,000 519,110
Repayment of advances from FHLBSF........... (1,433,266) (669,520) (282,400)
Repurchase of common stock.................. (24,359) (2,279) --
Issuance of Senior Debentures, net of
issuance costs............................. 49,406 -- --
Proceeds from reverse repurchase agreements. 373,272 166,738 376,960
Repayment of reverse repurchase agreements.. (329,370) (255,106) (122,530)
Net change in other borrowings.............. (4,406) (605) (12,596)
Proceeds from issuance of common stock...... 1,864 4,294 1,906
Dividends paid to stockholders.............. (4,137) (4,374) (4,266)
----------- --------- ---------
Net cash provided by (used in) financing
activities............................... (239,538) (168,388) 489,297
----------- --------- ---------
Net increase in cash and cash equivalents... 64,068 16,568 2,037
Cash and cash equivalents at beginning of
year....................................... 42,760 26,192 24,155
----------- --------- ---------
Cash and cash equivalents at end of year.... $ 106,828 $ 42,760 $ 26,192
=========== ========= =========
Cash paid during the year for:
Interest.................................. $ 87,422 $ 80,226 $ 58,806
Income taxes.............................. $ 4,951 $ 4,450 $ 4,584
Supplemental noncash investing and financing
activities:
Loans transferred to real estate owned.... $ 10,065 $ 31,070 $ 19,706
Transfer of mortgage-backed securities
from held-to-maturity to available-for-
sale (Note 1)............................ $ -- $ 147,661 $ --
Mortgage-backed securities acquired in
exchange for securitized loans........... $ -- $ -- $ 10,034
Loans originated to sell real estate
owned.................................... $ 5,011 $ 8,905 $ 1,550
</TABLE>
The acquisition of California Thrift & Loan involved the following (see note
2):
<TABLE>
<S> <C>
Push-down of the Company's acquisition cost......................... $ 61,819
Liabilities assumed................................................. 476,492
Fair value of assets acquired, other than cash and
cash equivalents................................................... (531,029)
Goodwill............................................................ (6,968)
---------
Net cash and cash equivalents received............................ $ 314
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts of
Bay View Capital Corporation, a holding company incorporated in Delaware (the
"Company" or "BVCC"), and its wholly owned subsidiaries: Bay View Federal
Bank, a Federal Savings Bank ("BVFB"), California Thrift & Loan, a California
industrial loan company ("CTL") and Bay View Securitization Corporation, a
Delaware corporation ("BVSC"). All significant intercompany accounts and
transactions have been eliminated. As used herein, the terms "Company" or
"BVCC" refer to the Company and its consolidated subsidiaries unless otherwise
indicated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid financial instruments, with
maturities of 90 days or less at the time of purchase, that are readily
convertible into cash and have insignificant interest rate risk.
LOANS RECEIVABLE
Loans receivable originated or purchased by the Company are identified as
either held for sale or held for investment at, or soon after, origination or
purchase and are recorded at cost net of discounts, deferred loan origination
fees, and allowance for loan losses as applicable. Loans receivable held for
investment are carried at amortized cost and are not adjusted to the lower of
cost or market because management intends and the Company has the ability, to
hold these loans to maturity. Interest is accrued as income only to the extent
considered collectible. Generally, the Company discontinues interest accruals
on loans 90 days or more past due. Interest income on nonaccrual loans is
measured on a cash basis. Loans classified as held for sale are carried at the
lower of cost or market on an aggregate basis by property type. Market value
for these loans is based on prices for similar loans in the secondary loan
market.
The Company charges fees for originating loans at the time the loan is
granted. The Company recognizes these loan origination fees, net of certain
direct costs, as a yield adjustment over the life of the related loan using
the interest method. Amortization of net deferred loan origination fees are
discontinued on nonperforming loans. When a loan is sold or paid off, any
unamortized net loan origination fees are included in income at that time.
Statement of Accounting Standards No. 114 ("SFAS 114"), "Accounting by
Creditors for Impairment of a Loan" as amended by Statement of Financial
Accounting Standards No. 118 ("SFAS 118"), "Accounting by Creditors for
Impairment of a loan--Income Recognition and Disclosures" was effective
January 1, 1995. A loan is impaired when, based on current information and
events, it is probable that the Company is unable to collect all amounts due
according to the contractual terms of the loan agreement. The Company
considers nonperforming loans and troubled debt restructurings as impaired
loans. Nonperforming loans are defined as loans 90 days or more delinquent
(excluding accruing loans delinquent 90 days or more) and loans less than 90
days delinquent when the Company determines that full collection of principal
and interest is doubtful. Troubled debt restructurings are loans which have
been modified based on interest rate concessions and/or payment concessions.
SFAS 114 is not applicable to large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment. The Company considers
its consumer loans as homogeneous loans for purposes of the application of
SFAS 114.
F-14
<PAGE>
Charge-offs are recorded when the measure of the impaired loan is less than
the recorded investment in the loan. In determining charge-offs for specific
loans, management evaluates its loans on an individual basis that includes
assessing the creditworthiness and financial status of the borrower and
analyzing cash flows and current property appraisals. SFAS 114 requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company's impaired loans
are measured based on the fair value of the collateral because they are
collateral dependent. At December 31, 1996, there were $16.6 million of
impaired loans.
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan. The Company recognizes interest income on impaired
loans on a cash basis.
ALLOWANCE FOR LOAN LOSSES
Allowances for loan losses are maintained at levels that management deems
adequate to cover estimated losses and are continually reviewed and adjusted.
The Company adheres to an internal asset review system and an established loan
loss reserve methodology. Management evaluates factors such as the prevailing
and anticipated economic conditions, historic loss experiences, composition of
the loan portfolio by property type, levels and trends of classified loans and
loan delinquencies in assessing overall valuation allowance levels to be
maintained.
While management uses currently available information to provide for losses
on loans, additions to the allowance may be necessary based on new information
and/or future economic conditions. When the property collateralizing a
delinquent mortgage loan is foreclosed on by the Company and transferred to
real estate owned, the difference between the loan balance and the fair value
of the property less estimated selling costs is charged-off against the
allowance for loan losses.
LOAN SALES AND SERVICING
Gains or losses on the sale of loans are recognized at the time of sale.
When a participating interest in loans sold had an average contractual
interest rate, adjusted for normal servicing fees, which was different than
the agreed upon yield to the purchaser, the sales price was adjusted by the
present value of the differential for the estimated remaining life of the
loans. Any resulting net premium or discount is amortized to interest income
over the estimated remaining life of the loans based on a methodology that
approximates the effective interest yield method. The aggregate amount of
unamortized premiums arising from loan sales (capitalized excess servicing) is
included as other assets. Capitalized excess servicing fees are periodically
reviewed for impairment based on their fair values in accordance with
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights". The fair value of the capitalized excess servicing, for the
purposes of impairment, is measured using a discounted cash flow analysis
based on the Company's estimated annual cost of servicing, the market
prepayment rates, and the market discount rates. At December 31, 1996, there
was no impairment relating to capitalized excess servicing fees. Amortization
of capitalized excess servicing fees and any related impairments are included
in noninterest income as incurred.
SECURITIES
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities" establishes
the classification of investments into three categories: held-to-maturity,
available-for-sale and trading. Securities classified as held-to-maturity are
recorded at amortized cost because management intends and the Company has the
ability to hold these securities to maturity. Securities classified as
available-for-sale are reported at fair value. Fair value for these securities
is obtained principally from published information or quotes by registered
securities brokers. Securities for which quotes are not readily available are
valued based on the present value of discounted estimated future cash flows.
The Company does not have a trading portfolio.
F-15
<PAGE>
Securities are identified as either available-for-sale or held-to-maturity
at, or soon after, purchase and are accounted for accordingly. Net unrealized
gains and losses on securities available-for-sale are excluded from earnings
and reported net of applicable income taxes as a separate component of
stockholders' equity until realized. Gains and losses on sales of securities
are recorded in earnings at the time of sale and are determined by the
difference between the net sale proceeds and the amortized cost of the
security, using specific identification.
Discounts and premiums on securities are amortized using a method
approximating the interest method over the estimated life of the security,
adjusted for actual prepayments. Interest on securities is accrued as income
only to the extent considered collectible.
In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities Questions and Answers" ("Special Report"). The
Special Report was issued as an aid in understanding and implementing SFAS
115. For companies that adopted SFAS 115 prior to the issuance of this Special
Report and the effects of adoption resulted in reclassification of securities
between categories, the guidance stipulated that the transfers should be
accounted for in accordance with SFAS 115. As a result, concurrent with the
initial adoption of the Special Report, the Company reassessed the
appropriateness of its classifications for all securities held at that time
and, in December 1995, reclassified $147.7 million in mortgage-backed
securities from held to maturity to available-for-sale. The transfer was
recorded at a fair value of $146.0 million with $981,000 of unrealized losses
(net of tax) recorded as a separate component of stockholders' equity.
REAL ESTATE OWNED
Real estate owned is comprised of property acquired through foreclosure and
is recorded at the lower of cost (i.e., net loan value) or fair value less
estimated costs to sell, as of the date of foreclosure. Thereafter, specific
valuation allowances are established for adverse changes in the fair value of
the underlying assets.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
basis over the estimated useful lives for each of the various asset
categories.
INTANGIBLES
Core deposit premiums arise from the acquisition of deposits and are
amortized on a straight-line basis over the estimated life of the deposit base
acquired, generally eight years. The Company continually evaluates the periods
of amortization to determine whether later events and circumstances warrant
revised estimates. In addition, the market value of core deposit premiums is
established on an annual basis to evaluate the recoverability of its carrying
value for inclusion as a component of regulatory capital.
Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is amortized to expense over a period no greater than the
estimated remaining life of the long-term interest-earning assets acquired. If
the assets acquired do not include a significant amount of long-term interest-
earning assets, goodwill is amortized over a period that does not exceed the
estimated remaining life of the existing customer deposit base. Goodwill is
amortized on a straight-line basis over a period of up to 7 years. If it
becomes probable that the estimated undiscounted future cash flows will be
less than the carrying amount of goodwill, a reduction in the carrying amount
is recognized.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable.
F-16
<PAGE>
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that management expects to hold and use are based on the fair
value of the asset. Long-lived assets and certain identifiable intangibles to
be disposed of are reported at the lower of carrying amount or fair value less
cost to sell.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which are considered financing activities. The
obligations to repurchase the securities are reflected as liabilities, and
related underlying securities for the agreements are included in the Company's
securities portfolio as recorded assets.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory rates applicable to future years to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. The effect on deferred taxes for a change
in tax rates is recognized in income during the period of enactment.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses certain derivative financial instruments to manage interest
rate risk, principally interest rate exchange agreements (swaps, caps and
collars). The Company does not hold any derivative financial instruments for
trading purposes. The Company uses interest rate swap agreements as part of
its overall asset/liability management in order to reduce its exposure to
interest rate fluctuation risk. The agreements involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying notional amounts. Net interest income (expense), resulting from the
differential between exchanging floating and fixed rate interest payments, is
recorded on a current basis. Notional principal amounts are often used to
express the volume of interest rate swap transactions, but the amounts
potentially subject to loss are much smaller. The Company is exposed to loss
of future interest differential payments (credit risk) in the event of
nonperformance by the counterparties to the interest rate exchange agreements.
The Company manages the credit risk of its interest rate exchange agreements
by maintaining exposure limits and adhering to a strict counterparty selection
process. The Company does not anticipate nonperformance by the other parties.
STOCK BASED COMPENSATION
The Company accounts for stock based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion (APB) No.
25 "Accounting for Stock Issued to Employees."
EARNINGS (LOSS) PER SHARE
Earnings per share for 1996 and 1994 were calculated using weighted average
number of common shares outstanding including common stock equivalents
(primarily outstanding stock options). Loss per share for 1995 was calculated
using the weighted average number of common shares outstanding. The average
number of shares outstanding (including common stock equivalents) for 1996 and
1994 were 13,899,838 and 14,361,760 shares, respectively. The average number
of shares outstanding for 1995 was 14,586,984. The Company's fully diluted
earnings per share does not differ materially from its primary earnings per
share, therefore, it has not been separately reported.
RECLASSIFICATION
Certain reclassifications have been made to the prior year balances in order
to conform to the current year presentation.
F-17
<PAGE>
NOTE 2. ACQUISITION OF CTL
Effective June 1, 1996, the Company acquired all the outstanding stock of
CTL Credit, Inc. and its wholly owned subsidiary California Thrift & Loan
("CTL") for cash.
CTL is an FDIC insured California industrial loan company with a specific
focus on consumer lending. The acquisition was accounted for using the
purchase method of accounting in accordance with APB No. 16, "Business
Combinations". Under this method of accounting, the acquisition purchase price
of approximately $62 million was allocated to assets acquired and liabilities
assumed based on their estimated fair values as of the effective date of
acquisition.
In conjunction with the transaction, the Company issued $50 million of 8.42%
Senior Debentures in May 1996 of which a portion was used to partially finance
the acquisition.
The aggregate cost of the acquisition exceeded the estimated fair value of
net assets acquired by approximately $7 million and is being amortized on a
straight-line basis over seven years. Results of operations for the acquired
entity have been included in the Company's consolidated financial statements
commencing as of the effective date of acquisition.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information assumes the
acquisition occurred as of the beginning of 1995. The disclosed results have
been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition been made as of the
beginning of 1995 or of the results which may occur in the future.
The following table reflects the combined historical results of operations
for BVCC and CTL after giving effect to the amortization of fair value and
other purchase accounting adjustments recorded in connection with the
acquisition of CTL. Such adjustments include the revaluation of assets held-
for-sale, the capitalization of goodwill and other intangibles, and specific
expense accruals and reserves for acquisition-related costs and contingencies.
The following pro forma historical results for the years ended December 31,
1996 and 1995 have been adjusted to include amortization of the aforementioned
adjustments for the full periods presented which was calculated based on
appropriate methods and periods of benefit as determined by management.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest income.............................................. $265,298 $267,444
Interest expense............................................. 171,121 187,933
-------- --------
Net interest income........................................ 94,177 79,511
Provision for loan losses.................................... 4,981 9,432
-------- --------
Net interest income after provision for loan losses........ 89,196 70,079
Noninterest income........................................... 10,433 9,365
Noninterest expense.......................................... 77,386 81,685
-------- --------
Income (loss) before income taxes and extraordinary item... 22,243 (2,241)
Income tax provision (benefit)............................... 9,694 (140)
Extraordinary item, net of tax............................... -- (2,544)
-------- --------
Net income (loss).......................................... $ 12,549 $ (4,645)
======== ========
Per share data:
Income (loss) before extraordinary item...................... $ 0.90 $ (0.14)
======== ========
Net income (loss)............................................ $ 0.90 $ (0.32)
======== ========
</TABLE>
F-18
<PAGE>
NOTE 3. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996
----------------------
BVFB CTL BVCC(1) 1995
-------- ---- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest-earning deposits due from depository
institutions................................... $ 22,405 $605 $ 22,608 $24,144
Interest-earning deposits....................... 220 -- 220 2,366
Short-term investments.......................... 84,000 -- 84,000 16,250
-------- ---- -------- -------
Total......................................... $106,625 $605 $106,828 $42,760
======== ==== ======== =======
</TABLE>
- --------
(1) Intercompany depository accounts have been eliminated.
Generally, the Company's banking depositories either pay interest on
deposits or apply an imputed interest credit to deposit balances which is used
as an offset to charges for banking services rendered. The Company has no
compensating balance arrangements or lines of credit with banks. Cash balances
for BVFB required to be held at the Federal Reserve Bank totaled approximately
$5.5 million and $5.7 million at December 31, 1996 and 1995, respectively.
There were no similar cash balance reserve requirements for CTL.
NOTE 4. INVESTMENT SECURITIES
A summary of the Company's investment securities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ----- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale
U. S. Treasury Bills...................... $12,792 $-- $ -- $12,792
Federal Home Loan Mortgage Corporation
preferred stock.......................... 1,000 10 -- 1,010
------- ---- ----- -------
Total................................... $13,792 $ 10 $ -- $13,802
======= ==== ===== =======
Held-to-Maturity
Federal Home Loan Mortgage Corporation
debentures............................... $ 5,004 $-- $ (27) $ 4,977
Federal Home Loan Mortgage Corporation
notes.................................... 5,000 -- (19) 4,981
Federal Farm Credit Bank callable note.... 5,000 -- (46) 4,954
U.S. Treasury Bills....................... 200 -- -- 200
------- ---- ----- -------
Total................................... $15,204 $-- $ (92) $15,112
======= ==== ===== =======
<CAPTION>
DECEMBER 31, 1995
----------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ----- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale
Federal Home Loan Mortgage Corporation and
Student Loan Mortgage Association notes.. $ 7,000 $-- $ -- $ 7,000
Federal Home Loan Mortgage Corporation
preferred stock.......................... 1,000 35 -- 1,035
------- ---- ----- -------
Total................................... $ 8,000 $ 35 $ -- $ 8,035
======= ==== ===== =======
Held-to-Maturity
Federal Home Loan Mortgage Corporation
debentures............................... $ 9,988 $-- $ (4) $ 9,984
Federal Home Loan Mortgage Corporation
notes.................................... 24,940 45 -- 24,985
Federal Farm Credit Bank callable note.... 5,000 -- -- 5,000
------- ---- ----- -------
Total................................... $39,928 $ 45 $ (4) $39,969
======= ==== ===== =======
</TABLE>
F-19
<PAGE>
The weighted average yield of investment securities available-for-sale and
held-to-maturity at December 31, 1996 was 5.29% and 6.67%, respectively. The
weighted average yield of investment securities available-for-sale and held-
to-maturity at December 31, 1995 was 7.19% and 6.58%, respectively.
