<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, 1999
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 001-14879
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) 312-7200
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, 1999
(Title of Class) 18,683,637 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 Income and Comprehensive Income............. 5-6
Consolidated Statements of Stockholders' Equity........................ 7
Consolidated Statements of Cash Flows.................................. 8-9
Notes to Consolidated Financial Statements............................. 10-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 13-56
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................ 57-60
PART II. OTHER INFORMATION
- -------- -----------------
Other Information...................................................... 61
Signatures............................................................. 62
</TABLE>
2
<PAGE>
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which describe our
future plans, strategies, and expectations. All forward-looking statements are
based on assumptions and involve risks and uncertainties, many of which are
beyond our control and which may cause our actual results, performance or
achievements to differ materially from the results, performance or achievements
that we anticipate. Factors that might affect forward-looking statements
include, among other things:
. the demand for our products;
. actions taken by our competitors;
. changes in tax requirements, including tax rate changes, new tax laws and
revised tax law interpretations;
. adverse changes occurring in securities markets;
. inflation and changes in the interest rate environment that reduce our
margins or the fair value of the financial instruments we hold;
. economic or business conditions, either nationally or in our market areas,
that are worse than we expect;
. legislative or regulatory changes that adversely affect our business;
. our inability to identify suitable future acquisition candidates;
. the timing, impact and other uncertainties of our future acquisitions and
our success or failure in the integration of their operations;
. our ability to enter new markets successfully and capitalize on growth
opportunities;
. technological changes, including the Year 2000 compliance issue, that are
more difficult or expensive than we expect;
. increases in defaults by borrowers and other loan delinquencies;
. increases in our provision for losses on loans and leases;
. increased costs or other difficulties relating to our pending acquisition
of Franchise Mortgage Acceptance Company;
. our inability to sustain or improve the performance of our subsidiaries;
. our inability to achieve the financial goals in our strategic plans,
including any financial goals related to both contemplated and consummated
acquisitions;
. the outcome of lawsuits or regulatory disputes;
. credit and other risks of lending, leasing and investment activities; and
. our inability to use the net operating loss carryforwards we currently
have.
As a result of the above, we cannot assure you that our future results of
operations or financial condition or any other matters will be consistent with
those presented in any forward-looking statements. Accordingly, we caution you
not to rely on these forward-looking statements. We do not undertake, and
specifically disclaim any obligation, to update these forward-looking
statements, which speak only as of the date made.
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
-------------- --------------
June 30, December 31,
1999 1998
-------------- --------------
ASSETS (Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash and due from depository institutions $ 40,733 $ 37,296
Short-term investments 48,659 167,890
-------------- --------------
89,392 205,186
Securities available-for-sale:
Investment securities 4,828 5,319
Mortgage-backed securities 11,766 13,616
Securities held-to-maturity:
Investment securities - -
Mortgage-backed securities 602,379 621,773
Loans held-for-sale 514,394 -
Loans and leases held-for-investment, net of allowance for losses 3,959,193 4,191,269
Investment in operating leased assets, net 338,845 183,453
Investment in stock of the FHLB of San Francisco 95,770 90,878
Investment in stock of the Federal Reserve Bank 13,110 -
Real estate owned, net 1,548 2,666
Premises and equipment, net 22,906 24,727
Intangible assets 128,572 134,088
Other assets 120,625 123,257
-------------- --------------
Total assets $5,903,328 $5,596,232
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts $1,759,996 $1,627,275
Retail certificates of deposit 1,530,161 1,642,362
Brokered certificates of deposit 56,718 -
-------------- --------------
3,346,875 3,269,637
Advances from the FHLB of San Francisco 1,900,400 1,653,300
Securities sold under agreements to repurchase 51,205 25,302
Subordinated Notes, net 99,469 99,437
Senior Debentures - 50,000
Other borrowings 4,190 5,077
Other liabilities 30,135 25,668
-------------- --------------
Total liabilities 5,432,274 5,128,421
-------------- --------------
Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures ("Capital Securities") 90,000 90,000
Stockholders' equity:
Serial preferred stock: Authorized, 7,000,000 shares; Outstanding, none - -
Common stock ($.01 par value): Authorized, 60,000,000 shares;
issued, 6/30/99-20,400,251 shares; 12/31/98-20,376,251 shares;
outstanding, 6/30/99-18,677,637 shares; 12/31/98-19,113,637 shares 204 204
Additional paid-in capital 251,321 251,010
Retained earnings (substantially restricted) 166,539 155,715
Treasury stock, at cost, 6/30/99-1,722,614 shares; 12/31/98-1,262,614 shares (33,538) (25,157)
Accumulated other comprehensive income:
Unrealized loss on securities available-for-sale, net of tax (213) (202)
Debt of Employee Stock Ownership Plan (3,259) (3,759)
-------------- --------------
Total stockholders' equity 381,054 377,811
-------------- --------------
Total liabilities and stockholders' equity $5,903,328 $5,596,232
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------
Three Months Ended
June 30,
---------------------------------------------
1999 1998
-------------------- --------------------
(Amounts in thousands, except
per share amounts)
<S> <C> <C>
Interest income:
Interest on loans and leases $ 90,914 $ 84,660
Interest on mortgage-backed securities 8,798 13,289
Interest and dividends on investment securities 3,004 2,398
------------------- --------------------
102,716 100,347
Interest expense:
Interest on deposits 33,475 37,600
Interest on Senior Debentures and Notes 3,158 3,527
Interest on borrowings 23,337 20,876
------------------- --------------------
59,970 62,003
Net interest income 42,746 38,344
Provision for losses on loans and leases 6,800 1,700
------------------- --------------------
Net interest income after provision for losses on loans and leases 35,946 36,644
Noninterest income:
Leasing income 13,094 1,052
Loan fees and charges 1,783 1,710
Account fees 1,778 1,461
Sales commissions 1,300 1,221
Gain on sale of loans and securities - 297
Other, net 160 388
------------------- --------------------
18,115 6,129
Noninterest expense:
General and administrative 25,879 29,230
Leasing expenses 8,938 708
Dividend expense on Capital Securities 2,234 -
Real estate owned operations, net (57) (115)
Net recoveries on real estate - (84)
Amortization of intangible assets 2,883 2,866
------------------- --------------------
39,877 32,605
Income before income tax expense 14,184 10,168
Income tax expense 6,648 4,934
------------------- --------------------
Net income $ 7,536 $ 5,234
=================== ====================
Basic earnings per share $ 0.40 $ 0.26
=================== ====================
Diluted earnings per share $ 0.40 $ 0.25
=================== ====================
Average basic shares outstanding 18,746 20,329
=================== ====================
Average diluted shares outstanding 18,874 20,715
=================== ====================
Net income $ 7,536 $ 5,234
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available-for-sale, net of tax expense (benefit)
of ($56) for the three months ended June 30, 1999 and $265 for the three months ended
June 30, 1998 (80) 376
------------------- --------------------
Comprehensive income $ 7,456 $ 5,610
=================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------
Six Months Ended
June 30,
----------------------------------------
1999 1998
------------------ -----------------
(Amounts in thousands, except
per share amounts)
<S> <C> <C>
Interest income:
Interest on loans and leases $ 178,032 $ 165,917
Interest on mortgage-backed securities 18,196 28,544
Interest and dividends on investment securities 6,509 4,952
----------------- -----------------
202,737 199,413
Interest expense:
Interest on deposits 67,077 78,597
Interest on Senior Debentures and Notes 6,685 7,053
Interest on borrowings 45,446 38,485
------------------ -----------------
119,208 124,135
Net interest income 83,529 75,278
