<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to_____
Commission file number 0-17901
BAY VIEW CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3078031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Gateway Drive, San Mateo, California 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 573-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, Par Value $.01 Outstanding at July 31, 1998
(Title of Class) 20,279,498 shares
1
<PAGE>
FORM 10-Q
INDEX
BAY VIEW CAPITAL CORPORATION
----------------------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page(s)
- ------- --------------------- -------
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition.............. 4
Consolidated Statements of Operations....................... 5-6
Consolidated Statement of Stockholders' Equity.............. 7
Consolidated Statements of Cash Flows....................... 8-9
Notes to Consolidated Financial Statements.................. 10-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 15-41
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................. 42-45
PART II. OTHER INFORMATION
- -------- -----------------
Other Information........................................... 46
Signatures.................................................. 47
</TABLE>
2
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements included in this Form 10-Q or in future filings by Bay
View Capital Corporation (the "Company") with the Securities and Exchange
Commission, in the Company's press releases or shareholder communications or in
oral statements made with the approval of an authorized executive officer,
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 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," "intends," "plans," "projects," "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 herein or therein with respect to projected
results of operations, financial condition, financial performance or other
financial or statistical matters constitutes 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, 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 by the Company to realize expected cost savings or revenue enhancements
from the acquisition of America First Eureka Holdings, Inc. ("AFEH"); deposit
attrition, customer loss or revenue loss; costs or difficulties related to the
integration of the businesses of the Company and AFEH and their respective
subsidiaries; the Company's ability to sustain or improve the performance of
AFEH, Ultra Funding, Inc., Concord Growth Corporation and Bay View Credit; the
ability to identify suitable future acquisition candidates; changes in interest
rates which may, among other things, adversely affect net interest margins and
the level of prepayments on loans and mortgage-backed securities; 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 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 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 to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
3
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 42,963 $ 40,885
Interest-bearing deposits and short-term investments 65,053 190,937
------------------- -------------------
108,016 231,822
Securities available-for-sale:
Investment securities 6,133 5,639
Mortgage-backed securities 235,500 54,402
Securities held-to-maturity:
Investment securities - 5,000
Mortgage-backed securities 535,477 415,859
Loans, net of allowance for loan losses 4,387,974 2,373,113
Investment in leased property, net 46,642 -
Investment in stock of the FHLB of San Francisco 84,653 61,012
Real estate owned, net 3,563 4,146
Premises and equipment, net 25,542 16,164
Intangible assets 138,489 29,507
Other assets 148,120 49,812
------------------- -------------------
Total assets $5,720,109 $3,246,476
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits:
Transaction accounts $1,395,036 $ 553,820
Certificates of deposit 1,918,729 1,123,315
------------------- -------------------
3,313,765 1,677,135
Advances from the FHLB of San Francisco 1,691,060 1,110,270
Securities sold under agreements to repurchase 140,457 90,134
Subordinated notes, net 99,404 99,372
Senior debentures 50,000 50,000
Other borrowings 5,435 6,200
Other liabilities 26,086 39,738
------------------- -------------------
Total liabilities 5,326,207 3,072,849
=================== ===================
Stockholders' equity:
Serial preferred stock: authorized, 7,000,000 shares; outstanding, none - -
Common stock ($.01 par value): authorized, 60,000,000 shares;
issued, 6/30/98 - 20,342,412 shares; 12/31/97 - 15,125,874 shares;
outstanding, 6/30/98 - 20,276,298 shares; 12/31/97 - 12,070,474 shares 203 151
Additional paid-in capital 250,468 103,052
Retained earnings (substantially restricted) 147,292 141,065
Treasury stock, at cost, 6/30/98 - 66,114 shares; 12/31/97 - 3,055,400 shares (1,094) (66,352)
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available-for-sale, net of tax 792 (72)
Debt of Employee Stock Ownership Plan (3,759) (4,217)
------------------- -------------------
Total stockholders' equity 393,902 173,627
------------------- -------------------
Total liabilities and stockholders' equity $5,720,109 $3,246,476
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------------------
1998 1997
--------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Interest income:
Interest on loans $ 84,660 $48,406
Interest on mortgage-backed securities 13,289 8,848
Interest and dividends on investment securities 2,398 2,085
--------------- ---------------
100,347 59,339
Interest expense:
Interest on customer deposits 37,600 18,545
Interest on senior debentures and notes 3,527 1,114
Interest on borrowings 20,876 17,912
--------------- ---------------
62,003 37,571
Net interest income 38,344 21,768
Provision for loan losses 1,700 612
--------------- ---------------
Net interest income after provision for loan losses 36,644 21,156
Noninterest income:
Loan fees and charges 1,710 1,745
Leasing income 1,052 -
Other income 3,367 2,003
--------------- ---------------
6,129 3,748
Noninterest expense:
General and administrative expenses 29,230 16,211
Leasing expenses 708 -
Real estate owned operations, net (115) (69)
Recovery of losses on real estate (84) (78)
Amortization of intangible assets 2,866 953
--------------- ---------------
32,605 17,017
Income before income tax expense 10,168 7,887
Income tax expense 4,934 3,383
--------------- ---------------
Net income $ 5,234 $ 4,504
=============== ===============
Basic earnings per share $0.26 $0.35
=============== ===============
Diluted earnings per share $0.25 $0.34
=============== ===============
Average basic shares outstanding 20,329 13,038
=============== ===============
Average diluted shares outstanding 20,715 13,335
=============== ===============
Net income $ 5,234 $ 4,504
Other comprehensive income, net of tax:
Unrealized gain on securities available-for-sale, net
of tax expense of $265 and $350 for the three months
ended June 30, 1998 and 1997, respectively 376 482
--------------- ---------------
Comprehensive income $ 5,610 $ 4,986
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
1998 1997
--------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Interest income:
Interest on loans $165,917 $ 95,070
Interest on mortgage-backed securities 28,544 18,079
Interest and dividends on investment securities 4,952 4,346
--------------- ---------------
199,413 117,495
Interest expense:
Interest on customer deposits 78,597 38,139
Interest on senior debentures and notes 7,053 2,228
Interest on borrowings 38,485 34,305
--------------- ---------------
124,135 74,672
Net interest income 75,278 42,823
Provision for loan losses 2,360 1,177
--------------- ---------------
Net interest income after provision for loan losses 72,918 41,646
Noninterest income:
Loan fees and charges 3,439 2,903
Leasing income 1,052 -
Other income 5,840 4,428
--------------- ---------------
10,331 7,331
Noninterest expense:
General and administrative expenses 56,972 30,831
Leasing expenses 708 -
Real estate owned operations, net (78) (91)
Recovery of losses on real estate (108) (526)
Amortization of intangible assets 5,611 1,630
--------------- ---------------
63,105 31,844
Income before income tax expense 20,144 17,133
Income tax expense 9,850 7,367
--------------- ---------------
Net income $ 10,294 $ 9,766
=============== ===============
Basic earnings per share $0.51 $0.74
=============== ===============
Diluted earnings per share $0.50 $0.73
=============== ===============
Average basic shares outstanding 20,290 13,126
=============== ===============
Average diluted shares outstanding 20,696 13,440
=============== ===============
Net income $ 10,294 $ 9,766
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities
available-for-sale, net of tax expense (benefit) of
$609 and ($368) for the six months ended June 30, 1998
and 1997, respectively 864 (507)
--------------- ---------------
Comprehensive income $ 11,158 $ 9,259
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS* STOCK
--------------- -------------- --------------- -------------- ---------------
(AMOUNTS AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 15,005 $ 150 $ 100,436 $ 131,324 $ (26,497)
Repurchase of common stock (39,855)
Exercise of stock options, including tax benefits 121 1 2,616
Cash dividends declared ($0.34 per share) (4,280)
Unrealized gain, net of tax
Repayment of debt
Net income 14,021
--------------- -------------- --------------- -------------- ---------------
Balance at December 31, 1997 15,126 151 103,052 141,065 (66,352)
Issuance of common stock (AFEH acquisition):
From shares held in treasury 65,258
From authorized but unissued shares 5,087 51 144,691
Exercise of stock options, including tax benefits 129 1 2,725
Cash dividends declared ($0.20 per share) (4,067)
Unrealized gain, net of tax
Repayment of debt
Net income 10,294
--------------- -------------- --------------- -------------- ---------------
Balance at June 30, 1998 20,342 $ 203 $ 250,468 $ 147,292 $ (1,094)
=============== ============== =============== ============== ===============
<CAPTION>
-------------------------------------------------------------
UNREALIZED DEBT OF
GAIN (LOSS) EMPLOYEE
ON SECURITIES STOCK TOTAL
AVAILABLE-FOR-SALE, OWNERSHIP STOCKHOLDERS'
NET OF TAX PLAN EQUITY
-------------------------------------------------------------
(AMOUNTS AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Balance at December 31, 1996 $ (713) $ (4,638) $ 200,062
Repurchase of common stock (39,855)
Exercise of stock options, including tax benefits 2,617
Cash dividends declared ($0.34 per share) (4,280)
Unrealized gain, net of tax 641 641
Repayment of debt 421 421
Net income 14,021
--------------------- ------------------- ---------------
Balance at December 31, 1997 (72) (4,217) 173,627
Issuance of common stock (AFEH acquisition):
From shares held in treasury 65,258
From authorized but unissued shares 144,742
Exercise of stock options, including tax benefits 2,726
Cash dividends declared ($0.20 per share) (4,067)
Unrealized gain, net of tax 864 864
Repayment of debt 458 458
Net income 10,294
--------------------- ------------------- ---------------
Balance at June 30, 1998 $ 792 $ (3,759) $ 393,902
===================== =================== ===============
</TABLE>
* Substantially restricted
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
1998 1997
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,294 $ 9,766
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of intangible assets 5,610 1,630
Proceeds from sale of loans held-for-sale - 265,203
Provision for losses on loans and real estate owned 2,252 1,210
Depreciation and amortization of premises and equipment 2,901 1,400
Decrease in capitalized excess servicing fees 256 138
Amortization of premiums, net of discounts 459 2,781
Gain on sale of loans and securities (412) (1,001)
(Increase) decrease in other assets (29,092) 901
Decrease in other liabilities (38,988) (59,623)
Other, net (738) 816
---------------- ----------------
Net cash (used in) provided by operating activities (47,458) 223,221
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash and cash equivalents received (paid) in conjunction with
acquisitions 82,129 (9,924)
Decrease in loans resulting from principal payments,
net of originations 251,116 46,233
Purchases of loans (782,933) (146,750)
Principal payments on mortgage-backed securities 158,791 38,631
Proceeds from sale of mortgage-backed securities available-for-sale 32,248 -
Proceeds from sale of investment securities available-for-sale 886 12,792
Proceeds from maturity or call of investment securities 5,000 -
held-to-maturity
Purchases of investment securities (1,956) (6,888)
Proceeds from sale of real estate owned 2,841 5,332
Net additions to premises and equipment (8,386) (3,939)
Increase in stock of FHLB of San Francisco (3,078) (7,399)
---------------- ----------------
Net cash used in investing activities (263,342) (71,912)
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
BAY VIEW CAPTIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------
SIX MONTHS ENDED
JUNE 30,
----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (376,013) (185,761)
Proceeds from advances from FHLB of San Francisco 2,368,700 3,584,032
Repayment of advances from FHLB of San Francisco (1,843,910) (3,469,052)
Proceeds from securities sold under agreements to repurchase 278,885 321,017
Repayment of securities sold under agreements to repurchase (228,562) (389,196)
Decrease in other borrowings (10,765) (10,578)
Proceeds from issuance of common stock 2,726 883
Repurchase of common stock - (12,350)
Dividends paid (4,067) (2,079)
----------------- -----------------
Net cash provided by (used in) financing activities 186,994 (163,084)
----------------- -----------------
Net decrease in cash and cash equivalents (123,806) (11,775)
Cash and cash equivalents at beginning of period 231,822 106,828
----------------- -----------------
Cash and cash equivalents at end of period $ 108,016 $ 95,053
================= =================
Supplemental disclosures:
Interest paid $ 127,609 $ 74,803
Income taxes paid $ - $ 7,463
Supplemental non-cash investing and financing activities:
Loans transferred to real estate owned $ 2,662 $ 6,677
Loans transferred from held-for-sale to held-for-investment $ - $ 117,187
The acquisition of subsidiaries involved the following:
Common stock issued $ 210,000 $ -
Fair value of liabilities assumed 2,103,318 13,358
Fair value of assets acquired, excluding cash and cash (2,128,883) (1,986)
equivalents
Goodwill (102,306) (21,296)
----------------- -----------------
Net cash and cash equivalents received (paid) $ 82,129 $ (9,924)
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
BAY VIEW CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of Bay View Capital Corporation (the "Company"), a Delaware
corporation operating as a diversified financial services company. Its business
activities are concentrated in three principal areas. Bay View Bank ("BVB"), a
California corporation and a federally chartered capital stock savings bank,
comprises the Company's Banking Platform. Bay View Acceptance Corporation
("BVAC"), a Nevada corporation and a subsidiary of BVB, comprises the Company's
Consumer Finance Platform. BVAC operates through its wholly owned subsidiaries,
Bay View Credit ("BVC"), Ultra Funding, Inc. ("Ultra") and LFS-BV, Inc. ("LFS").
