<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 30, 1998
-------------------
BAY VIEW CAPITAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-17901 94-3078031
- --------------------------------------------------------------------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification
incorporation) No.)
1840 Gateway Drive, San Mateo, California 94404
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 573-7300
--------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 5. Other Events.
------------
On January 2, 1998, Bay View Capital Corporation ("Bay View") completed
its acquisition of America First Eureka Holdings, Inc. ("AFEH") and
AFEH's wholly owned subsidiary, EurekaBank, A Federal Savings Bank (the
"Merger"). Under the terms of the definitive agreement, America First
Financial Fund 1987-A Limited Partnership, the sole shareholder of
AFEH, received shares of Bay View common stock valued at approximately
$210 million and $90 million in cash.
Attached as Exhibit 99.1 hereto are the consolidated financial
statements of AFEH prepared in accordance with Rule 3.05 of
Regulation S-X of the Securities and Exchange Commission. Attached as
Exhibit 99.2 hereto is the pro forma financial information regarding
the Merger of the Company and AFEH prepared in accordance with Article
11 of Regulation S-X of the Securities and Exchange Commission.
Item 7. Financial Statements and Exhibits.
---------------------------------
(c) Exhibits
23 Consent of Independent Accountants
99.1 Consolidated Financial Statements of America First Eureka
Holdings, Inc.
99.2 Unaudited Pro Forma Condensed Combined Financial Information
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
Date: September 30, 1998 By: /s/David A. Heaberlin
-----------------------------
David A. Heaberlin
Executive Vice President and
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
23 Consent of Independent Accountants
99.1 Consolidated Financial Statements of America First Eureka
Holdings, Inc.
99.2 Unaudited Pro Forma Condensed Combined Financial Information
<PAGE>
EXHIBIT 23
The Board of Directors
Bay View Capital Corporation:
We consent to the inclusion of our report dated February 20, 1998, relating to
the consolidated balance sheets of America First Eureka Holdings, Inc. and
Subsidiary (the Company) as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholder's equity and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the Form 8-K of Bay View Capital Corporation dated September 30,
1998. Our report refers to the consummation of a merger between Bay View Capital
Corporation and the Company effective January 2, 1998.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
San Francisco, California
September 30, 1998
<PAGE>
EXHIBIT 99.1
AMERICA FIRST EUREKA HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Bay View Capital Corporation:
We have audited the accompanying consolidated balance sheets of America First
Eureka Holdings, Inc. and Subsidiary (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the years in the three year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1 to the financial statements, a merger between Bay View
Capital Corporation and the Company was consummated on January 2, 1998.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of America First Eureka
Holdings, Inc. and Subsidiary as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
San Francisco, California
February 20, 1998
1
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 62,816 $ 28,266
Cash in escrow 23,769 -
Federal funds sold 30,000 20,000
Securities purchased under agreements to resell 60,000 5,300
Mortgage-backed securities, net
Held to maturity 454,273 630,106
Available for sale 39,922 44,489
Loans receivable, net 1,526,137 1,403,483
Loans held for sale 1,347 370
Accrued interest receivable 11,659 12,206
Premises and equipment, net 8,881 8,888
Federal Home Loan Bank stock, at cost 20,563 21,827
Real estate held for sale or investment, net 715 1,328
Real estate owned, net 470 1,438
Deferred tax assets, net 21,733 22,643
Other assets 24,968 6,121
---------- ----------
Total Assets $2,287,253 $2,206,465
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Customer deposits $2,012,643 $1,840,485
Securities sold under agreements to repurchase - 44,353
Other borrowings 56,000 106,998
Other liabilities and accrued expenses 23,315 22,166
---------- ----------
Total Liabilities 2,091,958 2,014,002
Redeemable Preferred Stock; Series A, no par value:
100 shares outstanding, $10 million liquidation
value at December 31, 1997; 200 shares outstanding,
$20 million liquidation value at December 31, 1996 10,000 17,748
Common stock; par value $1.00; 100 shares
issued and outstanding - -
Paid in capital 102,189 102,189
Retained earnings 83,106 72,526
---------- ----------
Total Shareholder's Equity 185,295 174,715
---------- ----------
Total Liabilities and Shareholder's Equity $2,287,253 $2,206,465
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
2
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC.
Consolidated Statements of Income
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans receivable $112,091 $107,157 $105,199
Interest on mortgage-backed securities 41,176 50,161 53,818
Interest and dividends on investments 4,322 4,565 4,538
-------- -------- --------
Total interest income 157,589 161,883 163,555
-------- -------- --------
INTEREST EXPENSE:
Interest on customer deposits 90,145 81,982 75,772
Interest on other borrowings 6,559 19,689 31,830
-------- -------- --------
Total interest expense 96,704 101,671 107,602
-------- -------- --------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 60,885 60,212 55,953
Provision for loan losses 4,756 965 793
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 56,129 59,247 55,160
-------- -------- --------
NON-INTEREST INCOME:
Deposit related fees 2,027 1,900 2,157
Loan related fees 1,144 1,379 1,601
Gain on disposition of loans receivable 333 307 67
Gain on sale of real estate held for investment 1,939 - -
Other 6,126 4,814 5,598
-------- -------- --------
Total non-interest income 11,569 8,400 9,423
-------- -------- --------
NON-INTEREST EXPENSE:
Compensation and benefits 25,809 21,550 19,648
Occupancy and equipment 8,034 8,349 8,918
FDIC premiums and special assessments 1,536 15,089 4,210
Professional services 1,826 1,380 880
Advertising and promotion 1,014 1,107 1,285
Provision for loss (recovery) on interest rate
exchange agreements 40 (332) 1,934
Other 8,144 9,657 10,138
-------- -------- --------
Total non-interest expense 46,403 56,800 47,013
-------- -------- --------
INCOME BEFORE INCOME TAXES 21,295 10,847 17,570
Income tax expense (benefit) 1,280 (20,870) -
-------- -------- --------
NET INCOME $ 20,015 $ 31,717 $ 17,570
======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC.
Consolidated Statements of Shareholder's Equity
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
(dollars in thousands) Stock Capital Earnings Total
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ - $ 102,189 $ 41,140 $ 143,329
Net income - - 17,570 17,570
Cash distributions paid or accrued - - (10,800) (10,800)
Net unrealized gains on mortgage-backed
securities available for sale - - 4,049 4,049
------------ ------------- ------------ ------------
Balance at December 31, 1995 - 102,189 51,959 154,148
Net income - - 31,717 31,717
Cash distributions paid or accrued - - (10,800) (10,800)
Net unrealized losses on mortgage-backed
securities available for sale - - (350) (350)
------------ ------------- ------------ ------------
Balance at December 31, 1996 - 102,189 72,526 174,715
Net income - - 20,015 20,015
Cash distributions paid or accrued - - (9,900) (9,900)
Net unrealized gains on mortgage-backed
securities available for sale - - 465 465
------------ ------------- ------------ ------------
Balance at December 31, 1997 $ - $ 102,189 $ 83,106 $ 185,295
============ ============= ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,015 $ 31,717 $ 17,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of:
Investments and mortgage-backed securities net premium 2,079 2,455 751
Loan premium (discount) 158 686 (1,562)
Intangibles 1,158 1,213 1,340
Proceeds from sales of loans originated and held for sale 19,573 18,567 6,663
Originations of loans held for sale (20,216) (18,227) (6,847)
Gain on disposition of loans held for sale (333) (307) (67)
Provision for loan losses 4,756 965 793
Provision for loss (recovery) on interest rate exchange agreements 40 (332) 1,934
Decrease (increase) in accrued interest receivable 547 1,286 (1,872)
Depreciation and amortization of premises and equipment 1,673 1,699 1,992
Increase in other assets (22,463) (1,260) (486)
Increase (decrease) in other liabilities 1,110 (1,506) (4,441)
Deferred income tax expense/(benefit) 721 (20,870) -
Other, net 1,043 1,838 169
--------- --------- ---------
Net cash provided by operating activities 9,861 17,924 15,937
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated and held for investment (445,059) (236,900) (173,904)
Purchases of mortgage-backed securities held to maturity - (53,118) (164,910)
Purchases of real estate loans (10,665) (23,527) (92,709)
Purchases of premises and equipment (1,766) (1,082) (888)
Principal payments on mortgage-backed securities 178,785 191,516 143,301
Principal payments on loans receivable 326,209 280,966 252,001
Proceeds from the maturities of investment securities - 40,000 3,000
Proceeds from sales of Federal Home Loan Bank stock 2,599 911 -
Proceeds from sales of real estate held for sale 1,776 - 1,684
Proceeds from sales of real estate owned 3,573 5,593 7,437
Proceeds from sale of consumer loans - - 12,959
Other, net 800 1,170 1,558
--------- --------- ---------
Net cash provided by (used in) investing activities 56,252 205,529 (10,471)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in checking and savings accounts 132,284 132,385 3,058
Proceeds from issuance of certificates of deposit 278,818 225,553 249,060
Payments for maturing or early withdrawal of certificates of deposit (238,945) (221,919) (243,943)
Net decrease in short-term repurchase agreements (44,353) (162,503) (255,629)
Increase (decrease) in Federal Home Loan Bank advances (50,998) (203,089) 259,809
Redemption of FDIC preferred stock (10,000) - -
Capital distributions (9,900) (10,800) (10,800)
--------- --------- ---------
Net cash provided by (used in) financing activities 56,906 (240,373) 1,555
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 123,019 (16,920) 7,021
Cash and cash equivalents at beginning of period 53,566 70,486 63,465
--------- --------- ---------
Cash and cash equivalents at end of period $ 176,585 $ 53,566 $ 70,486
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Additions to real estate acquired through foreclosure $ 2,386 $ 4,803 $ 4,768
Cash paid for interest (including interest credited) $ 97,415 $ 103,546 $ 106,056
Cash paid for alternative income and minimum franchise taxes $ 370 $ 545 $ 445
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
AMERICA FIRST EUREKA HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
1. Organization and Merger Agreement
---------------------------------
America First Eureka Holdings, Inc. (the "Company" or "AFEH") was a wholly
owned subsidiary of America First Financial Fund 1987-A Limited Partnership
(the "Partnership"), formed for the purpose of owning and managing one or
more acquired financial institutions. The Company acquired EurekaBank
("Eureka") on May 27, 1988 ("the Acquisition").