There were no sales of investment securities during 1996 and 1995. During
1994, proceeds from sales of investment securities available-for-sale were
$5.3 million and gross gains of $171,000 were realized on those sales.
In conjunction with the pending securitization of CTL's auto loan portfolio,
during the fourth quarter of 1996, CTL entered into a short sale of Treasury
securities to hedge the valuations from movements in interest rates. A loss of
$293,000 in accordance with generally accepted principles was recorded in the
fourth quarter associated with this short sale of Treasury securities.
The following table sets forth the contractual maturities and amortized cost
of the Company's investment securities as of December 31, 1996:
<TABLE>
<CAPTION>
ONE YEAR THROUGH
WITHIN ONE YEAR FIVE YEARS TOTAL
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasury Bills....... $12,792 5.29% $ -- -- $12,792 5.29%
======= ==== ======= ==== ======= ====
Fair value.................. $12,792 $ -- $12,792
======= ======= =======
Held-to-Maturity
Federal Home Loan Mortgage
Corporation debentures... $ -- $ 5,004 6.81% $ 5,004 6.81%
Federal Home Loan Bank
callable note............ -- 5,000 6.52 5,000 6.52
Federal Farm Credit Bank
callable note............ -- 5,000 6.75 5,000 6.75
U.S. Treasury Bills....... 200 4.75% -- 200 4.75
------- ---- ------- ---- ------- ----
Total................... $ 200 4.75% $15,004 6.69% $15,204 6.67%
======= ==== ======= ==== ======= ====
Fair value.................. $ 200 $14,912 $15,112
======= ======= =======
</TABLE>
The Company's investment in FHLMC preferred stock of $1.01 million has no
scheduled maturity and is redeemable in whole or in part after June 30, 1997
at the option of FHLMC.
F-20
<PAGE>
NOTE 5. MORTGAGE-BACKED SECURITIES
A summary of the Company's mortgage-backed securities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ----- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale
Federal National Mortgage Association.... $ 84,401 $ -- $ (1,247) $ 83,154
======== ===== ======== ========
Held-to-Maturity
Federal Home Loan Mortgage Corporation... $202,402 $ 77 $ (4,805) $197,674
Federal National Mortgage Association.... 285,495 104 (6,754) 278,845
Government National Mortgage Association. 660 22 -- 682
Financial institutions and financial
intermediaries.......................... 5,902 358 -- 6,260
-------- ----- -------- --------
$494,459 $ 561 $(11,559) $483,461
======== ===== ======== ========
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ----- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale
Federal Home Loan Mortgage Corporation... $ 13,457 $ -- $ (199) $ 13,258
Federal National Mortgage Association.... 113,543 -- (1,135) 112,408
Government National Mortgage Association. 24,000 482 (370) 24,112
-------- ----- -------- --------
$151,000 $ 482 $ (1,704) $149,778
======== ===== ======== ========
Held-to-Maturity
Federal Home Loan Mortgage Corporation... $242,839 $ 173 $ (3,224) $239,788
Federal National Mortgage Association.... 329,090 242 (4,035) 325,297
Government National Mortgage Association. 893 31 -- 924
Financial institutions and financial
intermediaries.......................... 6,128 460 (1) 6,587
Other nonrated, nonresidential real
estate.................................. 2,650 75 -- 2,725
-------- ----- -------- --------
$581,600 $ 981 $ (7,260) $575,321
======== ===== ======== ========
</TABLE>
The weighted average yield of mortgage-backed securities available-for-sale
and held-to-maturity at December 31, 1996 was 6.61% and 6.44%, respectively.
The weighted average yield of mortgage-backed securities available-for-sale
and held-to-maturity at December 31, 1995 was 6.72% and 6.58%, respectively.
Adjustable rate mortgage-backed securities included above totaled $664,000
at December 31, 1996 and $725,000 at December 31, 1995. The Company uses
mortgage-backed securities as full or partial collateral for borrowings. The
total amount of pledged mortgage-backed securities at December 31, 1996 and
1995 was $560.0 million and $551.1 million, respectively.
Proceeds from sales of mortgage-backed securities ("MBS") available-for-sale
during 1996 were $54.5 million. Gross gains of $411,000 and gross losses of
$918,000 were realized on those sales. Proceeds from the sale of MBS held-to-
maturity (scheduled to mature three months from sale date) during 1996 was
$2.6 million and there was no gain or loss on this sale. Proceeds from sales
of mortgage-backed securities available-for-sale during 1995 were $101.2
million. Gross gains of $688,000 and gross losses of $2.9 million were
realized on those sales. There were no sales of mortgage-backed securities in
1994.
F-21
<PAGE>
The following table sets forth the remaining contractual terms to maturity of
the Company's mortgage-backed securities portfolio as of December 31, 1996
which is held exclusively by BVFB:
<TABLE>
<CAPTION>
OVER ONE YEAR OVER FIVE YEARS
THROUGH FIVE THROUGH TEN
WITHIN ONE YEAR YEARS YEARS OVER TEN YEARS TOTAL
--------------- ---------------- --------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ -------- ------- -------- ------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
FNMA.................... $ -- $ -- $ -- $ 84,401 6.61% $ 84,401 6.61%
====== ======= ====== ======== ===== ======== =====
Fair Value.............. $ -- $ -- $ -- $ 83,154 $ 83,154
====== ======= ====== ======== ========
Held-to-Maturity
FHLMC, FNMA and GNMA... $3,614 5.12% $27,852 5.09% $5,167 7.45% $451,924 6.47% $488,557 6.39%
Financial institutions
and intermediaries.... -- 131 8.88% -- 5,771 10.22% 5,902 10.19%
------ ---- ------- ---- ------ ---- -------- ----- -------- -----
Total amortized cost... $3,614 5.12% $27,983 5.11% $5,167 7.45% $457,695 6.52% $494,459 6.44%
====== ==== ======= ==== ====== ==== ======== ===== ======== =====
Fair Value.............. $3,590 $27,590 $5,159 $447,121 $483,461
====== ======= ====== ======== ========
</TABLE>
F-22
<PAGE>
NOTE 6. LOANS RECEIVABLE
The Company originates loans for the purpose of enabling borrowers to
purchase or refinance multifamily (five or more units) and nonresidential real
estate through its wholly owned subsidiary, BVFB. During 1996, management re-
directed its business lending practices whereas it de-emphasized its focus on
single family real estate lending. As a result, the Company discontinued its
loan origination operations for those specific products. BVFB's loans
receivable are primarily secured by real property located in Northern
California with the heaviest concentration in the counties of San Mateo, San
Francisco and Santa Clara. Although BVFB has a diversified loan portfolio, the
geographic concentration of its borrowers implies a dependence on the regional
economy and local real estate markets. The loan portfolio for CTL consists
primarily of consumer loans. CTL's auto loans are classified as held-for-sale
because they are expected to be sold to BVSC for subsequent securitization.
The following is a summary of the Company's loans receivable which includes
loans held-for-sale at December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996
--------------------------------
BVFB CTL BVCC 1995
---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential
Single family (one to four
units)....................... $ 610,607 $ 81,479 $ 692,086 $ 731,310
Multifamily (five or more
units)....................... 1,033,252 15,039 1,048,291 995,038
Nonresidential.................. 367,104 14,718 381,822 333,236
---------- -------- ---------- ----------
2,010,963 111,236 2,122,199 2,059,584
Consumer loans:
Auto loans...................... 21,703 293,736 315,439 2,367
Home equity and other........... 36,058 31,960 68,018 32,482
---------- -------- ---------- ----------
57,761 325,696 383,457 34,849
---------- -------- ---------- ----------
Gross loans receivable........... 2,068,724 436,932 2,505,656 2,094,433
Advances to borrowers............ 1,173 -- 1,173 607
Less:
Net deferred loan origination
fees........................... (2,405) -- (2,405) (1,009)
Unearned discounts and premiums. (694) -- (694) (1,749)
Allowance for loan losses....... (26,681) (2,332) (29,013) (30,014)
---------- -------- ---------- ----------
(29,780) (2,332) (32,112) (32,772)
---------- -------- ---------- ----------
$2,040,117 $434,600 $2,474,717 $2,062,268
========== ======== ========== ==========
</TABLE>
BVFB has historically sold (none in 1996 and 1995) mortgage loans to the
secondary market and usually retained responsibility for servicing the loans.
At December 31, 1996, 1995 and 1994, BVFB serviced participating interests in
loans sold of $412.4 million, $466.5 million, and $541.0 million,
respectively.
The Company has agreed to modifications of certain multifamily and
nonresidential mortgage loans. The modifications have taken the form of
interest rate concessions, and/or payment concessions. Such loan modifications
are considered troubled debt restructurings (see Note 1) and are entered into
with the objective of maximizing the Company's long-term recovery of the
investment in the loan when a borrower is experiencing financial difficulties.
The Company has no commitments to lend additional funds to borrowers whose
loans were so modified. In the aggregate, the Company's investment in troubled
debt restructurings (excluding troubled debt restructurings classified as
nonaccrual loans) was $509,000 and $15.6 million at December 31, 1996 and
1995, respectively. Under their original terms, interest income with respect
to these loans would not have been significant in 1996 and would have been
$1.1 million in 1995 and $863,000 in 1994. Actual interest recognized by the
Company on these modified loans was not significant in 1996 and was $1.1
million in 1995 and $920,000 in 1994.
F-23
<PAGE>
At December 31, 1996 and 1995, nonaccrual loans totaled $16.1 million and
$10.8 million, respectively. Interest on nonaccrual loans that was not
recorded in income was $735,000, $623,000 and $2.8 million for years ended
December 31, 1996, 1995, and 1994, respectively. Actual interest recognized by
the Company on these nonaccrual loans was not significant in 1996 or 1995. At
December 31, 1996, the Company had no commitments to lend additional funds to
these borrowers.
The average investment in impaired loans during 1996 and 1995 was $15.1
million and $38.5 million, respectively. Impaired loans recorded in accordance
with SFAS 114 consist of nonperforming loans (see Note 1) and troubled debt
restructurings as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996
----------------------
BVFB CTL BVCC 1995
------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonperforming loans............................. $14,033 $2,092 $16,125 $10,755
Troubled debt restructurings.................... 509 -- 509 15,641
------- ------ ------- -------
$14,542 $2,092 $16,634 $26,396
======= ====== ======= =======
</TABLE>
The following table summarizes the changes in the allowance for loan losses
for the periods indicated (including CTL effective June 1, 1996):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------------------ ------- -------
BVFB CTL BVCC
------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year....... $30,014 $2,860 $32,874 $29,115 $33,790
Charge-offs:
Mortgage......................... (5,706) (221) (5,927) (4,727) (8,428)
Consumer......................... (8) (466) (474) (152) (86)
------- ------ ------- ------- -------
(5,714) (687) (6,401) (4,879) (8,514)
Recoveries:
Mortgage......................... 522 -- 522 1,424 1,337
Consumer......................... 59 61 120 70 135
------- ------ ------- ------- -------
581 61 642 1,494 1,472
Net charge-offs.................... (5,133) (626) (5,759) (3,385) (7,042)
Provision for loan losses.......... 1,800 98 1,898 4,284 2,367
------- ------ ------- ------- -------
Balance at end of year............. $26,681 $2,332 $29,013 $30,014 $29,115
======= ====== ======= ======= =======
Allowance for loans by category:
Mortgage......................... $26,157 $1,812 $27,969 $29,541 $28,560
Consumer......................... 524 520 1,044 473 555
------- ------ ------- ------- -------
Total.......................... $26,681 $2,332 $29,013 $30,014 $29,115
======= ====== ======= ======= =======
</TABLE>
Allowance for loan losses was provided for all impaired loans at December
31, 1996 and 1995. The portion of the total allowance for loan losses that was
attributable to impaired loans was $1.9 million and $5.1 million at December
31, 1996 and 1995, respectively. Provision for loan losses, charge-offs and
recoveries relating to impaired loans were $1.9 million, $6.4 million and $0.6
million for the year ended December 31, 1996 and $4.3 million, $4.9 million
and $1.5 million for the year ended December 31, 1995, respectively.
To facilitate the sale of real estate loans, the Company has in the past
occasionally offered a recourse guaranty on loans sold whereby the Company
agreed to repurchase or substitute loans that became 90 days
F-24
<PAGE>
delinquent. In addition, the Company on occasion subordinated its retained
participation interest in sold loans. At December 31, 1996 and 1995, the
Company had outstanding recourse and subordination contingencies relating to
principal of $54.3 million and $56.0 million, respectively, on sold mortgage
loans.
At December 31, 1996 and 1995, mortgage loans aggregating $1.13 billion and
$1.24 billion respectively, were pledged as collateral for advances from the
FHLBSF.
NOTE 7. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996
------------------------
BVFB CTL BVCC 1995
------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Land........................................ $ 214 $ -- $ 214 $ 4,777
Buildings................................... 336 -- 336 10,237
Capitalized leases.......................... 3,979 -- 3,979 3,979
Leasehold improvements...................... 5,495 1,422 6,917 5,486
Furniture and equipment..................... 10,281 4,455 14,736 12,456
Construction in progress.................... 361 -- 361 3,523
------- ------ ------- -------
20,666 5,877 26,543 40,458
Less:
Accumulated depreciation and amortization... (14,769) (4,869) (19,638) (17,174)
Reserve for write-down on corporate office
complex.................................... -- -- -- (7,100)
------- ------ ------- -------
$ 5,897 $1,008 $ 6,905 $16,184
======= ====== ======= =======
</TABLE>
During the fourth quarter of 1995, the Company recorded a charge of $7.1
million to adjust the carrying amount of the land and building of its San
Mateo, California corporate office complex to its estimated fair value less
costs to sell as a result of its decision to pursue a sale of the complex. The
Company recorded additional charges of $500,000 as a result of the sale of the
complex in September 1996. During 1996, the Company wrote off $1.2 million of
computer hardware equipment as a result of new specifications relating to the
Company's long-term information services technology agreement with an outside
data processing services vendor. Depreciation and amortization expense for the
years ended December 31, 1996, 1995 and 1994 was $2.2 million, $3.1 million
and $3.1 million, respectively.
NOTE 8. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996
---------------------
BVFB CTL BVCC 1995
------ ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Core deposit premiums.............................. $3,810 $ -- $ 3,810 $5,835
Goodwill........................................... -- 6,387 6,387 --
------ ------ ------- ------
$3,810 $6,387 $10,197 $5,835
====== ====== ======= ======
</TABLE>
Core deposit premiums of $274,000 were written off during 1996 due to a
branch closure. During the fourth quarter of 1995, core deposit premiums of
$854,000 were written-off for the year ended December 31, 1995 resulting from
an impairment in the value of core deposit premiums that was attributable to
higher than expected decay rates in the customer deposits acquired. The
balance of core deposit premiums was subsequently amortized over its remaining
useful life. There were no core deposit premiums written off during 1994.
Amortization expense for core deposit premiums was $1.8 million, $1.9 million
and $2.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-25
<PAGE>
During the fourth quarter of 1995, BVFB explored the sale and/or exchange of
certain of its acquired branches which had purchased goodwill dating from
1981. Based on offers received and management's estimate of undiscounted
future cash flows, it was determined that the recovery of the goodwill
associated with these branches was no longer recoverable. Correspondingly,
related unamortized goodwill of $758,000 was written off in 1995. Amortization
expense for goodwill was $581,000 for the year ended December 31, 1996 and
$396,000 for each of the years ended December 31, 1995 and 1994.