Provision for losses on loans and leases 12,111 2,360
------------------ -----------------
Net interest income after provision for losses on loans and leases 71,418 72,918
Noninterest income:
Leasing income 22,752 1,052
Loan fees and charges 3,784 3,439
Account fees 3,432 2,920
Sales commissions 2,481 1,854
Gain on sale of loans and securities - 419
Other, net 1,633 647
------------------ -----------------
34,082 10,331
Noninterest expense:
General and administrative 52,035 56,972
Leasing expenses 15,619 708
Dividend expense on Capital Securities 4,469 -
Real estate owned operations, net (40) (78)
Net losses (recoveries) on real estate 17 (108)
Amortization of intangible assets 5,787 5,611
------------------ -----------------
77,887 63,105
Income before income tax expense 27,613 20,144
Income tax expense 12,944 9,850
------------------ -----------------
Net income $ 14,669 $ 10,294
================== =================
Basic earnings per share $ 0.77 $ 0.51
================== =================
Diluted earnings per share $ 0.77 $ 0.50
================== =================
Average basic shares outstanding 18,953 20,290
================== =================
Average diluted shares outstanding 19,103 20,696
================== =================
Net income $ 14,669 $ 10,294
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available-for-sale, net of tax expense
(benefit) of ($8) for the six months ended June 30, 1999 and $609 for the
six months ended June 30, 1998 (11) 864
================== =================
Comprehensive income $ 14,658 $ 11,158
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Unrealized
Loss
Additional On Securities
Number of Common Paid-in Retained Treasury Available-for-Sale,
Shares Stock Capital Earnings* Stock Net of Tax
--------- ------- ---------- --------- -------- -------------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 15,126 $ 151 $ 103,052 $ 141,065 $(66,352) $ (72)
Issuance of common stock (AFEH acquisition):
From shares held in treasury - - - - 65,258 -
From authorized but unissued shares 5,087 51 144,691 - - -
Repurchase of common stock - - - - (24,063) -
Exercise of stock options, including tax benefits 163 2 3,267 - - -
Cash dividends declared ($0.40 per share) - - - (8,069) - -
Unrealized loss, net of tax - - - - - (130)
Repayment of debt - - - - - -
Net income - - - 22,719 - -
--------- ------- ---------- --------- -------- -------------------
Balance at December 31, 1998 20,376 $ 204 $ 251,010 $ 155,715 $(25,157) $ (202)
========= ======= ========== ========= ======== ===================
Repurchase of common stock - - - - (8,381) -
Exercise of stock options 24 - 311 - - -
Cash dividends declared ($0.20 per share) - - - (3,845) - -
Unrealized loss, net of tax - - - - - (11)
Repayment of debt - - - - - -
Net income - - - 14,669 - -
--------- ------- ---------- --------- -------- -------------------
Balance at June 30, 1999 20,400 $ 204 $ 251,321 $ 166,539 $(33,538) $ (213)
========= ======= ========== ========= ======== ===================
<CAPTION>
-----------------------------------
Debt of
Employee
Stock Total
Ownership Stockholders'
Plan Equity
------------ ----------------
<S> <C> <C>
Balance at December 31, 1997 (4,217) $ 173,627
Issuance of common stock (AFEH acquisition):
From shares held in treasury - 65,258
From authorized but unissued shares - 144,742
Repurchase of common stock - (24,063)
Exercise of stock options, including tax benefits - 3,269
Cash dividends declared ($0.40 per share) - (8,069)
Unrealized loss, net of tax - (130)
Repayment of debt 458 458
Net income - 22,719
--------- -------------
Balance at December 31, 1998 (3,759) $ 377,811
========= =============
Repurchase of common stock
Exercise of stock options - (8,381)
Cash dividends declared ($0.20 per share) - 311
Unrealized loss, net of tax - (3,845)
Repayment of debt - (11)
Net income 500 500
- 14,669
Balance at June 30, 1999 --------- -------------
$ (3,259) $ 381,054
========= =============
</TABLE>
* Substantially restricted
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------
Six Months Ended
June 30,
-------------------------------------
1999 1998
--------------- ----------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,669 $ 10,294
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of intangible assets 5,787 5,611
Provision for losses on loans and leases and real estate owned 12,128 2,252
Depreciation and amortization of premises and equipment 3,690 2,901
Depreciation and amortization of investment in operating leased assets 13,732 574
Amortization of premiums, net of discounts 4,525 459
Gain on sale of loans and securities - (419)
Decrease in net deferred tax assets (6,350) (6,755)
(Increase) decrease in other assets 7,803 (22,337)
Increase (decrease) in other liabilities 5,365 (38,988)
Other, net 31 (476)
--------------- ----------------
Net cash provided by (used in) operating activities 61,380 (46,884)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash and cash equivalents received - 82,129
Net decrease in loans and leases resulting from principal payments,
net of originations 117,916 250,542
Purchase of loans and leases, net (584,198) (782,933)
Purchase of investment securities - (1,956)
Purchase of mortgage-backed securities (74,467) -
Principal payments on mortgage-backed securities 93,848 158,791
Proceeds from sale of mortgage-backed securities available-for-sale - 32,248
Proceeds from sale of investment securities available-for-sale - 886
Proceeds from maturity or call of investment securities held-to-maturity - 5,000
Proceeds from sale of real estate owned 2,158 2,841
Additions to premises and equipment (1,869) (8,386)
Increase in investment in stock of the FHLB of San Francisco (4,892) (3,078)
Increase in investment in stock of the Federal Reserve Bank (13,110) -
--------------- ----------------
Net cash used in investing activities (464,614) (263,916)
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------
Six Months Ended
June 30,
----------------------------------------
1999 1998
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 77,238 $ (376,013)
Proceeds from advances from the FHLB of San Francisco 1,653,100 2,368,700
Repayment of advances from the FHLB of San Francisco (1,406,000) (1,843,910)
Proceeds from reverse repurchase agreements 79,252 278,885
Repayment of reverse repurchase agreements (53,349) (228,562)
Maturity of Senior Debentures (50,000) -
Net change in other borrowings (887) (10,765)
Repurchase of common stock (8,381) -
Proceeds from issuance of common stock 311 2,726
Dividends paid to stockholders (3,844) (4,067)
----------------- -----------------
Net cash provided by financing activities 287,440 186,994
----------------- -----------------
Net decrease in cash and cash equivalents (115,794) (123,806)
Cash and cash equivalents at beginning of period 205,186 231,822
----------------- -----------------
Cash and cash equivalents at end of period $ 89,392 $ 108,016
================= =================
Cash paid for:
Interest $ 123,506 $ 127,609
Income taxes $ - $ -
Supplemental non-cash investing and financing activities:
Loans transferred to real estate owned $ - $ 2,662
Loans transferred from held-for-investment to held-for-sale $ 514,394 $ -
The acquisition of subsidiaries involved the following:
Common stock issued $ - $ 210,000
Liabilities assumed - 2,103,318
Fair value of assets acquired, other than cash and cash equivalents - (2,128,883)
Goodwill - (102,306)
----------------- -----------------
Net cash and cash equivalents received $ - $ 82,129
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Bay View Capital Corporation, a diversified financial services
holding company incorporated in 1989 in the state of Delaware, and our wholly
owned subsidiaries: Bay View Bank, N.A., a national bank (sometimes referred to
as "Bay View Bank"); Bay View Securitization Corporation, a Delaware
corporation; and Bay View Capital I, a Delaware business trust. Bay View Bank
includes its wholly owned subsidiaries: Bay View Acceptance Corporation, a
Nevada corporation; Bay View Commercial Finance Group, a California corporation;
MoneyCare, Inc., a California corporation; and Bay View Auxiliary Corporation, a
California corporation. Bay View Acceptance Corporation includes its wholly
owned subsidiary, LFS-BV, Inc., a Nevada corporation. Bay View Credit and Ultra
Funding, Inc. were merged into Bay View Acceptance Corporation effective June
14, 1999 and as a result, the businesses of Bay View Credit and Ultra Funding,
Inc. are now conducted by Bay View Acceptance Corporation directly. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Effective March 1, 1999, Bay View Capital Corporation contributed the
capital stock of Bay View Commercial Finance Group to Bay View Bank in
conjunction with the March 1, 1999 conversion of Bay View Bank from a federally
chartered capital stock savings bank to a national bank. Bay View Commercial
Finance Group was previously a wholly owned subsidiary of Bay View Capital
Corporation.