On May 8, 1997, the Partnership announced that it had entered into a
definitive agreement with Bay View Capital Corporation ("Bay View") to merge
its subsidiary America First Eureka Holdings, Inc. with Bay View (the "Merger
Agreement"). The merger was consummated on January 2, 1998. Pursuant to the
Merger Agreement, Bay View paid $90 million in cash and issued 8,076,923
shares of its common stock to the Partnership, the sole shareholder of the
Company.
Excluding the FDIC final participation payment discussed in Note 3, total
merger expenses recognized upon the consummation of the merger were
approximately $48 million. Pursuant to the Merger Agreement, certain merger
expenses were paid by the Company prior to the consummation date. The
Company recorded these payments as other assets in the accompanying financial
statements since such merger expenses were conditional upon consummation of
the merger. At December 31, 1997, prepaid merger contingent expenses
recorded as other assets consist primarily of:
Legal and investment banking fees $ 2.8 million
Employee benefits and severance 16.1 million
Other 0.5 million
---------------
Total $ 19.4 million
===============
The following presents an unaudited pro-forma summary of operations of the
Company for the year ended December 31, 1997, and is presented as if the
merger had been consummated on December 31, 1997:
Unaudited
----------------
Net income (as reported) $ 20.0 million
Less: Prepaid merger contingent expenses
recorded as other assets at December 31, 1997 19.4 million
Less: Merger contingent payments made upon
consummation of the merger 27.1 million
----------------
Net loss (pro-forma) $(26.5 million)
================
The $27.1 million of merger contingent payments made upon consummation of the
merger relates primarily to the Company's compensation plans as described in
Note 18 as well as amounts paid for employee severance and retention. Of the
$27.1 million, $12.2 million was sent to a third party escrow company by the
Company on December 31, 1997. Such amount is recorded as cash in escrow in
the accompanying financial statements.
2. Summary of Significant Accounting Policies
------------------------------------------
(A) Principles of Accounting and Consolidation
------------------------------------------
The consolidated financial statements of the Company include the accounts
of AFEH and AFEH's wholly owned subsidiary, Eureka and its subsidiaries.
The consolidated financial statements are prepared on the accrual method
of accounting in accordance with generally accepted accounting principles
("GAAP") and industry practices applicable to savings and loan
associations. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
financial statements and income and expenses during the reporting period.
Actual results could differ from those estimates. All significant
intercompany transactions have been eliminated. Certain amounts in the
consolidated financial statements for prior years have been reclassified
to conform to the current consolidated financial statement presentation.
6
<PAGE>
(B) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. These include
cash and amounts due from depository institutions, federal funds sold and
securities purchased under agreements to resell.
(C) Investments and Mortgage-Backed Securities
------------------------------------------
Securities classified as held-to-maturity are carried at amortized cost.
These investments are carried at cost because management intends and has
the ability to hold them to maturity. Securities not classified as held-
to-maturity are classified as available-for-sale and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholder's equity. Premiums and
discounts are amortized or accreted as an adjustment of yield using the
interest method over the term of each security, adjusted for actual and
anticipated payments. Gains or losses on sales of securities available
for sale are recognized at the time of sale using the specific
identification method. Interest and dividends on investments include
interest on investments, the amortization and accretion of related
premiums and discounts, and dividends on Federal Home Loan Bank ("FHLB")
stock.
(D) Loans Receivable
----------------
Loans receivable originated subsequent to Eureka's acquisition by AFEH
are stated at the unpaid principal balance. Loans receivable held by
Eureka at Acquisition were stated at unpaid principal balance discounted
to the fair market value at the date of Acquisition. The Acquisition fair
market value discount is being accreted as an adjustment of yield using
the interest method over the expected lives of the underlying mortgage
loans adjusted for actual and anticipated prepayments. Loans receivable
is shown net of deferred loan origination fees, premiums, unearned
discounts and the allowance for losses. Management intends and has the
ability to hold until maturity all loans that are not designated as held-
for-sale. If a decision is made to dispose of loans designated as held-
to-maturity, or should the Company become unable to hold loans until
maturity, the loans would be reclassified to held-for-sale at the lower
of amortized cost or market value.
All non-refundable loan origination fees, net of certain direct loan
origination costs, are deferred and accreted or amortized using a method
that approximates the interest method over the term of the loan or until
the loan is sold. Interest is not accrued on loans which are 90 days or
more delinquent. Interest income is recognized on the cash basis for
restructured loans performing under the terms of the restructuring
agreement.
(E) Loans Held for Sale
-------------------
Loans held for sale are recorded at the lower of amortized cost or market
value. Gains or losses from sales of mortgage loans are recognized at the
time of sale by comparing the net sales proceeds to the net carrying
value of the asset sold. For loans sold with servicing retained, normal
servicing fees are included in non-interest income.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement establishes standards
under which, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. In
December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 ("SFAS No. 127") "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," which deferred the
effective date of certain provisions of SFAS No. 125 for one year. The
adoption of SFAS No. 125 did not have a material effect on the Company's
financial statements.
(F) Provisions for Loan Losses
--------------------------
Provisions for loan losses are charged to operations based upon
management's periodic evaluation of potential losses in the loan
portfolio. In addition to providing valuation allowances on specific
assets, Eureka establishes a general valuation allowance and evaluates
the adequacy of the allowance based on Eureka's past loan loss
experience, known and inherent risks in the portfolio, estimated value of
any underlying collateral and current and prospective economic
conditions. However, the allowance for losses is subjective.
Additionally, various regulatory agencies, as an integral part of their
examination process, periodically review Eureka's allowance for losses on
loans. Such agencies may require Eureka to recognize additions to the
allowance based on their judgment and information available to them at
the
7
<PAGE>
time of their examination. Management believes that the allowance for
losses on loans is adequate.
(G) Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of premises and equipment is generally
computed using the straight-line method over the estimated useful lives
of the assets except for leasehold improvements which is computed using
the shorter of the straight-line method over the remaining terms of the
leases or the estimated useful life of the asset. The estimated useful
life is 31 years or less for premises and leasehold improvements, and
seven years or less for equipment. Improvements are capitalized and
maintenance and repairs are charged to expense.
(H) Real Estate
-----------
Real estate held for investment is recorded at the lower of cost or net
realizable value. Real estate acquired through foreclosure and real
estate held for sale are recorded at the lower of cost or estimated fair
market value, less estimated disposition costs. Costs related to the
development and improvement of the properties are capitalized.