Concord Growth Corporation ("CGC"), a California corporation, and its asset-
based lending division, Bay View Financial Corporation ("BVFC"), comprise the
Company's Commercial Finance Platform. The Company is also the holding company
for Bay View Securitization Corporation ("BVSC"), a Delaware corporation formed
for the purpose of issuing asset-backed securities through a trust, and Regent
Financial Corporation ("Regent"), a California corporation providing item
processing services. All significant intercompany balances and transactions
have been eliminated in consolidation.
The Company completed its acquisition of America First Eureka Holdings,
Inc. ("AFEH") and its wholly owned subsidiary, EurekaBank, a federal savings
bank, on January 2, 1998. The Company's results for the first six months of 1998
reflect the acquisition of AFEH, which was accounted for under the purchase
method of accounting.
The information provided in 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, 1998 and
December 31, 1997, the results of its operations for the three and six month
periods ended June 30, 1998 and 1997, and its cash flows for the six month
periods ended June 30, 1998 and 1997. Such adjustments are of a normal,
recurring nature unless otherwise disclosed in this Form 10-Q. As necessary,
reclassifications have been made to prior period amounts to conform to the
current period presentation. These reclassifications had no effect on the
results of operations or stockholders' equity. These interim financial
statements have been prepared in accordance with the instructions to Form 10-Q,
and therefore do not include all of the necessary information and footnotes for
a presentation in conformity with generally accepted accounting principles.
The information included under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is written with the
presumption that the users of these interim consolidated financial statements
have read or have access to the Company's 1997 Annual Report on Form 10-K, which
contains the latest audited financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition as of December
31, 1997 and 1996 and Results of Operations for the years ended December 31,
1997, 1996 and 1995. Accordingly, only certain changes in financial condition
and results of operations are discussed in this Form 10-Q. Furthermore, the
interim financial results for the three and six month periods ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period.
10
<PAGE>
BAY VIEW CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
NOTE 2 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share" ("SFAS 128"). SFAS 128 establishes standards for computing and
reporting earnings per share ("EPS") and applies to entities with publicly held
common stock or financial instruments that are potentially convertible into
publicly held common stock. SFAS 128 replaces primary EPS and fully diluted EPS
with basic EPS and diluted EPS and was effective for the Company's December 31,
1997 consolidated financial statements. Basic EPS is calculated by dividing net
earnings available to common stockholders by the weighted-average number of
common shares outstanding for that period. There is no adjustment to the number
of common shares outstanding for dilutive instruments, such as stock options.
Diluted EPS takes into account the dilutive impact of such instruments and uses
the average share price for the period in determining the number of incremental
shares to add to the weighted-average number of common shares outstanding. All
prior period EPS amounts have been restated to reflect the adoption of SFAS 128.
The following table illustrates the calculation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------- -----------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
----------------- ---------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net earnings available to common stockholders $ 5,234 $ 4,504 $10,294 $ 9,766
Weighted-average common shares outstanding 20,329 13,038 20,290 13,126
Add: Dilutive potential common shares 386 297 406 314
----------------- ---------------- --------------- ---------------
Diluted weighted average shares outstanding 20,715 13,335 20,696 13,440
----------------- ---------------- --------------- ---------------
Basic earnings per share $ 0.26 $ 0.35 $ 0.51 $ 0.74
================= ================ =============== ===============
Diluted earnings per share $ 0.25 $ 0.34 $ 0.50 $ 0.73
================= ================ =============== ===============
</TABLE>
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, which was paid on June 2, 1997. All common share and per share
data, including stock option plan information, has been restated to reflect the
stock split.
NOTE 3 - COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which requires that all entities report comprehensive
income and its components in their financial statements. SFAS 130 requires that
all items which are required to be recognized under generally accepted
accounting principles as components of comprehensive income be reported in a
financial statement which is displayed with the same prominence as other
financial statements. Comprehensive income is defined as net income plus the
change in "other comprehensive income," as defined by SFAS 130. The only
component of other comprehensive income currently applicable for the Company is
the net unrealized gain or loss on securities available-for-sale. This statement
was implemented during the first quarter of 1998.
11
<PAGE>
BAY VIEW CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
NOTE 4 - STOCK OPTIONS
The Company has five stock option plans: the "Amended and Restated 1986
Stock Option and Incentive Plan," the "1995 Stock Option and Incentive Plan,"
the "1989 Non-Employee Director Stock Option and Incentive Plan," the "1998-2000
Performance Stock Plan," and the "1998 Non-Employee Director Stock Option and
Incentive Plan" which authorize the issuance of up to 1,759,430 shares,
2,000,000 shares, 550,000 shares, 400,000 shares, and 200,000 shares of the
Company's common stock, respectively. At June 30, 1998, there were 1,177,899
shares available for grant under these plans as illustrated in the following
table:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
AMENDED AND 1989 NON- 1998
RESTATED 1995 STOCK EMPLOYEE NON-EMPLOYEE
1986 STOCK OPTION AND DIRECTOR STOCK 1998-2000 DIRECTOR STOCK
OPTION AND INCENTIVE OPTION AND PERFORMANCE OPTION AND
INCENTIVE PLAN PLAN INCENTIVE PLAN STOCK PLAN INCENTIVE PLAN
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Shares reserved for issuance 1,759,430 2,000,000 550,000 400,000 200,000
Granted (2,048,816) (1,556,000) (570,000) - -
Forfeited 290,074 133,899 20,000 - -
Expired (688) - - - -
----------------- ----------------- ----------------- ----------------- -----------------
Total available for grant - 577,899 - 400,000 200,000
================= ================= ================= ================= =================
</TABLE>
At June 30, 1998, the Company had outstanding stock options for all
plans, with expiration dates from the years 1998 through 2008, as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
NUMBER OF EXERCISE PRICE AVERAGE
OPTION SHARES RANGE EXERCISE PRICE
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Outstanding at December 31, 1997 1,758,400 $ 7.88 - $34.41 $19.70
Granted 287,000 $29.91 - $35.20 $31.76
Exercised (128,901) $ 7.88 - $28.44 $12.56
Forfeited (55,399) $25.50 - $34.41 $27.40
--------------------- ---------------------- ----------------------
Outstanding at June 30, 1998 1,861,100 $ 7.88 - $35.20 $21.82
===================== ====================== ======================
</TABLE>
NOTE 5 - DIVIDEND DECLARATION
The Company declared a quarterly cash dividend of $0.10 per share on June
25, 1998, payable on July 24, 1998 to stockholders of record as of July 10,
1998. The dividend payable, totaling $2.0 million, was accrued as of June 30,
1998 and is reflected in the accompanying interim consolidated financial
statements.
NOTE 6 - ACQUISITION OF AMERICA FIRST EUREKA HOLDINGS, INC.
The Company completed its acquisition of America First Eureka Holdings,
Inc. and its wholly owned subsidiary, EurekaBank, a federal savings bank, on
January 2, 1998. Pursuant to the Merger Agreement, the Company paid $90 million
in cash and $210 million in stock (8,076,923 shares of the Company's common
stock, a portion of which were issued from the Company's shares in treasury) to
America First Financial Fund 1987-A Limited Partnership, the sole shareholder of
AFEH, for a total purchase price of $300 million. The number of common shares
issued was based on the average value of the Company's common stock for the 20
full trading days ending on the fifth business day prior to the merger closing
date. Based on the average value of the Company's common stock during this
period and pursuant to the Merger
12
<PAGE>
BAY VIEW CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Agreement, the number of common shares issued was determined by dividing the
$210 million stock portion of the purchase price by $26.00 per share.
The acquisition of AFEH was accounted for under the purchase method of
accounting effective January 2, 1998. The amount of goodwill recorded as of the
merger date was approximately $102 million, excluding core deposit intangibles
("CDI") of approximately $12 million. This goodwill, representing the excess of
the purchase price over the fair value of net assets acquired, is being
amortized on a straight-line basis over a 20-year period. This goodwill amount
is subject to the finalization of purchase accounting adjustments.
The following table illustrates the estimated allocation of the purchase
price:
<TABLE>
<CAPTION>
-------------------
(DOLLARS IN
THOUSANDS)
-------------------
<S> <C>
Cash paid $ 90,000
Value of common stock issued 210,000
Acquisition costs 4,456
-------------------
Total purchase price 304,456
Fair value of assets acquired, including CDI 2,305,468
Fair value of liabilities assumed 2,103,318
-------------------
Net assets acquired 202,150
-------------------
Purchase price in excess of net assets acquired $ 102,306
===================
</TABLE>
The unaudited pro forma financial information in the table below presents
the combined results of operations of the Company and AFEH for the three and six
month periods ended June 30, 1997 as if the acquisition had occurred as of
January 1, 1997. The pro forma financial information is presented for
informational purposes and is not necessarily indicative of the results of
operations which would have occurred had the Company and AFEH constituted a
single entity during the first six months of 1997. The pro forma financial
information is also not necessarily indicative of the future results of
operations of the combined company. In particular, the Company expects to
achieve certain cost savings as a result of the acquisition which have not been
included in the pro forma financial information.
<TABLE>
<CAPTION>
---------------------------------------------------
THREE MONTHS ENDED SIX MONTHS
JUNE 30, 1997 ENDED JUNE 30, 1997
----------------------- -----------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net interest income $34,896 $68,992
Provision for loan losses 862 1,679
Noninterest income 7,279 12,578
Noninterest expense 30,235 56,585
Income tax expense 5,225 10,966
======================= =======================
Net income $ 5,853 $12,340
======================= =======================
Basic earnings per share $ 0.28 $ 0.58
======================= =======================
Diluted earnings per share $ 0.27 $ 0.57
======================= =======================
</TABLE>
13
<PAGE>
BAY VIEW CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
The unaudited pro forma combined net income for the second quarter of
1997 of $5.9 million consists of net income for the Company of $4.5 million and
net income for AFEH of $6.6 million, less pro forma adjustments of $5.2 million.
The unaudited pro forma combined net income for the first six months of 1997 of
$12.3 million consists of net income for the Company of $9.7 million and net
income for AFEH of $12.7 million, less pro forma adjustments of $10.1 million.
Significant pro forma adjustments include interest expense relating to $100
million in subordinated debt issued in August 1997 in anticipation of the
Company's acquisition of AFEH, amortization expense relating to goodwill and
core deposit intangibles created as a result of the acquisition and additional
income tax expense relating to income taxes that would have been recognized
utilizing the Company's effective income tax rates for the first six months of
1997, net of the tax impact of the pro forma adjustments. The unaudited pro
forma financial information excludes the utilization of net operating loss
carryforwards as the tax benefit associated with the net operating loss
carryforwards was established as a deferred tax asset as of the acquisition
date. As of January 2, 1997, AFEH had approximately $207 million in net
operating loss ("NOL") carryforwards for federal tax purposes which expire in
various years through 2007 and approximately $26 million in net operating losses
for state franchise tax purposes which expired in 1997.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
STRATEGIC OVERVIEW
The Company is a diversified financial services company which operates from
three distinct business platforms:
. A Banking/Depository/Wholesale Platform ("Banking Platform") which is
comprised primarily of first and second mortgage loans and mortgage-backed
securities.
. A Consumer Finance Platform which is comprised of motor vehicle loans and
leases and high loan-to-value ("HLTV") home equity loans.
. A Commercial Finance Platform which is comprised of asset-based lending,
factoring, warehouse lending, and commercial leasing activities.
THE COMPANY'S MISSION STATEMENT
To build a diversified financial services company by investing in niche
businesses with risk-adjusted returns that enhance shareholder value.
THE COMPANY'S STRATEGIES
The Company's strategies center around the continued expansion of its net
interest margin. In order to realize this objective, management is pursuing
strategies that include the following:
. Replacing lower-yielding mortgage loans and mortgage-backed securities with
consumer and commercial loans and leases with higher risk-adjusted returns,
shorter maturities and less sensitivity to interest rate fluctuations.
. Enhancing BVB's deposit base by reducing higher-cost deposits and expanding
lower-cost transaction accounts by emphasizing relationship banking and
capitalizing on cross-sell opportunities with customers.
. De-emphasizing the less profitable elements of the Company's business
activities by ceasing residential mortgage loan originations and reducing
BVB's wholesale activities.
. Maintaining the capital of BVB at or above the minimum "well capitalized"
(as defined for bank regulatory purposes) level and returning any excess
capital to the Company.
. Redeploying the Company's excess capital in businesses intended to generate
assets with higher risk-adjusted returns than those typically provided by
mortgage loans and mortgage-backed securities.
Banking Platform Strategies
The Banking Platform is largely represented by the operations of BVB which has
56 branches serving primarily the San Francisco Bay Area. The Banking
Platform's strategic focus is to expand the retail deposit franchise through the
growth of "transaction accounts" (e.g., checking, savings and money market
accounts), instead of higher-cost certificates of deposit, as a source of
financing for the Company, including the Consumer Finance Platform and the
Commercial Finance Platform. As a result, transaction accounts at BVB as a
percentage of total retail deposits increased to 42.1% at June 30, 1998 as
compared with 34.6% and 30.3% at December 31, 1997 and 1996, respectively.
15
<PAGE>
CONSUMER FINANCE PLATFORM STRATEGIES
The Consumer Finance Platform is comprised of motor vehicle loans originated
and purchased by BVC and Ultra, motor vehicle leases purchased by LFS from
Lendco Financial Services ("Lendco") and HLTV home equity loans purchased by the
Company.