The information provided in these interim financial statements reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of our financial condition as of June 30, 1999 and December 31,
1998, the results of our operations for the three and six-month periods ended
June 30, 1999 and 1998, and our cash flows for the six-month periods ended June
30, 1999 and 1998. 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 our financial condition, 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 in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" was written assuming that you
have read or have access to our 1998 Annual Report on Form 10-K, as amended,
which contains the latest audited consolidated financial statements and notes,
along with Management's Discussion and Analysis of Financial Condition as of
December 31, 1998 and 1997 and Results of Operations for the years ended
December 31, 1998, 1997 and 1996. 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, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period.
10
<PAGE>
Note 2 - Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Measurement of
Earnings Per Share," establishes standards for computing and reporting basic
earnings per share and diluted earnings per share. Basic earnings per share is
calculated by dividing net earnings for the period by the weighted-average
common shares outstanding for that period. There is no adjustment to the number
of outstanding shares for potential dilutive instruments, such as stock options.
Diluted earnings per share takes into account the potential 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 shares
outstanding.
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,
1999 1998 1999 1998
------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Net earnings available to common
stockholders $ 7,536 $ 5,234 $ 14,669 $ 10,294
Weighted-average common shares
outstanding 18,746 20,329 18,953 20,290
Add: Dilutive potential common shares 128 386 150 406
------------------- ------------------ ------------------- ------------------
Diluted weighted-average common shares
outstanding 18,874 20,715 19,103 20,696
------------------- ------------------ ------------------- ------------------
Basic earnings per share $ 0.40 $ 0.26 $ 0.77 $ 0.51
=================== ================== =================== ==================
Diluted earnings per share $ 0.40 $ 0.25 $ 0.77 $ 0.50
=================== ================== =================== ==================
</TABLE>
Note 3 - Stock Options
At June 30, 1999, Bay View Capital Corporation had five stock option plans:
the "Amended and Restated 1986 Stock Option and Incentive Plan," the "Amended
and Restated 1995 Stock Option and Incentive Plan," the "Amended and Restated
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."
The following table illustrates the stock options available for grant as of
June 30, 1999:
<TABLE>
<CAPTION>
----------------- ----------------- ----------------- ----------------------------------
1989 Non- 1998
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) (2,100,000) (570,000) (107,000) (42,000)
Forfeited 290,574 260,999 20,000 - -
Expired (1,188) - - - -
----------------- ----------------- ----------------- ---------------- -----------------
Total available for grant - 160,999 - 293,000 158,000
================= ================= ================= ================ =================
</TABLE>
11
<PAGE>
At June 30, 1999, we had outstanding options under the plans with
expiration dates ranging from the years 2000 through 2009, as illustrated in the
following table:
<TABLE>
<CAPTION>
--------------------- --------------------- ----------------------
Number of Exercise Price Weighted-Average
Option Shares Range Price
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
Outstanding at December 31, 1998 2,145,700 $ 7.88 - 35.20 $ 21.55
Granted 351,000 18.17 - 18.81 18.76
Exercised (24,000) 8.72 - 17.00 12.96
Forfeited (101,400) 17.00 - 34.41 26.29
--------------------- --------------------- ----------------------
Outstanding at June 30, 1999 2,371,300 $ 7.88 - 35.20 $ 21.01
===================== ===================== ======================
</TABLE>
Note 4 - Dividend Declaration
Bay View Capital Corporation declared a quarterly common stock cash
dividend of $0.10 per common share on June 24, 1999, which was paid on July 23,
1999 to common stockholders of record as of July 9, 1999. The dividend, totaling
approximately $2.0 million, was accrued as of June 30, 1999 and is reflected in
the accompanying interim consolidated financial statements.
Note 5 - Acquisition of Franchise Mortgage Acceptance Company
On March 11, 1999, we signed a definitive merger agreement with southern
California-based Franchise Mortgage Acceptance Company, sometimes referred to as
FMAC. Under the terms of the definitive merger agreement, we will acquire all of
the common stock of FMAC for consideration valued at approximately $309 million.
Each share of FMAC common stock will be exchanged for, at the election of the
holder, either $10.25 in cash or 0.5125 shares of our common stock. The FMAC
shareholder elections are subject to the aggregate number of shares of FMAC
common stock to be exchanged for our common stock being equal to 60% of the
number of shares of FMAC common stock outstanding immediately prior to closing
the transaction and no FMAC shareholder owning more than 9.99% of our common
stock, after the merger, other than any former FMAC shareholder who had been
expressly approved by the appropriate banking regulatory authorities to own more
that 9.99% of our common stock. The definitive merger agreement also provides
for additional payments of up to $30 million in connection with the earn-out
provision of FMAC's April 1998 purchase of Bankers Mutual, a multi-family
lending division of FMAC, $7.5 million of which was paid by FMAC during the
second quarter of 1999. During the second quarter of 1999, we received
regulatory approval for the merger from the Federal Reserve Bank. The
acquisition, which is still subject to approval by the Office of the Comptroller
of the Currency and both our shareholders and FMAC's shareholders, is expected
to close during late third quarter or early fourth quarter of 1999.
During the first and second quarters of 1999, we purchased approximately
$515 million in franchise loans from FMAC. These loans were purchased at the
estimated market value of the loans at the time of purchase. The amount of loans
purchased from FMAC excludes approximately $85 million in franchise loans
originally purchased from FMAC that we agreed to sell back to FMAC, and FMAC
agreed to repurchase, at the loan portfolio's estimated market value, in
connection with our liquidity and capital management activities. In July 1999,
Bay View Bank established a $350 million warehouse facility which provides us
with a additional funding source for franchise loans on a prospective basis. Bay
View Bank also expects to issue $50 million in 10% Subordinated Notes, due 2009,
on August 18, 1999. These Subordinated Notes qualify as Tier 2 capital for
regulatory purposes. We have continued to purchase franchise loans from FMAC
subsequent to June 30, 1999, including the $85 million in loans discussed above.
We do not anticipate selling any additional loans back to FMAC prior to the
close of the acquisition.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operations
---------------------
Strategic Overview
Bay View Capital Corporation is a diversified financial services company
that operates distinct business platforms. Each platform is comprised of
interest-earning assets with similar characteristics including, among other
things, marketing and distribution channels, pricing, credit risk, and interest
rate sensitivity.
Throughout 1998, we reported on three business platforms: a Banking
Platform, a Consumer Platform and a Commercial Platform. The Banking Platform
included single-family, multi-family and commercial mortgage loans,
mortgage-backed securities, and retail and business deposit products and
services. The Consumer Platform included motor vehicle loans and leases and home
equity loans. The Commercial Platform included asset-based lending, factoring
and commercial leasing activities.
Effective January 1, 1999, we expanded our business platforms to four in
order to facilitate a more effective presentation and analysis of our different
business activities. These platforms are as follows:
. A Banking Platform comprised of single-family, multi-family and commercial
mortgage loans, mortgage-backed securities, retail and business deposit
products and services, and asset-based commercial participation loans. The
Banking Platform also includes franchise loans purchased during the first
six months of 1999 in connection with our pending acquisition of FMAC. We
anticipate presenting the FMAC franchise lending activities as a separate
business platform subsequent to our consummation of the acquisition.