Valuations, based on market information, are performed periodically by
management and an allowance for losses is established by a charge to
operations, if determined necessary.
(I) Income Taxes
------------
The consolidated financial statement provision (benefit) for income
taxes relates to the Company and its subsidiaries. The Company and its
subsidiaries file calendar year consolidated federal income and combined
California franchise tax returns. Deferred tax assets and liabilities
are recorded for estimated future tax consequences attributable to
temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the year in which the
temporary differences giving rise to such assets and liabilities are
expected to be realized or settled. A valuation allowance is recorded if
it is more likely than not that some portion or all of the deferred tax
assets will not be realized based on a review of available evidence. The
allowance is subject to ongoing adjustments based on changes in
circumstances that affect management's assessment of the realizability
of the deferred tax assets. Adjustments to increase or decrease the
valuation allowance are charged or credited, respectively, to income tax
expense (benefit).
(J) Interest Rate Exchange Agreements
---------------------------------
Eureka uses interest rate exchange agreements ("swaps") to reduce the
impact of future fluctuations in interest rates on fixed rate loans
funded by variable rate liabilities. A swap is an agreement between two
parties in which one party exchanges cash payments based on a floating
rate of interest for a counterparty's cash payment based on a fixed rate
or a different indexed floating rate of interest calculated on a
notional principal amount. The net interest received or paid on these
contracts is reflected as an adjustment to interest income on loans
receivable.
(K) Goodwill
--------
The cost in excess of net assets from branch acquisitions is recorded as
goodwill and amortized using the straight-line method over a period of
seven years, which represents the estimated period of benefit.
(L) Recent Accounting Pronouncements
--------------------------------
In February, 1997, the FASB issued SFAS 129, "Disclosure of Information
about Capital Structure," which requires that all entities, public and
non-public, disclose certain capital-related information such as
dividend and liquidation preferences, participation rights, call prices
and dates, unusual voting rights, and significant terms of contracts to
issue additional shares. This Statement is effective for the Company's
1997 year-end financials; however due to the Company's simple capital
structure, its provisions have no effect on the Company's financial
statements.
3. Assistance Agreement
--------------------
Under the terms of the Assistance Agreement between Eureka and the Federal
Deposit Insurance Corporation ("FDIC") entered into during 1988 in connection
with the assisted acquisition of the assets and liabilities of Eureka Federal
Savings and Loan Association, $50 million in preferred stock was issued to
the FDIC. In 1990, $30 million of the preferred stock was redeemed by the
FDIC, and in May 1997, an additional $10 million of the preferred stock was
redeemed. The final $10 million in non-voting Series A Preferred Stock,
which originally had a redemption date of May 1998 and had a liquidation
value of $100 per share, was sent to
8
<PAGE>
a third party escrow company on December 30, 1997, and was redeemed by the
FDIC upon consummation of the merger. In addition, at December 31, 1997, $1.1
million of cash that had been held on behalf of the FDIC according to the
terms of the Assistance Agreement was remitted to the same escrow company by
the Company. The total amount of $11.1 million is classified as cash in
escrow in the accompanying financial statements. The accretion of the
preferred stock was recorded as interest expense on other borrowings. The
accretion for the years ended December 31, 1997, 1996 and 1995 totaled $1.7
million, $2.2 million and $1.9 million, respectively.
As a result of the Merger Agreement discussed in Note 1, and under a
final negotiated settlement of the Assistance Agreement, the FDIC received a
final participation payment of approximately $10.0 million from the proceeds
of the merger. The final participation payment was in addition to the
redemption of the remaining $10 million in outstanding Series A Preferred
Stock described above.
4. Cash and Short-Term Investments
-------------------------------
The Company is not required to maintain compensating cash balances for
agreements with other financial institutions. Federal funds sold represent
short-term instruments which are generally held overnight.
Securities purchased under agreements to resell identical securities are
carried at cost which approximates market value and are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Balance at December 31, $ 60.0 million 5.3 million
Average balance during year $ 26.5 million 13.7 million
Maximum balance at any month-end $ 95.0 million 44.4 million
Weighted average days to maturity at December 31, 8 days 27 days
Weighted average interest rate 5.54% 5.41%
</TABLE>
As of December 31, 1997, all of these repurchase agreements had original
maturities of three months or less and were considered cash and cash
equivalents. The underlying collateral for these agreements, which is held
by a third party custodian, consisted of U. S. Treasury Notes and mortgage-
backed securities.
5. Mortgage-Backed Securities
--------------------------
The following table summarizes mortgage-backed securities held at December
31, (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Market Amortized unrealized unrealized Market
cost gains losses value cost gains losses value
---------- ---------- --------- --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
- ----------------
FHLMC $ 83,801 $ 900 $ 390 $ 84,311 $112,868 $ 897 $ 80 $113,685
FNMA 119,363 1,601 1,384 119,580 139,422 1,965 1,951 139,436
Collateralized mortgage
obligations 22,135 - 156 21,979 42,209 12 309 41,912
Other non-agency 228,974 544 1,746 227,772 335,607 1,395 1,645 335,357
-------- ------ -------- -------- -------- ------ -------- --------
$454,273 $3,045 $3,676 $453,642 $630,106 $4,269 $3,985 $630,390
======== ====== ======== ======== ======== ====== ======== ========
Weighted average yield 7.11% 7.02%
======== ========
AVAILABLE FOR SALE
- ----------------------------
GNMA $ 25,302 $ 675 $ - $ 25,977 $ 30,157 $ 510 $ - $30,667
Collateralized mortgage
obligations 14,394 - 449 13,945 14,570 - 748 13,822
-------- ------ -------- -------- -------- ------ -------- --------
$ 39,696 $ 675 $ 449 $ 39,922 $ 44,727 $ 510 $ 748 $44,489
======== ====== ======== ======== ======== ====== ======== ========
Weighted average yield 6.92% 6.81%
======== ========
</TABLE>
9
<PAGE>
The following table sets forth the contractual maturities, amortized costs,
market values and weighted average yields for the Company's mortgage-backed
securities at December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------------------------------------ ------------------------------
Weighted Weighted
Amortized Market average Amortized Market average
cost value yield cost value yield
---------------- ------------------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Due within one year through five years $ 45,767 $ 45,419 6.48% $ - $ - -
Due after five years through ten years 5,162 5,313 7.78% - - -
Due after ten years through twenty years 52,832 53,046 6.74% 14,394 13,945 6.25%
Due after twenty years 350,512 349,864 7.25% 25,302 25,977 7.29%
---------------- ------------------- --------- --------- --------- --------
$454,273 $453,642 7.11% $ 39,696 $39,922 6.92%
================ ================== ========= ========= ========= ========
</TABLE>
The following table summarizes mortgage-backed securities pledged as
collateral at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------ --------------------
Amortized Market Amortized Market
Mortgage-backed securities pledged for: cost value cost value
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase $ - $ - $ 47,839 $ 46,472
Interest rate exchange agreements 3,742 3,904 11,578 12,143
FHLB advances 47,675 47,663 84,297 83,818
--------- ------- --------- ---------
$ 51,417 $51,567 $143,714 $142,433
========= ======= ========= =========
</TABLE>
6. Loans Receivable
----------------
The following table summarizes loans receivable at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Real estate loans:
1-4 family residential $1,385,589 $1,254,293
Second mortgage 23,122 24,700
Multi-family residential 62,176 67,122
Commercial property and land loans 63,767 59,574
---------- -----------
Total real estate loans 1,534,654 1,405,689
---------- -----------
Consumer loans:
Revolving credit and overdrafts 669 744
Other installment loans 1,806 2,522
Loans secured by savings accounts 447 599
Timeshare 264 633
---------- -----------
Total consumer loans 3,186 4,498
---------- -----------
Total loans 1,537,840 1,410,187
Less: Net deferred loan costs (1,743) (1,284)
Discounts and premiums, net 725 567
Allowance for losses 11,374 7,051
---------- -----------
Total loans, net 1,527,484 1,403,853
Less: Loans held for sale 1,347 370
---------- -----------
Loans receivable, net $1,526,137 $1,403,483
========== ===========
Weighted average interest rate 7.71% 7.78%
========== ===========
</TABLE>
The above classifications are net of participation interests sold and loans
serviced for others. Eureka was servicing mortgage loans for others with
principal balances totaling approximately $228 million, $246 million and $263
million at December 31, 1997, 1996 and 1995, respectively. Servicing fee
income from loans serviced for others totaled $499,000, $613,000 and $663,000
for the years ended December 31, 1997, 1996 and 1995, respectively. At
December 31, 1997, mortgage loans with principal balances approximating $253
million were pledged to the FHLB of San Francisco as collateral for other
borrowings with the FHLB and as collateral for future additional borrowings.