Bay View Credit
BVC (formerly California Thrift & Loan) underwrites and purchases motor
vehicle loans and has successfully carved out a niche in the increasingly
competitive motor vehicle finance industry. BVC is headquartered in Covina,
California and operates offices throughout California and the Western United
States. BVC became a subsidiary of Bay View Acceptance Corporation, a wholly
owned subsidiary of BVB, at December 31, 1997.
BVC's business strategy is to originate motor vehicle loans at rates which
generally exceed those offered by conventional financing sources while applying
its traditional underwriting criteria on a case-by-case basis to mitigate any
potential loan losses. BVC underwrites fixed-rate loans secured by new and used
motor vehicles. BVC'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, BVC has been able to charge interest rates higher than those typically
offered by traditional sources of motor vehicle financing, such as banks and
captive finance companies.
Sale and Securitization of Motor Vehicle Loan Portfolio
In January 1997, BVC sold $253 million of its motor vehicle loan portfolio to
BVSC. The motor vehicle loan portfolio was recorded at its fair value upon
acquisition assuming that such loans would be securitized and sold. As a
result, the only gain recorded on the sale and securitization was related to the
changes in the market interest rates between the acquisition date of BVC and the
sale and securitization of the loans. The Company ceased its securitization
activities during 1997 in conjunction with the announcement of the EurekaBank
acquisition.
Ultra Funding, Inc.
A significant source of the Consumer Finance Platform's loan production prior
to October 1, 1997 was a strategic alliance that began in November 1996 with
Ultra Funding, an originator of prime motor vehicle loans, whereby the Company
had a right of first refusal to purchase all of the motor vehicle installment
contracts originated by Ultra Funding which met the Company's underwriting
criteria. Effective October 1, 1997, the Company, through its newly created
subsidiary, Ultra Funding, Inc., acquired the origination capabilities and
certain assets of Ultra Funding. Ultra operates one office in Austin, Texas.
Strategic Alliances
The Company has previously announced a strategic alliance with Lendco for the
purchase of motor vehicle leases. The Company began purchasing motor vehicle
leases from Lendco during the second quarter of 1998. The agreements with Lendco
also provide the Company with an option to acquire Lendco. The Company is
continuing to evaluate the viability of such an acquisition.
The Company has also previously announced a strategic alliance with Onyx
Acceptance Corporation ("Onyx") for the purchase of motor vehicle loans. The
Company purchased approximately $15 million in motor vehicle loans from Onyx
during the first quarter of 1998 and made no purchases during the second quarter
of 1998. The agreement with Onyx also provides the Company with an option to
acquire Onyx. The Company will assess the viability of such an acquisition
during the third quarter of 1998. In a filing with the Securities and Exchange
Commission on July 29, 1998, the Company disclosed that it had reduced its stake
in Onyx to 2.9% of Onyx's common shares outstanding.
16
<PAGE>
COMMERCIAL FINANCE PLATFORM STRATEFIES
The Commercial Finance Platform is comprised of CGC and BVFC, a division of
CGC. CGC, based in San Mateo, California, offers factoring, warehouse lines and
commercial leases. BVFC, based in Encino, California, offers asset-based
lending.
In December 1997, the Company announced an expansion of the Commercial Finance
Platform including the formation of a new asset-based lending group known as Bay
View Financial Corporation. Specifically, the Company expanded the asset-based
lending segment of the business by adding personnel with significant industry
experience, relocating the asset-based lending business to Southern California,
one of the top asset-based lending markets in the country, and adding new and
enhanced products to the Commercial Finance Platform's product array. This
expansion represents a significant step in achieving the Company's goal of
establishing a $200-300 million asset-based lending platform.
Strategic Alliance
The Company has previously announced a strategic alliance with Signature
Financial Group ("Signature"), a Danville, California-based company specializing
in small-ticket equipment leases nationwide. The Company began purchasing
leases from Signature during the second quarter of 1998. The agreement with
Signature also provides the Company with an option to acquire Signature. The
Company is continuing to evaluate the viability of such an acquisition.
RESULTS OF OPERATIONS
The Company's results for the first six months of 1998 reflect the Company's
acquisitions of EurekaBank effective January 2, 1998 and Ultra effective October
1, 1997. The Company's results for the first six months of 1997 reflect the
Company's acquisition of CGC effective April 1, 1997.
Net income for the second quarter of 1998 was $5.2 million, or $0.25 per
diluted share, as compared with $4.5 million, or $0.34 per diluted share, for
the second quarter of 1997. Net income for the first six months of 1998 was
$10.3 million, or $0.50 per diluted share, as compared with $9.8 million, or
$0.73 per diluted share, for the first six months of 1997. Net income for the
first six months of 1997 includes net interest income on $253 million of motor
vehicle loans securitized and sold in January 1997 and a corresponding $925,000
gain on the sale.
NET INTEREST INCOME
Net interest income for the second quarter of 1998 was $38.3 million as
compared with $21.8 million for the second quarter of 1997. Net interest income
for the first six months of 1998 was $75.3 million as compared with $42.8
million for the first six months of 1997. The Company's net interest margin for
the second quarter of 1998 was 3.06% as compared with 2.86% for the second
quarter of 1997. The Company's net interest margin for the first six months of
1998 was 2.98% as compared with 2.79% for the first six months of 1997. The
increases in net interest income, as compared with the respective prior periods,
were principally a result of the Company's acquisition of EurekaBank, effective
January 2, 1998, as well as continued growth in the Consumer Finance Platform
and the Commercial Finance Platform. The increases in net interest margin, as
compared with the respective prior periods, were principally a result of the
continuing shift from traditional mortgage-based assets to consumer and
commercial assets with higher risk-adjusted yields combined with a decrease in
the Company's funding costs.
During the second quarter of 1998, the Company experienced accelerated
prepayments on loans (primarily mortgage loans) and mortgage-backed securities
reflecting the recent low interest rate environment. Prepayments (including
normal amortization) during the second quarter of 1998 were approximately $420
million, representing an annualized rate of 34.6%. Prepayments during June 1998
were approximately $150 million, representing an annualized rate of 36.0%.
Prepayments for the first six months of 1998 were
17
<PAGE>
approximately $720 million, representing an annualized rate of 29.6%. The impact
of prepayments during the first six months of 1998 was offset by asset
originations and purchases during the period in excess of $1.1 billion.
The following tables illustrate net interest income and net interest margin,
by platform, for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
-------------------------------- ---------------------------------
NET NET NET NET
INTEREST INTEREST INTEREST INTEREST
INCOME MARGIN INCOME MARGIN
-------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform $ 27,376 2.56% $ 17,563 2.47%
Consumer Finance Platform /(1)/ 8,666 5.16 1,653 4.72
Commercial Finance Platform /(1)/ 2,302 13.99 2,552 20.41
-------------- -------------- --------------- --------------
Total $ 38,344 3.06% $ 21,768 2.86%
============== ============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SIX MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
-------------------------------- ---------------------------------
NET NET NET NET
INTEREST INTEREST INTEREST INTEREST
INCOME MARGIN INCOME MARGIN
-------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform $ 55,787 2.51% $ 36,166 2.50%
Consumer Finance Platform /(1)/ 14,979 5.30 4,105 5.34
Commercial Finance Platform /(1)/ 4,512 15.29 2,552 20.41
-------------- -------------- --------------- --------------
Total $ 75,278 2.98% $ 42,823 2.79%
============== ============== =============== ==============
</TABLE>
/(1)/ The Consumer Finance Platform was created with the acquisitions of BVC
in June 1996 and Ultra in October 1997. The Consumer Finance Platform
began purchasing HLTV home equity loans in August 1997 and motor vehicle
leases in April 1998. The Commercial Finance Platform was created with
the acquisition of CGC effective April 1997.
As each of the above platforms is funded by the deposits and borrowings
of BVB and the debt of the Company, the cost of funds for each platform is equal
to the consolidated Company's direct cost of funds in the computation of net
interest income and net interest margin by platform.
The following table illustrates average interest-earning assets, by
platform, for the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(UNAUDITED)
---------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------ -----------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
------------------- ------------------ ------------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform $ 4,277,208 $ 2,838,877 $ 4,398,924 $ 2,860,864
Consumer Finance Platform 672,040 140,354 562,787 151,696
Commercial Finance Platform 65,979 50,145 59,510 25,073
------------------- ------------------ ------------------ -------------------
Total average interest-earning assets $ 5,015,227 $ 3,029,376 $ 5,021,221 $ 3,037,633
=================== ================== ================== ===================
</TABLE>
18
<PAGE>
Banking Platform
- ----------------
The Banking Platform's net interest margin for the second quarter of 1998 was
2.56% as compared with 2.47% for the second quarter of 1997. The platform's net
interest margin for the first six months of 1998 was 2.51% as compared with
2.50% for the first six months of 1997. The increases in net interest margin,
as compared with the respective prior periods, were a result of various factors
including higher yields on mortgage loans for the second quarter of 1998 and a
decrease in the Company's funding costs. This was partially offset, however, by
the impact of EurekaBank's lower-yielding portfolio of mortgage loans which were
acquired by the Company effective January 2, 1998.
During the second quarter of 1998, the Company successfully completed the
conversion of EurekaBank's systems to the Company's systems and EurekaBank's
branches to BVB branches, resulting in the closure of 7 branches. BVB now
operates 56 full-service branches throughout the greater San Francisco Bay Area.
Consumer Finance Platform
- -------------------------
The Consumer Finance Platform's net interest margin for the second quarter of
1998 was 5.16% as compared with 4.72% for the second quarter of 1997. The
platform's net interest margin for the first six months of 1998 was 5.30% as
compared with 5.34% for the first six months of 1997. The increase in net
interest margin for the second quarter of 1998, as compared with the second
quarter of 1997, was due to an increase in loan yields combined with a decrease
in the Company's funding costs. The decrease in net interest margin for the
first six months of 1998, as compared with the first six months of 1997, was
primarily due to the 1997 yield including the benefit of approximately one month
of interest on the aforementioned $253 million of higher-yielding auto loans
which were securitized in January 1997, partially offset by a decrease in the
Company's funding costs.
During the second quarter of 1998, the Consumer Finance Platform generated
$167 million in motor vehicle loans and leased assets as compared with $73
million during the second quarter of 1997. BVC originated $65 million in motor
vehicle loans and purchased $16 million in motor vehicle loans during the second
quarter of 1998. Ultra originated $41 million in motor vehicle loans during
this same period. LFS purchased $45 million in motor vehicle leases during the
second quarter of 1998.
At June 30, 1998, the Consumer Finance Platform had approximately $330 million
in HLTV home equity loans as compared with approximately $67 million at December
31, 1997. While these loans involve a higher degree of risk than other types of
mortgage lending, they provide higher risk-adjusted yields. During the second
quarter of 1998, the Company purchased approximately $160 million of HLTV home
equity loans with an average Fair Isaac Credit Score ("FICO") of 673 and an
average coupon rate of 13.7%. During the first six months of 1998, the Company
purchased approximately $300 million of HLTV home equity loans with an average
FICO score of 668 and an average coupon rate of 13.9%. Debt-to-income ratios,
indicating the borrower's ability to repay, averaged approximately 40% on HLTV
home equity loans purchased during the first six months of 1998.
On June 10, 1998, the Company announced that it had executed a definitive
agreement to acquire PSB Lending Corp. ("PSBL"), an indirect originator of HLTV
home equity loans. Based in Carlsbad, California, PSBL is a wholly owned
subsidiary of Pacific Southwest Bank based in Dallas, Texas. On June 22, 1998,
the Company announced it had learned that federal banking regulatory agencies
were considering new guidelines which may limit the amount of HLTV home equity
loans an insured financial institution may own. The Company is currently
reviewing alternatives to the transaction structure pending issuance and review
of the expected guidelines.
Commercial Finance Platform
- ---------------------------
The Commercial Finance Platform's net interest margin for the second quarter
of 1998 was 13.99% as compared with 20.41% for the second quarter of 1997. The
platform's net interest margin for the first six months of 1998 was 15.29% as
compared with 20.41% for the first six months of 1997. This platform was
created as a result of the Company's acquisition of CGC, which was accounted for
under the purchase method
19
<PAGE>
of accounting effective April 1, 1997. Although still very strong, the decreases
in net interest margin, as compared with the respective prior periods, were
largely the result of growth in the platform's asset-based lending and
commercial leasing segments which generate lower risk-adjusted yields relative
to the platform's factoring segment. The decreases in net interest margin also
resulted from pricing pressure associated with the competitive nature of this
business, partially offset by a decrease in the Company's funding costs.
As previously announced, the Company realigned and expanded the Commercial
Finance Platform during the first quarter of 1998. Specifically, the Company
expanded the platform's asset-based lending segment by adding personnel with
significant industry experience, relocated the asset-based lending business to
Southern California, one of the top asset-based lending markets in the country,
and added new and enhanced products to the Commercial Finance Platform's product
array.
These expansion efforts were successful in generating platform growth during
the second quarter of 1998, as reflected by the increase in the platform's loan
portfolio from approximately $56 million at March 31, 1998 to approximately $73
million at June 30, 1998, an increase of 30%. As this growth was generated
throughout the second quarter of 1998, as reflected by an increase in the
average interest-earning asset balance from $53 million for the first quarter of
1998 to $66 million for the second quarter of 1998, the positive impact of this
growth on net interest income will be greater in future quarters. This benefit,
along with anticipated future growth, as evidenced by a strong pipeline of
business at June 30, 1998, should enable the Commercial Finance Platform to
enhance its profitability in the future.