. A Home Equity Platform comprised of home equity loans and lines of credit.
. An Auto Platform comprised of motor vehicle loans and leases.
. A Commercial Platform comprised of asset-based lending, factoring and
commercial leasing activities.
The Company's Mission Statement
Our mission statement is "to build a diversified financial services company
by investing in niche businesses with risk-adjusted returns that enhance
shareholder value."
The Company's Strategy
Our strategy centers on the continued transition to traditional commercial
banking activities and the resulting expansion of our net interest margin. In
order to realize this objective, our actions include the following:
. Replacing lower-yielding mortgage loans and mortgage-backed securities on
our balance sheet with consumer and commercial loans and leases with higher
risk-adjusted returns, shorter maturities and less sensitivity to interest
rate changes.
13
<PAGE>
. Enhancing and expanding Bay View Bank's deposit base by emphasizing
lower-cost transaction accounts, including commercial and small business
checking accounts, instead of higher-cost certificates of deposit combined
with selected branch acquisitions.
. Redeploying our excess capital in businesses intended to generate assets
with higher risk-adjusted returns than those typically provided by mortgage
loans and mortgage-backed securities.
. Maintaining the capital level of both Bay View Bank and Bay View Capital
Corporation at or above the well-capitalized level, as defined for
regulatory purposes, and returning excess capital at Bay View Bank to the
holding company, as necessary, for redeployment.
Banking Platform Strategy
The Banking Platform's primary objective is enhancing the value of Bay View
Bank's retail branch franchise through internal growth, new and enhanced
products and services, acquisitions, and purchases of deposits. At June 30,
1999, the Banking Platform had approximately $3.9 billion in interest-earning
assets as compared with approximately $3.8 billion at December 31, 1998.
A primary component of the Banking Platform's strategy is increasing
lower-cost transaction accounts (e.g., checking, savings and money market
accounts) as a source of financing for Bay View Capital Corporation and its
subsidiaries. Transaction accounts at Bay View Bank as a percentage of total
retail deposits increased to 53.5% at June 30, 1999 as compared with 49.8% at
December 31, 1998 and 34.6% at December 31, 1997. At both June 30, 1999 and
December 31, 1998, the Banking Platform had approximately $3.3 billion in
deposits.
On July 8, 1999, we announced a definitive agreement with Luther Burbank
Savings, a savings bank headquartered in Santa Rosa, California, to acquire
Luther Burbank Savings' Mill Valley and Novato, California branches. These two
branches represent approximately $125 million in deposits. In accordance with
the agreement, we will pay a 5.25% deposit premium. The transaction is expected
to close on September 25, 1999, after which these two branches will operate as
Bay View Bank branches.
Effective March 1, 1999, Bay View Bank converted from a savings institution
regulated by the Office of Thrift Supervision to a national bank regulated by
the Office of the Comptroller of the Currency and Bay View Capital Corporation
converted from a savings and loan holding company regulated by the Office of
Thrift Supervision to a bank holding company regulated by the Federal Reserve
Board. These conversions represent a critical step in our transformation to a
commercial bank. The new national bank charter provides us with the ability to
continue, as well as expand, our focus on traditional commercial banking
activities.
Home Equity Platform Strategy
The Home Equity Platform originates and purchases home equity loans and
lines of credit with higher risk-adjusted returns than traditional mortgage
loans. At June 30, 1999, the Home Equity Platform had approximately $651 million
in interest-earning assets as compared with approximately $657 million at
December 31, 1998. The Home Equity Platform's portfolio included $465 million in
high loan-to-value home equity loans at June 30, 1999 as compared with $488
million at December 31, 1998. We do not anticipate increasing our exposure to
high loan-to-value home equity loans beyond their current levels.
14
<PAGE>
Auto Platform Strategy
The Auto Platform underwrites and purchases high-quality, fixed-rate loans
and leases secured by new and used motor vehicles. The platform commenced its
leasing activities effective April 1, 1998. At June 30, 1999, the Auto Platform
had approximately $1.0 billion in interest-earning assets and operating leased
assets as compared with approximately $754 million at December 31, 1998.
In executing its strategy, the Auto Platform identifies product niches
which are not the primary focus of traditional competitors in the auto lending
area. One such niche includes motor vehicle loans where the borrower desires a
higher relative loan amount and/or a longer term than is offered by many other
motor vehicle financing sources. In return for the flexibility of the product it
offers, the Auto Platform charges interest rates in this niche which are higher
than those typically offered by traditional sources of motor vehicle financing,
such as banks and captive finance companies, while applying its traditional
underwriting criteria, on a case-by-case basis, to mitigate any potential loan
losses. The Auto Platform also pursues geographic and product niches in its more
conventional loan and lease financing businesses.
Our strategic alliance with Lendco Financial Services for the purchase of
motor vehicle loans and leases, which began in the second quarter of 1998,
provided us with an option to acquire Lendco Financial Services. While we will
not exercise this option, we intend to continue purchasing motor vehicle loans
and leases from Lendco Financial Services.
Commercial Platform Strategy
The Commercial Platform's strategy focuses on being a nationwide provider
of commercial lending and leasing products and services. In December 1997, we
expanded our Commercial Platform by forming an asset-based lending group known
as Bay View Financial Corporation. Specifically, we added 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 asset-based lending segment's product
array. At June 30, 1999, the Commercial Platform had approximately $125 million
in interest-earning assets as compared with approximately $95 million at
December 31, 1998.
Acquisition of FMAC
FMAC is one of the nation's leading small business lenders specializing in
franchise concept loans. Bankers Mutual, a division of FMAC, is one of the
nation's leading multi-family lenders. Following the merger, FMAC and Bankers
Mutual will operate as separate subsidiaries of Bay View Bank. The acquisition
provides us with significant asset generation capabilities consistent with our
strategic direction. The acquisition provides us with a significant small
business platform focused on franchised quick-service restaurants, such as
Burger King, Wendy's, Pizza Hut, and KFC, and casual dining restaurants, such as
TGI Friday's, Applebees and Denny's. The acquisition also provides us
established lending groups focused on retail energy businesses (service
stations, convenience stores, truck stops, car washes, and quick lube
businesses) and funeral home and cemetery owners. In addition, Bankers Mutual,
which was acquired by FMAC in April of 1998, is one of the nation's leading
multi-family lenders and we expect to continue to expand that business. We
intend to portfolio a significant portion of the commercial franchise loans
originated, accelerating the transformation of our balance sheet to
higher-yielding consumer and commercial assets. Bankers Mutual has historically
sold its multi-family loan production through seller-servicer programs
administered by Fannie Mae and Freddie Mac which we intend to continue
prospectively.
15
<PAGE>
Results of Operations
Net income for the second quarter of 1999 was $7.5 million, or $0.40 per
diluted share, as compared with $5.2 million, or $0.25 per diluted share, for
the second quarter of 1998. Net income for the first six months of 1999 was
$14.7 million, or $0.77 per diluted share, as compared with $10.3 million, or
$0.50 per diluted share, for the first six months of 1998. The increases in net
income and earnings per share, as compared with the respective prior periods,
were attributable to higher levels of net interest income and noninterest income
partially offset by higher levels of provision for losses on loans and leases
and noninterest expense.
Contribution by Platform
Each of our business platforms contributes to our overall profitability.
Contribution by platform is defined as each platform's net interest income and
noninterest income less each platform's allocated provision for losses on loans
and leases, direct general and administrative expenses, including certain direct
expense allocations, and other noninterest expense, including the amortization
of intangible assets.