Credit Risk and Concentration
-----------------------------
Eureka's loan portfolio consists principally of mortgage loans secured by
residential property in California and consumer loans extended to Eureka's
retail customers within Northern California. Eureka's lending activities are
focused primarily on loans secured by 1-4 family residential properties
located primarily in Northern California. Beginning in 1990, Eureka purchased
fixed and adjustable rate residential mortgage loans that met Eureka's credit
and underwriting standards from mortgage banks and savings institutions.
These purchases supplemented Eureka's internal loan production. Eureka's
wholesale loan origination system was established during 1995, and enables
Eureka to add assets that meet its credit quality guidelines within its
market area.
As of December 31, 1997, Eureka's portfolios of multi-family and commercial
real estate loans are highly
10
<PAGE>
seasoned and have a very low delinquency rate. Concentration risk is also
limited as the average loan size is approximately $281,000 for multi-family
and $479,000 for commercial loans.
A loan is classified as impaired when it is probable that the Company will
be unable to collect all amounts due according to the original contractual
terms of the loan agreement. Impairment is measured based on the present
value of expected future cash flows discounted at the loan's original
effective interest rate, or the fair value of the collateral less estimated
selling costs if the impaired loan is collateral dependent. If the present
value of expected future cash flows, or the fair value of the collateral less
the estimated selling costs, is less than the recorded investment, a
valuation allowance is created by a charge to the provision for loan losses
or by adjusting an existing valuation allowance. Interest income on impaired
loans 90 days or more delinquent was recorded on a cash basis.
The following table shows Eureka's investment in loans for which impairment
has been recognized or restructured at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- ---------------------------------- --------------------------------
Recorded Average Interest Recorded Average Interest Recorded Average Interest
Investment Investment Recognized Investment Investment Recognized Investment Investment Recognized
---------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Impaired loans without
valuation allowances:
1-4 family $1,502 $1,956 $ 24 $2,410 $1,692 $ 38 $3,388 $2,400 $ 18
Multi-family - - - - - - - - -
Commercial real
estate - - - - 271 - 1,767 1,880 92
---------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- ----------
1,502 1,956 24 2,410 1,963 38 5,155 4,280 110
Impaired loans with
valuation allowances:
1-4 family - 293 - 586 393 - 45 125 -
Commercial real
estate - - - - 1,028 - 1,145 574 -
Allowance for
credit loss - (72) - (115) (199) - (311) (246) -
---------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- ----------
1,502 221 - 471 1,222 - 879 453 -
---------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- ----------
Total $1,502 $2,177 $ 24 $2,881 $3,185 $ 38 $6,034 $4,733 $110
========== =========== ========== =========== =========== ========== =========== =========== ==========
</TABLE>
The allowance for credit losses for impaired loans was included in the
total allowance for loan losses at December 31, 1997, 1996 and 1995. Non-
accrual loans were $4.3 million, $4.4 million and $6.4 million at December
31, 1997, 1996 and 1995, respectively. Interest income which was not
recognized on non-accrual loans totaled $165,000, $216,000 and $394,000 for
1997, 1996 and 1995, respectively.
11
<PAGE>
7. Allowance for Loan Losses
-------------------------
The following table summarizes the activity in the allowance for losses on
loans (dollars in thousands):
<TABLE>
<CAPTION>
Real Estate Loans Timeshare Loans Consumer Loans Total Loans
----------------------- ---------------------- ---------------------- -----------------------
Amount % of Total Amount % of Total Amount % of Total Amount % of Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 $5,352 .38% $ 1,111 50.29% $1,357 6.46% $7,820 .54%
Provision for losses 370 5 418 793
Charge-offs (312) (100) (1,331) (1,743)
Recoveries 6 91 500 597
Transfers 690 - (811) (121)
Reductions(1) - (468) - (468)
--------- -------- -------- -------
December 31, 1995 6,106 .43% 639 50.94% 133 2.93% 6,878 .48%
Provision for losses 962 3 - 965
Charge-offs (518) (46) (57) (621)
Recoveries - 33 52 85
Transfers 71 (3) (68) -
Reductions/(1)/ - (256) - (256)
--------- -------- -------- -------
December 31, 1996 6,621 .47% 370 58.49% 60 1.56% 7,051 .50%
Provision for losses 4,742 14 - 4,756
Charge-offs (216) (15) (50) (281)
Recoveries - 10 17 27
Transfers 80 (97) 17 -
Reductions/(1)/ - (179) - (179)
--------- -------- -------- -------
December 31, 1997 $11,227 .74% $103 39.11% $44 1.50% $11,374 .74%
========= ====== ======== ======== ======== ======= ======= ======
Ratio of net charge-offs
to average gross loans
during 1997 .01% 1.17% .94% .02%
- ----------------------------- ====== ======== ======= ======
/(1)/ Reductions are due to principal payoffs and remittances of pre-acquisition originated loans.
</TABLE>
8. Accrued Interest Receivable
---------------------------
The following table summarizes accrued interest receivable at December 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cash and Short-Term Investments $ 236 $ 30
Mortgage-backed securities 3,348 4,511
Loans receivable 8,075 7,665
------- -------
$11,659 $12,206
======= =======
</TABLE>
9. Premises and Equipment
----------------------
Premises and equipment are summarized as follows at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land $ 1,444 $ 1,444
Buildings and improvements 6,563 6,563
Leasehold improvements 4,786 4,463
Furniture and equipment 9,803 9,664
-------- --------
22,596 22,134
Less accumulated depreciation and amortization (13,715) (13,246)
-------- --------
$ 8,881 $ 8,888
======== ========
</TABLE>
10. Federal Home Loan Bank Stock
----------------------------
Eureka is required to own capital stock in the FHLB of San Francisco in an
amount at least equal to the greater of 1% of the aggregate principal amount
of its unpaid single family mortgage loans and similar obligations at the
end of each calendar year, or 5% of its advances (borrowings) from the FHLB
of San Francisco. Eureka was in compliance with this requirement at December
31, 1997 and 1996, respectively.
12
<PAGE>
11. Real Estate Held for Sale or Investment
---------------------------------------
Real estate held for sale or investment includes the following at December
31, (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Real estate held for sale or investment $ 715 $1,628
Allowance for loss on real estate held
for sale or investment - (300)
------ ------
$ 715 $1,328
====== ======
</TABLE>
The operating income (loss) for real estate held for sale or investment was
$1.9 million, ($245,416), and ($812,471) in 1997, 1996 and 1995,
respectively. Activity in the allowance for losses on real estate held for
sale or investment is as follows for the years ended December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -------
<S> <C> <C> <C>
Balance at January 1, $ 300 $ 300 $ 1,005
Provision for losses - - 700
Charge-offs/adjustments (300) - (1,405)
----- ----- -------
Balance at December 31, $ - $ 300 $ 300
===== ===== =======
</TABLE>
12. Real Estate Owned
-----------------
At December 31, 1997 and 1996, net real estate owned through foreclosure
amounted to $.5 million and $1.4 million, respectively. Activity in the
allowance for losses on real estate owned is as follows for the years ended
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Balance at January 1, $ 117 $ 198 $ 745
Provision for losses 25 282 90
Net charge-offs/adjustments (126) (363) (637)
----- ----- -----
Balance at December 31, $ 16 $ 117 $ 198
===== ===== =====
</TABLE>
13. Customer Deposits
-----------------
Customer deposits were comprised of the following at December 31, (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------
Weighted Weighted
% of Average % of Average
Amount Total Interest Rate Amount Total Interest Rate
----------- -------- -------------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Interest checking
accounts 1.00% to 4.00% $ 165,069 8.20% 1.74% $ 145,591 7.91% 1.67%
Non-interest checking
accounts 7,849 0.39 - 5,805 0.32 -
Money market accounts
2.05% to 4.35% 538,211 26.74 4.24% 426,757 23.19 3.87%
Passbook accounts 2.00% 38,634 1.92 2.00% 39,326 2.13 2.00%
----------- -------- ----------- --------
749,763 37.25 617,479 33.55
----------- -------- ----------- --------
Time certificates:
4.00% or less 66,786 84,669
4.01 to 6.00% 1,019,518 997,753
6.01 to 8.00% 161,220 125,281
8.01 to 10.00% 14,938 14,914
10.01 to 12.00% - 8
12.01 to 14.00% 221 202
14.01 to 16.00% 197 179
----------- -----------
Total time certificates 1,262,880 62.75 5.48% 1,223,006 66.45 5.35%
----------- -------- ----------- --------
$2,012,643 100.00% 4.75% $1,840,485 100.00% 4.63%
=========== ======== ============== =========== ======== ==============
</TABLE>
There were no brokered deposits at December 31, 1997 and 1996. The aggregate
amounts of time certificates of $100,000 or more were $304.3 million and
$273.2 million at December 31, 1997 and 1996, respectively. Accrued interest
on deposits at December 31, 1997 and 1996 amounted to $1.6 million and $1.1
million, respectively.