AVERAGE BALANCE SHEET
The following tables illustrate certain information relating to the Company's
consolidated statements of financial condition and reflect the average yields
earned 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 interest expense by the average balances of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods indicated. Average balances of interest-earning assets and interest-
bearing liabilities were derived primarily from daily average balances.
20
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
AVERAGE BALANCES, YIELDS AND RATES (UNAUDITED)
---------------------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
----------------------------------------- ------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------------- ------------ ------------ ------------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Loans $ 4,046,141 $ 84,660 8.38% $ 2,343,491 $ 48,406 8.25%
Mortgage-backed securities/(1)/ 821,259 13,289 6.47 546,438 8,848 6.48
Investment securities /(1)/ 147,827 2,398 6.50 139,447 2,085 6.28
------------- ------------ ------------ ------------- ------------ ----------------
Total interest-earning assets 5,015,227 $ 100,347 8.01% 3,029,376 $ 59,339 7.84%
============ ============ ============ ================
Other assets 380,158 53,540
------------- -------------
Total assets $ 5,395,385 $ 3,082,916
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Customer deposits $ 3,384,196 $ 37,600 4.46% $ 1,612,775 $ 18,545 4.61%
Borrowings /(2)/ 1,545,643 24,403 6.32 1,238,304 19,026 6.16
------------- ------------ ------------ ------------- ------------ ----------------
Total interest-bearing liabilities 4,929,839 $ 62,003 5.04% 2,851,079 $ 37,571 5.29%
============ ============ ============ ================
Other liabilities 74,168 37,470
------------- -------------
Total liabilities 5,004,007 2,888,549
Stockholders' equity 391,378 194,367
------------- -------------
Total liabilities and stockholders' equity $ 5,395,385 $ 3,082,916
============= =============
Net interest income/net interest spread $ 38,344 2.97% $ 21,768 2.55%
============ ============ ============ ================
Net interest earning assets $ 85,388 $ 178,297
============= =============
Net interest margin/(3)/ 3.06% 2.86%
============ ================
</TABLE>
/(1)/ Average balances and yields for mortgage-backed securities and
investment securities available-for-sale are based on historical amortized
cost.
/(2)/ Interest expense for borrowings includes interest expense on interest
rate swaps of $620,000 and $660,000 for the three months ended June 30,
1998 and 1997, respectively.
/(3)/ Annualized net interest income divided by average interest-earning
assets.
21
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
AVERAGE BALANCES, YIELDS AND RATES (UNAUDITED)
----------------------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------------------------ ---------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------------- ------------ -------------- ------------ ------------ ----------------
(DOLLARS IN THOUSANDS)
ASSETS
- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $3,999,789 $165,917 8.31% $ 2,338,768 $ 95,070 8.13%
Mortgage-backed securities/(1)/ 865,107 28,544 6.60 556,726 18,079 6.49
Investment securities /(1)/ 156,325 4,952 6.38 142,139 4,346 6.14
------------- ------------ -------------- ------------ ------------ ----------------
Total interest-earning assets 5,021,221 $199,413 7.95% 3,037,633 $117,495 7.74%
============ ============== ============ ================
Other assets 371,237 49,466
------------- ------------
Total assets $5,392,458 $ 3,087,099
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Customer deposits $3,492,618 $ 78,597 4.54% $ 1,662,160 $ 38,139 4.63%
Borrowings /(2)/ 1,431,704 45,538 6.39 1,181,770 36,533 6.22
------------- ------------ -------------- ------------ ------------ ----------------
Total interest-bearing liabilities 4,924,322 $124,135 5.08% 2,843,930 $ 74,672 5.29%
============ ============== ============ ================
Other liabilities 79,255 47,778
------------- ------------
Total liabilities 5,003,577 2,891,708
Stockholders' equity 388,881 195,391
------------- ------------
Total liabilities and stockholders' equity $5,392,458 $ 3,087,099
============= ============
Net interest income/net interest spread $ 75,278 2.87% $ 42,823 2.45%
============ ============== ============ ================
Net interest earning assets $ 96,899 $ 193,703
============= ============
Net interest margin/(3)/ 2.98% 2.79%
============== ================
</TABLE>
/(1)/ Average balances and yields for mortgage-backed securities and
investment securities available-for-sale are based on historical amortized
cost.
/(2)/ Interest expense for borrowings includes interest expense on interest
rate swaps of $1.2 million and $1.6 million for the six months ended June
30, 1998 and 1997, respectively.
/(3)/ Annualized net interest income divided by average interest-earning
assets.
22
<PAGE>
INTEREST INCOME
Interest on Loans
Interest on loans was $84.7 million for the second quarter of 1998 as compared
with $48.4 million for the second quarter of 1997. Interest income on loans was
$165.9 million for the first six months of 1998 as compared with $95.1 million
for the first six months of 1997. The increases in interest income on loans, as
compared with the respective prior periods, were a result of the acquisitions of
EurekaBank, Ultra and CGC, combined with internally generated platform loan
growth.
The following tables illustrate interest on loans for the periods indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform $64,746 7.82% $42,048 7.78%
Consumer Finance Platform 16,797 10.09 3,184 9.38
Commercial Finance Platform 3,117 18.95 3,174 25.39
----------------- ----------------- ----------------- -----------------
Total $84,660 8.38% $48,406 8.25%
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
SIX MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform $131,517 7.78% $84,420 7.79%
Consumer Finance Platform 28,420 10.24 7,476 10.29
Commercial Finance Platform 5,980 20.27 3,174 25.39
----------------- ----------------- ----------------- -----------------
Total $165,917 8.31% $95,070 8.13%
================= ================= ================= =================
</TABLE>
Banking Platform
- ----------------
The Banking Platform's weighted average loan yield for the second quarter of
1998 was 7.82% as compared with 7.78% for the second quarter of 1997. The
platform's weighted average loan yield for the first six months of 1998 was
7.78% as compared with 7.79% for the first six months of 1997. The increase in
the platform's weighted average loan yield for the second quarter of 1998, as
compared with the second quarter of 1997, was primarily due to an increase in
loan yields on first and second mortgage loans as a result of a significant
portion of the adjustable-rate mortgage loan portfolio repricing to a higher
average monthly Eleventh District Cost of Funds Index ("COFI") during the second
quarter of 1998 versus the second quarter of 1997. The average monthly COFI was
approximately 18 basis points higher for the second quarter of 1998 as compared
with the second quarter of 1997. These benefits were partially offset, however,
by the impact of EurekaBank's lower-yielding portfolio of mortgage loans which
were acquired effective January 2, 1998 as well as the impact of accelerated
loan prepayments during the first six months of 1998. The platform's weighted
average loan yield for the first six months of 1998 was comparable to the first
six months of 1997.
Consumer Finance Platform
- -------------------------
The Consumer Finance Platform's weighted average loan yield for the second
quarter of 1998 was 10.09% as compared with 9.38% for the second quarter of
1997. The platform's weighted average loan yield for the first six months of
1998 was 10.24% as compared with 10.29% for the first six months of 1997. The
increase in
23
<PAGE>
the platform's weighted average loan yield for the second quarter of 1998, as
compared with the second quarter of 1997, was due the Company's purchases of
higher-yielding HLTV home equity loans beginning in the third quarter of 1997,
partially offset by the impact of lower yields on recent auto originations and
purchases due to pricing strategies and pricing pressures associated with the
competitive nature of the business. Additionally, the weighted average loan
yield for the second quarter of 1997 was impacted by the aforementioned
securitization of $253 million of higher-yielding motor vehicle loans in
January 1997 which resulted in a remaining portfolio of lower-yielding loans
during the second quarter of 1997. The decrease in the platform's weighted
average loan yield for the first six months of 1998, as compared with the first
six months of 1997, was primarily due to the 1997 yield including the benefit of
approximately one month of interest on the aforementioned $253 million of
higher-yielding auto loans which were securitized in January 1997 as well as the
impact of lower yields on recent auto originations and purchases, partially
offset by the aforementioned purchases of higher-yielding HLTV home equity
loans.
Commercial Finance Platform
- ---------------------------
The Commercial Finance Platform's weighted average loan yield for the second
quarter of 1998 was 18.95% as compared with 25.39% for the second quarter of
1997. The platform's weighted average loan yield for the first six months of
1998 was 20.27% as compared with 25.39% for the first six months of 1997. The
decreases in the platform's loans yields, as compared with the respective prior
periods, were largely the result of growth in the platform's asset-based lending
and commercial leasing segments which generate lower risk-adjusted yields
relative to the platform's factoring segment. The decreases in loan yields also
resulted from pricing pressure associated with the competitive nature of this
business. This platform was created as a result of the acquisition of CGC
effective April 1997.
Interest on Mortgage-backed Securities
Interest on the Company's mortgage-backed securities ("MBS") for the second
quarter of 1998 was $13.3 million as compared with $8.8 million for the second
quarter of 1997. Interest on MBS for the first six months of 1998 was $28.5
million as compared with $18.1 million for the first six months of 1997. The
weighted average yield on MBS was 6.47% for the second quarter of 1998 as
compared with 6.48% for the second quarter of 1997. The weighted average yield
on MBS was 6.60% for the first six months of 1998 as compared with 6.49% for the
first six months of 1997. The increases in interest on MBS, as compared with
the respective prior periods, were primarily attributable to the acquisition of
EurekaBank's MBS portfolio effective January 2, 1998, partially offset by an
accelerated level of MBS prepayments during the first six months of 1998. While
EurekaBank's MBS portfolio had a higher weighted average yield than the
Company's MBS portfolio, this benefit was more than offset during the second
quarter of 1998 by the accelerated level of MBS prepayments, which resulted in
the slight decrease in the weighted average yield for the second quarter of
1998.
Interest and Dividends on Investment Securities
Interest and dividends from the Company's investment securities for the second
quarter of 1998 was $2.4 million as compared with $2.1 million for the second
quarter of 1997. Interest and dividends on investment securities for the first
six months of 1998 was $5.0 million as compared with $4.3 million for the first
six months of 1997. The weighted average yield on investment securities for the
second quarter of 1998 was 6.50% as compared with 6.28% for the second quarter
of 1997. The weighted average yield on investment securities for the first six
months of 1998 was 6.38% as compared with 6.14% for the first six months of
1997. The increases in interest and dividends on investment securities, along
with the corresponding increases in the weighted average yield, as compared with
the respective prior periods, were primarily due to the impact of the Company's
acquisition of EurekaBank's investment securities effective January 2, 1998.
INTEREST EXPENSE
Interest on Customer Deposits
Interest on the Company's customer deposits was $37.6 million for the second
quarter of 1998 as compared with $18.5 million for the second quarter of 1997.
Interest on customer deposits was $78.6 million for the first
24
<PAGE>
six months of 1998 as compared with $38.1 million for the first six months of
1997. The cost of deposits was 4.46% for the second quarter of 1998 as compared
with 4.61% for the second quarter of 1997. The cost of deposits was 4.54% for
the first six months of 1998 as compared with 4.63% for the first six months of
1997. The increases in interest on customer deposits, as compared with the
respective prior periods, were due to the acquisition of EurekaBank's customer
deposit balances effective January 2, 1998 partially offset by a decrease in the
Company's cost of deposits.
This decrease in the cost of deposits resulted from a combination of factors,
including an increase in lower-cost transaction accounts, aggressive deposit
pricing strategies, the recent interest rate environment, and the run-off of
jumbo and brokered certificates of deposit. The Company's cost of deposits at
June 30, 1998 was 4.43%. This cost was 45 basis points below the Eleventh
District COFI of 4.88%. Transaction account balances as a percentage of total
retail deposits were 42.1% at June 30, 1998.
The following table illustrates the Company's cost of deposits versus COFI and
the Company's transaction accounts as a percentage of total retail deposits for
the periods indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------
(UNAUDITED)
------------------------------------------------------------------
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cost of deposits 4.43% 4.71% 4.60%
COFI 4.88 4.95 4.84
================== ================== ==================
Spread below COFI (0.45%) (0.24%) (0.24%)
================== ================== ==================
Transaction accounts as a
percentage of total retail deposits 42.1% 34.6% 30.3%
================== ================== ==================
</TABLE>
Interest on Borrowings
Interest on the Company's borrowings, including senior debentures,
subordinated notes and other borrowings, was $24.4 million for the second
quarter of 1998 as compared with $19.0 million for the second quarter of 1997.
Interest on borrowings was $45.5 million for the first six months of 1998 as
compared with $36.5 million for the first six months of 1997. The weighted
average cost of borrowings was 6.32% for the second quarter of 1998 as compared
with 6.16% for the second quarter of 1997. The weighted average cost of
borrowings was 6.39% for the first six months of 1998 as compared with 6.22% for
the first six months of 1997. The increases in interest on borrowings and the
corresponding weighted average cost of borrowings, as compared with the
respective prior periods, were due to a combination of factors including a
higher level of Federal Home Loan Bank ("FHLB") advances outstanding during 1998
and the Company's issuance of $100 million in subordinated debt in August 1997
with an all-in cost of approximately 9.6%.