In computing net interest income by platform, funding costs are allocated
to each platform based on the duration of its interest-earning assets and
auto-related leased assets and, specifically, by matching these assets with
interest-bearing liabilities with similar durations. Accordingly, the Auto
Platform's and the Commercial Platform's funding costs were determined based on
our average cost of transaction accounts for the appropriate period. The Banking
Platform's and the Home Equity Platform's funding costs were determined based on
the average cost of our remaining funding sources, including the noninterest
dividend expense associated with our 9.76% Capital Securities issued on December
21, 1998.
All indirect general and administrative expenses not specifically
identifiable with, or allocable to, our business platforms are included in
indirect corporate overhead. Indirect corporate overhead includes both recurring
items, such as our administrative and support functions, and certain special
mention items, such as expenses associated with corporate-wide process and
systems re-engineering projects and third party Year 2000 compliance-related
activities.
Our prior period platform results were revised to reflect the expanded
number of business platforms and to reflect the methodology discussed above. We
continue to enhance our cost allocation methodology and anticipate further
enhancements during future periods. Intercompany revenues and expenses are
eliminated in the measurement of platform contribution.
16
<PAGE>
The following tables illustrate each platform's contribution for the
periods indicated. The tables also illustrate the reconciliation of total
contribution by platform to our net income for the periods indicated.
Reconciling items generally include indirect corporate overhead and income tax
expense.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Three Months Ended June 30, 1999 (Unaudited)
------------------------------------------------------------------------------
Banking Home Equity Auto Commercial Total
----------- ------------- ----------- ------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $ 24,410 $ 8,530 $ 6,305 $ 3,501 $ 42,746
Provision for losses on loans and leases - (5,107) (1,300) (393) (6,800)
Noninterest income /1/ 4,471 17 13,408 219 18,115
Direct general and administrative
expenses /2/ (14,226) (1,013) (3,499) (2,060) (20,798)
Leasing expenses /1/ - - (8,938) - (8,938)
Dividend expense on Capital Securities (1,910) (324) - - (2,234)
Net income on real estate owned 57 - - - 57
Amortization of intangible assets (2,191) - (329) (363) (2,883)
----------- ------------- ----------- ------------- -----------
Contribution by platform $ 10,611 $ 2,103 $ 5,647 $ 904 19,265
=========== ============= =========== =============
Indirect corporate overhead /2/ (5,081)
Income tax expense (6,648)
------------
Net income $ 7,536
============
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Three Months Ended June 30, 1998 (Unaudited)
------------------------------------------------------------------------------
Banking Home Equity Auto Commercial Total
----------- ----------- ----------- ------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $ 24,011 $ 4,611 $ 7,121 $ 2,601 $ 38,344
Provision for losses on loans and leases - (545) (1,155) - (1,700)
Noninterest income /1/ 4,384 105 1,477 163 6,129
Direct general and administrative
expenses /2/ (16,327) (573) (4,730) (1,909) (23,539)
Leasing expenses /1/ - - (708) - (708)
Net income on real estate owned 99 - - 100 199
Amortization of intangible assets (2,213) - (290) (363) (2,866)
----------- ----------- ----------- ------------- -----------
Contribution by platform $ 9,954 $ 3,598 $ 1,715 $ 592 15,859
=========== =========== =========== =============
Indirect corporate overhead /2/ (5,691)
Income tax expense (4,934)
-----------
Net income $ 5,234
===========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Six Months Ended June 30, 1999 (Unaudited)
------------------------------------------------------------------------------
Banking Home Equity Auto Commercial Total
------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $ 47,870 $ 16,701 $ 12,397 $ 6,561 $ 83,529
Provision for losses on loans and leases - (8,608) (3,050) (453) (12,111)
Noninterest income /1/ /2/ 9,953 41 23,593 495 34,082
Direct general and administrative
expenses /2/ (28,503) (2,039) (7,502) (3,980) (42,024)
Leasing expenses /1/ - - (15,619) - (15,619)
Dividend expense on Capital Securities (3,810) (659) - - (4,469)
Net income on real estate owned 23 - - - 23
Amortization of intangible assets (4,428) - (633) (726) (5,787)
------------ --------------- ----------- -------------- ------------
Contribution by platform $ 21,105 $ 5,436 $ 9,186 $ 1,897 37,624
============ =============== ============ ===============
Indirect corporate overhead /2/ (10,011)
Income tax expense (12,944)
------------
Net income $ 14,669
============
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Six Months Ended June 30, 1998 (Unaudited)
------------------------------------------------------------------------------
Banking Home Equity Auto Commercial Total
------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $ 49,588 $ 7,129 $ 13,474 $ 5,087 $ 75,278
Provision for losses on loans and leases - (545) (1,815) - (2,360)
Noninterest income /1/ 7,531 179 2,308 313 10,331
Direct general and administrative
expenses /2/ (31,518) (915) (8,561) (3,912) (44,906)
Leasing expenses /1/ - - (708) - (708)
Net income on real estate owned 86 - - 100 186
Amortization of intangible assets (4,305) - (580) (726) (5,611)
----------- ----------- ----------- ------------- -----------
Contribution by platform $ 21,382 $ 5,848 $ 4,118 $ 862 32,210
=========== =========== =========== =============
Indirect corporate overhead /2/ (12,066)
Income tax expense (9,850)
-----------
Net income $ 10,294
===========
</TABLE>
/1/ The Auto Platform commenced its leasing activities effective April 1,
1998.
/2/ Amounts include certain special mention items which are discussed at
"Noninterest Income" and "General and Administrative Expenses." Special
mention items generally include income and expense items recognized
during the period that we believe are significant and/or unusual in
nature and, therefore, useful to you in evaluating our performance and
trends. These items may or may not be nonrecurring in nature.
A discussion of each of the significant components of contribution by
platform follows:
Net Interest Income and Net Interest Margin
Net interest income for the second quarter of 1999 was $42.7 million as
compared with $38.3 million for the second quarter of 1998. Net interest income
for the first six months of 1999 was $83.5 million as compared with $75.3
million for the first six months of 1998. Net interest margin was 3.28% for the
second quarter of 1999 as compared with 3.06% for the second quarter of 1998.
Net interest margin was 3.22% for the first six months of 1999 as compared with
2.98% for the first six months of 1998.
18
<PAGE>
The increases in net interest income and net interest margin for the second
quarter of 1999 and for the first six months of 1999, as compared with the
respective prior periods, were attributable to both increases in average
interest-earning assets and increases in net interest margin. The increases in
average interest-earning assets reflect our ability to replace asset
prepayments, including normal amortization, with asset originations and
purchases, including our purchases of franchise loans. The increases in net
interest margin reflect the impact of the continued change-out of our assets
whereby our mortgage-based asset prepayments are being replaced by
higher-yielding consumer and commercial assets, including franchise loans. Our
net interest margin has also benefited from decreases in our funding costs,
attributable to a change-out of our liabilities, including a focus on lower-cost
transaction accounts, and to our deposit pricing strategies.