13
<PAGE>
The following table summarizes customer deposits by remaining maturity at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
No contractual maturity $ 749,763 $617,479
Maturity within one year 923,865 934,486
1 to 2 years 251,182 222,701
2 to 3 years 36,774 41,764
3 to 4 years 22,956 11,091
4 to 5 years 27,262 11,670
Thereafter 841 1,294
---------- ----------
$2,012,643 $1,840,485
========== ==========
</TABLE>
Interest expense is summarized as follows for the period ending December 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Checking $ 2,879 $ 1,599 $ 1,302
Money market/passbook 19,089 14,293 10,122
Time certificate 68,177 66,090 64,348
-------- ------- -------
$90,145 $81,982 $75,772
======== ======= =======
</TABLE>
14. Securities Sold Under Agreements to Repurchase
----------------------------------------------
Securities sold under agreements to repurchase identical securities are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Balance at December 31, - $ 44.4 million
Market value at December 31, - $ 44.4 million
Average balance during year $11.7 million $109.7 million
Maximum balance at any month-end $48.7 million $164.5 million
Weighted average days to maturity at December 31, - 36 days
Weighted average interest rate at December 31, - 5.50%
Weighted average interest rate for the year 5.35% 5.41%
</TABLE>
There were no securities sold under agreement to repurchase as of December
31, 1997. The collateral for these agreements as of December 31, 1996, which
was held with a third party custodian, consisted of mortgage-backed
securities with a carrying value of $48.1 million (including accrued
interest of $0.3 million) and a market value of $46.5 million.
15. Other Borrowings
----------------
Other borrowings consist of borrowings from the FHLB of San Francisco. The
unused borrowing capacity with the FHLB of San Francisco at December 31,
1997 and 1996 was $206 million and $226 million, respectively. The following
table summarizes FHLB advances at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
Interest Interest
1997 Rate 1996 Rate
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Short-term fixed rate advances
(maturing within one year) $15,200 5.66% $ 49,298 5.61%
Long-term fixed rate advances
(maturing through 2002) $40,800 5.68% $ 57,700 5.73%
Average balance during year $70,676 $201,775
Maximum balance at any month-end $75,181 $305,878
Mortgage-backed securities pledged as collateral
for other borrowings $47,675 $ 85,000
Weighted average interest rate at December 31, 5.70% 5.67%
Weighted average interest rate for the year 5.68% 5.60%
</TABLE>
16. Interest Rate Exchange Agreements
---------------------------------
The Company has entered into interest rate exchange agreements to reduce
the impact of future fluctuations in interest rates on fixed rate loans
funded by variable rate liabilities. The floating rates to be received by
the Company under the terms of these agreements are reset quarterly and are
indexed to the three month London Interbank Offered Rate ("LIBOR").
Interest rate exchange agreements outstanding per contractual terms are as
follows at December 31, (dollars in thousands):
14
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ -----------------------------------------------
Weighted Average Interest Rate Weighted Average Interest Rate
------------------------------ ------------------------------
Notional Pay Receive Notional Pay Receive
Year of Maturity Amount (Fixed) (Floating) Amount (Fixed) (Floating)
--------------- ------------- ---------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997 $ - - - $ 40,000 8.87% 5.21%
1998 10,000 8.57% 5.87% 10,000 8.57% 5.56%
1999 30,000 7.89% 5.83% 30,000 7.89% 5.56%
--------------- ------------- ---------- --------------- ------------- ----------
Total 40,000 8.06% 5.84% 80,000 8.47% 5.39%
Pay Receive Pay Receive
(Floating) (Floating) (Floating) (Floating)
------------- ---------- ------------- ----------
1997 - - - 20,000 5.52% 5.39%
--------------- ------------- ---------- --------------- ------------- ----------
- - - 20,000 5.52% 5.39%
--------------- ------------- ---------- --------------- ------------- ----------
$40,000 8.06% 5.84% $100,000 7.86% 5.39%
=============== ===============
</TABLE>
In 1993, Eureka established a liability and recorded a charge to
earnings of $20.4 million related to interest rate exchange agreements that
were no longer deemed effective as hedges. During the year ended December
31, 1997, $40,000 of non-interest expense was recorded to increase the
interest rate exchange agreements liability for the effect of interest rate
fluctuations throughout the year on the market value of obligations deemed
ineffective as hedges. During the year ended December 31, 1996, Eureka
recorded a net credit of $0.3 million to decrease the interest rate exchange
agreements liability to reflect the effect of interest rate increases on the
market value of obligations. The exchange agreements liability totaled $0.3
million and $1.2 million at December 31, 1997 and 1996, respectively. Net
interest payable on exchange agreements was $0.4 million and $0.6 million at
December 31, 1997 and 1996, respectively, and was included in other
liabilities and accrued expenses.
Net interest paid or accrued on interest rate exchange agreements of
approximately $0.7 million, $0.8 million and $2.4 million was included as an
adjustment to interest income on loans for the years ended December 31, 1997,
1996, and 1995, respectively.
The Company's credit exposure associated with non-performance of
counterparties is controlled by the Company's credit policies. All
agreements are with primary government securities dealers. The Company does
not require collateral to support the credit exposure related to these
financial instruments.
17. Income Taxes
------------
The consolidated financial statement provisions for income tax for the
years ended December 31, 1997, 1996 and 1995 relate to the Company and its
subsidiary. The Company and its subsidiary file calendar year consolidated
federal income and combined California franchise tax returns.
Eureka determined its bad debt deduction using the experience method in
1995. Effective 1996, Eureka is allowed a bad debt deduction equal to
actual net charge-offs for federal tax purposes and continues to use the
experience method for California tax purposes.
The income tax provisions for the years ended December 31, 1997, 1996 and
1995 consist of (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ------------------------------- ------------------------
Federal State Total Federal State Total Federal State Total
-------- ------- --------- --------- --------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ 389 $ 170 $ 559 $ 364 $ 132 $ 496 $ 353 $ 143 $ 496
Deferred (1,623) 2,344 721 (19,649) (1,717) (21,366) (353) (143) (496)
------- ------ -------- -------- -------- -------- ------- ----- -----
$(1,234) $2,514 $ 1,280 $(19,285) $ (1,585) $(20,870) $ - $ - $ -
======= ====== ======== ======== ======== ======== ======= ===== =====
</TABLE>
The Company's expected income tax rate for 1997, 1996 and 1995 differs from
the actual effective income tax rate as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- -------
<S> <C> <C> <C>
Tax at statutory rate 34.00% 34.00% 35.00%
State tax net of federal benefits 7.85 8.10 7.35
Increases (reductions)
Non-deductible amortization 1.85 3.80 2.30
Change in valuation allowance (39.14) (242.00) (43.60)
Other, net 1.45 4.10 (1.05)
------ ------- ------
Effective income tax rate 6.01% (192.00%) 0.00%
====== ======= ======
</TABLE>
15
<PAGE>
Deferred tax assets are initially recognized for net operating loss and tax
credit carryforwards and differences between the financial statements
carrying amount and the tax bases of assets and liabilities which will
result in future deduction amounts. A valuation allowance is established to
reduce the deferred tax assets to the level at which it is more likely than
not that the tax benefits will be recognized.