NOTE 9. CUSTOMER DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
WEIGHTED
% OF AVERAGE
AMOUNT TOTAL RATE
---------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BVFB:
Passbook accounts............................... $ 189,279 12.0% 2.38%
Checking accounts............................... 111,699 7.1 0.78
Money market accounts........................... 176,799 11.2 3.90
---------- ----- ----
Transaction accounts............................ 477,777 30.3 2.57
Certificates of deposit......................... 1,100,559 69.7 5.48
---------- ----- ----
$1,578,336(1) 100.0% 4.60%
========== ===== ====
CTL:
Money market accounts........................... $ 16,057 8.6% 4.16%
Thrift certificates............................. 169,837 91.4 5.55
---------- ----- ----
$ 185,894 100.0% 5.43%
========== ===== ====
BVCC:
Passbook accounts............................... $ 189,279 10.7% 2.38%
Checking accounts............................... 111,436 6.3 0.78
Money market accounts........................... 192,856 10.9 3.92
---------- ----- ----
Transaction accounts............................ 493,571 27.9 2.62
Certificates of deposit......................... 1,100,559 62.4 5.48
Thrift certificates............................. 169,837 9.7 5.55
---------- ----- ----
$1,763,967(1) 100.0% 4.69%
========== ===== ====
</TABLE>
- --------
(1) Intercompany deposit accounts have been eliminated
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------
WEIGHTED
% OF AVERAGE
AMOUNT TOTAL RATE
---------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts............................... $ 173,739 9.6% 2.93%
Checking accounts............................... 107,595 5.9 0.80
Money market accounts........................... 106,276 5.8 3.09
---------- ----- ----
Transaction accounts 387,610 21.3 2.38
Certificates of deposit 1,432,230 78.7 6.02
---------- ----- ----
$1,819,840 100.0% 5.24%
========== ===== ====
</TABLE>
F-26
<PAGE>
Noninterest bearing deposits were $24.6 million and $13.3 million as of
December 31, 1996 and 1995, respectively. Customer deposits at December 31,
1996 included certificates of deposit scheduled to mature as follows:
<TABLE>
<CAPTION>
BVFB CTL BVCC
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1997....................................... $ 878,878 $122,404 $1,001,282
1998....................................... 179,045 33,949 212,994
1999....................................... 27,830 8,353 36,183
2000....................................... 11,139 3,311 14,450
2001....................................... 3,667 1,820 5,487
---------- -------- ----------
Total.................................... $1,100,559 $169,837 $1,270,396
========== ======== ==========
</TABLE>
Interest expense on customer deposits by deposit type is as follows
(including CTL effective June 1, 1996):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------------------ ------- -------
BVFB CTL BVCC
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Passbook accounts............ $ 5,335 $ -- $ 5,335 $ 3,777 $ 3,673
Checking and money market
accounts.................... 5,726 393 6,095 4,468 4,625
Certificates of deposit...... 73,429 -- 73,429 85,153 57,274
Brokered retail certificates. -- -- -- -- 852
Thrift certificates.......... -- $15,366 15,366 -- --
------- ------- -------- ------- -------
$84,490 $15,759 $100,225(1) $93,398 $66,424
======= ======= ======== ======= =======
</TABLE>
- --------
(1) Intercompany amounts have been eliminated
NOTE 10. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF SAN FRANCISCO
At December 31, 1996 and 1995, BVFB had the following advances outstanding
with the following maturities and rates:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST
PRINCIPAL AMOUNTS RATES
----------------- ----------
1996 1995 1996 1995
-------- -------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996........................................ $ -- $486,940 -- 6.69%
1997........................................ 774,480 96,580 5.69% 5.63
1998........................................ 108,270 108,270 5.87 5.88
1999........................................ 35,000 35,000 5.84 5.84
2000........................................ 20,000 20,000 5.88 5.88
2001........................................ 40,000 20,000 7.18 8.66
-------- -------- ---- ----
$977,750 $766,790 5.78% 6.43%
======== ======== ==== ====
</TABLE>
FHLBSF advances at December 31, 1996 included $25 million of borrowings
maturing in 1997 and 1998 at interest rates that reset monthly based on the
Eleventh District Cost of Funds Index and $20 million of borrowings maturing
in 2001 at interest rates that reset semi-annually based on the 6-month LIBOR
rate. The advances were collateralized by loans and mortgage-backed securities
totaling $1.70 billion and $1.61 billion at December 31, 1996 and 1995,
respectively.
BVFB is a member of the Federal Home Loan Bank System. As a member, BVFB is
required to purchase stock in the FHLBSF at an amount equal to the greater of
1% of BVFB's residential mortgage loans or 5% of
F-27
<PAGE>
outstanding FHLBSF advances. The stock is purchased at par value ($100 per
share) and shares of stock held in excess of the minimum requirement may be
sold back to the FHLBSF at par value. BVFB records its investment in FHLBSF
stock at cost (par value). At December 31, 1996, BVFB's investment was $49.6
million and its minimum required investment was $48.9 million. The stock is
pledged as collateral for advances from the FHLBSF. The FHLBSF generally
declares quarterly stock dividends. The amount of FHLBSF dividends recorded in
income during the years ended December 31, 1996, 1995 and 1994 was $2.5
million, $2.2 million, and $2.3 million, respectively.
As part of its asset/liability management strategy to reduce interest rate
risk exposure, the Company prepaid $45 million of its advances from the
FHLBSF, and during the fourth quarter of 1995, committed to prepay $145
million of its FHLBSF advances in February 1996. Accordingly, the Company
incurred a prepayment charge of $2.5 million (net of applicable income taxes)
in connection with the early retirement of FHLBSF advances which was reported
as an extraordinary item in 1995.
NOTE 11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are effectively borrowings
secured by mortgage-backed securities. The securities sold under the terms of
these agreements are safekept for the Company by the registered primary
securities dealers who arrange the transactions. Borrowings under reverse
repurchase agreements at December 31, 1996 and 1995 were $210.6 million and
$166.7 million, respectively. The weighted average interest rate on reverse
repurchase agreements at December 31, 1996 and 1995 were 5.53% and 6.13%,
respectively.
These borrowings have maturities of one year or less and are collateralized
by mortgage-backed securities aggregating $218.2 million and $172.2 million
respectively, at December 31, 1996 and 1995. The contractually required market
values of the collateral may range up to 106% of the borrowings. The market
value of the mortgage-backed securities collateralizing such borrowings at
December 31, 1996 and 1995 was $218.7 million and $174.8 million,
respectively.
NOTE 12. SENIOR DEBENTURES
In May 1996, Bay View Capital Corporation issued $50 million of Senior
Debentures of which a portion was used to partially finance the acquisition of
CTL. The Senior Debentures are due June 1, 1999 and pay interest semi-annually
at a rate of 8.42%.
NOTE 13. INCOME TAXES
The Company files consolidated federal tax returns with its wholly owned
subsidiaries. Income tax expense (benefit) before extraordinary items is
summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1996:
Current............................................ $ 3,007 $ 352 $ 3,359
Deferred........................................... 3,046 1,872 4,918
------- ------- -------
$ 6,053 $ 2,224 $ 8,277
======= ======= =======
1995:
Current............................................ $(5,652) $(2,482) $(8,134)
Deferred........................................... 5,135 2,291 7,426
------- ------- -------
$ (517) $ (191) $ (708)
======= ======= =======
1994:
Current............................................ $ 4,237 $ 2,669 $ 6,906
Deferred........................................... 883 39 922
------- ------- -------
$ 5,120 $ 2,708 $ 7,828
======= ======= =======
</TABLE>
F-28
<PAGE>
Following is a summary of current and deferred income taxes included in other
assets (liabilities):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current receivable (payable)................... $ 2,735 $ (6,248)
Deferred asset (liability)..................... (4,698) 11,683
----------- -----------
$(1,963) $ 5,435
=========== ===========
</TABLE>
The differences between the effective tax rates and the federal statutory
rates were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1996 1995 1994
------ ----- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Federal tax expense, computed at statutory rate
of 35%
for 1996, 1995 and 1994......................... $6,736 $(999) $ 7,819
Revision of prior year estimates................. -- -- (2,100)
State tax expense, net of federal tax benefit.... 2,439 (192) 1,587
Other, net....................................... (898) 483 522
------ ----- -------
$8,277 $(708) $ 7,828
====== ===== =======
Effective tax rate, as a percentage of income
before income tax expense (benefit) and
extraordinary items............................. 43.0 % (24.8)% 35.0 %
====== ===== =======
</TABLE>
The components of the net deferred tax assets as of December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Provision for loan losses........................... $ 10,579 $ 12,508
Real estate joint ventures.......................... 1,130 1,090
Depreciation........................................ 1,947 1,476
State income taxes.................................. 830 235
Intangible assets................................... 3,327 3,505
Unrealized loss on securities available-for-sale.... 532 504
Leases.............................................. 1,347 787
Prepayment penalties................................ -- 1,815
Write-down of corporate office complex.............. 996 2,823
Other............................................... 3,776 2,579
-------- --------
Gross deferred tax assets........................... 24,464 27,322
-------- --------
Deferred tax liabilities:
Excess over base year reserves...................... (993) (914)
Unrealized gain on loans available-for-sale......... (12,745) --
Loan fees........................................... (7,213) (8,411)
FHLBSF stock dividends.............................. (6,677) (5,405)
Capitalized excess servicing fees................... (263) (456)
Other............................................... (1,271) (453)
-------- --------
Gross deferred tax liabilities...................... (29,162) (15,639)
-------- --------
Net deferred tax asset (liability).................. $ (4,698) $ 11,683
======== ========
</TABLE>
F-29
<PAGE>
In accordance with SFAS 109, a deferred tax liability has not been
recognized for the bad debt reserves of the Company which arose in the tax
years which began prior to December 31, 1987. At December 31, 1996 and 1995,
the amount of these reserves was approximately $17.0 million.
The amount of unrecognized deferred tax liability at December 31, 1996 and
1995 was approximately $6.1 million. The deferred tax liability could be
recognized if in the future there is a change in federal tax law, certain
distributions are made with respect to the stock of the savings institution,
or the bad debt reserves are used for any purpose other than absorbing bad
debt losses.
During 1996, the Company and the Internal Revenue Service ("IRS") reached a
final agreement to resolve certain disputed issues related to the taxable
years 1987 through 1989. The principal disputed issues related to various
savings and loan industry tax issues for which the Company had previously
provided deferred taxes.
As a result of reaching a tentative agreement in 1994, the Company reduced
its 1994 income tax expense by approximately $2.1 million. The reduction in
1994 income tax expense represented an adjustment to the Company's current and
deferred tax liabilities (including the estimated effect of the IRS agreement
on the Company's California franchise tax returns).
The acquisition of CTL during 1996 increased deferred income tax liabilities
by $7.3 million.
NOTE 14. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
Federal legislation to recapitalize and fully fund the Savings Association
Insurance Fund ("SAIF") was signed into law on September 30, 1996. Customer
deposits for BVFB are SAIF-insured, and as a result of the legislation BVFB
was required to pay a one-time special assessment of $11.7 million pre-tax
($6.7 million after tax or $.485 per share). The legislation had no effect on
CTL, as its deposits are insured under the Bank Insurance Fund.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, BVFB and CTL must meet specific capital guidelines that
involve quantitative measures of BVFB's or CTL's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. BVFB's and CTL's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements.
BAY VIEW FEDERAL BANK
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") provides definitions of regulatory capital (tangible capital, core
capital and risk-based capital) and methods of calculating the minimum
requirement for each type of capital. The tangible capital requirement is 1.5%
of tangible assets. The core capital requirement is 3.0% of tangible assets
plus qualifying intangibles. The risk-based capital requirement is 8.0% of
risk-weighted assets. At December 31, 1996, BVFB's fully phased-in regulatory
capital exceeds the minimum requirements of each regulatory capital standard
in effect on such date as follows:
<TABLE>
<CAPTION>
MINIMUM
ACTUAL REQUIRED EXCESS
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible......................... $165,110 5.52% $ 44,860 1.50% $120,250 4.02%
Core (Leverage).................. $168,782 5.64% $ 89,829 3.00% $ 78,953 2.64%
Risk-based....................... $190,981 10.74% $142,308 8.00% $ 48,673 2.74%
</TABLE>
F-30
<PAGE>
The following table is a reconciliation of BVFB's capital (excluding
unrealized loss on securities available-for-sale, net of tax benefit) under
Generally Accepted Accounting Principles ("GAAP") with its regulatory capital
at December 31, 1996:
<TABLE>
<CAPTION>
RISK-
TANGIBLE CORE BASED
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BVFB stockholder's equity (GAAP).................. $170,847 $170,847 $170,847
Increase (decrease):
Unrealized loss on securities................... 713 713 713
Core deposit premiums........................... (3,810) (138) (138)
Nonincludable investments in subsidiary......... (2,640) (2,640) (2,640)
Nonqualifying equity investments................ -- -- (124)
Qualifying general loan loss allowances......... -- -- 22,323
-------- -------- --------
BVFB regulatory capital........................... $165,110 $168,782 $190,981
======== ======== ========
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 required
each federal banking agency to implement prompt corrective actions for
institutions that it regulates. In response to this requirement, the Office of
Thrift Supervision adopted final rules, effective December 19, 1992, based on
FDICIA's five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
The regulations provide that a savings institution is well capitalized if
its Tier II risk-based capital ratio is 10% or greater, its Tier I risk-based
capital ratio is 6% or greater, its leverage ratio is 5% or greater, and the
institution is not subject to a capital directive. As used herein, Tier II
risk-based capital ratio means the ratio of Tier II risk-based capital to
risk-weighted assets, Tier I capital ratio means the ratio of core capital to
risk-weighted assets, and leverage ratio means the ratio of core capital to
adjusted total assets, in each case as calculated in accordance with current
OTS capital regulations. As of December 31, 1996 and 1995, the most recent
notification from the OTS categorized BVFB as well capitalized. There are no
conditions or events since that notification that management believes have
changed BVFB's category.
Under capital guidelines enacted by FDICIA, BVFB met the criteria for the
"well capitalized" standard at December 31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
WELL
CAPITALIZED
ACTUAL REQUIREMENT EXCESS
-------------- -------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leverage......................... $168,782 5.64% $149,716 5.00% $19,066 0.64%
Tier I risk-based................ $168,782 9.49% $106,731 6.00% $62,051 3.49%
Tier II risk-based............... $190,981 10.74% $177,885 10.00% $13,096 0.74%
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------
WELL
CAPITALIZED
ACTUAL REQUIREMENT EXCESS
-------------- -------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leverage......................... $158,378 5.28% $150,030 5.00% $ 8,348 0.28%
Tier I risk-based................ $158,378 9.25% $102,693 6.00% $55,685 3.25%
Tier II risk-based............... $179,865 10.51% $171,155 10.00% $ 8,710 0.51%
</TABLE>
F-31
<PAGE>
Currently, the OTS has deferred implementation of the interest rate risk
component for institutions with a greater than "normal" (i.e. greater than 2%)
level of interest rate risk exposure. As of December 31, 1996, if the interest
rate risk component regulation had been implemented, BVFB would not have been
subject to an interest rate risk capital deduction for risk-based capital
purposes.
The Company is a legal entity separate and distinct from BVFB. The Company's
principal source of funds on an unconsolidated basis is expected dividends
from its wholly owned subsidiaries. Dividends declared by BVFB to the Company
were $0 in 1996, $29.4 million in 1995 and $4.4 million in 1994. There are
various statutory and regulatory limitations on the extent to which BVFB can
pay dividends to, make investments in or loans to, or otherwise supply funds
to the Company. Based on the current financial status of BVFB, the Company
believes that such limitations and restrictions will not impair the Company's
ability to continue to pay the current level of dividends.
CALIFORNIA THRIFT & LOAN
As of December 31, 1996, the most recent notification from the FDIC
categorized CTL as well capitalized. There are no conditions or events since
that notification that management believes have changed CTL's category. CTL's
capital ratios at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
WELL CAPITALIZED
-------------------------------------------
ACTUAL REQUIREMENT EXCESS
------------- ------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leverage........................... $43,462 9.50% $22,885 5.00% $20,577 4.50%
Tier I Risk-based.................. $43,462 9.97% $26,164 6.00% $17,298 3.97%
Tier II Risk-based................. $48,913 11.33% $43,179 10.00% $ 5,734 1.33%
</TABLE>
CTL declared and paid a dividend of $15 million in 1996 to return excess
capital to the Company.
NOTE 15. STOCK REPURCHASE PROGRAM
During 1995, the Company's Board of Directors authorized a stock repurchase
program enabling the Company to purchase up to 1,200,000 shares of the
Company's common stock which was subsequently increased in 1996 to a total of
1,600,000 shares authorized for repurchase. As of December 31, 1996, the
Company had completed its previously announced stock buy back of 1,600,000
shares (610,000 shares in 1995 and 990,000 in 1996) which were repurchased at
an average cost of $15.985.
On January 22, 1997, the Company announced that its Board of Directors has
authorized the repurchase of an additional $25 million of shares of the
Company's common stock.
NOTE 16. STOCK OPTIONS
The Company has adopted the "Amended and Restated 1986 Stock Option and
Incentive Plan" and the "1995 Stock Option and Incentive Plan" which authorize
the issuance of up to 1,759,430 and 1,000,000 shares of common stock,
respectively. The Company has also adopted a Non-Employee Director Stock
Option Plan which authorizes the issuance of up to 550,000 additional shares
of common stock. The stock option plans were approved by the Company's
stockholders.
<TABLE>
<CAPTION>
1986 STOCK NON-EMPLOYEE
OPTION 1995 STOCK DIRECTOR
PLAN OPTION PLAN OPTION PLAN TOTAL
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Shares reserved for issuance... 1,759,430 1,000,000 550,000 3,309,430
Granted........................ (2,048,816) (602,000) (456,000) (3,106,816)
Canceled....................... 290,074 20,000 20,000 330,074
Expired........................ (688) -- -- (688)
---------- --------- -------- ----------
Total available for grant...... 0 418,000 114,000 532,000
========== ========= ======== ==========
</TABLE>
F-32
<PAGE>
At December 31, 1996, the Company had outstanding non-qualified options for
all three plans with expiration dates from 1997 to 2006, as follows:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
OPTION EXERCISE PRICE
SHARES PRICE RANGE RANGE
--------- ------------ -------
<S> <C> <C> <C>
Outstanding at December 31, 1993................ 1,232,592 $ 6.97-11.87 $ 8.94
Granted......................................... 52,000 10.75-11.94 10.84
Exercised....................................... (225,422) 6.97- 9.81 8.47
--------- ------------ ------
Outstanding at December 31, 1994................ 1,059,170 6.97-11.94 9.14
Granted......................................... 434,000 9.37-13.31 12.28
Exercised....................................... (477,232) 6.97-11.06 9.00
Canceled........................................ (38,844) 8.75-12.50 11.46
--------- ------------ ------
Outstanding at December 31, 1995................ 977,094 6.97-13.31 10.51
Granted......................................... 424,000 13.47-18.87 16.01
Exercised....................................... (202,204) 6.97-12.50 9.20
Canceled........................................ (44,000) 12.50-12.81 12.78
--------- ------------ ------
Outstanding at December 31, 1996................ 1,154,890 $ 7.28-18.87 $12.67
========= ============ ======
Options exercisable at December 31, 1996........ 756,890 $ 7.28-18.87 $11.19
========= ============ ======
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARD (SFAS) NO. 123 PRO FORMA DISCLOSURE
The Company accounts for its stock option grants in accordance with APB
Opinion No. 25 "Accounting for Stock Issued to Employees." Had compensation
cost been recorded based on SFAS No. 123, the Company's net income (loss) and
earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income (loss):
Actual....................................................... $10,969 $(4,690)
Pro forma.................................................... $10,255 $(5,239)
Primary net income (loss) per share:
Actual....................................................... $ 0.79 $ (0.32)
Pro forma.................................................... $ 0.73 $ (0.35)
</TABLE>
The fair value of options granted was estimated as of the date of grant
based on the Black-Scholes option pricing model given the following weighted-
average assumptions.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Dividend yield.................................................. 2.0 % 2.50%
Volatility...................................................... .30 .30
Risk-free interest.............................................. 5.21% 7.78%
Expected term (years)........................................... 4.84 4.84
</TABLE>
F-33
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------- --------------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT LIFE AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1996 (IN YEARS) EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- ------------------------ ----------------- ---------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 7.28 - 10.75.......... 414,890 4.83 $ 9.34 414,890 $ 9.34
$11.87 - 15.62.......... 552,000 8.81 $13.70 282,000 $12.77
$16.56 - 18.87.......... 188,000 9.47 $16.97 60,000 $16.56
--------- -------
1,154,890 756,890
========= =======
</TABLE>
NOTE 17. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) thrift plan under which an employee with one or
more years of service may contribute from 2% to 15% of base salary to the
plan. The Company will match an employee's contribution up to 100% of the
first 6% of the employee's base salary, depending on the employee's length of
service. The Company's contributions for the years ended December 31, 1996,
1995 and 1994 were $435,000, $483,000, and $526,000 respectively.