The following tables illustrate net interest income and net interest
margin, by platform, for the periods indicated:
<TABLE>
<CAPTON>
-----------------------------------------------------------
Three Months Ended (Unaudited)
-----------------------------------------------------------
June 30, 1999 June 30, 1998
---------------------------- ---------------------------
Net Net Net Net
Interest Interest Interest Interest
Income Margin Income Margin
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $ 24,410 2.57% $ 24,011 2.29%
Home Equity Platform 8,530 5.27 4,611 5.28
Auto Platform /1/ 6,305 3.96 7,121 6.73
Commercial Platform 3,501 11.96 2,601 16.15
------------ ------------ ------------ ------------
Total $ 42,746 3.28% $ 38,344 3.06%
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Six Months Ended (Unaudited)
-----------------------------------------------------------
June 30, 1999 June 30, 1998
---------------------------- ---------------------------
Net Net Net Net
Interest Interest Interest Interest
Income Margin Income Margin
------------ ------------ ------------ ------------
(Dollars in thousandS)
<S> <C> <C> <C> <C>
Banking Platform $ 47,870 2.53% $ 49,588 2.27%
Home Equity Platform 16,701 5.18 7,129 5.37
Auto Platform /1/ 12,397 4.09 13,474 7.00
Commercial Platform 6,561 12.24 5,087 17.44
------------ ------------ ------------ ------------
Total $ 83,529 3.22% $ 75,278 2.98%
============ ============ ============ ============
</TABLE>
/1/ The Auto Platform commenced its leasing activities effective April 1,
1998. The Auto Platform's margin compression is largely attributable to
funding costs associated with the platform's leasing activities. The
platform's net interest margin presented above does not include the
revenue impact of its auto leasing activities, which is included in
noninterest income, but does include the associated funding costs.
19
<PAGE>
The following table illustrates interest-earning assets, excluding our
auto-related operating leased assets, by platform, as of the dates indicated:
<TABLE>
<CAPTION>
------------------------------------
(Unaudited)
------------------------------------
At At
June 30, December 31,
1999 1998
---------------- ----------------
(Dollars in thousandS)
<S> <C> <C>
Banking Platform $ 3,858,406 $ 3,816,993
Home Equity Platform 651,306 657,148
Auto Platform 660,019 570,128
Commercial Platform 124,821 94,888
---------------- ----------------
Total $ 5,294,552 $ 5,139,157
================ ================
</TABLE>
The following tables illustrate average interest-earning assets, excluding
our auto-related operating leased assets, by platform, for the periods
indicated:
<TABLE>
<CAPTION>
--------------------------------------
Three Months Ended (Unaudited)
--------------------------------------
June 30, June 30,
1999 1998
---------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform $ 3,814,044 $ 4,177,742
Home Equity Platform 648,230 349,074
Auto Platform 622,487 423,833
Commercial Platform 117,408 64,578
---------------- ------------------
Total $ 5,202,169 $ 5,015,227
================ ==================
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------
Six Months Ended (Unaudited)
-------------------------------------
June 30, June 30,
1999 1998
---------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform $ 3,804,811 $ 4,309,954
Home Equity Platform 649,025 264,951
Auto Platform 600,906 387,507
Commercial Platform 108,187 58,809
---------------- -----------------
Total average interest-earning assets $ 5,162,929 $ 5,021,221
================ =================
</TABLE>
Banking Platform
The Banking Platform's net interest income for the second quarter of 1999
was $24.4 million as compared with $24.0 million for the second quarter of 1998.
The platform's net interest income for the first six months of 1999 was $47.9
million as compared with $49.6 million for the first six months of 1998. The
platform's net interest margin for the second quarter of 1999 was 2.57% as
compared with 2.29% for the second quarter of 1998. The platform's net interest
margin for the first six months of 1999 was 2.53% as compared with 2.27% for the
first six months of 1998.
The increase in net interest income for the second quarter of 1999, as
compared with the second quarter of 1998, was attributable to an increase in net
interest margin, primarily due to lower funding
20
<PAGE>
costs, partially offset by a decrease in average interest-earning assets, due to
asset prepayments exceeding loan originations and purchases. The decrease in net
interest income for the first six months of 1999, as compared with the first six
months of 1998, was attributable to a decrease in average interest-earning
assets, due to asset prepayments exceeding loan originations and purchases,
partially offset by an increase in net interest margin, due to a combination of
franchise loan purchases and lower funding costs.
Home Equity Platform
The Home Equity Platform's net interest income for the second quarter of
1999 was $8.5 million as compared with $4.6 million for the second quarter of
1998. The platform's net interest income for the first six months of 1999 was
$16.7 million as compared with $7.1 million for the first six months of 1998.
The platform's net interest margin for the second quarter of 1999 was 5.27% as
compared with 5.28% for the second quarter of 1998. The platform's net interest
margin for the first six months of 1999 was 5.18% as compared with 5.37% for the
first six months of 1998.
The increases in net interest income for the second quarter of 1999, as
compared with the second quarter of 1998, and for the first six months of 1999,
as compared with the first six months of 1998, were primarily due to increases
in average interest-earning assets largely resulting from high loan-to-value
home equity loan purchases partially offset by decreases in net interest margin.
The decreases in net interest margin were due purchases of higher-quality, but
lower-yielding high loan-to-value home equity loans, including 100% insured
loans, combined with higher premium amortization attributable to higher
prepayment speeds on our high loan-to-value home equity loans partially offset
by lower funding costs.
At June 30, 1999, the Home Equity Platform's loans totaled $619 million,
including $465 million in high loan-to-value home equity loans. High
loan-to-value home equity loans totaled $488 million at December 31, 1998. At
June 30, 1999, the combined loan-to-value ratio for our high loan-to-value home
equity loan portfolio was approximately 115%. Our underwriting standards for
high loan-to-value home equity loans focus on the borrower's ability to repay,
as demonstrated by debt-to-income ratios, as well as the borrower's willingness
to repay, as demonstrated by Fair, Isaac & Company, Incorporated credit scores,
sometimes referred to as FICO scores. At June 30, 1999, our high loan-to-value
home equity loan portfolio had an average debt-to-income ratio of approximately
39% and an average FICO score of approximately 670. We do not anticipate
increasing our exposure to high loan-to-value home equity loans beyond their
current levels.
Auto Platform
The Auto Platform's net interest income for the second quarter of 1999 was
$6.3 million as compared with $7.1 million for the second quarter of 1998. The
platform's net interest income for the first six months of 1999 was $12.4
million as compared with $13.5 million for the first six months of 1998. The
platform's net interest margin for the second quarter of 1999 was 3.96% as
compared with 6.73% for the second quarter of 1998. The platform's net interest
margin for the first six months of 1999 was 4.09% as compared with 7.00% for the
first six months of 1998.
The decreases in net interest income for the second quarter of 1999, as
compared with the second quarter of 1998, and for the first six months of 1999,
as compared with the first six months of 1998, were attributable to decreases in
net interest margin, partially offset by increases in average interest-earning
assets due to loan originations and purchases exceeding prepayments. The
decreases in net interest margin were largely attributable to the funding costs
associated with the platform's auto leasing activities combined with lower asset
yields resulting from the platform's continued migration to higher-quality,
21
<PAGE>
but lower-yielding loans, and the yield compression associated with competition,
partially offset by lower funding costs.
The Auto Platform's net interest margin, calculated in accordance with
generally accepted accounting principles, sometimes referred to as GAAP,
excludes the revenue impact of our auto leasing activities. Because the auto
leases are accounted for as operating leases, the rental income and related
expenses, including depreciation expense, are reflected in noninterest income
and noninterest expense, respectively, in accordance with GAAP. As a result, the
Auto Platform's net interest margin does not include the revenue impact of our
auto leasing activities but does include the associated funding costs. For a
discussion of normalized net interest income and net interest margin, including
the revenue impact of our auto leasing activities, see "Non-GAAP Performance
Measures - Normalized Net Interest Income and Net Interest Margin."
During the second quarter of 1999, the Auto Platform generated $221 million
in auto loans and leases as compared with $167 million during the second quarter
of 1998. The totals for the second quarter of 1999 included $131 million in auto
loans, with an average FICO score of 722, and $90 million in auto leases, with
an average FICO score of 734. The totals for the second quarter of 1998 included
$122 million in auto loans, with an average FICO score of 701, and $45 million
in auto leases, with an average FICO score of 733.