Components of net deferred tax assets at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Purchase accounting adjustments $ 1,738 $ 2,165
Excess book accumulated depreciation and amortization 658 937
Unrecognized built-in losses 514 168
Alternative minimum tax credit 2,286 1,382
Investment tax credit 667 667
Net operating loss carryovers 61,963 72,425
Other accrued expenses not deducted for tax purposes 1,661 1,976
Provision for loss on interest rate exchange agreements 72 508
-------- --------
Total gross deferred tax assets 69,559 80,228
Less valuation allowance (40,479) (48,850)
-------- --------
Deferred tax assets 29,080 31,378
-------- --------
Deferred tax liabilities:
Tax bad debt reserves in excess of book 2,532 4,022
Deferred income 4,626 4,713
-------- --------
Deferred tax liabilities 7,158 8,735
-------- --------
Net deferred tax assets $ 21,922 $ 22,643
======== ========
</TABLE>
Net operating loss carryforwards and investment tax credits generated by
Eureka and its subsidiaries through the date Eureka was acquired by the
Company are available to offset future taxable income or income taxes of
Eureka and its subsidiaries, but may not be used to offset future taxable
income or income taxes of any other new member of the consolidated group. At
December 31, 1997, pre-acquisition net operating loss carryforwards for
federal income tax purposes amounted to $76 million and will expire from
1999 through 2002. At December 31, 1997, post-acquisition net operating loss
carryforwards for federal income tax purposes amounted to approximately $107
million and will expire from 2003 to 2007. The post-acquisition net
operating loss carryforwards for state franchise tax purposes expired in
1997.
At December 31, 1997, the Company has alternative minimum tax credit
carryovers of $2.3 million and investment tax credit carryovers aggregating
approximately $667,000 which expire in years 1998 through 2000. Such
investment tax credit carryovers are subject to a 35% reduction under the
Tax Reform Act of 1986.
18. Benefit and Compensation Plans
------------------------------
Benefit Plans
-------------
Eureka has a qualified, noncontributory defined benefit retirement plan (the
"Plan") covering substantially all of its employees. Eureka "froze" the Plan
effective January 1, 1994. Prior to that date, the benefits were based on
the average of the highest five consecutive annual salaries of the ten years
preceding age 65. An employee became fully vested upon completion of five
years of qualifying service. It is the policy of Eureka to fund the minimum
amount required.
Due to the Plan's frozen status, no additional benefits will accrue in the
Plan after January 1, 1994. All Plan participants became fully vested in
their accrued benefits on this date. Eureka may elect to terminate the
frozen Plan at some point in the future according to its rights under the
Plan. The Plan assets consist primarily of a well-diversified portfolio of
equities and fixed income securities.
16
<PAGE>
The following table sets forth the Plan's funded status and amounts
recognized in Eureka's consolidated balance sheet at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation (all vested) $6,683 $6,093
Fair value of Plan assets at December 31, 6,949 6,387
------ ------
Plan assets in excess of projected benefit obligation 266 294
Unrecognized net loss from past experience different
from that assumed, and effects of changes in assumptions 720 664
Unrecognized prior service cost (167) (189)
Unrecognized net transition asset (7) (7)
------ ------
Total pension prepayment $ 812 $ 762
====== ======
Weighted average discount rate 7.0% 7.5%
Expected long-term rate of return on assets 8.0% 8.0%
</TABLE>
The components of net pension expense (recovery) for the years ended December
31, (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Interest cost on projected benefit obligation $ 453 $ 439 $ 497
Actual return on Plan assets (1,065) (676) (918)
Net amortization and deferral 561 211 425
------- ----- -----
Total pension expense (recovery) $ (51) $ (26) $ 4
======= ===== =====
</TABLE>
Beginning January 1, 1994, Eureka introduced a new retirement plan, the
EurekaBank Service Investment Plan ("ESIP"), which covers substantially all
of its employees. Through this plan, Eureka makes an annual retirement
contribution to an ESIP account based on the participant's length of service
which equals one percent of eligible pay per year up to a maximum
contribution of four percent for four or more years of service provided that
the participant must be employed on the last day of the year. Participants
become 100% vested in their account after five years of service. The amount
recorded as contribution expense for the ESIP totaled $452,700, $478,200 and
$505,000 for 1997, 1996 and 1995, respectively.
Eureka also has a qualified 401(k) plan effective as of July 1, 1989,
covering substantially all employees. Eureka's matching contributions to the
401(k) plan for the years ended December 31, 1997, 1996 and 1995 amounted to
$459,100, $433,500 and $415,400, respectively. In addition, Eureka has a
post retirement medical plan, and the expense totaled approximately $65,000,
$65,000 and $59,500 for 1997, 1996 and 1995, respectively.
Compensation Plans
------------------
In order to create incentives for key employees and directors and because the
capital structure of America First is not conducive to traditional stock
option plans, America First established two compensation plans: the LTIP and
the EAP. The LTIP provides current and deferred compensation to key
officers, in the form of cash and BUCs, as approved by the Board of Directors
of EurekaBank. The compensation is paid over three subsequent years of which
one-half is cash and one-half is Beneficial Unit Certificates ("BUCs") of the
Partnership, except for the 1997 award which was paid in cash. Calculation of
the awards, the form and timing of payments and forfeitures are described in
the Plan. Annual compensation pursuant to the LTIP is determined based on
EurekaBank's return on average equity for the year.
Compensation expense related to the LTIP amounted to $1,449,000, $686,000
and $784,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. A summary of cash and BUCs awards under the LTIP for 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- ------------------------------------
BUCs BUCs
---------------------- --------------------
Cash Number Avg. Price Cash Number Avg. Price
---------------- ---------- ---------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Awards granted $1,961,005 - - $662,497 21,769 $30.425
Weighted average price of BUCs
granted during the year $ - $30.425
========== ==========
</TABLE>
There were no forfeitures for the 1997 and 1996 awards.
In addition, the LTIP provides that in the event of a transaction such as
the Merger, aggregate incentive compensation equal to 10% of the "after-tax
gain" from the transaction shall be allocated among the LTIP participants
based upon the weighted average annual incentive compensation earned under
the LTIP by each participant (taking into account all whole years since the
LTIP effective date). The "gain" from the transaction will
17
<PAGE>
be equal to the difference between the value of the Merger Consideration and
book value. The incentive compensation resulting from the Merger will be paid
in cash by the Company under the LTIP. Upon consummation of the Merger, the
participants of the LTIP plan received approximately $18 million.
During 1996, the EAP was implemented and eligible participants include
Eureka officers, directors and select employees of Eureka and the Company, as
approved by the board of directors of Eureka. Participants receive cash
compensation based on the appreciation in Eureka's equity from April 1, 1996
through March 31, 1999. Only participants that remain as employees or
directors as of March 31, 1999 are eligible to receive awards. The cash
awards may be paid between March 31, 1999 and March 31, 2006. Based on the
provisions of the EAP and Eureka's equity appreciation, compensation expense
for 1997 and 1996 for the EAP was $439,783 and $983,141, respectively.
In addition, the EAP provides that in the event of a transaction such as
the Merger, the EAP participants shall be entitled to receive an additional
amount of cash award based on the aggregate sales price of AFEH and a formula
specified in the EAP plan. Such amount to be paid by AFEH will be allocated
among the EAP participants based upon the number of rights previously awarded
to each participant by the AFEH Board of Directors. Upon consummation of the
Merger, participants of the EAP plan received approximately $20 million.
19. Capital
-------
Capital Requirements
--------------------
The Office of Thrift Supervision ("OTS") requires that savings
institutions satisfy three separate capital requirements: a leverage ratio
of core capital to total adjusted assets of 3%, a tangible capital to total
adjusted assets ratio of 1.5% and a risk-based capital to risk-weighted
assets ratio of 8%. At December 31, 1997 and 1996, Eureka's regulatory
capital ratios exceeded the requirements and were as follows: leverage
ratio of 7.34% and 6.96%, respectively, tangible capital ratio of 7.34% and
6.96%, respectively, and risk-based ratio of 16.46% and 15.95%,
respectively.
The most recent notification from the OTS categorized Eureka as well
capitalized under the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") regulatory framework for prompt corrective action. This capital
classification is solely for purposes of federal regulatory capital
adequacy purposes, and the administration of federal "prompt corrective
action" requirements, and is not necessarily indicative of Eureka's actual
financial condition. To be categorized as well capitalized, the institution
must maintain the following: a leverage ratio of core capital to total
adjusted assets of 5%, a Tier 1 risk-based capital to risk-weighted assets
ratio of 6% and a risk-based capital to risk-weighted assets ratio of 10%.
There are no conditions or events since that notification that management
believes have changed Eureka's capital category.