Effective December 31, 1995, the Company modified its non-qualified defined
benefit retirement plan for non-employee members of its Board of Directors and
terminated its non-qualified supplemental retirement plan for executive
officers (collectively, the "Plans"). As of December 31, 1996, the Company had
a $1.1 million liability to certain non-employee members of its Board of
Directors payable in 66,114 shares of the Company's common stock in
satisfaction of the retirement plan liability. Such shares were repurchased in
the market and are held in treasury and restricted as to issuance until paid
out. The liability is included in additional paid in capital. As of December
31, 1996, the Company had a $2.0 million liability to certain retired
Directors and executive officers (relating to the remaining benefits owed
pursuant to the terminated supplemental retirement plan for executive
officers).
The pension liability in the Consolidated Statements of Financial Condition
at December 31, 1995 was $4.5 million, which represented the expected payout
to participants upon termination of the Plans. The benefits were based on
years of service and the participants' compensation. The amounts charged to
income for the pension benefits, including the charges relating to the
modification and termination of these plans, during 1996, 1995 and 1994 were
$42,000, $637,000, and $860,000, respectively.
Net pension cost for these Plans included the following components for 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Service cost-benefits earned during the year....... $285
Interest cost on projected benefit obligation...... 492
Net amortization and deferral...................... 83
----
Net periodic pension cost........................ $860
====
</TABLE>
The Company has an ESOP covering all regular full-time and part-time
employees who have completed one year of employment. The Company borrowed $6.0
million from a financial institution which it in turn lent to the ESOP to
purchase shares of the Company's common stock in the open market. At December
31, 1996 and 1995, the ESOP held 314,190 and 353,178 shares, respectively, of
the Company's common stock. The interest rate paid by the Company on the ESOP
debt is based on 90% of the prime rate. Total interest expense incurred on the
ESOP debt was $362,000, $407,000 and $352,000, respectively, for the years
ended December 31, 1996, 1995 and 1994. The interest expense recorded by the
Company was $289,000, $254,000, and $199,000, for the
F-34
<PAGE>
years ended December 31, 1996, 1995 and 1994, respectively. The Company makes
periodic contributions to the ESOP primarily to enable the ESOP to pay
interest expense and administrative costs not covered by cash dividends
received by the ESOP on its shares of the Company's common stock.
Contributions from the Company to the ESOP on a cash basis totaled $674,000
for 1996, $609,000 for 1995, and $508,000 for 1994.
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE EXCHANGE AGREEMENTS (SWAPS)
At December 31, 1996 and 1995 the Company was party to interest rate swap
agreements with notional principal amounts of $421.0 million and $150.0
million, respectively. The information presented below is based on interest
rates at December 31, 1996 and 1995. To the extent that rates change, variable
interest rate information will change. The following schedule represents the
maturities and weighted average interest rates for swap agreements outstanding
as of December 31, 1996:
<TABLE>
<CAPTION>
MATURITIES OF DERIVATIVES INSTRUMENTS
-----------------------------------------------
1999 2000 2001 2002+ TOTAL
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pay fixed generic swaps
Notional amount............... $39,500 $100,000 $104,000 $177,500 $421,000
Weighted average receive rate
(3-month LIBOR).............. 5.55% 5.56% 5.53% 5.53% 5.54%
Weighted average pay rate
(fixed)...................... 6.67% 6.10% 6.72% 6.41% 6.44%
</TABLE>
The following schedule represents the maturities and weighted average
interest rates for swap agreements outstanding as of December 31, 1995:
<TABLE>
<CAPTION>
MATURITIES OF DERIVATIVES
INSTRUMENTS
----------------------------
2001 2001+ TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Pay fixed generic swaps
Notional amount................................... $100,000 $ 50,000 $150,000
Weighted average receive rate (3-month LIBOR)..... 5.89% 5.68% 5.82%
Weighted average pay rate (fixed)................. 6.10% 6.03% 6.08%
Forward starting swap
Notional amount................................... $ -- $150,000 $150,000
Weighted average receive rate (3-month LIBOR)..... -- 5.63% 5.63%
Weighted average pay rate (fixed)................. -- 6.35% 6.35%
</TABLE>
The interest rate swaps at December 31, 1996 and 1995 were collateralized by
loans and mortgage-backed securities totaling $10.4 million and $14.6 million,
respectively. The effect of interest rate swap agreements for the years ended
December 31, 1996, 1995 and 1994 was to increase interest expense by $2.6
million, $40,000, and $80,000, respectively.
TREASURY RATE LOCK AGREEMENT
At December 31, 1996, CTL entered into a $210 million treasury rate lock
agreement to hedge its auto loan portfolio pending sale to BVSC and subsequent
securitization and sale of asset-backed securities by BVSC. The treasury rate
lock agreement guarantees a stated interest rate for a stated period of time
and CTL will receive/pay the difference between the lock rate and the
effective treasury rate on settlement date. Gains and losses on the hedge are
deferred and recognized in income upon settlement of the hedge or sale of the
underlying assets being hedged.
NOTE 19. COMMITMENTS AND CONTINGENCIES
BANKING CENTER PREMISES
In 1980, the Company sold a building which formerly housed its headquarters
for $3.45 million, and, concurrent with the sale, leased back the entire
building under a twenty-year lease which has been accounted for
F-35
<PAGE>
as a capital lease. The Company occupies a minor portion of this building and
receives sublease rental income from the major portion, and is responsible for
all operating and maintenance expenses associated with the building. Sublease
rentals totaled $389,000, $385,000, and $389,000 during the years ended
December 31, 1996, 1995 and 1994, respectively. During the years ended
December 31, 1996, 1995 and 1994, depreciation on the capital lease was
$303,000 for each year. Accumulated depreciation at December 31, 1996 and 1995
was $2.9 million and $2.6 million, respectively.
Certain banking center locations and the Company's administrative corporate
office are leased by the Company under operating type lease arrangements
expiring at various dates through 2012. Lease rental expense for the years
ended December 31, 1996, 1995 and 1994 totaled $3.5 million, $2.4 million, and
$2.5 million, respectively.
Future minimum payments under lease obligations at December 31, 1996 are
included in the following table:
<TABLE>
<CAPTION>
CAPITAL LEASE OPERATING LEASE
PAYMENTS PAYMENTS
------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1997...................................... $ 872 $ 4,982
1998...................................... 924 4,634
1999...................................... 978 3,870
2000...................................... 508 3,028
2001...................................... -- 2,771
2002 and thereafter....................... -- 20,543
------ -------
3,282 $39,828
=======
Less amount representing interest......... (773)
------
Net capital lease obligation.............. $2,509
======
</TABLE>
MORTGAGE LOANS
As of December 31, 1996 the Company had outstanding commitments to originate
$7.4 million of mortgage loans. The Company has outstanding recourse and
subordination contingencies relating to $54.3 million of sold loans at
December 31, 1996 (see Note 6).
LITIGATION
The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of business. In the opinion of management, after
consultation with counsel, the resolution of these legal actions will not have
a material adverse effect on the Company's consolidated financial condition or
results of operations.
NOTE 20. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been determined
by the Company using market information and valuation methodologies considered
appropriate. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
F-36
<PAGE>
The fair value estimates presented herein are based on pertinent information
available to the Company as of December 31, 1996 and 1995. Although the
Company is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------------------------------- ---------------------
BVFB CTL BVCC(2)
--------------------- ------------------ ---------------------
ESTIMATED
CARRYING ESTIMATED CARRYING FAIR CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- -------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash
equivalents.......... $ 106,623 $ 106,623 $ 605 $ 605 $ 106,828 $ 106,828 $ 42,760 $ 42,760
Loans held for sale... 1,213 1,213 293,736 294,636 294,949 295,849 -- --
Investment securities. 15,004 14,912 12,792 12,792 29,006 28,914 47,963 48,004
Mortgage-backed
securities........... 577,613 566,615 -- -- 577,613 566,615 731,378 725,099
Loans receivable (1): 2,038,904 2,055,394 140,864 144,252 2,179,768 2,199,646 2,062,268 2,079,818
Investment in stock of
the FHLBSF........... 49,571 49,571 2,320 2,320 51,891 51,891 39,450 39,450
Capitalized excess
servicing............ 575 8,001 -- -- 575 8,001 985 6,520
Liabilities
Transaction accounts.. 479,258 479,258 16,057 16,057 493,571 493,571 387,610 387,610
Fixed maturity
deposits............. 1,100,559 1,103,744 169,837 169,837 1,270,396 1,273,581 1,432,230 1,439,214
Advances from the
FHLBSF............... 977,750 980,775 -- -- 977,750 980,775 766,790 775,567
Securities sold under
agreements to repur-
chase................ 210,640 211,341 -- -- 210,640 211,341 166,738 166,854
Senior Debentures..... 50,000 50,166
</TABLE>
- --------
(1) Carrying amounts are net of allowance for losses
(2) Intercompany accounts have been eliminated
<TABLE>
<CAPTION>
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
----------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- -------------------
CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT GAIN/(LOSS) AMOUNT LOSS
-------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BVFB:
Interest rate swaps.................... $ 549 $(3,335) $ 15 $(4,353)
===== ======= ==== =======
CTL:
Treasury rate lock..................... $ -- $ 33 $-- $ --
===== ======= ==== =======
</TABLE>
The Company believes the carrying amounts of cash and cash equivalents and
investment in stock of the FHLBSF are reasonable estimates of their fair
values. The fair values of investment securities and mortgage-backed
securities were based on published market prices or quotes obtained from
independent registered securities brokers.
The estimated fair value of loans receivable held for investment was
determined by discounting the projected cash flows using current interest
rates at which similar loans would be made to borrowers of similar credit
risk. Prepayment estimates were based on historical experience and published
data for similar loans. Fair values for loans available-for-sale are based on
prices for similar loans in the secondary loan market. The estimated fair
value of capitalized excess servicing represents the present value of the
discounted cash flows on the sold loans less the Company's cost to service
such loans.
F-37
<PAGE>
The fair value of transactions accounts (demand deposits, savings accounts
and money market accounts) is the amount payable on demand and is assumed to
equal the carrying amount. The fair value of fixed maturity deposits for BVFB
was estimated using the rates currently offered for certificates of deposit
with similar remaining maturities and for CTL at carrying amount due to the
call feature.
Rates currently available to the Company for debt with similar terms and
remaining maturities were used to estimate the fair value of existing debt,
including advances from the FHLBSF, securities sold under agreements to
repurchase and Senior Debentures.
The unrealized loss on interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the swap agreements at the reporting
date, taking into account current interest rates and the current
creditworthiness of the swap counterparties. The unrealized gain on the
Treasury rate lock is the estimated amount that the Company would receive to
terminate the agreement with the counterparty.
NOTE 21. PARENT COMPANY FINANCIAL INFORMATION
The Company and its subsidiaries file consolidated Federal income tax
returns in which the taxable income or loss of the Company is combined with
that of its subsidiaries. The Company's share of income tax expense is based
on the amount which would be payable if separate returns were filed.
Accordingly, the Company's equity in the net income of its subsidiaries
(distributed and undistributed) is excluded from the computation of the
provision for income taxes for financial statement purposes.
The Parent Company's statements of financial condition and related
statements of operations and cash flows are as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
ASSETS 1996 1995
------ -------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash in Bank................................................. $ 795 $ 2,047
Demand note due from BVFB (interest at prime rate)........... 24,817 24,361
Investment securities........................................ 1,210 1,035
Investment in and advances to subsidiaries................... 221,603 162,129
Dividend receivable from subsidiaries........................ -- 25,000
Other assets................................................. 2,899 823
-------- --------
Total Assets............................................. $251,324 $215,395
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities
Accounts payable and other liabilities..................... $ 1,262 $ 7,418
Senior Debentures.......................................... 50,000 --
Stockholders' equity......................................... 200,062 207,977
-------- --------
Total Liabilities and Stockholders' Equity............... $251,324 $215,395
======== ========
</TABLE>
F-38
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries....................... $ 3,029 $ 29,400 $ 4,400
Interest income................................... 1,548 1,529 1,135
Other income...................................... -- -- 13
------- -------- -------
4,577 30,929 5,548
------- -------- -------
Expense:
Interest on Senior Debentures..................... 2,623 -- --
General and administrative expense................ 1,234 582 502
Income tax expense (benefit)...................... (997) 383 158
------- -------- -------
2,860 965 660
------- -------- -------
Income before undistributed net income (loss) of
subsidiaries..................................... 1,717 29,964 4,888
Undistributed net income (loss) of subsidiaries... 9,252 (34,654) 9,625
------- -------- -------
Net income (loss)................................... $10,969 $ (4,690) $14,513
======= ======== =======
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................... $ 10,969 $ (4,690) $14,513
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Undistributed net (income) loss of
subsidiaries................................. (9,252) 34,654 (9,625)
Dividends received (receivable)............... 25,000 (25,000) --
Increase in other assets...................... (2,076) -- --
Increase in other liabilities................. 1,829 -- --
Other......................................... (312) (48) 1,098
-------- -------- -------
Net cash provided by operating activities... 26,158 4,916 5,986
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of California Thrift & Loan, net of
cash and cash equivalents received............. (61,505) -- --
Purchase of investment securities held-to-
maturity....................................... (200) -- --
Net change in advances to subsidiaries.......... 6 15 4
Return of investment from subsidiary............ 11,971 -- --
Demand note due from BVFB....................... (456) (1,661) (3,700)
-------- -------- -------
Net cash used in investing activities....... (50,184) (1,646) (3,696)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to stockholders.................. (4,137) (4,374) (4,266)
Issuance of Senior Debentures, net of costs..... 49,406 -- --
Repurchase of common stock...................... (24,359) (2,279) --
Proceeds from issuance of common stock.......... 1,864 4,294 1,906
-------- -------- -------
Net cash provided by (used in) financing
activities................................. 22,774 (2,359) (2,360)
-------- -------- -------
Net increase (decrease) in cash................... (1,252) 911 (70)
Cash at beginning of year......................... 2,047 1,136 1,206
-------- -------- -------
Cash at end of year............................... $ 795 $ 2,047 $ 1,136
======== ======== =======
</TABLE>
F-39
<PAGE>
NOTE 22. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996(1)
-----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER(2) QUARTER
------- ------- ---------- -------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income............................ $53,409 $57,094 $66,028 $65,224
Net interest income........................ 16,214 18,837 22,878 23,053
Provision for losses on loans.............. 600 498 400 400
Net income (loss).......................... 3,993 4,216 (2,108) 4,868
Primary earnings per share:
Net income (loss)........................ 0.28 0.30 (0.15) 0.36
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ---------- -------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income............................ $53,480 $54,266 $54,481 $54,236
Net interest income........................ 14,429 13,567 13,746 14,174
Provision for losses on loans.............. 900 900 900 1,584
Income (loss) before extraordinary item.... 2,443 (749) 2,276 (6,116)
Extraordinary item, net of tax............. -- -- -- (2,544)
Net income (loss).......................... 2,443 (749) 2,276 (8,660)
Primary earnings per share:
Income (loss) before extraordinary item.... 0.17 (0.05) 0.15 (0.41)
Net income (loss)........................ 0.17 (0.05) 0.15 (0.59)
</TABLE>
- --------
(1) Including CTL effective June 1, 1996
(2) Includes SAIF recapitalization assessment (see note 14)
NOTE 23. SIGNIFICANT FOURTH QUARTER 1995 ADJUSTMENTS
The following significant fourth quarter adjustments were recorded in the
1995 Consolidated Statement of Operations:
<TABLE>
<CAPTION>
AMOUNT
----------
(DOLLARS
IN
THOUSANDS)
<S> <C>
Write-down of corporate office complex (see Note 7)............ $ 7,100
Prepayment penalties on FHLBSF advances, pretax (see Note 10).... 4,422
Severance payments related to work force reductions and pension
plans......................................................... 1,449
Core deposit premiums written-off (see Note 8)................. 854
Goodwill written-off (see Note 8).............................. 758
-------
$14,583
=======
</TABLE>
NOTE 24. SUBSEQUENT EVENTS
On January 21, 1997, the Company executed a definitive agreement to acquire
EXXE Data Corporation ("EXXE") and its wholly owned subsidiary Concord Growth
Corporation ("CGC"), a nationwide commercial finance company. The acquisition
will be accounted for as a purchase and is expected to be completed during
March 1997. Under the terms of the definitive agreement, shareholders of EXXE
capital stock, warrants and options will receive an initial aggregate payment
of $19.8 million at closing and will be entitled to potential future payments,
dependent on the future financial performance of CGC, of up to $34 million.