Commercial Platform
The Commercial Platform's net interest income for the second quarter of
1999 was $3.5 million as compared with $2.6 million for the second quarter of
1998. The platform's net interest income for the first six months of 1999 was
$6.6 million as compared with $5.1 million for the first six months of 1998. The
platform's net interest margin for the second quarter of 1999 was 11.96% as
compared with 16.15% for the second quarter of 1998. The platform's net interest
margin for the first six months of 1999 was 12.24% as compared with 17.44% for
the first six months of 1998.
The increases in net interest income, as compared with the respective prior
periods, were due to increases in the platform's average interest-earning
assets, attributable to continued growth and expansion within the platform,
partially offset by decreases in net interest margin. The decreases in net
interest margin were largely attributable to most of the platform's growth being
comprised of asset-based loans and equipment leases, which generate lower yields
relative to the platform's factoring activities, combined with the yield
compression associated with competition, partially offset by lower funding
costs.
Prepayments
Prepayments, including normal amortization, for the second quarter of 1999
were $404 million, representing an annualized rate of 30.9%, as compared with
approximately $420 million during the second quarter of 1998, representing an
annualized rate of 34.6%. Prepayments for the first six months of 1999 were $804
million, representing an annualized rate of 32.1%, as compared with prepayments
of $720 million for the first six months of 1998, representing an annualized
rate of 29.6%. The lower annualized prepayment rate for the second quarter of
1999, as compared with the second quarter of 1998, reflects the impact of growth
in our loan and lease portfolio during the first six months of 1999. Prepayments
during the second quarter of 1999, most of which were mortgage-based assets,
were more than offset by loan and lease originations and purchases of $564
million combined with $75 million in purchases of government agency securities.
The higher annualized prepayment rate
22
<PAGE>
for the first six months of 1999, as compared with the first six months of 1998,
was due to accelerated prepayments, primarily on mortgage-based assets.
Prepayments during the first six months of 1999 were more than offset by loan
and lease originations and purchases of $1.2 billion combined with $75 million
in purchases of government agency securities.
Average Balance Sheet
The following tables illustrate average yields on our interest-earning
assets and average rates on our interest-bearing liabilities for the periods
indicated. These average yields and rates were calculated by dividing interest
income by the average balance of interest-earning assets and by dividing
interest expense by the average balances of interest-bearing liabilities, for
the periods indicated. Average balances of interest-earning assets and
interest-bearing liabilities were calculated by averaging the relevant month-end
amounts for the respective periods.
23
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------
AVERAGE BALANCES, YIELDS AND RATES (Unaudited)
---------------------------------------------------------
Three Months Ended
June 30, 1999
---------------------------------------------------------
Average Average
Balance Interest Yield/rate
---------------- ---------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Assets
------
Interest-earning assets:
Loans and leases receivable $ 4,432,301 $ 90,914 8.23%
Mortgage-backed securities /1/ 560,263 8,798 6.28
Investments /1/ 209,605 3,004 5.29
---------------- --------------- ---------------
Total interest-earning assets 5,202,169 102,716 7.90%
=============== ===============
Other assets 586,089
----------------
Total assets $ 5,788,258
================
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing liabilities:
Deposits $ 3,340,714 $ 33,475 4.02%
Borrowings /2/ 1,901,115 26,495 5.59
---------------- --------------- ---------------
Total interest-bearing liabilities 5,241,829 $ 59,970 4.59%
=============== ===============
Other liabilities 167,180
----------------
Total liabilities 5,409,009
Stockholders' equity 379,249
-----------------
Total liabilities and stockholders' equity $ 5,788,258
=================
Net interest income/net interest spread $ 42,746 3.31%
=============== ===============
Net interest-earning assets $ (39,660)
=================
Net interest margin /3/ 3.28%
===============
<CAPTION>
------------------------------------------------------
Three Months Ended
June 30, 1998
------------------------------------------------------
Average Average
Balance Interest Yield/Rate
--------------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Assets
------
Interest-earning assets:
Loans and leases receivable $ 4,046,141 $ 84,660 8.38%
Mortgage-backed securities /1/ 821,259 13,289 6.47
Investments /1/ 147,827 2,398 6.50
--------------- -------------- ----------
Total interest-earning assets 5,015,227 $ 100,347 8.01%
============== ==========
Other assets 380,158
Total assets ---------------
$ 5,395,385
Liabilities and stockholders' equity ===============
------------------------------------
Interest-bearing liabilities:
Deposits $ 3,384,196 $ 37,600 4.46%
Borrowings /2/ 1,545,643 24,403 6.32
--------------- -------------- ----------
Total interest-bearing liabilities 4,929,839 $ 62,003 5.04%
============== ==========
Other liabilities 74,168
---------------
Total liabilities 5,004,007
Stockholders' equity 391,378
---------------
Total liabilities and stockholders' equity $ 5,395,385
===============
Net interest income/net interest spread $ 38,344 2.97%
============== ==========
Net interest-earning assets $ 85,388
===============
Net interest margin /3/ 3.06%
==========
</TABLE>
/1/ Average balances and yields for securities and other investments classified
as available-for-sale are based on historical amortized cost.
/2/ Interest expense for borrowings includes interest expense on interest rate
swaps of $1.0 million and $0.6 million for the three months ended June 30,
1999 and 1998, respectively. Interest expense for borrowings excludes
expenses related to our Capital Securities.
/3/ Annualized net interest income divided by average interest-earning assets.
24
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------
AVERAGE BALANCES, YIELDS AND RATES (Unaudited)
---------------------------------------------------
Six months ended
June 30, 1999
---------------------------------------------------
Average Average
Balance Interest Yield/Rate
--------------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Assets
------
Interest-earning assets:
Loans and leases receivable $ 4,349,872 $ 178,032 8.22%
Mortgage-backed securities /1/ 579,309 18,196 6.28
Investments /1/ 233,748 6,509 5.20
--------------- ------------- ----------
Total interest-earning assets 5,162,929 202,737 7.87%
============= ==========
Other assets 532,216
---------------
Total assets $ 5,695,145
===============
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing liabilities:
Deposits $ 3,318,617 $ 67,077 4.08%
Borrowings /2/ 1,858,649 52,131 5.65
--------------- ------------- ----------
Total interest-bearing liabilities 5,177,266 $ 119,208 4.64%
============= ==========
Other liabilities 138,179
---------------
Total liabilities 5,315,445
Stockholders' equity 379,700
---------------
Total liabilities and stockholders' equity $ 5,695,145
===============
Net interest income/net interest spread $ 83,529 3.23%
=========== =========
Net interest-earning assets $ (14,337)
===============
Net interest margin /3/ 3.22%
=========
<CAPTION>
---------------------------------------------------
Six months ended
June 30, 1998
--------------------------------------------------
Average Average
Balance Interest Yield/rate
--------------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C>
Assets
------
Interest-earning assets:
Loans and leases receivable $ 3,999,789 $ 165,917 8.31%
Mortgage-backed securities /1/ 865,107 28,544 6.60
Investments /1/ 156,325 4,952 6.38
--------------- ----------- -----------
Total interest-earning assets 5,021,221 $ 199,413 7.95%
Other assets 371,237 =========== ===========
---------------
Total assets $ 5,392,458
===============
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing liabilities:
Deposits $ 3,492,618 $ 78,597 4.54%
Borrowings /2/ 1,431,704 45,538 6.39
--------------- ----------- -----------
Total interest-bearing liabilities 4,924,322 $ 124,135 5.08%
=========== ===========
Other liabilities 79,255
---------------
Total liabilities 5,003,577
Stockholders' equity 388,881
---------------
Total liabilities and stockholders' equity $ 5,392,458
===============
Net interest income/net interest spread $ 75,278 2.87%
============ ===========
Net interest-earning assets $ 96,899
===============
Net interest margin /3/ 2.98%
===========
</TABLE>
/1/ Average balances and yields for securities and other investments classified
as available-for-sale are based on historical amortized cost.