Dividend Restrictions
---------------------
The Capital Maintenance Agreement, which expired when the FDIC Preferred
Stock was redeemed, also contained certain restrictions on disposition of
the ownership of Eureka and AFEH and dividend payments by Eureka. The
Company's primary source of funds was dividends paid by (or accrued from)
Eureka. These dividends provided the funds for distributions to the
Partnership's BUC Holders. Dividend payments by Eureka were subject to the
following limitations under the Capital Maintenance Agreement:
- No dividends may be paid if regulatory capital is less than required
levels.
- Aggregate dividends paid subsequent to the Acquisition may not exceed 50%
of the capital contributed upon and after the Acquisition, plus 50% of
aggregate net income earned subsequent to the Acquisition.
- Dividends in any calendar year may not exceed the greater of $12 million
or 50% of net income for that year.
The payment of dividends to the Company from Eureka was subject to OTS
regulations requiring thirty days prior notice of the intent to declare
dividends. Additionally, the OTS had the authority to preclude the
declaration of any dividends. Also, AFEH made quarterly dividends to the
Partnership, payable the month after each quarter-end. The final payment
for the fourth quarter of 1997 was paid in December 1997, one month earlier
than required, due to the pending merger with Bay View. The amount of the
quarterly dividend was $2.7 million for the first quarter of 1997 and $2.4
million for each of the remaining three quarters.
18
<PAGE>
20. Commitments and Contingencies
-----------------------------
The following lending and investment commitments were outstanding at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
----- -------
<S> <C> <C>
Commitments to originate fixed rate mortgage loans $ - $ 4,159
Commitments to originate adjustable rate mortgage loans $ 977 $43,368
Commitments to purchase mortgage loans $ - $ 6,145
Commitments to sell mortgage loans $ 515 $ 500
</TABLE>
There were no other outstanding commitments to purchase or sell securities
at December 31, 1997 and 1996.
Eureka is involved in various legal actions arising in the normal course
of business. It is the opinion of management, after consultation with
counsel, that resolution of these matters would not have a material adverse
effect on the Company's consolidated financial condition or operations.
Certain branch and office locations are leased by the Company or Eureka
under operating type leases expiring at various dates through the year 2008,
except for one lease which expires in the year 2040. Related rental expense
during 1997, 1996 and 1995 amounted to $4.6 million, $4.8 million and $4.7
million, respectively. Future minimum lease payments under terms of existing
operating leases at December 31, 1997 are $4.6 million in 1998, $3.8 million
in 1999, $1.8 million in 2000, $1.1 million in 2001 and $2.7 million
thereafter. Effective prior to the consummation of the merger with Bay View,
the Company entered into a non-cancellable sublease arrangement for Eureka's
corporate offices. This sublease is effective February 1, 1998 and ends
February 28, 2000, with payments totalling $1.9 million per year.
At December 31, 1997, loans of approximately $7.9 million had been sold
with recourse to repurchase if loans become 120 days delinquent or upon
completion of the foreclosure process. These loans, which are secured by 1-4
family residential mortgages, are seasoned and were sold by Eureka prior to
its acquisition by the Company. Repurchases of loans sold with recourse
amounted to less than $25,000 for the years ended December 31, 1997, 1996
and 1995. There were no foreclosures of these loans.
21. Transactions with Related Parties
---------------------------------
The Company paid or reimbursed the general partner of the Partnership,
America First Capital Associates Limited Partnership Five ("AFCA-5"), for
certain costs and expenses incurred in connection with the operation of the
Company including legal and accounting fees and other administrative costs.
The amount of such expenses incurred by AFCA-5 and reimbursed by the
Company, was $12,699, $13,989 and $13,473 for the years ended 1997, 1996 and
1995, respectively.
The Company, Eureka and an affiliate of AFCA-5, America First Service
Corporation ("AFSC"), have entered into a licensing agreement through which
AFSC provides services to the Company and Eureka which include economic and
financial advice and consultation services. The Company is committed to pay
an annual fee equal to 0.5% of Eureka's interest income and other income
without deduction for interest expense and other expenses. During 1997, 1996
and 1995, $848,334, $850,112, and $863,793, respectively, of the annual fees
had been paid or accrued.
22. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of estimated fair values for financial instruments. Such
estimates are subjective in nature, involving significant judgment regarding
the risk characteristics of various financial instruments at a discrete
point in time. Therefore, such estimates could vary significantly if
assumptions regarding uncertain matters were changed. Major assumptions,
methods, and fair value estimates for Eureka's financial instruments for
1997 and 1996 are set forth below.
Cash and Short-Term Investments - The carrying amount was a reasonable
-------------------------------
estimate of fair value.
Cash in Escrow - The carrying amount was a reasonable estimate of fair
--------------
value.
Mortgage-Backed Securities - The fair value estimates for mortgage-backed
--------------------------
securities were based on quoted market prices or dealer quotes, and included
the carrying value of accrued interest receivable which was a reasonable
estimate of fair value.
Loans Receivable - Fair value of real estate mortgage loans was estimated
----------------
using a discounted cash flow method, adjusted for differences in credit risk
and liquidity. Fair value estimates for real estate mortgage loans
19
<PAGE>
included the carrying value of accrued interest receivable which was a
reasonable estimate of fair value.
Other Financial Instrument Assets - Other financial instrument assets
---------------------------------
consisted of an investment in FHLB stock, the carrying value of which was
deemed a reasonable estimate of fair value.
Deposit Liabilities - The fair value of deposits was estimated using a
-------------------
discounted cash flow methodology based on current market rates for wholesale
borrowing alternative, and included the carrying value of accrued interest
payable which was a reasonable estimate of fair value.
Borrowings - Borrowings consisted of securities sold under agreements to
----------
repurchase and FHLB advances. The fair value was estimated using a
discounted cash flow method based on current market rates for similar debt
and maturities, and included the carrying value of accrued interest payable
which was a reasonable estimate of fair value.
Other Financial Instrument Liabilities - Other financial instrument
--------------------------------------
liabilities consisted of preferred stock and other financial liabilities,
the carrying values of which were deemed a reasonable estimate of fair
value.
Interest Rate Exchange Agreements - The fair value of interest rate exchange
---------------------------------
agreements for 1996 was estimated using the average of current bid and ask
rates for agreements of similar remaining terms, after considering the
creditworthiness of the exchange agreements' counterparties. The carrying
amount included the liability established based on the estimated fair value
of the exchange agreements that were no longer deemed effective as hedges.
For 1997, the carrying amount was a reasonable estimate of fair value.
Commitments to Extend Credit - In 1997 and 1996, commitments to extend
----------------------------
credit were related to origination of residential and commercial mortgage
loans. The fair value of such commitments was estimated using current market
rates for loans with similar characteristics rather than the committed
rates.
Franchise Value and Intangible Assets - The estimated value of Eureka's
-------------------------------------
financial instruments did not include certain material intangible assets.
Management believes that the value of the deposit franchise and customer
base was significant. In addition, the estimated fair values did not include
the value of the portfolio of loans serviced for others.
Estimated fair values of financial instruments at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
---------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 152,816 $ 152,816 $ 53,570 $ 53,570
Cash in escrow 23,769 23,769 - -
Mortgage-backed securities 497,544 496,913 679,106 679,859
Loans receivable 1,534,212 1,546,703 1,411,519 1,416,826
Other 20,563 20,563 21,828 21,828
Financial liabilities:
Deposits 2,014,264 2,026,421 1,223,464 1,225,196
Borrowings 57,236 57,204 153,851 153,870
Other - - 18,377 18,377
Off-balance sheet financial instruments:
Interest rate exchange agreements liability (256) (256) (1,234) (2,246)
Commitments to extend credit - - - 8
</TABLE>
20
<PAGE>
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Financial Information
is based on the historical consolidated financial statements of Bay View
Capital Corporation and Subsidiaries ("Bay View") and America First Eureka
Holdings, Inc. and Subsidiary ("AFEH") and has been prepared to illustrate the
effect of the Merger and the related issuance of $100 million in subordinated
notes ("Notes").
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1997 is based on the historical consolidated statements of
financial condition of Bay View and AFEH giving effect to the accounting for
the Merger using the purchase method of accounting and assuming the Merger was
consummated and the Notes were issued as of the Balance Sheet date.