Changes in Rate and Volume
The following tables illustrate the changes in net interest income due to
changes in the rate and volume of the Company's interest-earning assets and
interest-bearing liabilities for the three and six months ended June 30, 1998 as
compared with the three and six months ended June 30, 1997. The variances
include the effects of the Company's acquisitions. Changes in rate and volume
which cannot be segregated (e.g., changes in weighted average interest rate
multiplied by average portfolio balance) have been allocated proportionately
between the change in rate and the change in volume.
25
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1998 VS 1997 (UNAUDITED)
-----------------------------------------------------------------------
RATE VOLUME TOTAL
VARIANCE VARIANCE VARIANCE
------------------- --------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans $ 758 $ 35,496 $ 36,254
Mortgage-backed securities (14) 4,455 4,441
Investment securities 115 198 313
------------------- --------------------- --------------------
859 40,149 41,008
------------------- --------------------- --------------------
Interest expense:
Customer deposits (582) 19,637 19,055
Borrowings 509 4,868 5,377
------------------- --------------------- --------------------
(73) 24,505 24,432
------------------- --------------------- --------------------
Net interest income $ 932 $ 15,644 $ 16,576
=================== ===================== ====================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 VS 1997 (UNAUDITED)
-----------------------------------------------------------------------
RATE VOLUME TOTAL
VARIANCE VARIANCE VARIANCE
------------------- --------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans $ 2,126 $ 68,721 $ 70,847
Mortgage-backed securities 311 10,154 10,465
Investment securities 171 435 606
------------------- --------------------- --------------------
2,608 79,310 81,918
------------------- --------------------- --------------------
Interest expense:
Customer deposits (727) 41,185 40,458
Borrowings 1,031 7,974 9,005
------------------- --------------------- --------------------
304 49,159 49,463
------------------- --------------------- --------------------
Net interest income $ 2,304 $ 30,151 $ 32,455
=================== ===================== ====================
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1.7 million for the second quarter of 1998
as compared with $612,000 for the second quarter of 1997. The provision for loan
losses was $2.4 million for the first six months of 1998 as compared with $1.2
million for the first six months of 1997. See "Balance Sheet Analysis -
Allowance for Loan Losses" for a discussion of the provision for loan losses.
NONINTEREST INCOME
Noninterest income for the second quarter of 1998 was $6.1 million as compared
with $3.7 million for the second quarter of 1997. Noninterest income for the
first six months of 1998 was $10.3 million as compared with $7.3 million for the
first six months of 1997. The increases in noninterest income, as compared with
the respective prior periods, were due to a combination of factors including the
acquisitions of EurekaBank effective January 1998 and CGC effective April 1997,
higher prepayment penalty fees associated with the accelerated level of loan
prepayments and leasing income on the Company's leasing activities which began
in April 1998. Noninterest income for the first six months of 1998 included
approximately $412,000 in gains on the sale of MBS and investment securities
available-for-sale. Noninterest income for the first six months of 1997
included approximately $925,000 in gains on the aforementioned securitization
and sale of a $253 million motor vehicle loan portfolio in January 1997.
26
<PAGE>
NONINTEREST EXPENSE
General and Administrative Expenses
General and administrative expenses were $29.2 million for the second quarter
of 1998 as compared with $16.2 million for the second quarter of 1997. General
and administrative expenses were $57.0 million for the first six months of 1998
as compared with $30.8 million for the first six months of 1997. The increases
in general and administrative expenses, as compared with the respective prior
periods, were attributable to various factors including the acquisitions
EurekaBank effective January 1998, Ultra effective October 1997 and CGC
effective April 1997, a higher level of special mention items in both the
Banking Platform and the Consumer Finance Platform as discussed elsewhere
herein, the continued growth of the Company, especially in the Consumer Finance
Platform, and inflationary pressures, including the Company's annual salary
increases which were effective for the second quarter of 1998. See "Non-GAAP
Performance Measures - Core General and Administrative Expenses" for a
discussion of general and administrative expenses excluding special mention
items.
The following table illustrates general and administrative expenses, by
platform, for the periods indicated:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
(UNAUDITED)
-------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------- ------------------------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------------- ------------------- ------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform
(includes BVB and the Company) $ 22,248 $ 12,516 $ 43,653 $ 24,846
Consumer Finance Platform 4,981 1,688 9,224 3,978
Commercial Finance Platform 2,001 2,007 4,095 2,007
------------------- ------------------- ------------------- ------------------
Total $ 29,230 $ 16,211 $ 56,972 $ 30,831
=================== =================== =================== ==================
</TABLE>
Leasing Expenses
Leasing expenses for the second quarter of 1998 were $708,000 representing
expenses related to the Company's leasing activities which began in April 1998.
As the leases are accounted for as operating leases, the corresponding assets
are capitalized and depreciated down to their estimated residual values over
their lease terms. This depreciation expense is included in leasing expenses,
along with the amortization of capitalized initial direct lease costs and the
provision for estimated losses incurred upon repossession or return of the
leased vehicles.
Real Estate Owned Operations, Net and Recovery of Losses on Real Estate
Income from real estate owned operations, net and recovery of losses on real
estate for the second quarter of 1998 was $199,000 as compared with $147,000 for
the second quarter of 1997. Income from real estate owned operations, net and
recovery of losses on real estate for the first six months of 1998 was $186,000
as compared with $617,000 for the first six months of 1997. The decrease in
income for the first six months of 1998, as compared with the first six months
of 1997, was primarily due to a $415,000 recovery received during the first
quarter of 1997. See "Non-GAAP Performance Measures - Special Mention Items"
for further discussion on the recovery received during 1997.
Amortization of Intangible Assets
The amortization of intangible assets was $2.9 million for the second quarter
of 1998 as compared with $1.0 million for the second quarter of 1997. The
amortization of intangible assets was $5.6 million for the first six months of
1998 as compared with $1.6 million for the first six months of 1997. The
increases in amortization expense, as compared with the respective prior
periods, were due to the additional intangible assets generated from the
Company's acquisitions of EurekaBank effective January 1998, Ultra effective
October 1997 and CGC effective April 1997.
27
<PAGE>
INCOME TAX EXPENSE
Income tax expense was $4.9 million for the second quarter of 1998 as compared
with $3.4 million for the second quarter of 1997. Income tax expense was $9.9
million for the first six months of 1998 as compared with $7.4 million for the
first six months of 1997. The effective tax rate was 48.5% for the second
quarter of 1998 as compared with 42.9% for the second quarter of 1997. The
effective tax rate was 48.9% for the first six months of 1998 as compared with
43.0% for the first six months of 1997. The increases in the effective tax
rates, as compared with the respective prior periods, were primarily due to the
increases in nondeductible goodwill amortization.
NON-GAAP PERFORMANCE MEASURES
The following disclosures of core earnings, tangible cash earnings, net
interest margin, and core general and administrative expenses, along with their
corresponding ratios, are not measures of performance under generally accepted
accounting principles ("GAAP"). These measures should not be considered
alternatives to net income, net interest margin and general and administrative
expenses as an indicator of the Company's operating performance. Such measures
are included herein as management believes they are useful tools for investors
and analysts in assessing the Company's performance and trends. These measures
may not be comparable to similarly titled measures reported by other companies.
CORE EARNINGS
Core earnings exclude special mention items as discussed elsewhere herein and
primarily related to the Company's acquisition and integration of EurekaBank.
Core earnings for the second quarter of 1998 were $7.7 million, or $0.37 per
diluted share, as compared with $4.3 million, or $0.33 per diluted share, for
the second quarter of 1997. Core earnings for the first six months of 1998 were
$14.7 million, or $0.71 per diluted share, as compared with $9.6 million, or
$0.72 per diluted share, for the first six months of 1997.
The following table illustrates the reconciliation of net income to core
earnings for the periods indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(UNAUDITED)
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------- --------------------------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------------ -------------------- ------------------ -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income $ 5,234 $ 4,504 $ 10,294 $ 9,766
Special mention items, net of tax 2,444 (173) 4,417 (152)
------------------ -------------------- ------------------ -------------------
Core earnings $ 7,678 $ 4,331 $ 14,711 $ 9,614
------------------ -------------------- ------------------ -------------------
Core earnings per diluted share $ 0.37 $ 0.33 $ 0.71 $ 0.72
================== ==================== ================== ===================
Core return on average assets 0.57% 0.56% 0.55% 0.62%
================== ==================== ================== ===================
Core return on average equity 7.85% 8.91% 7.57% 9.84%
================== ==================== ================== ===================
</TABLE>
28
<PAGE>
TANGIBLE CASH EARNINGS
Tangible cash earnings are based on core earnings and exclude charges related
to the amortization of intangible assets and charges tied to the Company's
common stock.
The following tables illustrate the components of tangible cash earnings for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
---------------------------------------------
JUNE 30, JUNE 30,
1998 1997
--------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Core earnings $ 7,678 $4,331
Adjustments, net of tax, as applicable:
Amortization of intangible assets 2,474 771
Charges tied to common stock 67 60
--------------------- -------------------
Tangible cash earnings $10,219 $5,162
--------------------- -------------------
Tangible cash earnings per diluted share $ 0.49 $ 0.39
===================== ===================
Tangible cash return on average assets /(1)/ 0.76% 0.67%
===================== ===================
Tangible cash return on average equity /(1)/ 10.45% 10.62%
===================== ===================
Tangible cash return on average tangible assets 0.78% 0.67%
/(2)/
===================== ===================
Tangible cash return on average tangible equity 16.19% 11.85%
/(2)/
===================== ===================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED (UNAUDITED)
----------------------------------------------
JUNE 30, JUNE 30,
1998 1997
--------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Core earnings $14,711 $ 9,614
Adjustments, net of tax, as applicable:
Amortization of intangible assets 4,877 1,267
Charges tied to common stock 132 120
--------------------- -------------------
Tangible cash earnings $19,720 $11,001
--------------------- -------------------
Tangible cash earnings per diluted share $ 0.95 $ 0.82
===================== ===================
Tangible cash return on average assets /(1)/ 0.73% 0.71%
===================== ===================
Tangible cash return on average equity /(1)/ 10.14% 11.26%
===================== ===================
Tangible cash return on average tangible assets 0.75% 0.72%
/(2)/
===================== ===================
Tangible cash return on average tangible equity 15.82% 12.18%
/(2)/
===================== ===================
</TABLE>
/(1)/ Tangible cash return on average assets (average equity) is defined as
tangible cash earnings divided by average assets (average equity).
/(2)/ Tangible cash return on average tangible assets (average tangible equity)
is defined as tangible cash earnings divided by average tangible assets
(average tangible equity). Average tangible assets (average tangible
equity) is defined as average assets (average equity) less average
intangible assets.
29
<PAGE>
The following tables illustrate tangible cash earnings, plus the utilization
of NOL carryforwards acquired from AFEH, for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------
JUNE 30, JUNE 30,
1998 1997
---------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Tangible cash earnings $10,219 $5,162
Utilization of NOL carryforwards 2,739 -
---------------------- -------------------
Tangible cash earnings, plus the utilization of
NOL carryforwards $12,958 $5,162
====================== ===================
Tangible cash earnings, plus the utilization of
NOL carryforwards, per diluted share $ 0.63 $ 0.39
====================== ===================
Tangible cash return on average assets, plus the
utilization of NOL carryforwards 0.96% 0.67%
====================== ===================
Tangible cash return on average equity, plus the
utilization of NOL carryforwards 13.24% 10.62%
====================== ===================
Tangible cash return on average tangible assets,
plus the utilization of NOL carryforwards 0.99% 0.67%
====================== ===================
Tangible cash return on average tangible equity,
plus the utilization of NOL carryforwards 20.53% 11.85%
====================== ===================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED (UNAUDITED)
----------------------------------------------
JUNE 30, JUNE 30,
1998 1997
---------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Tangible cash earnings $19,720 $11,001
Utilization of NOL carryforwards 5,478 -
---------------------- -------------------
Tangible cash earnings, plus the utilization of
NOL carryforwards $25,198 $11,001
====================== ===================
Tangible cash earnings, plus the utilization of
NOL carryforwards, per diluted share $ 1.22 $ 0.82
====================== ===================
Tangible cash return on average assets, plus the
utilization of NOL carryforwards 0.93% 0.71%
====================== ===================
Tangible cash return on average equity, plus the
utilization of NOL carryforwards 12.96% 11.26%
====================== ===================
Tangible cash return on average tangible assets,
plus the utilization of NOL carryforwards 0.96% 0.72%
====================== ===================
Tangible cash return on average tangible equity,
plus the utilization of NOL carryforwards 20.21% 12.18%
====================== ===================
</TABLE>
In conjunction with the acquisition of AFEH, the Company acquired $179 million
in NOL carryforwards. The Company may utilize these carryforwards, subject to
annual limitations, to reduce its current liability for federal income taxes.
The associated tax benefit of the NOL carryforwards is approximately $62 million
and the Company preliminarily estimates that it will be able to utilize
approximately $11 million of the tax benefit of the NOL carryforwards during
1998. This estimate will be refined during the third quarter of 1998 as the
Company finalizes and files its 1997 consolidated income tax returns. The
amount of NOL carryforwards utilized as reflected in the above tables represents
the pro rata portion of the estimated annual utilization.