The transaction is subject to the approval of EXXE shareholders and all
applicable regulatory authorities.
F-40
<PAGE>
On January 24, 1997, the Company securitized and sold $253 million of asset-
backed securities through its wholly owned subsidiary BVSC pursuant to a
previously filed shelf registration statement on Form S-3 for $500 million of
automobile receivable-backed securities. The securities consisted of 6.29%
Class A-1 Automobile Receivable Backed Certificates in aggregate principal
amount of $200,979,000, 6.59% Class A-2 Automobile Receivable Backed
Certificates in the aggregate principal amount of $52,245,989, and other
Interest Only Automobile Receivable Backed Certificates that will not receive
distributions of principal. The premium arising from the sale of the
automobile loans has been recorded as part of the purchase accounting
valuations related to the acquisition of CTL. A gain of approximately $900,000
will be realized in the statement of operations due to the improvement in the
fair value of the automobile loans as a result of changes in market interest
rates between June 1, 1996 and the sale of the automobile loans on January 24,
1997. The underlying automobile loans collaterizing the certificates will be
serviced by CTL.
On April 14, 1997, the Company declared a 2 for 1 stock split in the form of
a 100% stock dividend to stockholders of record as of the close of business on
May 9, 1997 which was paid on June 2, 1997. All share and per share amounts
have been restated to reflect this stock split.
On May 8, 1997, the Company signed a definitive agreement to acquire America
First Eureka Holdings, Inc. ("AFEH") and its wholly owned bank subsidiary,
EurekaBank ("Eureka"). Under the terms of the definitive agreement, America
First Financial Fund 1987-A Limited Partnership (Nasdaq: "AFFFZ"), the
shareholder of AFEH capital stock, will receive approximately $300 million
comprised of Bay View Common stock valued at $210 million (subject to possible
adjustment) and cash of $90 million. The acquisition of AFEH/Eureka will be
accounted for as a purchase and is expected to be completed on or about
December 31, 1997 or January 1, 1998. The purchase price is currently
estimated to exceed the fair value of the net assets acquired by approximately
$112 million, which Bay View anticipates amortizing over a 15 year period.
On May 22, 1997, shareholders approved an amendment to the Company's
restated Certificate of Incorporation to increase the authorized shares of
common stock to 60,000,000.
F-41
<PAGE>
BAY VIEW CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------
PARENT CO
BVFB CTL & OTHER SUBS(1) ELIMINATIONS CONSOLIDATED
---------- -------- --------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash and cash
equivalents............ $ 106,623 $ 605 $ 1,480 $ (1,880) $ 106,828
Loans held for sale..... 1,213 293,736 -- -- 294,949
Securities available-
for-sale:..............
Investment securities. -- 12,792 1,010 -- 13,802
Mortgage-backed
securities........... 83,154 -- -- -- 83,154
Securities held-to-
maturity:
Investment securities. 15,004 -- 200 -- 15,204
Mortgage-backed
securities........... 494,459 -- -- -- 494,459
Loans receivable held
for investment, net.... 2,038,904 140,864 -- -- 2,179,768
Investment in stock of
the FHLBSF............. 49,571 2,320 -- -- 51,891
Real estate owned....... 4,896 2,491 -- -- 7,387
Premises and equipment,
net.................... 5,897 1,008 -- -- 6,905
Investment in
subsidiaries/due from
affiliates............. 163,183 -- 246,420 (409,603) --
Intangibles............. 3,810 6,387 -- -- 10,197
Other assets............ 29,179 3,891 3,353 (705) 35,718
---------- -------- -------- --------- ----------
Total Assets........ $2,995,893 $464,094 $252,463 $(412,188) $3,300,262
========== ======== ======== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
---------------------
Customer deposits....... $1,579,817 $185,894 $ -- $ (1,744) $1,763,967
Advances from the
FHLBSF................. 977,750 -- -- -- 977,750
Securities sold under
agreements to
repurchase............. 210,640 -- -- -- 210,640
Senior Debentures....... -- -- 50,000 -- 50,000
Other borrowings........ 30,871 163,220 -- (186,944) 7,147
Other liabilities....... 25,968 65,132 1,553 (1,957) 90,696
---------- -------- -------- --------- ----------
Total Liabilities... 2,825,046 414,246 51,553 (190,645) 3,100,200
Stockholders' equity:
Common stock.......... -- 4,000 150 (4,000) 150
Additional paid-in
capital.............. 74,187 42,819 101,446 (118,016) 100,436
Retained earnings
(substantially
restricted).......... 102,011 3,029 125,811 (99,527) 131,324
Treasury stock at
cost................. -- -- (26,497) -- (26,497)
Unrealized loss on
securities available-
for-sale (net of
tax)................. (713) -- -- -- (713)
Debt of Employee Stock
Ownership Plan....... (4,638) -- -- -- (4,638)
---------- -------- -------- --------- ----------
Total Stockholders'
Equity............. 170,847 49,848 200,910 (221,543) 200,062
---------- -------- -------- --------- ----------
Total Liabilities
and Stockholders'
Equity............. $2,995,893 $464,094 $252,463 $(412,188) $3,300,262
========== ======== ======== ========= ==========
</TABLE>
- --------
(1) Includes Bay View Securitization Corporation and Regent Financial
Corporation, wholly owned subsidiaries of the Company, which are not
material for separate financial statement disclosure for the periods
presented.
F-42
<PAGE>
BAY VIEW CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------
PARENT CO &
BVFB CTL(1) OTHER SUBS(2) ELIMINATIONS CONSOLIDATED
-------- ------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest on loans
receivable............ $161,149 $31,294 -- -- $192,443
Interest on mortgage-
backed securities..... 42,081 -- 42,081
Interest and dividends
on investments........ 6,428 761 $ 1,564 $ (1,522) 7,231
-------- ------- ------- -------- --------
209,658 32,055 1,564 (1,522) 241,755
Interest expense:
Interest on customer
deposits.............. 84,490 15,759 (24) 100,225
Interest on Senior
Debentures............ -- 2,623 2,623
Interest on borrowings. 59,349 74 (1,498) 57,925
-------- ------- ------- -------- --------
143,839 15,833 2,623 (1,522) 160,773
Net interest income..... 65,819 16,222 (1,059) -- 80,982
Provision for losses on
loans.................. 1,800 98 1,898
-------- ------- ------- -------- --------
Net interest income
after provision for
losses................. 64,019 16,124 (1,059) -- 79,084
Noninterest income:
Loan fees and charges.. 3,858 1,072 -- -- 4,930
Loss on loans and
securities............ (507) (946) -- -- (1,453)
Rental income from
premises.............. 534 -- -- -- 534
Equity in earnings of
subsidiaries.......... -- 12,281 (12,281) --
Other, net............. 4,287 284 -- (18) 4,553
-------- ------- ------- -------- --------
8,172 410 12,281 (12,299) 8,564
Noninterest expense:
General and
administrative
expenses.............. 47,560 10,172 1,241 (18) 58,955
SAIF recapitalization
assessment............ 11,750 -- -- -- 11,750
Real estate owned
operations, net....... (5,001) 195 -- -- (4,806)
Recovery of losses on
real estate........... (103) -- -- -- (103)
Amortization and write-
down of intangible
assets................ 2,025 581 -- -- 2,606
-------- ------- ------- -------- --------
56,231 10,948 1,241 (18) 68,402
Income before income
taxes.................. 15,960 5,586 9,981 (12,281) 19,246
Income tax expense
(benefit).............. 6,717 2,557 (997) -- 8,277
-------- ------- ------- -------- --------
Net income.............. $ 9,243 $ 3,029 $10,978 $(12,281) $ 10,969
======== ======= ======= ======== ========
</TABLE>
- --------
(1) Reflects operating results beginning on June 1, 1996, the effective date
of acquisition.
(2) Includes Bay View Securitization Corporation and Regent Financial
Corporation, wholly owned subsidiaries of the Company, which are not
material for separate financial statement disclosure for the periods
presented.
F-43
<PAGE>
BAY VIEW CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------
PARENT CO.
BVFB CTL(1) & OTHER SUBS(2) ELIMINATIONS CONSOLIDATED
-------- ------ --------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income............. $ 9,243 $3,029 $10,978 $(12,281) $10,969
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Undistributed net
income of
subsidiaries......... -- -- (9,252) 9,252 --
Write-down on disposal
of premises and
equipment............ 1,767 -- -- -- 1,767
Write-down and
amortization of
intangible assets.... 2,025 581 -- -- 2,606
Proceeds from loans
sold................. 9,668 -- -- -- 9,668
Provision for losses
on loans and real
estate owned......... 1,697 98 -- -- 1,795
Depreciation and
amortization of
premises and
equipment............ 1,876 334 -- -- 2,210
Amortization of
deferred loan costs.. 1,396 -- -- -- 1,396
Decrease in
capitalized excess
servicing fees....... 411 -- -- -- 411
Amortization of
premiums, net of
discounts............ 3,815 1,345 -- -- 5,160
Dividends received.... -- -- 25,000 (25,000) --
Loss on loans and
securities........... 507 653 -- -- 1,160
(Increase) decrease in
other assets......... 4,097 (78) (2,380) 227 1,866
Increase (decrease) in
other liabilities.... (2,301) 49,602 2,120 (1,488) 47,933
Other, net............ (3,509) (63) 14 -- (3,558)
-------- ------ ------- -------- -------
Net cash provided by
operating activities. 30,692 55,501 26,480 (29,290) 83,383
-------- ------ ------- -------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES
Acquisition of CTL, net
of cash and cash
equivalents received.. -- 314 (61,819) -- (61,505)
Return of investment
from subsidiary....... -- -- 11,971 (11,971) --
Net decrease in loans
resulting from
originations net of
principal payments.... 59,007 11,131 -- -- 70,138
Purchase of loans...... (56,909) (7,812) -- -- (64,721)
Principal payments on
mortgage-backed
securities............ 91,748 -- -- -- 91,748
Purchase of mortgage-
backed securities
held-to-maturity...... 2,602 -- -- -- 2,602
Proceeds from sale of
mortgage-backed
securities available-
for-sale.............. 54,458 -- -- -- 54,458
Proceeds from
maturities of
investment securities
held-to-maturity...... 24,493 -- -- -- 24,493
Proceeds from
maturities of
investment securities
available-for-sale.... 7,000 8,000 -- -- 15,000
Purchase of investment
securities held-to-
maturity.............. -- (2,841) (200) -- (3,041)
Proceeds from sale of
real estate........... 31,435 1,255 -- -- 32,690
Proceeds from sale of
leasing portfolio held
for sale.............. -- 59,848 -- -- 59,848
Proceeds from sale of
premises and
equipment............. 8,054 2,594 -- -- 10,648
Additions to premises
and equipment......... (1,410) (167) -- -- (1,577)
Increase in stock of
FHLBSF................ (10,121) (437) -- -- (10,558)
Investment in
subsidiaries/Due from
affiliates............ (163,183) -- (450) 163,633 --
-------- ------ ------- -------- -------
Net cash provided by
(used in) investing
activities.......... 47,174 71,885 (50,498) 151,662 220,223
-------- ------ ------- -------- -------
</TABLE>
F-44
<PAGE>
BAY VIEW CAPITAL CORPORATION
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------
PARENT CO.
BVFB CTL(1) & OTHER SUBS(2) ELIMINATIONS CONSOLIDATED
---------- --------- --------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES
Net deposit inflows
(outflows)............ (242,746) (3,501) 979 (245,268)
Redemption of CTL
deposits.............. -- (267,500) -- -- (267,500)
Proceeds from advances
from FHLBSF........... 1,644,226 -- -- -- 1,644,226
Repayment of advances
from FHLBSF........... (1,433,266) -- -- -- (1,433,266)
Repurchase of common
stock................. -- -- (24,359) -- (24,359)
Issuance of Senior
Debentures, net of
issuance costs........ -- -- 49,406 -- 49,406
Proceeds from reverse
repurchase
agreements............ 373,272 -- -- -- 373,272
Repayment of reverse
repurchase
agreements............ (329,370) -- -- -- (329,370)
Net change in other
borrowings............ (26,119) 159,220 -- (137,507) (4,406)
Proceeds from issuance
of common stock....... -- -- 1,864 -- 1,864
Dividends paid to
stockholders.......... -- (15,000) (4,137) 15,000 (4,137)
---------- --------- -------- --------- -----------
Net cash provided by
(used in) financing
activities.......... (14,003) (126,781) 22,774 (121,528) (239,538)
---------- --------- -------- --------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 63,863 605 (1,244) 844 64,068
Cash and cash
equivalents at
beginning of year...... 42,760 -- 2,724 (2,724) 42,760
---------- --------- -------- --------- -----------
Cash and cash
equivalents at end of
year................... $ 106,623 $ 605 $ 1,480 $ (1,880) $ 106,828
========== ========= ======== ========= ===========
</TABLE>
- --------
(1) Reflects cash flows beginning on June 1, 1996, the effective date of
acquisition.
(2) Includes Bay View Securitization Corporation and Regent Financial
Corporation, wholly owned subsidiaries of the Company, which are not
material for separate financial statement disclosure for the periods
presented.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Bay View Capital Corporation:
We have audited the accompanying consolidated statements of financial
condition of Bay View Capital Corporation and subsidiaries (the "Company") as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Bay View Capital
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental
consolidating schedules of financial information on pages F-42 through F-45
are presented for the purpose of additional analysis of the basic consolidated
financial statements rather than to present the financial position, results of
operations, and cash flows of the individual companies, and are not a required
part of the basic consolidated financial statements. These schedules are the
responsibility of the Company's management. Such schedules have been subjected
to the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, are fairly stated in all material
respects when considered in relation to the basic consolidated financial
statements taken as a whole.
Deloitte & Touche LLP
San Francisco, California
January 24, 1997
(June 2, 1997 as to paragraphs
3, 4, and 5 of Note 24)
F-46
<PAGE>
PROSPECTUS
- ----------
[LOGO OF BAYVIEW CAPITAL CORPORATION APPEARS HERE]
SUBORDINATED DEBT SECURITIES
----------------
Bay View Capital Corporation (the "Company") may from time to time offer and
sell its unsecured subordinated debt securities (the "Securities" or the "Debt
Securities") in one or more series for an aggregate initial public offering
price of up to $150,000,000 (or the equivalent in foreign currencies, currency
units or composite currencies (each, a "Currency")). The Securities will be
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined herein) of the Company. See "Description of Debt
Securities--Subordination." Payment of the principal of the Securities may be
accelerated only in the case of certain events involving the bankruptcy,
insolvency or reorganization of the Company or any Major Bank Subsidiary (as
defined) of the Company, and no right of acceleration will exist in the case
of default in the payment of the principal of, or premium, if any, or
interest, if any, on the Securities or in the performance of any other
covenant of the Company. See "Description of Debt Securities--Events of
Default; Limited Rights of Acceleration."
The Securities may be offered through dealers, underwriters or agents
designated from time to time, as set forth in the accompanying Prospectus
Supplement. The Securities will be offered to the public at prices and on
terms determined at the time of offering. The Securities may be sold for U.S.
dollars or other Currencies and any amounts payable by the Company in respect
of the Securities may likewise be payable in U.S. dollars or other Currencies.
Net proceeds from the sale of Securities will be equal to the purchase price
in the case of a dealer, the public offering price less discount in the case
of an underwriter or the purchase price less commission in the case of an
agent, in each case less other expenses attributable to the issuance and
distribution of the Securities. The Company may also sell Securities directly
to investors on its own behalf. In the case of sales made directly by the
Company, no commission will be payable. See "Plan of Distribution" for
possible indemnification arrangements for dealers, underwriters and agents.
The Prospectus Supplement to this Prospectus sets forth (where applicable),
with respect to the series or issue of Securities for which such Prospectus
Supplement is being delivered, the terms of such Securities offered,
including, where applicable, their title, aggregate principal amount,
maturity, rate of interest (or method of calculation) and time of payment
thereof, any redemption or repayment terms, the Currency or Currencies (if
other than U.S. dollars) in which such Securities will be denominated or
payable, any index, formula or other method pursuant to which principal,
premium, if any, or interest, if any, may be determined, and other specific
terms not described in this Prospectus.
This Prospectus may not be used to consummate sales of Securities unless
accompanied or, to the extent permitted by applicable law, preceded by a
Prospectus Supplement.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THESE SECURITIES ARE UNSECURED OBLIGATIONS OF THE COMPANY AND ARE NOT DEPOSITS
OR SAVINGS ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
----------------
The date of this Prospectus is June 30, 1997.