The following Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1997 is based on the historical
consolidated statements of operations of Bay View and AFEH for the year ended
December 31, 1997, giving effect to the accounting for the Merger using the
purchase method of accounting and assuming the Merger was consummated and the
Notes were issued as of January 1, 1997.
The Unaudited Pro Forma Condensed Combined Balance Sheet and Statement of
Operations should be read in conjunction with the audited consolidated
financial statements and the accompanying notes contained in the Bay View 1997
Form 10-K, and the audited consolidated financial statements of AFEH included
herein as Exhibit 99.1.
As noted above, the Merger was accounted for using the purchase method of
accounting. The resulting goodwill represents the excess of the acquisition
cost over the fair value of assets acquired and liabilities assumed. The amount
of goodwill recorded as of the Merger date was approximately $114 million,
including approximately $12 million in core deposit intangibles. No assurance
can be given that the final goodwill amount will not be more or less than the
current amount reflected in the pro forma financial statements.
The Unaudited Pro Forma Condensed Combined Financial Information is
presented for informational purposes and 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
date indicated, nor does it purport to be indicative of the combined results
of operations or financial condition that may be achieved in the future.
1
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
BAY VIEW CAPITAL CORPORATION AND AMERICA FIRST EUREKA HOLDINGS, INC.
AT DECEMBER 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Bay View AFEH Adjustments Combined Notes
-------- ---- ----------- --------- -----
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 231,822 $ 176,585 $(133,748) $ 274,659 (1)
Loans receivable held-for-sale - 1,347 - 1,347
Securities available-for-sale - -
Investment securities 5,639 - - 5,639
Mortgage-backed securities 54,402 39,922 - 94,324
Securities held-to-maturity - -
Investment securities 5,000 - - 5,000
Mortgage-backed securities 415,859 454,273 (612) 869,520 (2)
Loans receivable held-for-investment, net 2,373,113 1,526,137 2,177 3,901,427 (2)
Investment in stock of the FHLB of San Francisco 61,012 20,563 - 81,575
Real estate owned, net 4,146 470 - 4,616
Premises and equipment, net 16,164 8,881 (4,988) 20,057 (2)
Intangible assets 29,507 1,693 112,770 143,970 (3)
Other assets 49,812 57,382 38,595 145,789 (4)
---------- ---------- --------- ----------
Total assets $3,246,476 $2,287,253 $ 14,194 $5,547,923
========== ========== ========= ==========
Liabilities and Stockholders' Equity:
Customer deposits $1,677,135 $2,012,643 $ - $3,689,778
Advances from the FHLB of San Francisco 1,110,270 56,000 - 1,166,270
Securities sold under agreements to repurchase 90,134 - - 90,134
Subordinated notes, net 99,372 - - 99,372
Senior debentures 50,000 - - 50,000
Other borrowings 6,200 - - 6,200
Other liabilities 39,738 23,315 (511) 62,542 (5)
---------- ---------- --------- ----------
Total liabilities 3,072,849 2,091,958 (511) 5,164,296
Redeemable preferred stock - 10,000 (10,000) - (1)
Stockholders' equity 173,627 185,295 24,705 383,627 (6)
---------- ---------- --------- ----------
$3,246,476 $2,287,253 $ 14,194 $5,547,923
========== ========== ========= ==========
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Information."
2
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
BAY VIEW CAPITAL CORPORATION AND AMERICA FIRST EUREKA HOLDINGS, INC.
YEAR ENDED DECEMBER 31, 1997
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Bay View AFEH Adjustments Combined Notes
-------- ---- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest on loans receivable 197,898 112,091 667 310,656 (7)
Interest on mortgage-backed securities 34,317 41,176 75,493
Interest and dividends on investments 10,029 4,322 14,351
------- ------- ------- -------
242,244 157,589 667 400,500
Interest Expense:
Interest on customer deposits 76,484 90,145 166,629
Interest on senior debentures and notes 7,716 - 6,367 14,083 (8)
Interest on borrowings 70,708 6,559 77,267
------- ------- ------- -------
154,908 96,704 6,367 257,979
Net interest income 87,336 60,885 (5,700) 142,521
Provision for losses on loans 1,952 4,756 6,708
------- ------- ------- -------
Net interest income after provision for
losses on loans 85,384 56,129 (5,700) 135,813
Noninterest Income:
Loan fees and charges 5,679 1,144 6,823
Gain on sale of loans and securities 925 333 1,258
Other 6,151 10,092 16,243
------- ------- ------- -------
12,755 11,569 24,324
Noninterest Expense:
General and administrative 71,913 45,220 (669) 116,464 (9)
SAIF recapitalization assessment - - -
Real estate owned (1,128) 25 (1,103)
Amortization of intangibles 4,088 1,158 6,026 11,272 (10)
------- ------- ------- -------
74,873 46,403 5,357 126,633
Income before income tax expense 23,266 21,295 (11,057) 33,504
Income tax expense 9,245 1,280 5,169 15,694 (11)
------- ------- ------- -------
Net income 14,021 20,015 (16,226) 17,810 (12)
======= ======= ======= =======
Earnings per diluted share 1.06 0.84 (12)
======= =======
Average diluted shares outstanding 13,203 21,280 (13)
======= =======
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Financial Information."
3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. These adjustments reflect (i) redemption of the $10 million of
preferred stock of EurekaBank held by the FDIC (ii) $90 million of cash
consideration paid in connection with the Merger and (iii) payments of
severance and other amounts due in accordance with the Merger.
2. These adjustments represent fair value assessments including the write-
down and write-off of certain premises and equipment.
3. This adjustment represents the current estimate of the excess of the
acquisition cost over the fair value of assets acquired and liabilities assumed
(i.e., goodwill) net of the AFEH pre-acquisition goodwill written-off as of
December 31, 1997. Goodwill is being amortized on a straight-line basis over a
period of 20 years. The $102 million in goodwill arising from the Merger was
based on the fair values of the assets acquired and liabilities assumed on the
date the Merger was consummated. This goodwill amount excludes the allocation of
$12 million of the purchase price to the core deposit intangibles which are
expected to be amortized over 10 years.
4. As of December 31, 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. The adjustment also includes net tax receivables
related to purchase method accounting adjustments, deferred taxes related to
core deposit intangibles and certain fair value assessments related to prepaid
assets.
5. This adjustment represents the settlement of obligations under
existing contracts, offset by accruals for direct acquisition costs, accruals
for certain estimated expenses associated with branch closings, and for
severance pay related to involuntary terminations in connection with the
Merger.
6. This adjustment represents the issuance of $210 million of Bay View
common stock to America First Financial Fund 1987 - A Limited Partnership (the
"Partnership"), the sole shareholder of AFEH, offset by the elimination of
AFEH's shareholder's equity for consolidation purposes.
7. This adjustment represents the reduction of interest expense related
to interest rate exchange contracts terminated upon consummation of the
Merger. This expense was originally classified as an offset to interest on
loans receivable.
8. This adjustment represents interest expense on the Notes (all-in cost
is approximately 9.62% per annum) assuming the Notes were issued January 1,
1997.
9. This adjustment represents the reduction of depreciation expense
related to the write-down and write-off of certain premises and equipment. As
there can be no assurance that any cost savings will be realized in connection
with the Merger, no adjustments have been made to general and administrative
expenses for expected annualized cost savings which Bay View believes will be
derived primarily from the elimination of duplicative administrative
functions, consolidation of loan servicing functions and the cessation of
EurekaBank's residential loan origination activities.
10. This adjustment represents the amortization of Merger-related goodwill
offset in part by the reversal of the amortization of pre-acquisition AFEH
goodwill. This adjustment also includes the amortization of Merger-related
core deposit intangibles. See Note 3 above.
11. This adjustment represents the reversal of tax benefits recognized by
AFEH associated with tax loss carryforwards partially offset by the tax
benefit related to the interest expense on the Notes.
12. The net income and earnings per diluted share reflected herein do not
purport to be indicative of actual results that would have been achieved had
the Merger been consummated and the Notes been issued on the dates indicated nor
do they purport to be indicative of the combined results of operations that may
be achieved in the future. No adjustments have been made to general and
administrative expenses for expected cost savings as described in Note 9 above.
In addition, no adjustments have been made for Merger-related costs of $46.5
million incurred and recognized by AFEH upon consummation of the Merger.
4
<PAGE>
13. The number of shares of Bay View common stock issued to the Partnership
was calculated based on the total Merger-related stock consideration of $210
million divided by a stock price of $26.00 per share.
5