30
<PAGE>
The following tables illustrate tangible cash earnings contributed by platform
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------------------------ --------------------------------
TANGIBLE PER TANGIBLE PER DILUTED
CASH DILUTED CASH SHARE
EARNINGS SHARE EARNINGS
------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Banking Platform $ 7,825 $0.38 $4,196 $0.32
Consumer Finance Platform 2,120 0.10 348 0.02
Commercial Finance Platform 274 0.01 618 0.05
------------- ------------- ------------- --------------
Total $10,219 $0.49 $5,162 $0.39
============= ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------------------------ ------------------------------
TANGIBLE PER TANGIBLE PER DILUTED
CASH DILUTED CASH SHARE
EARNINGS SHARE EARNINGS
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Banking Platform $15,982 $0.77 $ 9,020 $0.67
Consumer Finance Platform 3,308 0.16 1,363 0.10
Commercial Finance Platform 430 0.02 618 0.05
------------- ------------- ------------- ------------
Total $19,720 $0.95 $11,001 $0.82
============= ============= ============= =============
</TABLE>
The increases in tangible cash earnings for the Banking Platform, as compared
with the respective prior periods, were primarily due to the Company's
acquisition of EurekaBank effective January 2, 1998. The increases in tangible
cash earnings for the Consumer Finance Platform, as compared with the respective
prior periods, were due to the continued growth of the platform, including HLTV
home equity loans with higher risk-adjusted yields. The decreases in tangible
cash earnings for the Commercial Finance Platform, as compared with the
respective prior periods, were a result of a combination of factors including
growth in the platform's asset-based lending and commercial leasing segments
which generate lower risk-adjusted yields relative to the platform's factoring
segment, pricing pressures associated with the increasingly competitive nature
of these businesses and the corresponding impact on loan yields and additional
expenses incurred in conjunction with the recent expansion of this platform.
Recent and anticipated future loan growth should enable the Commercial Finance
Platform to achieve greater economies of scale in the future and, in return,
generate additional tangible cash earnings.
NET INTEREST MARGIN
The Company's net interest margin, calculated in accordance with generally
accepted accounting principles, excludes the impact of the Company's leasing
activities which began in April 1998 and which are principally funded by the
Company's deposits and other borrowings. As the leases are accounted for as
operating leases, the rental income and related expenses, including depreciation
expense, are reflected as noninterest income and noninterest expenses,
respectively, in accordance with generally accepted accounting principles.
Accordingly, these amounts are not reflected in the Company's net interest
income or net interest margin. Had the excess of rental income over
depreciation expense, along with the corresponding average balance of leased
assets, been included in the computation of net interest margin, the Company's
net interest margin would have been 3.07% for the second quarter of 1998 and
2.99% for the first six months of 1998. This compares with the Company's
31
<PAGE>
net interest margin calculated in accordance with generally accepted accounting
principles of 3.06% for the second quarter of 1998 and 2.98% for the first six
months of 1998.
CORE GENERAL AND ADMINISTRATIVE EXPENSES
Core general and administrative expenses exclude special mention items,
primarily expenses related to the Company's acquisition and integration of
EurekaBank. Core general and administrative expenses for the second quarter of
1998 were $25.0 million as compared with $16.5 million for the second quarter of
1997. Core general and administrative expenses for the first six months of 1998
were $49.4 million as compared with $30.7 million for the first six months of
1997.
The following table illustrates the reconciliation of general and
administrative expenses to core general and administrative expenses for the
periods indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
(UNAUDITED)
---------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------- --------------------------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
General and administrative expenses $29,230 $16,211 $56,972 $30,831
Special mention items (4,236) 300 (7,600) (150)
------------------- ------------------- ------------------- -------------------
Core general and administrative
expenses $24,994 $16,511 $49,372 $30,681
=================== =================== =================== ===================
</TABLE>
The following table illustrates core general and administrative expenses, by
platform, for the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
(UNAUDITED)
---------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------- ---------------------------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------------- ------------------- ------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banking Platform (includes BVB
and the Company) $18,672 $12,816 $36,779 $24,696
Consumer Finance Platform 4,321 1,688 8,498 3,978
Commercial Finance Platform 2,001 2,007 4,095 2,007
------------------- ------------------- ------------------- ---------------------
Total $24,994 $16,511 $49,372 $30,681
=================== =================== =================== =====================
</TABLE>
The increases in the Banking Platform's core general and administrative
expenses, as compared with the respective prior periods, were attributable to
the acquisition of EurekaBank effective January 2, 1998, continued growth in the
platform and inflationary pressures, including the Company's annual salary
increases which were effective for the second quarter of 1998. The increases in
the Consumer Finance Platform's core general and administrative expenses, as
compared with the respective prior periods, were a result of the continued
growth in the platform, and in particular, the Company's leasing operations
which began April 1, 1998, combined with inflationary pressures. The increase in
the Commercial Finance Platform's core general and administrative expenses for
the first six months of 1998, as compared with the first six months of 1997, was
a result of the platform being created with the Company's acquisition of CGC
effective April 1997 combined with continued growth in the platform and
inflationary pressures.
32
<PAGE>
The following table illustrates the ratio of core general and administrative
expenses (excluding special mention items) to average assets (including
securitized assets), by platform, on an annualized basis for the periods
indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(UNAUDITED)
--------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------- ------------------------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------------- ------------------- ------------------------------------------
<S> <C> <C> <C> <C>
Banking Platform (includes BVB
and the Company) 1.48% 1.67% 1.44% 1.70%
Consumer Finance Platform 2.08% 2.91% 2.29% 2.41%
Commercial Finance Platform 9.87% 12.34% 10.08% 12.34%
------------------- ------------------- ------------------- -----------------
Total to Average Assets 1.85% 2.01% 1.83% 1.87%
=================== =================== =================== =================
</TABLE>
The lower expense ratio for each platform, as compared with the respective
prior periods, were primarily the result of the Company's acquisition of
EurekaBank effective January 2, 1998 and the corresponding increase in the
Company's assets, combined with loan growth within the Consumer Finance Platform
and the Commercial Finance Platform, partially offset by higher levels of core
general and administrative expenses as previously discussed.
Another measure that management uses to monitor the Company's level of core
general and administrative expenses is the core efficiency ratio. The core
efficiency ratio is calculated by dividing the amount of core general and
administrative expenses by operating revenues, defined as net interest income,
loan fees and charges, other income and the excess of the Company's leasing
rental income over leasing depreciation expense. This ratio reflects the level
of core general and administrative expenses required to generate $1 of operating
revenue. The Company's core efficiency ratio for the second quarter of 1998 was
57.1% as compared with 64.7% for the second quarter of 1997. The improvement
was due to cost efficiencies resulting from the Company's acquisition of
EurekaBank.
The Company had previously estimated that it would realize approximately $21
million in annual cost savings related to its acquisition of EurekaBank. This
amount represented 46% of EurekaBank's $47 million in annualized general and
administrative expenses. The Company also estimated that it would realize
approximately 75% of this cost savings in 1998 and 100% in 1999.
The following table illustrates the projected cost savings for 1998:
<TABLE>
<CAPTION>
---------------------
(UNAUDITED)
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
EurekaBank annualized 1997 G&A expenses (based on 3/rd/ quarter of 1997) /(1)/ $ 46,692
The Company's annualized 1997 core G&A expenses (based on 4/th/ quarter of 1997) 68,684
---------------------
Combined annualized 1997 core G&A expenses 115,376
The Company's annualized 1998 core G&A expenses 99,360
---------------------
Projected 1998 cost savings $ 16,016
=====================
Percentage of projected $21 million annual cost savings 76%
=====================
</TABLE>
/(1)/ The 3/rd/ quarter of 1997 was utilized for the purpose of this analysis
as it was more reflective of an annualized rate due to EurekaBank
winding down its operations during the fourth quarter of 1997.
Based on the above computation, the Company appears to be on track towards
achieving the $21 million in projected annual cost savings. The Company will
utilize the third quarter of 1998, the first full quarter subsequent to the
complete integration of EurekaBank into the Company, to reevaluate the projected
annual cost savings.
33
<PAGE>
SPECIAL MENTION ITEMS
The Company's net income for the periods indicated below included certain
items which deserve special mention and which are excluded from net income to
arrive at core earnings.
Second Quarter 1998
- -------------------
The impact of the following items was a net expense of $4.2 million ($2.4
million after-tax, or $0.12 per diluted share).
. $3.9 million ($2.3 million after-tax) primarily related to the integration of
EurekaBank and related systems, operations and reengineering projects.
Combined with the expenses incurred during the first quarter of 1998, the
Company incurred a total of $7.3 million ($4.3 million after-tax) in expenses
year-to-date related to the integration of EurekaBank. The Company previously
disclosed that during 1998 it expected to incur approximately $5.0 million
($2.9 million after-tax) in costs associated with the acquisition and
integration of EurekaBank into the Company. The expenses incurred in excess
of those originally anticipated were primarily a result of systems conversion-
related expenditures.
. $235,000 in other expenses including $195,000 relating to the Company's
efforts to ensure Year 2000 compliance. See "Year 2000" for further
discussion.
First Quarter 1998
- ------------------
The impact of the following item was a net expense of $3.4 million ($2.0
million after-tax, or $0.10 per diluted share).
. $3.4 million related to the acquisition and integration of EurekaBank.
Second Quarter 1997
- -------------------
The impact of the following items was a net benefit of $300,000 ($173,000
after-tax, or $0.01 per diluted share).
. $400,000 benefit associated with the decision to cease the BISYS conversion
and remain with Fiserv (the then current processor for BVB and EurekaBank).
. $100,000 expense accrual for long-term incentive plan awards due to an
increase in the Company's stock price.
First Quarter 1997
- ------------------
The after-tax impact of the following items essentially offset each other.
. $700,000 expense accrual for long-term incentive plan awards due to an
increase in the Company's stock price.
. $415,000 recovery related to a real estate joint venture previously written-
off.
. $250,000 credit to income relating to the reversal of an accrual for the
termination of BVB's data processing contract.
34
<PAGE>
BALANCE SHEET ANALYSIS
The Company's total assets were $5.7 billion at June 30, 1998 as
compared with $3.2 billion at December 31, 1997. The increase in total assets
was due to the Company's acquisition of EurekaBank effective January 2, 1998
and continued growth in the Company's loan portfolio during the first six
months of 1998.
SECURITIES
The Company maintains a portfolio of MBS, primarily issued by the
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA") and Government National Mortgage Association ("GNMA").
The following table illustrates the Company's securities portfolio as
of the dates indicated:
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------------------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
----------------------------------------- ---------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------------- -------------------- ------------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
- ------------------
Investment securities $ 6,133 $ 6,133 $ 5,639 $ 5,639
Mortgage-backed securities:
FHLMC, FNMA and GNMA
and other 234,176 235,500 54,526 54,402
----------------- -------------------- ------------------- ----------------------
240,309 241,633 60,165 60,041
----------------- -------------------- ------------------- ----------------------
HELD-TO-MATURITY
- ----------------
Investment securities - - 5,000 5,015
Mortgage-backed securities:
FHLMC, FNMA, GNMA
and other 535,477 536,058 415,859 413,980
----------------- -------------------- ------------------- ----------------------
535,477 536,058 420,859 418,995
----------------- -------------------- ------------------- ----------------------
$775,786 $777,691 $481,024 $479,036
================= ==================== =================== ======================
</TABLE>
The Company sold $9.4 million and $22.9 million in MBS securities from the
available-for-sale portfolio during the first and second quarters of 1998,
respectively, consistent with the Company's interest rate risk management
strategies. There were no sales of MBS during the first six months of 1997 nor
were there any purchases of MBS during the first six months of 1998 or 1997.
35
<PAGE>
LOANS AND LEASES
The following table illustrates the Company's loan and lease portfolio as of
the dates indicated:
<TABLE>
<CAPTION>
-------------------------------------------------
(UNAUDITED)
-------------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997
--------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Banking Platform:
Single-family real estate $2,023,114 $ 550,506
Multi-family real estate 1,066,653 1,026,148
Commercial real estate 379,451 348,754
HLTV home equity 334,445 67,092
Consumer 77,893 61,478
--------------------- --------------------
3,881,556 2,053,978
Consumer Finance Platform:
Motor vehicle 447,543 298,627
Commercial Finance Platform:
Commercial loans and leases 72,746 54,120
--------------------- --------------------
Gross loans receivable 4,401,845 2,406,725
Premiums and discounts, deferred fees
and advances 33,321 4,846
Allowance for loan losses (47,192) (38,458)
--------------------- --------------------
Net loans receivable $4,387,974 $2,373,113
===================== ====================
</TABLE>
Management's strategy is to supplement its loan originations with purchases of
loans and leased assets with higher risk-adjusted yields. The following tables
illustrate loans and leased assets originated and purchased for the periods
indicated:
<TABLE>
<CAPTION>
-----------------------------------------
THREE MONTHS ENDED
(UNAUDITED)
-----------------------------------------
JUNE 30, JUNE 30,
1998 1997
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LOAN AND LEASE ORIGINATIONS:
Real estate /(1)/ $ 45,593 $29,630
Motor vehicle 106,117 44,450
Commercial 21,771 3,707
Other 18,985 6,244
------------------ ------------------
Total originations $192,466 $84,031
------------------ ------------------
LOAN AND LEASED ASSET PURCHASES:
Real estate /(1)/ $405,919 $ 18,802
HLTV home equity 160,526 -
Motor vehicle 61,099 28,829
------------------ ------------------
Total purchases $627,544 $ 47,631
------------------ ------------------
Total originations and purchases $820,010 $131,662
================== ==================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------
SIX MONTHS ENDED
(UNAUDITED)
-----------------------------------------
JUNE 30, JUNE 30,
1998 1997
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LOAN AND LEASE ORIGINATIONS:
Real estate /(1)/ $ 72,326 $ 70,584
Motor vehicle 205,995 82,847
Commercial 30,830 4,693
Other 25,741 10,815
------------------ ------------------
Total originations $334,892 $168,939
------------------ ------------------
LOAN AND LEASED ASSET PURCHASES:
Real estate /(1)/ $ 410,414 $ 49,482
HLTV home equity 293,433 -
Motor vehicle 79,086 45,812
------------------ ------------------
Total purchases $ 782,933 $ 95,294
------------------ ------------------
Total originations and purchases $1,117,825 $264,233
================== ==================
</TABLE>
/(1)/ Includes first and second mortgages.