<PAGE>
Certain persons participating in an offering of Securities may engage in
transactions that stabilize, maintain or otherwise affect the price of such
Securities. Such transactions may include stabilizing and the purchase of such
Securities to cover syndicate short positions. For a description of any such
activities, see the applicable Prospectus Supplement.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
Regional Offices in New York (Seven World Trade Center, 13th Floor, New York,
New York 10048), and Chicago (Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661). Copies of these materials may be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov. In addition, reports, proxy statements and other
information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
This Prospectus constitutes a part of a registration statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
omits certain of the information contained in the Registration Statement in
accordance with the rules and regulations of the Commission. Reference is
hereby made to the Registration Statement and related exhibits for further
information with respect to the Company and the Securities. Statements
contained herein concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed or incorporated by reference as an exhibit to the Registration Statement
or otherwise filed with the Commission. Each such statement is qualified in
its entirety by such reference.
FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference herein and in the
accompanying Prospectus Supplement constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act and are subject to a number of risks and uncertainties. Any such
forward-looking statements contained or incorporated by reference herein or in
the accompanying Prospectus Supplement should not be relied upon as
predictions of future events. Certain such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "projects," "pro forma," "estimates" or "anticipates" or similar
expressions or the negative thereof or other variations thereof or comparable
terminology, or by discussions of strategy, plans or intentions. Such forward-
looking statements are necessarily dependent on assumptions, data or methods
that may be incorrect or imprecise and they may be incapable of being
realized. In that regard, the following factors, among others and in addition
to the matters discussed elsewhere in this Prospectus, the accompanying
Prospectus Supplement and the documents incorporated or deemed to be
incorporated by reference herein, could cause actual results and other matters
to differ materially from those in such forward-looking statements: failure by
the Company to realize expected cost savings or revenue enhancements from the
Merger (as hereinafter defined); deposit attrition, customer loss or revenue
loss following the Merger; costs or difficulties related to the integration of
the businesses of the Company and AFEH (as hereinafter defined) and their
respective subsidiaries following the Merger; changes in the terms of the
Merger, including the possibility that the Company may have to increase the
number of shares of its common stock issued to consummate the Merger; failure
to consummate the Merger; changes in interest rates which may, among other
things, adversely affect margins; competition in the banking, financial
services and related industries; government regulation and tax matters; credit
and other risks of lending and investment activities; changes in conditions in
the securities markets; and changes in regional and national business and
economic conditions and inflation. As a result of the foregoing, no assurance
can be given as to future results of operations or financial condition, and
the Company wishes to caution prospective investors not to rely on any such
forward-looking statements. The Company does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements, which
speak only as of the date made.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 as amended on Form 10-K/A on June 27, 1997.
2. The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997 as amended on Form 10-Q/A on June 27, 1997.
3. The Company's Current Report on Form 8-K dated February 7, 1997.
4. The Company's Current Report on Form 8-K dated March 4, 1997.
5. The Company's Current Report on Form 8-K dated May 8, 1997.
6. The Company's Current Report on Form 8-K dated June 18, 1997.
7. The Company's Current Report on Form 8-K dated June 23, 1997.
8. The Company's Current Report on Form 8-K dated June 23, 1997.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior
to the termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
the respective dates of filing of such documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein, in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein or in the applicable Prospectus Supplement modifies or
supersedes such statement. Any statement or document so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute part
of this Prospectus.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon request, a copy of any and all of the documents
described above that are incorporated by reference herein other than exhibits
to such documents which are not specifically incorporated by reference in such
documents. Written or telephone requests should be directed to: Robert J.
Flax, Esq., Executive Vice President, General Counsel and Secretary, Bay View
Capital Corporation, 1840 Gateway Drive, San Mateo, California 94404
(telephone (415) 573-7300).
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in
this Prospectus or the applicable Prospectus Supplement and, if given or made,
such information or representations must not be relied upon as having been
authorized. Neither this Prospectus nor any Prospectus Supplement constitutes
an offer to sell or the solicitation of an offer to buy any securities other
than the securities described in this Prospectus and such Prospectus
Supplement or an offer to sell or the solicitation of an offer to buy such
securities in any jurisdiction where or to any person to whom it is unlawful
to make such an offer or solicitation. Neither the delivery of this Prospectus
or any Prospectus Supplement nor any sale made hereunder or thereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of the Company since the date hereof or thereof or that the
information contained or incorporated by reference herein or therein is
correct as of any time subsequent to its date.
3
<PAGE>
THE COMPANY
Bay View Capital Corporation (the "Company"), a Delaware corporation, is a
savings and loan holding company which has as its primary wholly owned
subsidiaries (i) Bay View Bank (the "Bank"), a federally chartered capital
stock savings bank, (ii) California Thrift & Loan ("CTL"), a California
industrial bank operating a consumer finance company, (iii) Concord Growth
Corporation ("CGC"), a California corporation operating a commercial finance
company, and (iv) Bay View Securitization Corporation ("BVSC"), a Delaware
corporation formed for the purpose of issuing asset-backed securities through
a trust. The Company was organized in 1989 to become the holding company for
the Bank following the Bank's 1986 conversion from a mutual to stock chartered
federal savings association. The Company's executive offices are located at
1840 Gateway Drive, San Mateo, California 94404, and its telephone number is
(415) 573-7300. Unless otherwise indicated or unless the context otherwise
requires, all references in this Prospectus and any Prospectus Supplement to
the Company include Bay View Capital Corporation and its consolidated
subsidiaries.
On May 8, 1997, the Company signed a definitive agreement to acquire America
First Eureka Holdings, Inc. ("AFEH") and AFEH's wholly owned subsidiary,
EurekaBank, a Federal Savings Bank ("EurekaBank"). Under the terms of the
definitive merger agreement (the "Merger Agreement"), America First Financial
Fund 1987-A Limited Partnership (the "Partnership"), the sole stockholder of
AFEH, is to receive shares of the common stock of the Company valued at
approximately $210 million (subject to possible adjustment) plus $90 million
in cash. Pursuant to the Merger Agreement, AFEH will be merged into the
Company or a subsidiary of the Company (the "Merger"), and EurekaBank will be
merged into the Bank. Consummation of the acquisition is subject to the
satisfaction of a number of conditions set forth in the Merger Agreement,
including approval by the Company's stockholders and the limited partners and
the beneficial unit certificate holders of the Partnership, and the regulatory
approval of the Office of Thrift Supervision (the "OTS"). At March 31, 1997,
EurekaBank had total assets of approximately $2.2 billion, deposits of
approximately $1.9 billion and stockholder's equity of approximately $174
million.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Securities
offered hereby for general corporate purposes, which may include, among other
things, the repayment of indebtedness, investments in or extensions of credit
to its subsidiaries and the financing of acquisitions.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to fixed
charges for the Company for the periods indicated. Earnings represent income
from continuing operations before income taxes, fixed charges and
extraordinary items. Fixed charges include interest expense and the portion of
rental expense which approximates the interest component of lease payments.
Such information is qualified in its entirety by the more detailed financial
information set forth in the Company's financial statements and notes thereto
appearing in the documents incorporated herein by reference. See
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------ --------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges:
Including interest on customer
deposits...................... 1.25x 1.19x 1.12x 0.98x(1) 1.17x 1.18x 1.07x
Excluding interest on customer
deposits...................... 1.52x 1.49x 1.31x 0.96x(1) 1.35x 1.41x 1.14x
</TABLE>
- --------
(1) For the year ended December 31, 1995, earnings were insufficient to cover
fixed charges. The amount of the deficiency was $2,853,710.
4
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be subordinated unsecured obligations of the
Company issued in one or more series under an Indenture (the "Indenture") to
be entered into between the Company and a trustee (the "Trustee") whose name
will be set forth in the applicable Prospectus Supplement. The form of the
Indenture has been filed as an exhibit to the Registration Statement. The
terms of any series of Debt Securities will be those set forth in the
Indenture and such Debt Securities and those made part of the Indenture by the
Trust Indenture Act. The summary of certain provisions of the Indenture and
the Debt Securities set forth below and the summary of certain terms of a
particular series of Debt Securities set forth in the applicable Prospectus
Supplement do not purport to be complete and are subject to and are qualified
in their entirety by reference to all of the provisions of the Indenture,
which provisions of the Indenture (including defined terms) are incorporated
herein by reference. Certain capitalized terms used herein and not defined are
defined in the Indenture. Likewise, the description of certain provisions of
federal and state law set forth below does not purport to be complete. As used
in this "Description of Debt Securities," all references to the "Company"
shall mean Bay View Capital Corporation, excluding, unless the context shall
otherwise require, its subsidiaries.
The following description of Debt Securities sets forth certain general
terms and provisions of the series of Debt Securities to which any Prospectus
Supplement may relate. Certain other specific terms of any particular series
of Debt Securities will be described in the applicable Prospectus Supplement.
To the extent that any particular terms of the Debt Securities described in a
Prospectus Supplement differ from any of the terms described herein, then such
terms described herein shall be deemed to have been superseded by such
Prospectus Supplement.
GENERAL
The Debt Securities may be issued from time to time in one or more series.
The Indenture does not limit the aggregate principal amount of Debt Securities
which may be issued thereunder and provides that Debt Securities of any series
may be issued thereunder up to an aggregate principal amount which may be
authorized from time to time by the Company. Reference is made to the
applicable Prospectus Supplement relating to the series of Debt Securities
offered thereby for specific terms, including (where applicable): (1) the
title or designation of such Debt Securities; (2) any limit on the aggregate
principal amount of such Debt Securities; (3) the price or prices (expressed
as a percentage of the principal amount thereof) at which such Debt Securities
will be issued; (4) the date or dates on which the principal of such Debt
Securities will be payable, or the method or methods, if any, by which such
date or dates will be determined; (5) the rate or rates (which may be fixed or
variable) at which such Debt Securities will bear interest, if any, or the
method or methods, if any, by which such rate or rates are to be determined,
the date or dates, if any, from which such interest will accrue, or the method
or methods, if any, by which such date or dates are to be determined, and
whether and under what circumstances Additional Amounts on such Debt
Securities will be payable, and the basis upon which interest will be
calculated if other than that of a 360-day year of twelve 30-day months; (6)
the dates on which such interest, if any, will be payable and the record
dates, if any, therefor; (7) the place or places where the principal of,
premium, if any, and interest, if any, on such Debt Securities will be payable
and the place or places where such Debt Securities may be surrendered for
registration of transfer and exchange, if other than The City of New York; (8)
if applicable, the date or dates on which, the period or periods within which,
the price or prices at which and the other terms and conditions upon which
such Debt Securities may be redeemed at the option of the Company or are
subject to repurchase at the option of the holders; (9) the terms of any
sinking fund or analogous provision; (10) if other than U.S. dollars, the
Currency for which the Debt Securities may be purchased and the Currency in
which the payment of principal thereof and premium, if any, and interest, if
any, thereon may be made, and the ability, if any, of the Company or the
holders of Debt Securities to have payments made in any Currency other than
those in which the Debt Securities are stated to be payable; (11) any addition
to, or modification or deletion of, any covenant or Event of Default with
respect to such Debt Securities; (12) whether any such Debt Securities are to
be issuable in registered or bearer form or both and, if in bearer form, the
terms and conditions relating thereto and any limitations on issuance of such
Bearer Securities (including in exchange for Registered Securities of the same
series); (13) whether any such Debt Securities will be issued in temporary
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or permanent global form and, if so, the identity of the depositary for such
global Debt Security; (14) whether and under what circumstances the Company
will pay Additional Amounts (as contemplated by the Indenture) on such Debt
Securities to any holder who is a United States Alien (as defined in the
Indenture, as such definition may be modified) in respect of any tax,
assessment or other governmental charge and, if so, whether the Company will
have the option to redeem such Debt Securities rather than pay such Additional
Amounts; (15) the person to whom any interest on any Registered Securities of
the series shall be payable, if other than the person in whose name the
Registered Security (or one or more Predecessor Securities) is registered at
the close of business on the Regular Record Date for such interest, the manner
in which, or the person to whom, any interest on any Bearer Security of the
series shall be payable, if other than upon presentation and surrender of the
coupons appertaining thereto as they severally mature, and the extent to
which, or the manner in which, any interest payable on a temporary global Debt
Security will be paid if other than in the manner provided in the Indenture;
(16) the portion of the principal amount of such Debt Securities which shall
be payable upon acceleration thereof if other than the full principal amount
thereof; (17) the authorized denominations in which such Debt Securities will
be issuable, if other than denominations of $1,000 and any integral multiple
thereof (in the case of Registered Securities) or $5,000 (in the case of
Bearer Securities); (18) whether the amount of payments of principal of,
premium, if any, and interest, if any, on such Debt Securities may be
determined with reference to an index, formula or other method or methods (any
such Debt Securities being hereinafter called "Indexed Securities") and the
manner in which such amounts will be determined; and (19) any other terms of
such Debt Securities.
As used in this Prospectus and any Prospectus Supplement relating to the
offering of any Debt Securities, references to the principal of and premium,
if any, and interest, if any, on such Debt Securities will be deemed to
include mention of the payment of Additional Amounts, if any, required by the
terms of such Debt Securities in such context.
Debt Securities may be issued as Original Issue Discount Securities (as
defined in the Indenture) to be sold at a substantial discount below their
principal amount. In the event of an acceleration of the maturity of any
Original Issue Discount Security, the amount payable to the holder thereof
upon such acceleration will be determined in the manner described in the
applicable Prospectus Supplement. As noted elsewhere herein, the maturity of
the Debt Securities may be accelerated only in the case of certain events of
bankruptcy, insolvency or reorganization of the Company or any Major Bank
Subsidiary (as defined herein) of the Company. See "--Events of Default;
Limited Rights of Acceleration." Material federal income tax and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
If the purchase price of any Debt Securities is payable in a Currency other
than U.S. dollars or if principal of, or premium, if any, or interest, if any,
on any of the Debt Securities is payable in any Currency other than U.S.
dollars, the specific terms and other information with respect to such Debt
Securities and such foreign Currency will be specified in the Prospectus
Supplement relating thereto.
Under the Indenture, the terms of the Debt Securities of any series may
differ and the Company, without the consent of the holders of the Debt
Securities of any series, may reopen a previous series of Debt Securities and
issue additional Debt Securities of such series or establish additional terms
of such series.
REGISTRATION, TRANSFER, PAYMENT AND PAYING AGENT
Unless otherwise indicated in the applicable Prospectus Supplement, each
series of Debt Securities will be issued in registered form only, without
coupons. The Indenture, however, provides that the Company may also issue Debt
Securities in bearer form only, or in both registered and bearer form. Bearer
Securities shall not be offered, sold, resold or delivered in connection with
their original issuance in the United States or to any United States person
(as defined below) other than offices located outside the United States of
certain United States financial institutions. As used herein, "United States
person" means any citizen or resident of the United States, any corporation,
partnership or other entity created or organized in or under the laws of the
United States, any estate the income of which is subject to United States
federal income taxation regardless of its source, or any trust whose
administration is subject to the primary supervision of a United States court
and which has one or
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more United States fiduciaries who have the authority to control all
substantial decisions of the trust, and "United States" means the United
States of America (including the states thereof and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction.
Purchasers of Bearer Securities will be subject to certification procedures
and may be affected by certain limitations under United States tax laws. Such
procedures and limitations will be described in the Prospectus Supplement
relating to the offering of the Bearer Securities.
Unless otherwise indicated in the applicable Prospectus Supplement,
Registered Securities will be issued in denominations of $1,000 or any
integral multiple thereof, and Bearer Securities will be issued in
denominations of $5,000.
Unless otherwise indicated in the applicable Prospectus Supplement, the
principal, premium, if any, and interest, if any, of or on the Debt Securities
will be payable, and Debt Securities may be surrendered for registration of
transfer or exchange, at an office or agency to be maintained by the Company
in the Borough of Manhattan, The City of New York, provided that payments of
interest with respect to any Registered Security may be made at the option of
the Company by check mailed to the address of the person entitled thereto or
by transfer to an account maintained by the payee with a bank located in the
United States. No service charge shall be made for any registration of
transfer or exchange of Debt Securities, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of principal of, premium, if any, and interest, if any, on Bearer Securities
will be made, subject to any applicable laws and regulations, at such office
or agency outside the United States as specified in the Prospectus Supplement
and as the Company may designate from time to time. Unless otherwise indicated
in the applicable Prospectus Supplement, payment of interest due on Bearer
Securities on any Interest Payment Date will be made only against surrender of
the coupon relating to such Interest Payment Date. Unless otherwise indicated
in the applicable Prospectus Supplement, no payment of principal, premium or
interest with respect to any Bearer Security will be made at any office or
agency in the United States or by check mailed to any address in the United
States or by transfer to an account maintained with a bank located in the
United States; provided, however, that if amounts owing with respect to any
Bearer Securities shall be payable in U.S. dollars, payment with respect to
any such Bearer Securities may be made at the Corporate Trust Office of the
Trustee or at any office or agency designated by the Company in the Borough of
Manhattan, The City of New York, if (but only if) payment of the full amount
of such principal, premium or interest at all offices outside of the United
States maintained for such purpose by the Company is illegal or effectively
precluded by exchange controls or similar restrictions.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company will not be required to (i) issue, register the transfer of or
exchange Debt Securities of any series during a period beginning at the
opening of business 15 days before any selection of Debt Securities of that
series of like tenor to be redeemed and ending at the close of business on the
day of that selection; (ii) register the transfer of or exchange any
Registered Security, or portion thereof, called for redemption, except the
unredeemed portion of any Registered Security being redeemed in part; (iii)
exchange any Bearer Security called for redemption, except to exchange such
Bearer Security for a Registered Security of that series and like tenor that
is simultaneously surrendered for redemption; or (iv) issue, register the
transfer of or exchange any Debt Security which has been surrendered for
repayment at the option of the holder, except the portion, if any, of such
Debt Security not to be so repaid.