The Company's loan and leased asset origination and purchase activity during
the first six months of 1998, as compared with the first six months of 1997, is
consistent with the Company's strategy of focusing on generating assets within
the Consumer Finance Platform and the Commercial Finance Platform which provide
higher risk-adjusted yields compared to traditional mortgage-based assets. The
significant level of real estate loan purchases during the second quarter of
1998 was primarily to assist BVB in meeting its Community Reinvestment Act
("CRA") regulatory requirements.
CREDIT QUALITY
The Company defines nonperforming assets ("NPAs") as nonaccrual loans, real
estate owned and other repossessed assets. The Company defines nonaccrual loans
as loans 90 days or more delinquent as to principal and interest payments
(unless the principal and interest are well secured and in the process of
collection) 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. NPAs are placed on a 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 lower than those prevailing in the market.
Overall credit quality has continued to remain strong as evidenced by the
trends in NPAs and delinquencies. The following table illustrates the Company's
NPAs and TDRs as of the dates indicated and reflects the acquisition of
EurekaBank effective January 2, 1998:
<TABLE>
<CAPTION>
------------------------------------------------------------------
(UNAUDITED)
------------------------------------------------------------------
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans $16,201 $10,991 $16,125
Real estate owned 3,563 4,146 7,387
Other repossessed assets 1,041 629 798
------------------ ------------------ ------------------
Nonperforming assets 20,805 15,766 24,310
Troubled debt restructurings 805 731 509
------------------ ------------------ ------------------
Total $21,610 $16,497 $24,819
================== ================== ==================
</TABLE>
37
<PAGE>
The following table illustrates, by platform, NPAs and NPAs as a percentage of
total assets as of the dates indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AS A PERCENTAGE
OF TOTAL ASSETS (UNAUDITED)
----------------------------------------------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- -------------------------------- --------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform $17,234 0.30% $14,345 0.45% $23,323 0.71%
Consumer Finance Platform 3,150 0.05% 748 0.02% 987 0.03%
Commercial Finance Platform 421 0.01% 673 0.02% - -
------------- -------------- -------------- -------------- -------------- -------------
Total $20,805 0.36% $15,766 0.49% $24,310 0.74%
============= ============== ============== ============== -------------- -------------
</TABLE>
The following table illustrates, by platform, loans delinquent 60 days or more
as a percentage of gross loans as of the dates indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
LOANS DELINQUENT 60 DAYS OR MORE
AS A PERCENTAGE OF GROSS LOANS (UNAUDITED)
------------------------------------------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform $19,531 0.44% $21,526 0.90% $22,460 0.90%
Consumer Finance Platform 5,682 0.13% 1,045 0.04% 548 0.02%
Commercial Finance Platform 621 0.02% 673 0.03% - -
-------------- -------------- -------------- -------------- -------------- --------------
Total $25,834 0.59% $23,244 0.97% $23,008 0.92%
============== ============== ============== ============== ============== ==============
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Company conducts an ongoing review of its asset categories to assess the
adequacy of the allowance for loan losses, which is maintained at a level that
the Company believes is sufficient to cover estimated possible losses in the
portfolios. In determining the level of the allowance for loan losses, the
Company considers a number of factors, including 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 loan losses at June 30, 1998 was
$47.2 million as compared with $38.5 million and $29.0 million at December 31,
1997 and 1996, respectively. The increase in the allowance for loan losses at
June 30, 1998, as compared with December 31, 1997 and 1996, was due to the
allowances acquired in conjunction with the Company's acquisitions.
The following table illustrates the allowance for loan losses, including
approximately $7.4 million related to loans held for sale at December 31, 1996,
as a percentage of NPAs, gross loans and total assets, respectively, as of the
dates indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
AS A PERCENTAGE OF SPECIFIED ASSETS (UNAUDITED)
-----------------------------------------------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonperforming assets $ 20,805 227% $ 15,766 244% $ 24,310 150%
Gross loans $4,401,845 1.07% $2,406,725 1.60% $2,505,656 1.46%
Total assets $5,720,109 0.83% $3,246,476 1.18% $3,300,262 1.10%
</TABLE>
38
<PAGE>
The decrease in the allowance for loan losses as a percentage of gross loans
and total assets as of June 30, 1998, as compared with December 31, 1997 and
1996, was a result of the Company's acquisition of EurekaBank combined with
subsequent growth in the Company's gross loans and total assets. EurekaBank's
$1.5 billion loan portfolio consisted primarily of single-family and multi-
family residential mortgage loans which have lower credit risk as compared with
consumer and commercial assets, and thus had a corresponding lower allowance for
loan losses relative to gross loans and total assets than that of the Company.
The following table illustrates the changes in the allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(UNAUDITED)
--------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED FOR THE YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
----------------- ------------------ ----------------------------------
1998 1998 1997 1996
----------------- ------------------ ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $ 48,635 $38,458 $29,013 $30,014
Allowances related to acquisitions - 11,374 14,162 2,860
Charge-offs:
Real estate and other (846) (1,257) (2,699) (5,927)
HLTV home equity, primarily Emergent portfolio (1,216) (2,700) - -
Motor vehicle (1,764) (3,561) (4,057) (474)
Commercial (197) (382) (1,685) -
---------------- ----------------- ---------------- ------------
(4,023) (7,900) (8,441) (6,401)
Recoveries:
Real estate and other 4 1,668 706 522
HLTV home equity, primarily Emergent portfolio 41 41 - -
Motor vehicle 812 1,096 955 120
Commercial 23 95 111 -
---------------- ----------------- ---------------- ------------
880 2,900 1,772 642
Net charge-offs (3,143) (5,000) (6,669) (5,759)
Provision for loan losses 1,700 2,360 1,952 1,898
---------------- ----------------- ---------------- ------------
Ending balance $47,192 $47,192 $38,458 $29,013
================ ================= ================ ============
Net charge-offs to average loans (annualized) 0.31% 0.25% 0.28% 0.24%
================ ================= ================ ============
</TABLE>
The Company's provision for loan losses for the second quarter of 1998 was
$1.7 million as compared with $612,000 for the second quarter of 1997. The
Company's provision for loan losses for the first six months of 1998 was $2.4
million as compared with $1.2 million for the first six months of 1997. The
increases in the provision, as compared with the respective prior periods, were
largely associated with the continued growth in the Company's consumer and
commercial loans and HLTV home equity loans.
Net charge-offs for the first six months of 1998 included approximately $2.7
million in net charge-offs primarily related to the Company's portfolio of HLTV
home equity loans acquired from Emergent in August 1997, the reserves for which
were provided for upon acquisition. Net charge-offs for the first six months of
1998, excluding the Emergent HLTV home equity loan portfolio, were approximately
$2.3 million compared to the Company's provision for loan losses during this
same period of approximately $2.4 million. The provision for loan losses for the
first six months of 1998 reflects the composition and quality of the Company's
loan portfolio including the continued transition of its loan portfolio to
consumer and commercial assets with higher risk-adjusted yields relative to
traditional mortgage assets, but also higher corresponding credit losses.
39
<PAGE>
CUSTOMER DEPOSITS
As a primary part of the Company's business, customer deposits are generated
for the purpose of funding loans, leases and securities. The following table
illustrates customer deposits as of the dates indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
(UNAUDITED)
----------------------------------------------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
----------------------------------------------------- -------------------------------------------
% OF WEIGHTED % OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------------- ----------- ---------------- ---------------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts $1,395,036 42.1% 3.03% $ 553,820 33.0% 2.97%
Retail CDs 1,918,729 57.9 5.40 1,045,152 62.3 5.51
Brokered CDs - - - 78,163 4.7 5.82
---------------- ----------- ------------- ---------------- ---------- ----------
Total $3,313,765 100.0% 4.43% $1,677,135 100.0% 4.71%
================ =========== ============= ================ ========== ==========
</TABLE>
BORROWINGS
The Company utilizes collateralized advances from the FHLB of San Francisco
and other borrowings, such as securities sold under agreements to repurchase, on
a collateralized and noncollateralized basis, for purposes of funding loans,
leases and securities. The following table illustrates outstanding borrowings
as of the dates indicated:
<TABLE>
<CAPTION>
----------------------------------------------
(UNAUDITED)
----------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Advances from the FHLB of San Francisco $1,691,060 $1,110,270
Securities sold under agreements to repurchase 140,457 90,134
Subordinated notes 99,404 99,372
Senior debentures 50,000 50,000
Other 5,435 6,200
------------------ ------------------
Total $1,986,356 $1,355,976
================== ==================
</TABLE>
LIQUIDITY
The Company's primary sources of funds include cash flows from operations,
loan and MBS repayments, customer deposits, advances from the FHLB of San
Francisco, and securities sold under agreements to repurchase. The Company uses
its liquidity resources principally to fund the origination and purchase of
loans and leases, to repay maturing borrowings and to fund maturing time
deposits and other deposit withdrawals.
CAPITAL
BVB's regulatory capital at June 30, 1998 exceeded the minimum requirements of
each Office of Thrift Supervision ("OTS") regulatory capital standard on a fully
phased-in basis as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
MINIMUM
ACTUAL REQUIREMENT EXCESS
------------------------------ -------------------------------- --------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ------------ --------------- ------------- ---------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible $333,072 6.02% $ 82,955 1.50% $250,117 4.52%
Core 334,057 6.04% 221,253 4.00% 112,804 2.04%
Total Risk-based 374,073 10.43% 286,809 8.00% 87,264 2.43%
</TABLE>
40
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each Federal banking agency, including the OTS, to implement prompt
corrective actions for "under capitalized" institutions that it regulates. Under
capital guidelines enacted by FDICIA, BVB met the criteria for the "well
capitalized" standard at June 30, 1998 as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
------------------------------ -------------------------------- --------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ------------ --------------- ------------- ---------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leverage $334,057 6.04% $276,567 5.00% $ 57,490 1.04%
Tier I Risk-based 334,057 9.32% 215,107 6.00% 118,950 3.32%
Total Risk-based 374,073 10.43% 358,512 10.00% 15,561 0.43%
</TABLE>
YEAR 2000
The Year 2000 issue arises from computer programs that were written using two
digits rather than four to define the applicable year. As a result, computer
programs with time-sensitive software may have a difficult time distinguishing
between the year 2000 and the year 1900, causing potential disruptions of
operations, including among other things, potential miscalculations or an
inability to process transactions.
The majority of the Company's data processing capabilities are either
currently provided by third party vendors or are on systems that are in the
process of converting to third party vendors. Contracts with the Company's key
vendors require that the vendor be Year 2000 compliant. The Company continues to
monitor these vendors' progress towards Year 2000 compliance. Additionally, the
Company is evaluating all internal systems for potential Year 2000 compliance
issues. The Company currently estimates that its total internal and external
costs associated with making these internal systems Year 2000 compliant will be
approximately $1.0 million. The Company expects to fund these costs through
operating cash flows.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes annual and
interim reporting standards for a publicly held entity's operating segments and
related disclosures about its products, services, geographic areas, and major
customers. Adoption of this statement will not impact the Company's
consolidated financial condition, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. SFAS 131
will be effective for the Company's December 31, 1998 financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative. The Company
currently utilizes interest rate swap agreements to hedge cash flows associated
with current and anticipated transactions. To the extent these interest rate
swap agreements qualify as a cash flow hedge under SFAS 133, the effective
portion of the derivative's gain or loss would be initially reported as a
component of other comprehensive income (outside of earnings) and subsequently
reclassified into earnings when the forecasted transaction affected earnings.
SFAS 133 will be effective for the Company for the fiscal quarter beginning July
1, 1999.
41
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT
The objective of the Company's asset/liability management activities is to
improve earnings by adjusting the type and mix of assets and liabilities to
effectively address changing conditions and risks. Through overall management of
its balance sheet and by controlling various risks, the Company seeks to
optimize its financial returns within safe and sound parameters. The Company's
operating strategies for attaining this objective include:
. Managing net interest margin through appropriate risk/return pricing
of assets and liabilities.
. Increasing deposits as a percentage of interest-bearing liabilities
and reducing the Company's cost of funds.
. Utilizing the Company's strong capital position to boost the earnings
power through acquisition of quality assets with higher risk-adjusted
yields.