RANKING OF DEBT SECURITIES; HOLDING COMPANY STRUCTURE
The Subordinated Debt Securities will be unsecured obligations of the
Company and will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company as described below under "--
Subordination."
The Debt Securities are obligations exclusively of the Company. The Company
is a holding company, substantially all of whose consolidated assets are held
by its subsidiaries. Accordingly, the cash flow of the Company and the
consequent ability to service its debt, including the Debt Securities, are
primarily dependent
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upon the results of operations of such subsidiaries and upon the ability of
such subsidiaries to provide funds to the Company. Various statutory and
regulatory restrictions, however, limit directly or indirectly the amount of
dividends the Company's subsidiaries (including the Bank and CTL) can pay, and
also restrict the Bank and CTL from making investments in or loans to the
Company.
In particular, savings associations, such as the Bank, that before and after
a proposed capital distribution meet their regulatory capital requirements,
may make capital distributions during any calendar year equal to the greater
of (i) 100% of net income for the year-to-date plus 50% of the lowest of the
amounts by which the association's tangible, core or risk-based capital
exceeds its regulatory capital requirement for such capital component, as
measured at the beginning of the calendar year, or (ii) 75% of its net income
for the most recent four quarter period. The Bank currently may pay dividends
in accordance with this general authority. However, an association deemed to
be in need of more than normal supervision by the OTS may have its dividend
authority restricted by the OTS. In general, savings associations proposing to
make any capital distribution need only submit written notice to the OTS 30
days prior to such distribution. The OTS may object to the distribution during
that 30-day period notice based on safety and soundness concerns.
Under California law, a California-chartered thrift and loan, such as CTL,
is not permitted to declare dividends on its capital stock unless it has at
least $750,000 of unimpaired capital plus additional capital of $50,000 for
each branch office maintained. In addition, under California law, no
California corporation, including CTL and CGC, may pay dividends unless, in
general, (i) the payment would not exceed the corporation's retained earnings
or (ii) in the alternative, after giving effect to the dividend, and subject
to certain adjustments and exceptions, (A) the sum of the corporation's assets
(exclusive of goodwill, capitalized research and development expenses and
deferred charges) would not be less than 125% of its liabilities (not
including deferred taxes, deferred income and other deferred credits) and (B)
if the corporation classifies its assets into current and fixed assets, the
current assets of the corporation would be at least equal to its current
liabilities or, if the corporation's average earnings before income taxes and
interest expense for the two preceding fiscal years were less than its average
interest expense for such fiscal years, at least equal to 125% of its current
liabilities. In addition, a California corporation is not permitted to make a
dividend or other distribution to its shareholders if it is, or as a result
thereof would be, likely to be unable to meet its liabilities as they mature.
A California corporation must also meet certain additional financial tests to
pay dividends on any junior class or series of stock if it has outstanding any
preferred or other senior class or series of stock. BVSC, a Delaware
corporation, is subject to certain limitations on dividends under Delaware
law.
Neither the Bank nor CTL may pay a dividend if the institution does not meet
its minimum regulatory capital requirements prior to, or as a result of, such
dividend unless it receives prior regulatory approval.
Because the Company is a holding company, the Debt Securities will be
effectively subordinated to all existing and future liabilities, including
indebtedness, customer deposits, trade payables, guarantees and lease
obligations, of the Company's subsidiaries. Therefore, the Company's rights
and the rights of its creditors, including the holders of the Debt Securities,
to participate in the assets of any subsidiary upon the latter's liquidation
or reorganization will be subject to the prior claims of such subsidiary's
creditors and, if applicable, its depositors, except to the extent that the
Company may itself be a creditor with recognized claims against the
subsidiary, in which case the claims of the Company would still be effectively
subordinate to any security interest in, or mortgages or other liens on, the
assets of such subsidiary and would be subordinate to any indebtedness of such
subsidiary senior to that held by the Company. In that regard, in the event
that a receiver or conservator is appointed for any subsidiary of the Company
whose deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC"), such as the Bank, the Federal Deposit Insurance Act recognizes a
priority in favor of the holders of withdrawable deposits (including the FDIC
as subrogee or transferee) over general creditors. Thus, in the event of a
conservatorship or receivership of such a subsidiary, claims for customer
deposits would have a priority over any claims the Company may itself have as
a creditor of such subsidiary. The Indenture does not limit the amount of
indebtedness or other liabilities that may be incurred by the Company and its
subsidiaries. See "--Absence of Limitation on Indebtedness and Liens; Absence
of Event Risk Protection."
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DEBT SECURITIES INTENDED TO QUALIFY AS TIER 2 CAPITAL
It is currently intended that the Debt Securities would qualify, in the
event the Company were to become a bank holding company (which would occur if
the Bank were to convert from a federal savings bank to a commercial bank or
if the Company were to acquire control of a commercial bank), as Tier 2
Capital under the guidelines established by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") for bank holding
companies. The guidelines set forth specific criteria for subordinated debt to
qualify as Tier 2 Capital. Among other things, the subordinated debt must: (i)
be unsecured; (ii) have a minimum average maturity of five years; (iii) be
subordinated in right of payment; (iv) not contain provisions permitting the
holders thereof to accelerate payment of principal prior to maturity except in
the event of bankruptcy, insolvency or reorganization of the issuer or a major
bank subsidiary of the issuer; and (v) not contain provisions that would
adversely affect liquidity or unduly restrict management's flexibility to
operate the organization, particularly in times of financial difficulty, such
as limitations on additional secured or senior borrowings, sales or
dispositions of assets or changes in control. See "--Events of Default;
Limited Rights of Acceleration" and "--Subordination."
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities that will be deposited with, or on
behalf of, a depositary (the "Depositary") identified in the Prospectus
Supplement relating to such series. Global Debt Securities may be issued in
either registered or bearer form and in either temporary or permanent form.
Unless and until it is exchanged in whole or in part for individual
certificates evidencing Debt Securities in definitive form, a global Debt
Security may not be transferred except as a whole by the Depositary for such
global Debt Security to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by such
Depositary or any such nominee to a successor of such Depositary or a nominee
of such successor.
The specific terms of the depositary arrangement with respect to a series of
global Debt Securities and certain limitations and restrictions relating to a
series of global Bearer Securities will be described in the Prospectus
Supplement relating to such series.
OUTSTANDING DEBT SECURITIES
In determining whether the holders of the requisite principal amount of
outstanding Debt Securities have given any request, demand, authorization,
direction, notice, consent or waiver under the Indenture, (i) the portion of
the principal amount of an Original Issue Discount Security that shall be
deemed to be outstanding for such purposes shall be that portion of the
principal amount thereof that could be declared to be due and payable upon a
declaration of acceleration thereof pursuant to the terms of such Original
Issue Discount Security as of the date of such determination, (ii) the
principal amount of any Indexed Security that shall be deemed to be
outstanding for such purpose shall be the principal face amount of such
Indexed Security determined on the date of its original issuance, (iii) the
principal amount of a Debt Security denominated in a Currency other than U.S.
dollars shall be the U.S. dollar equivalent, determined on the date of
original issue of such Debt Security, of the principal amount of such Debt
Security and (iv) any Debt Security owned by the Company or any obligor on
such Debt Security or any Affiliate of the Company or such other obligor shall
be deemed not to be outstanding.
REDEMPTION AND REPURCHASE
The Debt Securities of any series may be redeemable at the option of the
Company, may be subject to mandatory redemption pursuant to a sinking fund or
otherwise, or may be subject to repurchase by the Company at the option of the
holders, in each case upon the terms, at the times and at the prices set forth
in the applicable Prospectus Supplement. However, the Company currently does
not intend to issue Debt Securities with redemption or repurchase features to
the extent such features would prevent the Debt Securities from qualifying as
Tier 2 Capital under the Federal Reserve Board's guidelines. See "--Debt
Securities Intended to Qualify as Tier 2 Capital."
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ABSENCE OF LIMITATION ON INDEBTEDNESS AND LIENS; ABSENCE OF EVENT RISK
PROTECTION
The Indenture does not limit the amount of indebtedness, guarantees or other
liabilities that may be incurred by the Company and its subsidiaries and does
not prohibit the Company and its subsidiaries from creating or assuming liens
on their property (including capital stock of the Bank and other subsidiaries
of the Company). The Indenture does not require the maintenance of any
financial ratios by, or specified levels of net worth, revenues, income, cash
flow or liquidity of, the Company. The Indenture does not contain provisions
which would give holders of the Debt Securities the right to require the
Company to repurchase their Debt Securities in the event of a takeover,
recapitalization or similar restructuring or change in control of the Company.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company shall not, in any transaction or
series of related transactions, consolidate with or merge into any Person or
sell, assign, transfer, lease or otherwise convey all or substantially all its
properties and assets to any Person unless (a) either the Company shall be the
continuing entity, or the successor Person (if other than the Company) is a
corporation which is organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia and shall
expressly assume the due and punctual payment of the principal of, premium, if
any, and interest, if any, on all the Debt Securities outstanding under the
Indenture and the performance of the Company's other obligations under the
Indenture and the Debt Securities outstanding thereunder; (b) immediately
after giving effect to such transaction, no Event of Default under the
Indenture, and no event which, after notice or lapse of time or both would
become an Event of Default under the Indenture, shall have happened and be
continuing; and (c) certain other conditions are met.
Upon any such merger, consolidation, sale, assignment, transfer, lease or
conveyance in which the Company is not the continuing corporation, the
successor corporation formed by such consolidation or into which the Company
is merged or to which such sale, assignment, transfer, lease or other
conveyance is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture with the same effect
as if such successor corporation had been named as the Company therein and
thereafter (except in the case of a lease) the Company shall be released from
its obligations under the Indenture and the Debt Securities.
EVENTS OF DEFAULT; LIMITED RIGHTS OF ACCELERATION
Unless otherwise specified in the applicable Prospectus Supplement, an Event
of Default with respect to the Debt Securities of any series is defined in the
Indenture as being: (i) default for 30 days in payment of any interest with
respect to any Debt Security of such series; (ii) default in payment of
principal or any premium with respect to any Debt Security of such series when
due upon maturity, redemption, repurchase at the option of the holder or
otherwise; (iii) default in deposit of any sinking fund payment when due with
respect to any Debt Security of such series; (iv) default by the Company in
the performance, or breach, of any other covenant or warranty in the Indenture
(other than a covenant or warranty included therein solely for the benefit of
series of Debt Securities other than that series) or any Debt Security of such
series which shall not have been remedied for a period of 30 days after notice
to the Company by the Trustee or the holders of not less than 25% in aggregate
principal amount of the Debt Securities of such series then outstanding; (v)
certain events of bankruptcy, insolvency or reorganization of the Company or
any Major Bank Subsidiary of the Company; or (vi) any other Event of Default
established for the Debt Securities of such series. No Event of Default with
respect to any particular series of Debt Securities necessarily constitutes an
Event of Default with respect to any other series of Debt Securities. The
Indenture provides that the Trustee may withhold notice to the holders of the
Debt Securities of any series of the occurrence of a default with respect to
the Debt Securities of such series (except a default in payment of principal,
premium, if any, interest, if any, or sinking fund payments, if any) if the
Trustee considers it in the interest of the holders to do so.
No Event of Default described in clauses (i), (ii), (iii), (iv) or (vi) of
the preceding paragraph permits acceleration of the payment of the principal
of the Debt Securities. The Indenture provides that, if an Event of Default
described under clause (v) of the preceding paragraph shall have occurred and
be continuing, either the
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Trustee or the holders of at least 25% in principal amount of the Debt
Securities of any series then outstanding may declare the principal amount (or
if any Debt Securities of such series are Original Issue Discount Securities,
such lesser amount as may be specified in the terms thereof) of all the Debt
Securities of such series to be due and payable immediately, but upon certain
conditions such declaration and its consequences may be rescinded and annulled
by the holders of a majority in principal amount of the Debt Securities of
such series then outstanding.
As described in the preceding paragraph, there is no right of acceleration
in the case of, among other things, (i) a default in the payment of the
principal of, or premium, if any, or interest, if any, on, or sinking fund
payments, if any, with respect to, the Debt Securities, (ii) a default in the
performance of any other covenant of the Company in the Indenture or the Debt
Securities, or (iii) a default in the payment or acceleration of any other
indebtedness of the Company or any of its subsidiaries. In the case of a
default in the payment of principal of, or premium, if any, or interest, if
any, on any Debt Securities, the Trustee, subject to certain limitations and
conditions, may institute a judicial proceeding for the collection thereof.
The limitation on acceleration described above is intended, in the event the
Company were to become a bank holding company (which would occur if the Bank
were to convert from a federal savings bank to a commercial bank or if the
Company were to acquire control of a commercial bank), to permit the Debt
Securities to qualify as Tier 2 Capital under the guidelines established by
the Federal Reserve Board for bank holding companies. See "--Debt Securities
Intended to Qualify as Tier 2 Capital."
Subject to the provisions of Trust Indenture Act requiring the Trustee,
during the continuance of an Event of Default under the Indenture, to act with
the requisite standard of care, the Trustee is under no obligation to exercise
any of its rights or powers under the Indenture at the request or direction of
any of the holders of Debt Securities of any series unless such holders have
offered the Trustee reasonable indemnity. Subject to the foregoing, holders of
a majority in principal amount of the then outstanding Debt Securities of any
series issued under the Indenture shall have the right, subject to certain
limitations, to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee under the Indenture with respect to
such series. The Indenture requires the annual filing by the Company with the
Trustee of a certificate as to whether or not the Company is in default under
the terms of the Indenture.
Notwithstanding any other provision of the Indenture, the holder of any Debt
Security shall have the right, which is absolute and unconditional, to receive
payment of the principal of and premium, if any, and interest, if any, on such
Debt Security on the respective due dates therefor and to institute suit for
enforcement of any such payment, and such right shall not be impaired without
the consent of such holder.
CERTAIN DEFINITIONS
As used in the Indenture, the following terms shall have the meanings set
forth below:
"Capital Stock" of any Person means any and all shares, interests,
participations, rights or other equivalents (however designated) in the equity
of such Person (including, without limitation, with respect to a corporation,
common stock, preferred stock and other capital stock, with respect to a
partnership, partnership interests, whether general or limited, and, with
respect to a limited liability company, limited liability company interests)
and any rights (other than debt securities convertible into or exchangeable or
exercisable for equity interests), warrants or options exchangeable or
exercisable for or convertible into an equity interest in such Person.
"Major Bank Subsidiary" means (i) BayView Bank and any successor to all or
substantially all of the business of the BayView Bank, in each case so long as
it shall be a Subsidiary of the Company and (ii) any Significant Subsidiary of
the Company which is a bank, trust company, savings bank, savings and loan
association, savings association or other banking or thrift institution.
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"Significant Subsidiary" means, with respect to any Person, any Subsidiary
of such Person which is a "significant subsidiary" as defined in Rule 1-02(w)
of Regulation S-X promulgated under the Securities Act of 1933, as amended (as
in effect on the date of the Indenture), but substituting 50 percent for 10
percent in each place that 10 percent appears in such Rule.
"Subsidiary" means, with respect to any Person (the "Subject Person"), any
corporation or other Person at least a majority of the equity ownership
interests or Voting Stock of which is at the time owned, directly or
indirectly, by the Subject Person and/or one or more other Subsidiaries of the
Subject Person. Notwithstanding the foregoing, no Securitization Entity shall
be deemed to be a Subsidiary of the Company.
"Voting Stock" means, with respect to any Person, any class or classes or
series or series of Capital Stock of such Person pursuant to which the holders
thereof have the general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of such
Person (irrespective of whether or not, at the time, Capital Stock of any
other class or classes or series or series shall have, or might have, voting
power by reason of the happening of any contingency).
MODIFICATION, WAIVERS AND MEETINGS
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of a majority in principal amount of the
outstanding Debt Securities of each series issued under the Indenture and
affected by a modification or amendment, to modify or amend any of the
provisions of the Indenture or of the Debt Securities of such series or the
rights of the holders of the Debt Securities of such series under the
Indenture, provided that no such modification or amendment shall, among other
things, (i) change the stated maturity of the principal of, or premium, if
any, or any installment of interest, if any, on any Debt Securities issued
under the Indenture or reduce the principal amount thereof or any premium
thereon, or reduce the rate of interest thereon, or reduce the amount of
principal of any Original Issue Discount Securities that would be due and
payable upon an acceleration of the maturity thereof, or change any place
where, or the Currency in which, any Debt Securities issued under the
Indenture are payable, or impair the holder's right to institute suit to
enforce the payment of any such Debt Securities on or after the stated
maturity thereof, or make any change that adversely affects the right, if any,
to convert or exchange such Debt Securities for other securities in accordance
with their terms, or (ii) reduce the aforesaid percentage of Debt Securities
of any series issued under the Indenture, the consent of the holders of which
is required for any such modification or amendment or the consent of whose
holders is required for any waiver (of compliance with certain provisions of
the Indenture or certain defaults thereunder and their consequences) or reduce
the requirements for a quorum or voting at a meeting of holders of such Debt
Securities or (iii) modify any of the provisions of Article Sixteen thereof
(relating to subordination of the Debt Securities) or the definition of Senior
Indebtedness in a manner adverse to the holders of the Debt Securities,
without in each such case obtaining the consent of the holder of each
outstanding Debt Security issued under the Indenture so affected.
The Indenture also contains provisions permitting the Company and the
Trustee, without the consent of the holders of any Debt Securities issued
thereunder, to modify or amend the Indenture in order to, among other things,
(a) add to the Events of Default or the covenants of the Company for the
benefit of the holders of all or any series of Debt Securities issued under
the Indenture; (b) to add or change any provisions of the Indenture to
facilitate the issuance of Bearer Securities; (c) to establish the form or
terms of Debt Securities of any series and any related coupons; (d) to cure
any ambiguity or correct or supplement any provision therein which may be
inconsistent with other provisions therein or to make any other provisions
with respect to matters or questions arising under the Indenture which in any
case shall not adversely affect the interests of the holders of any series of
Debt Securities issued thereunder in any material respect; or (e) to amend or
supplement any provision contained in the Indenture, provided that such
amendment or supplement does not apply to any outstanding Debt Securities
first issued prior to the date of such amendment or supplement and entitled to
the benefits of such provision.
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of any series may waive compliance by the Company with certain
restrictive provisions, if any, of the Indenture, including the covenants, if
any, described in the applicable Prospectus Supplement. The Holders of a
majority in aggregate
12
<PAGE>
principal amount of the outstanding Debt Securities of any series may, on
behalf of all holders of Debt Securities of that series, waive any past
default under the Indenture with respect to Debt Securities of that series and
its consequences, except a default in the payment of the principal of, or
premium, if any, or interest, if any, on any Debt Securities of such series or
in respect of a covenant or provision which cannot be modified or amended
without the consent of the holder of each outstanding Debt Securities of such
series affected.
The Indenture contains provisions for convening meetings of the holders of
Debt Securities of a series issued thereunder. A meeting may be called at any
time by the Trustee, and also, upon request, by the Company or the holders of
at least 10% in principal amount of the outstanding Debt Securities of such
series, in any such case upon notice given in accordance with the provisions
of the Indenture. Except for any consent which must be given by the holder of
each outstanding Debt Security affected thereby, as described above, any
resolution presented at a meeting or adjourned meeting duly reconvened at
which a quorum (as described below) is present may be adopted by the
affirmative vote of the holders of a majority in principal amount of the
outstanding Debt Securities of that series; provided, however, that any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action which may be made, given or taken by
the holders of a specified percentage, which is more or less than a majority,
in principal amount of the outstanding Debt Securities of a series may be
adopted at a meeting or adjourned meeting duly reconvened at which a quorum is
present by the affirmative vote of the holders of such specified percentage in
principal amount of the outstanding Debt Securities of that series. Any
resolution passed or decision taken at any meeting of holders of Debt
Securities of any series duly held in accordance with the Indenture will be
binding on all holders of Debt Securities of that series and the related
coupons. The quorum at any meeting called to adopt a resolution, and at any
reconvened meeting, will be persons holding or representing a majority in
principal amount of the outstanding Debt Securities of a series, subject to
certain exceptions.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Upon the direction of the Company, the Indenture shall cease to be of
further effect with respect to any series of Debt Securities issued thereunder
specified by the Company (subject to the survival of certain provisions
thereof, including the obligation, if any, to pay Additional Amounts) when
(i) either (A) all outstanding Debt Securities of such series and, in the case
of Bearer Securities, all coupons appertaining thereto, have been delivered to
the Trustee for cancellation (subject to certain exceptions) or (B) all Debt
Securities of such series and, if applicable, any coupons appertaining
thereto, have become due and payable or will become due and payable at their
stated maturity within one year or are to be called for redemption within one
year and the Company has deposited with the Trustee, in trust, funds in U.S.
dollars or in such Foreign Currency in which such Debt Securities are payable
in an amount sufficient to pay the entire indebtedness on such Debt Securities
in respect of principal (and premium, if any) and interest, if any, to the
date of such deposit (if such Debt Securities have become due and payable) or
to the Maturity thereof, as the case may be, (ii) the Company has paid all
other sums payable under the Indenture with respect to the Debt Securities of
such series, and (iii) certain other conditions are met. If the Debt
Securities of any such series provide for the payment of Additional Amounts,
the Company will remain obligated, following such deposit, to pay Additional
Amounts on such Debt Securities.
Unless otherwise provided in the applicable Prospectus Supplement, the
Company may elect with respect to any series of Debt Securities either (a) to
defease and be discharged from any and all obligations with respect to such
Debt Securities (except for, among other things, the obligation to pay
Additional Amounts, if any, upon the occurrence of certain events of taxation,
assessment or governmental charge with respect to payments on such Debt
Securities, and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities, to hold moneys for payment in trust, and, if applicable, to
exchange or convert such Debt Securities into other securities in accordance
with their terms) ("defeasance"), or (b) to be released from its obligations
with respect to such Debt Securities under a restrictive covenant set forth in
the Indenture and such other restrictive covenants, if any, as may be set
forth in the applicable Prospectus Supplement, and any omission to comply with
such obligations shall not constitute a default or an Event of Default with
respect to the Debt Securities of such
13
<PAGE>
series ("covenant defeasance"), in either case upon the irrevocable deposit
with the Trustee (or other qualifying trustee), in trust for such purpose, of
an amount, in U.S. dollars or in such Foreign Currency in which such Debt
Securities are payable at Stated Maturity or, if applicable, upon redemption,
and/or Government Obligations (as defined in the Indenture) which through the
payment of principal and interest in accordance with their terms will provide
money, in an amount sufficient to pay the principal of and any premium and any
interest on such Debt Securities, and any mandatory sinking fund or analogous
payments thereon, on the scheduled due dates therefor or the applicable
redemption date, as the case may be.
Such defeasance or covenant defeasance shall only be effective if, among
other things, (i) it shall not result in a breach or violation of, or
constitute a default under, the Indenture or any other material agreement or
instrument to which the Company or any Major Bank Subsidiary is a party or by
which it is bound, (ii) the Company has delivered to the Trustee an opinion of
counsel (as specified in the Indenture) to the effect that the holders of such
Debt Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance or covenant defeasance, as the case
may be, and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred, (iii) if the cash and
Government Obligations deposited are sufficient to pay the outstanding Debt
Securities of such series provided such Debt Securities are redeemed on a
particular redemption date, the Company shall have given the Trustee
irrevocable instructions to redeem such Debt Securities on such date and (iv)
it is effected during the last year prior to the final stated maturity of such
Debt Securities. It shall also be a condition to the effectiveness of
defeasance and covenant defeasance that no Event of Default or event which
with notice or lapse of time or both would become an Event of Default with
respect to Debt Securities of such series shall have occurred and been
continuing on the date of, or, solely in the case of Events of Default
described in clause (v) of the first paragraph under "--Events of Default;
Limited Rights of Acceleration" above, during the period ending on the 91st
day after the date of, such deposit into trust.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any
series, (a) the holder of a Debt Security of such series is entitled to, and
does, elect pursuant to the Indenture or the terms of such Debt Security to
receive payment in a Currency other than that in which such deposit has been
made in respect of such Debt Security, or (b) a Conversion Event (as defined
below) occurs in respect of the Foreign Currency in which such deposit has
been made, the indebtedness represented by such Debt Security shall be deemed
to have been, and will be, fully discharged and satisfied through the payment
of the principal of (and premium, if any) and interest, if any, on such Debt
Security as such Debt Security becomes due out of the proceeds yielded by
converting the amount so deposited in respect of such Debt Security into the
Currency in which such Debt Security becomes payable as a result of such
election or such Conversion Event based on (x) in the case of payments made
pursuant to clause (a) above, the applicable market exchange rate for such
Foreign Currency in effect on the second business day prior to such payment
date, or (y) with respect to a Conversion Event, the applicable market
exchange rate for such Foreign Currency in effect (as nearly as feasible) at
the time of the Conversion Event.
"Conversion Event" means the cessation of use of (i) a Foreign Currency both
by the government of the country or the confederation which issued such
Foreign Currency and for the settlement of transactions by a central bank or
other public institutions of or within the international banking community,
(ii) the ECU both within the European Monetary System and for the settlement
of transactions by public institutions of or within the European Union or
(iii) any currency unit or composite currency other than the ECU for the
purposes for which it was established.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because
of the occurrence of any Event of Default described in clause (v) of the first
paragraph under "--Events of Default; Limited Rights of Acceleration," the
amount of monies and/or Government Obligations deposited with the Trustee to
effect such covenant defeasance may not be sufficient to pay amounts due on
such Debt Securities at the time of any acceleration resulting from such Event
of Default. However, the Company would remain liable to make payment of such
amounts due at the time of acceleration.
14
<PAGE>
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting or restricting such defeasance or covenant defeasance with
respect to the Debt Securities of a particular series.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the laws of the State of New York.
REGARDING THE TRUSTEE
The Trust Indenture Act of 1939 contains limitations on the rights of a
trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions with the Company and its subsidiaries from
time to time, provided that if the Trustee acquires any conflicting interest
it must eliminate such conflict upon the occurrence of an Event of Default
under the Indenture, or else resign.
SUBORDINATION
The payment of the principal of, premium, if any, and interest, if any, on
the Debt Securities will be subordinated, to the extent and in the manner set
forth in the Indenture, in right of payment to the prior payment in full of
all Senior Indebtedness (as defined below) which may at any time and from time
to time be outstanding. Unless otherwise provided in the applicable Prospectus
Supplement with respect to an issue of Debt Securities, in the event of any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company, (i) all Senior Indebtedness
shall first be paid in full, or such payment shall be provided for, before any
payment on account of the principal of, or premium, if any, or interest, if
any, on the Debt Securities is made, (ii) any payment or distribution of
assets of the Company to which the holders of the Debt Securities would be
entitled except for the subordination provisions of the Indenture shall be
paid by the liquidating trustee or other person making such distribution
directly to the holders of Senior Indebtedness or on their behalf, to the
extent necessary to make payment in full of all Senior Indebtedness remaining
unpaid, after giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness, and (iii) in the event that,
notwithstanding the foregoing, any payment or distribution of assets of the
Company is received by the Trustee or the holders of any of the Debt
Securities before all Senior Indebtedness is paid in full, such payment or
distribution will be paid over to the holders of such Senior Indebtedness or
on their behalf for application to the payment of all such Senior Indebtedness
remaining unpaid until all such Senior Indebtedness has been paid in full or
such payment provided for, after giving effect to any concurrent payment or
distribution to the holders of such Senior Indebtedness. Subject to the
payment in full of all Senior Indebtedness upon any such distribution of
assets of the Company, the holders of the Debt Securities will be subrogated
to the rights of the holders of the Senior Indebtedness to receive payments or
distributions of cash, property or securities of the Company applicable to
Senior Indebtedness until the principal of (and premium, if any) and interest,
if any, on the Debt Securities shall be paid in full.
By reason of such subordination, in the event of any distribution of assets
of the Company upon dissolution, winding up, liquidation, reorganization or
other similar proceedings of the Company, (i) holders of Senior Indebtedness
will be entitled to be paid in full before payments may be made on the Debt
Securities and the holders of Debt Securities will be required to pay over
their share of such distribution, to the extent made in respect of such Debt
Securities, to the holders of Senior Indebtedness until such Senior
Indebtedness is paid in full and (ii) creditors of the Company who are neither
holders of Debt Securities nor holders of Senior Indebtedness may recover
less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the holders of the Debt Securities. Furthermore, such
subordination may result in a reduction or elimination of payments to the
holders of Debt Securities. The Indenture provides that the subordination
provisions thereof will not apply to any money and securities held in trust
pursuant to the discharge, defeasance and covenant defeasance provisions of
the Indenture (see "--Discharge, Defeasance and Covenant Defeasance" above).
15
<PAGE>
The Indenture also provides that no payment on account of the principal of,
or premium, if any, sinking funds, if any, or interest, if any, on the Debt
Securities shall be made if there shall have occurred and be continuing (i) a
default in the payment when due of principal of, or premium, if any, sinking
funds, if any, or interest, if any on any Senior Indebtedness of the Company
and any applicable grace period with respect to such default shall have ended
without such default having been cured or waived or ceasing to exist or (ii)
an event of default with respect to any Senior Indebtedness of the Company
resulting in the acceleration of the maturity thereof without such
acceleration having been rescinded or annulled or such Senior Indebtedness
having been paid in full.
The Indenture defines "Senior Indebtedness" as (a) any liability of the
Company (1) for borrowed money or under any reimbursement obligation relating
to a letter of credit, surety bond or similar instrument, or (2) evidenced by
a bond, note, debenture or similar instrument, or (3) for obligations to pay
the deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business, or (4) for the payment of
money relating to a capitalized lease obligation, or (5) for the payment of
money under any Swap Agreement; (b) any liability of others described in the
preceding clause (a) that the Company has guaranteed or that is otherwise its
legal liability; and (c) any deferral, renewal, extension or refunding of any
liability of the types referred to in clauses (a) and (b) above, unless, in
the instrument creating or evidencing any such liability referred to in clause
(a) or (b) above or any such deferral, renewal, extension or refunding
referred to in clause (c) above or pursuant to which the same is outstanding,
it is expressly provided that such liability, deferral, renewal, extension or
refunding is not senior or prior in right of payment to the Debt Securities or
ranks pari passu with or subordinate to the Debt Securities in right of
payment; and provided that the Debt Securities shall not constitute Senior
Indebtedness. The Indenture defines "Swap Agreement" as any commodity
contract, interest rate or currency swap agreement, cap, floor or collar
agreement, currency swap or forward contract or other similar agreement or
arrangement designed to protect against fluctuations in currency exchange
rates or interest rates.
The accompanying Prospectus Supplement or the information incorporated by
reference herein will set forth the approximate amount of Senior Indebtedness
outstanding as of a recent date. There are no limitations in the Indenture on
the issuance or incurrence of Senior Indebtedness of the Company.
PLAN OF DISTRIBUTION
The Company may sell Securities to one or more underwriters for public
offering and sale by them or may sell Securities through agents which solicit
or receive offers on behalf of the Company or through dealers or through a
combination of any such methods of sale, and the Company may also sell
Securities directly to investors. Any such underwriter or agent involved in
the offer and sale of Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, or from time to time at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Company may, from time to time, authorize agents acting
on a best or reasonable efforts basis or other basis to solicit or receive
offers to purchase the Securities upon the terms and conditions as are set
forth in the applicable Prospectus Supplement. In connection with the sale of
Securities, underwriters or agents may be deemed to have received compensation
from the Company in the form of underwriting discounts or commissions and may
also receive commissions from purchasers of Securities for whom they may act
as agents. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any compensation paid by the Company to underwriters or agents in connection
with the offering of Securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable Prospectus Supplement. Underwriters, dealers and agents
participating in a distribution of the Securities (including agents only
soliciting or receiving offers to purchase Securities on behalf
16
<PAGE>
of the Company) may be deemed to be underwriters, and any discounts or
commissions received by them and any profit realized by them on resale of
Securities may be deemed to be underwriting discounts and commissions.
Under agreements which may be entered into by the Company, underwriters,
dealers and agents who participate in the distribution of Securities may be
entitled to indemnification against certain liabilities, including liabilities
under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any
institutional purchaser under any such contract will not be subject to any
conditions except (i) the purchase by such institution of the Securities
covered by such contract shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such institution is subject, and (ii) if
such Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of such Securities less the
principal amount thereof covered by delayed delivery contracts.
Certain of the underwriters, dealers or agents and their affiliates may
engage in transactions with and perform services for the Company in the
ordinary course of business.
LEGAL MATTERS
Certain legal matters in connection with the offering made hereby will be
passed upon for the Company by Robert J. Flax, Esq., Executive Vice President,
General Counsel and Secretary of the Company, and by Silver, Freedman & Taff,
L.L.P., Washington, D.C. As of June 30, 1997, Mr. Flax owned approximately
3,540 shares of common stock of the Company, and held options to acquire
approximately 86,000 additional shares. Brown & Wood llp, San Francisco,
California, will act as counsel for any underwriters or agents.
EXPERTS
The consolidated financial statements and supplemental consolidating
schedules of Bay View Capital Corporation and its subsidiaries incorporated in
this Prospectus and in the Registration Statement by reference from the
Company's 1996 Annual Report on Form 10-K, as amended on Form 10-K/A, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein and therein by reference, and have
been so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of America First Eureka Holdings, Inc.
and Subsidiary as of December 31, 1996 and 1995, and for each of the years in
the three-year period ended December 31, 1996, have been incorporated by
reference herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent auditors, incorporated by reference
herein and in the Registration Statement, and upon the authority of said firm
as experts in accounting and auditing.
17
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Forward-Looking Statements................................................ S-2
Summary................................................................... S-3
Risk Factors.............................................................. S-15
Use of Proceeds........................................................... S-24
Consolidated Ratios of Earnings to Fixed Charges.......................... S-24
Capitalization............................................................ S-25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-26
Unaudited Pro Forma Condensed Combined Financial Information.............. S-51
Description of Notes...................................................... S-57
Underwriting.............................................................. S-72
Legal Matters............................................................. S-73
Experts................................................................... S-73
Index to Consolidated Financial Statements................................ F-1
PROSPECTUS
Available Information..................................................... 2
Forward-Looking Statements................................................ 2
Incorporation of Certain Documents by Reference........................... 3
The Company............................................................... 4
Use of Proceeds........................................................... 4
Consolidated Ratios of Earnings to Fixed Charges.......................... 4
Description of Debt Securities............................................ 5
Plan of Distribution...................................................... 16
Legal Matters............................................................. 17
Experts................................................................... 17
</TABLE>
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$100,000,000
[LOGO OF BAYVIEW CAPITAL CORPORATION APPEARS HERE]
9 1/8% SUBORDINATED NOTES DUE 2007
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PROSPECTUS SUPPLEMENT
----------------
MERRILL LYNCH & CO.
KEEFE, BRUYETTE & WOODS, INC.
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
AUGUST 22, 1997
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