. Controlling noninterest expense and enhancing noninterest income,
utilizing improved information systems to facilitate analysis of the
profitability of individual business units and products.
. Utilizing interest rate swap agreements and other hedging strategies
to reduce exposure to fluctuations in interest rates.
. Enhancing internal analysis capability for measuring, evaluating and
monitoring risk.
INTEREST RATE RISK
Financial institutions are subject to interest rate risk to the degree that
interest-bearing liabilities reprice or mature on a different basis and at
different times than interest-earning assets. The Company's strategy has been
to reduce the sensitivity of its earnings to interest rate fluctuations by more
closely matching the effective maturities or repricing characteristics of its
assets and liabilities. Certain assets and liabilities, however, may react in
different degrees to changes in market interest rates. Further, interest rates
on certain types of assets and liabilities may fluctuate prior to changes in
market interest rates, while rates on other types may lag behind. Additionally,
certain assets, such as ARMs, have features, including payment and rate caps,
which restrict changes in their interest rates. The Company considers the
anticipated effects of these factors when implementing its interest rate risk
management objectives.
The Company pursues balance sheet strategies that should, in the long run,
mitigate its exposure to fluctuations in interest rates. The Company also
considers other strategies to minimize the variability of the net interest
margin including off-balance sheet activities. The Company has initiated
numerous actions which significantly reduced the Company's exposure to
fluctuations in interest rates.
Interest Rate Swaps
- -------------------
The Company uses interest rate swap agreements to hedge cash flows
associated with the Company's borrowings. Interest rate swaps involve the
exchange of fixed-rate and floating-rate interest payment obligations without
the exchange of the underlying notional amounts. At June 30, 1998 and December
31, 1997, the Company was a party to interest rate swap agreements with notional
principal amounts of $449 million, which involve the receipt of floating
interest rates (based on 3-month LIBOR) and payment of fixed interest rates on
the underlying notional amounts.
INTEREST RATE SENSITIVITY
The Company's interest rate risk management policies are established and
monitored by its Asset/Liability Committee ("ALCO"). The ALCO reviews the
sensitivity of the Company's net interest income and market value of equity to
interest rate changes. The objective of the Company's ALCO activities is to
improve earnings by adjusting the types of assets and liabilities to effectively
address changing conditions and risks. Management believes that its
asset/liability activities have improved earnings within safe and sound
parameters.
42
<PAGE>
In measuring interest rate sensitivity, the Company uses simulation
modeling to estimate the potential effects of movements in interest rates.
Interest rate sensitivity analysis measures the Company's interest rate risk by
computing estimated market value of equity ("MVE") based on the net present
value of cash flows from assets, liabilities and off-balance sheet items in the
event of a range of assumed changes in market interest rates. MVE is equal to
the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items. This analysis assesses the risk of
loss in market risk-sensitive instruments in the event of a sudden and sustained
100 to 400 basis point increase or decrease in market interest rates.
The following table presents BVB's projected change in MVE, with and
without interest rate swaps, for the various basis point ("bp") rate shock
levels at June 30, 1998. All market risk-sensitive instruments presented in this
table are held-to-maturity or available-for-sale. The Company has no trading
securities.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
CHANGES IN MARKET VALUE OF EQUITY (UNAUDITED)
----------------------------------------------------------------------------------------
Projected Effect: +100 BP +200 BP +300 BP +400 BP
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
MVE without swaps $ 337,382 $ 296,285 $ 247,363 $ 186,869
MVE with swaps $ 343,098 $ 313,049 $ 274,648 $ 224,175
Impact of swaps $ 5,716 $ 16,764 $ 27,285 $ 37,306
----------------------------------------------------------------------------------------
Projected Effect: -100 BP -200 BP -300 BP -400 BP
------------------- ------------------- ------------------- -------------------
MVE without swaps $ 414,958 $ 474,823 $ 543,994 $ 626,755
MVE with swaps $ 396,874 $ 443,922 $ 499,616 $ 568,203
Impact of swaps $ (18,084) $ (30,901) $ (44,378) $ (58,552)
</TABLE>
The change in MVE as a percentage of the present value of assets from an
immediate 200 bp increase in interest rates was (1.04%) at June 30, 1998 as
compared with (0.59%) at December 31, 1997.
The computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the Company may undertake in response to changes in
interest rates. Certain shortcomings are inherent in the method of analysis
presented in the computation of MVE. Actual values may differ from those
projections set forth in the table should market conditions vary from
assumptions used in the preparation of the table.
To measure the Company's interest rate sensitivity, a cumulative gap
measure can also be used to assess the impact of potential changes in interest
rates on net interest income. The repricing gap represents the net position of
assets and liabilities subject to repricing in specified time periods. Assets
and liabilities are categorized according to the expected repricing time frames
based on management's judgment. A cumulative gap measure alone cannot be used to
evaluate interest rate sensitivity because interest rate changes do not affect
all categories of assets and liabilities equally or simultaneously.
43
<PAGE>
The following table illustrates the combined asset and liability repricing of
the Company as of June 30, 1998:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
REPRICING PERIOD (UNAUDITED)
-----------------------------------------------------------------------------
UNDER BETWEEN BETWEEN OVER
ONE ONE AND AND THREE FIVE
YEAR THREE YEARS FIVE YEARS YEARS TOTAL
------------- -------------- ---------------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
- -------
Cash and investments $ 134,376 $ 6,133 $ - $ 15,330 $ 155,839
Loans and mortgage-backed securities /(1)/ 3,260,942 1,150,933 498,572 342,338 5,252,785
------------- -------------- ---------------- ------------ --------------
Total interest rate sensitive assets $ 3,395,318 $1,157,066 $ 498,572 $ 357,668 $ 5,408,624
============= ============== ================ ============ ==============
LIABILITIES
- -----------
Deposits:
Transaction accounts $ 1,395,036 $ - $ - $ - $ 1,395,036
Certificates of deposit 1,636,070 243,681 37,973 1,005 1,918,729
Borrowings 1,525,745 149,404 - 311,207 1,986,356
------------- -------------- ---------------- ------------ --------------
Total interest rate sensitive liabilities $ 4,556,851 $ 393,085 $ 37,973 $ 312,212 $ 5,300,121
============= ============== ================ ============ ==============
Repricing gap-positive (negative) before impact of
interest rate swaps $(1,161,533) $ 763,981 $ 460,599 $ 45,456 $ 108,503
==============
Impact of interest rate swaps 389,250 (161,750) (100,000) (127,500)
------------- -------------- ---------------- ------------
(772,283) 602,231 360,599 (82,044)
============= ============== ================ ============
Cumulative repricing gap-positive (negative) $ (772,283) $ (170,052) $ 190,547 $ 108,503
============= ============== ================ ============
Cumulative repricing gap as a percentage of interest
rate sensitive assets at June 30, 1998 (14.28%) (3.14%) 3.52% 2.01%
============= ============== ================ ============
</TABLE>
/(1)/ Based on assumed annual prepayment and amortization rates which
approximate the Company's historical experience.
44
<PAGE>
The following table illustrates the combined asset and liability repricing of
the Company as of December 31, 1997:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
REPRICING PERIOD (UNAUDITED)
------------------------------------------------------------------------------
UNDER BETWEEN BETWEEN OVER
ONE ONE AND THREE THREE AND FIVE FIVE
YEAR YEARS YEARS YEARS TOTAL
-------------- ----------------- ----------------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Cash and investments $ 257,588 $ 5,000 $ - $ - $ 262,588
Loans and mortgage-backed securities/(1)/ 1,950,582 371,275 201,178 320,339 2,843,374
-------------- ----------------- ---------------- ----------- ------------
Total interest rate sensitive assets $2,208,170 $ 376,275 $ 201,178 $ 320,339 $3,105,962
============== ================= ================ =========== ============
LIABILITIES
- -----------
Deposits:
Transaction accounts $ 553,820 $ - $ - $ - $ 553,820
Certificates of deposit 1,007,420 110,987 4,908 - 1,123,315
Borrowings 1,101,604 135,000 20,000 99,372 1,355,976
-------------- ----------------- ---------------- ----------- ------------
Total interest rate sensitive liabilities $2,662,844 $ 245,987 $ 24,908 $ 99,372 $3,033,111
-------------- ----------------- ---------------- ----------- ------------
Repricing gap-positive (negative) before impact of
interest rate swaps $ (454,674) $ 130,288 $ 176,270 $ 220,967 $ 72,851
============
Impact of interest rate swaps 389,250 (111,750) (100,000) (177,500)
-------------- ----------------- ---------------- -----------
(65,424) 18,538 76,270 43,467
-------------- ----------------- ---------------- -----------
Cumulative repricing gap-positive (negative) $ (65,424) $ (46,886) $ 29,384 $ 72,851
============== ================= ================ ===========
Cumulative repricing gap as a percentage of interest
rate sensitive assets
at December 31, 1997 (2.11%) (1.51%) 0.95% 2.35%
============== ================= ================ ===========
</TABLE>
/(1)/ Based on assumed annual prepayment and amortization rates which
approximate the Company's historical experience.
45
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the annual meeting of the Company's stockholders, held on May 28,
1998, the stockholders considered the following proposals:
I. The election of three directors of the Company;
II. The approval and adoption of the Company's 1998-2000
Performance Stock Plan; and
III. The approval and adoption of the Company's 1998 Non-Employee
Director Stock Option and Incentive Plan.
The following directors were re-elected:
Robert M. Greber
Edward H. Sondker
W. Blake Winchell
The vote on the election of proposals II and III were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
BROKER NON-
FOR AGAINST ABSTAIN VOTES
------------------------ ------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Proposal II 15,854,968 1,896,467 363,927 271,165
Proposal III 16,513,545 1,168,839 432,708 271,165
</TABLE>
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a(i). Computation of Ratios of Earnings to Fixed Charges (Exhibit 12)
a(ii). Financial Data Schedule (Exhibit 27)
b(i). The Registrant filed the following report on Form 8-K dated April
29, 1998 as amended by Form 8-K/A and Form 8-K/A-2 during the three
months ended June 30, 1998:
The Registrant decided to replace Deloitte & Touche LLP, the
Registrant's independent accountants for the fiscal year ended
December 31, 1997, with a firm not named as of such date.
b(ii). The Registrant filed the following report on Form 8-K dated May 12,
1998 during the three months ended June 30, 1998:
The Registrant engaged KPMG Peat Marwick LLP as its independent
accountants.
46
<PAGE>
b(iii). The Registrant filed the following report on Form 8-K dated June
10, 1998 during the three months ended June 30, 1998:
The Registrant announced the acquisition of PSB Lending Corp.
b(iv). The Registrant filed the following report on Form 8-K dated June
22, 1998 during the three months ended June 30, 1998:
The Registrant announced that the acquisition of PSB Lending Corp.
was on hold pending receipt and review of expected federal
regulatory guidelines.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
----------------------------
Registrant
DATE: August 14, 1998 BY: /s/ David A. Heaberlin
---------------------------------------
David A. Heaberlin
Executive Vice President and Chief Financial
Officer
(Duly Authorized Officer and Principal Financial
Officer)
47
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Earnings:
Earnings before income tax expense 20,144 17,133
Add:
Interest on advances and other borrowings 45,538 36,533
Interest component of rental expense 1,076 467
------- -------
Earnings before fixed charges excluding 66,758 54,133
Interest on customer deposits
Interest on customer deposits 78,597 38,139
------- -------
Earnings before fixed charges 145,355 92,272
======= =======
Fixed Charges:
Interest on advances and other borrowings 45,538 36,533
Interest component of rental expense 1,076 467
------- -------
Fixed charges excluding interest on
customer deposits 46,614 37,000
Interest on customer deposits 78,597 38,139
------- -------
Total fixed charges 125,211 75,139
======= =======
Ratio of earnings to fixed charges including
interest on customer deposits 1.16x 1.23x
Ratio of earnings to fixed charges excluding
interest on customer deposits 1.43x 1.46x
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 42,963
<INT-BEARING-DEPOSITS> 59,723
<FED-FUNDS-SOLD> 5,330
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 241,633
<INVESTMENTS-CARRYING> 535,477
<INVESTMENTS-MARKET> 536,058
<LOANS> 4,387,974
<ALLOWANCE> 47,192
<TOTAL-ASSETS> 5,720,109
<DEPOSITS> 3,313,765
<SHORT-TERM> 1,525,745
<LIABILITIES-OTHER> 26,086
<LONG-TERM> 460,611
0
0
<COMMON> 203
<OTHER-SE> 393,699
<TOTAL-LIABILITIES-AND-EQUITY> 5,720,109
<INTEREST-LOAN> 165,917
<INTEREST-INVEST> 33,496
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 199,413
<INTEREST-DEPOSIT> 78,597
<INTEREST-EXPENSE> 45,538
<INTEREST-INCOME-NET> 75,278
<LOAN-LOSSES> 2,360
<SECURITIES-GAINS> 412
<EXPENSE-OTHER> 63,105
<INCOME-PRETAX> 20,144
<INCOME-PRE-EXTRAORDINARY> 20,144
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,294
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 2.98
<LOANS-NON> 16,201
<LOANS-PAST> 0
<LOANS-TROUBLED> 805
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 49,832
<CHARGE-OFFS> 7,900
<RECOVERIES> 2,900
<ALLOWANCE-CLOSE> 47,192
<ALLOWANCE-DOMESTIC> 47,192
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