/2/ Interest expense for borrowings includes interest expense on interest rate
swaps of $2.0 million and $1.2 million for the six months ended June 30,
1999 and 1998, respectively. Interest expense for borrowings excludes
expenses related to our Capital Securities.
/3/ Annualized net interest income divided by average interest-earning assets.
25
<PAGE>
Interest Income
Loans and Leases
Interest income on loans and leases was $90.9 million for the second
quarter of 1999 as compared with $84.7 million for the second quarter of 1998.
Interest income on loans and leases was $178.0 million for the first six months
of 1999 as compared with $165.9 million for the first six months of 1998. The
average yield on loans and leases was 8.23% for the second quarter of 1999 as
compared with 8.38% for the second quarter of 1998. The average yield on loans
and leases was 8.22% for the first six months of 1999 as compared with 8.31% for
the first six months of 1998.
The increases in interest income on loans and leases, as compared with the
respective prior periods, were primarily due to higher average balances of loans
and leases resulting from loan originations and purchases exceeding prepayments.
The decreases in net interest margin, as compared with the respective prior
periods, were due to a combination of factors including prepayments on mortgage
loans, the yield compression associated with competition, and the migration to
higher-quality assets with lower yields, partially offset by the positive impact
of the change in the mix of our loans and leases. Specifically, the average
balance of interest-earning assets within the Banking Platform decreased for the
second quarter of 1999, as compared with the second quarter of 1998, and for the
first six months of 1999, as compared with the first six months of 1998, while
the average balances of interest-earning assets in the comparatively
higher-yielding Home Equity, Auto and Commercial Platforms increased during
these same periods.
The following tables illustrate interest income on loans and leases, by
platform, for the periods indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Three Months Ended (Unaudited)
------------------------------------------------------------------------
June 30, 1999 June 30, 1998
---------------------------------- ---------------------------------
Average Average
Amount Yield Amount Yield
---------------- -------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $ 57,101 7.53% $ 62,198 7.75%
Home Equity Platform 16,068 9.92 9,090 10.42
Auto Platform 13,332 8.57 10,280 9.84
Commercial Platform 4,413 15.08 3,092 19.20
---------------- -------------- -------------- ---------------
Total $ 90,914 8.23% $ 84,660 8.38%
================ ============== ============== ===============
------------------------------------------------------------------------
Six Months Ended (Unaudited)
------------------------------------------------------------------------
June 30, 1999 June 30, 1998
---------------------------------- ---------------------------------
Average Average
Amount Yield Amount Yield
---------------- -------------- -------------- ---------------
(Dollars in thousands)
Banking Platform $ 112,091 7.53% $ 127,183 7.73%
Home Equity Platform 31,953 9.85 13,925 10.58
Auto Platform 25,722 8.63 18,853 9.94
Commercial Platform 8,266 15.41 5,956 20.55
---------------- -------------- -------------- ---------------
Total $ 178,032 8.22% $ 165,917 8.31%
================ ============== ============== ===============
</TABLE>
26
<PAGE>
Banking Platform
- ----------------
The Banking Platform's average loan yield for the second quarter of 1999
was 7.53% as compared with 7.75% for the second quarter of 1998. The platform's
average loan yield for the first six months of 1999 was 7.53% as compared with
7.73% for the first six months of 1998. The decreases in the platform's average
loan yield, as compared with the respective prior periods, were primarily due to
the impact of continued prepayments on mortgage loans combined with the purchase
of $200 million of lower-yielding residential mortgage loans in June 1998,
primarily to assist Bay View Bank in meeting its Community Reinvestment Act
obligations, partially offset by the impact of higher-yielding FMAC franchise
loans purchased during the first and second quarters of 1999.
Home Equity Platform
- --------------------
The Home Equity Platform's average loan yield for the second quarter of
1999 was 9.92% as compared with 10.42% for the second quarter of 1998. The
platform's average loan yield for the first six months of 1999 was 9.85% as
compared with 10.58% for the first six months of 1998. The decreases in the
platform's average loan yield, as compared with the respective prior periods,
were primarily due to purchases of higher-quality, yet lower-yielding, high
loan-to-value home equity loans, including 100% insured loans, combined with
higher premium amortization attributable to higher prepayment speeds on our high
loan-to-value home equity loans.
Auto Platform
- -------------
The Auto Platform's average loan yield for the second quarter of 1999 was
8.57% as compared with 9.84% for the second quarter of 1998. The platform's
average loan yield for the first six months of 1999 was 8.63% as compared with
9.94% for the first six months of 1998. The decreases in the platform's average
loan yield, as compared with the respective prior periods, were primarily due to
lower asset yields on auto loan originations and purchases. The lower yields
were largely attributable to the platform's continuing migration to
higher-quality, yet lower-yielding, loans along with the yield compression
associated with increased competition within the industry.
Commercial Platform
- -------------------
The Commercial Platform's average loan and lease yield for the second
quarter of 1999 was 15.08% as compared with 19.20% for the second quarter of
1998. The platform's average loan and lease yield for the first six months of
1999 was 15.41% as compared with 20.55% for the first six months of 1998. The
decreases in the platform's average loan and lease yield, as compared with the
respective prior periods, were a result of most of the platform's growth being
comprised of asset-based loans and equipment leases which generate lower yields
relative to the platform's factoring activities combined with yield compression
associated with competition.
Mortgage-Backed Securities
Interest income on mortgage-backed securities for the second quarter of
1999 was $8.8 million as compared with $13.3 million for the second quarter of
1998. Interest income on mortgage-backed securities for the first six months of
1999 was $18.2 million as compared with $28.5 million for the first six months
of 1998. The average yield on mortgage-backed securities was 6.28% for the
second quarter of 1999 as compared with 6.47% for the second quarter of 1998.
The average yield on mortgage-backed securities was 6.28% for the first six
months of 1999 as compared with 6.60% for the first six months of
27
<PAGE>
1998. The decreases in interest income and average yield on mortgage-backed
securities, as compared with the respective prior periods, were primarily due to
continued prepayments of mortgage-backed securities, partially offset by
purchases of higher-yielding investment grade collateralized mortgage
obligations during the latter half of 1998.
Investment Securities
Interest and dividend income on investment securities for the second
quarter of 1999 was $3.0 million as compared with $2.4 million for the second
quarter of 1998. Interest and dividend income on investment securities was $6.5
million for the first six months of 1999 as compared with $5.0 million for the
first six months of 1998. The average yield on investment securities for the
second quarter of 1999 was 5.29% as compared with 6.50% for the second quarter
of 1998. The average yield on investment securities for the first six months of
1999 was 5.20% as compared with 6.38% for the first six months of 1998. Our
investment securities are generally short-term in nature, and yields on these
securities are readily impacted by changes in the interest rate environment. The
increases in interest and dividend income on investment securities, as compared
with the respective prior periods, were primarily due to higher average balances
resulting from our funding and investment management activities partially offset
by decreases in average yields, primarily due to the impact of the recent
interest rate environment.
Interest Expense
Deposits
Interest expense on deposits was $33.5 million for the second quarter of
1999 as compared with $37.6 million for the second quarter of 1998. Interest
expense on deposits was $67.1 million for the first six months of 1999 as
compared with $78.6 million for the first six months of 1998. The cost of
deposits was 4.02% for the second quarter of 1999 as compared with 4.46% for the
second quarter of 1998. The cost of deposits was 4.08% for the first six months
of 1999 as compared with 4.54% for the first six months of 1998. The decreases
in interest expense, as compared with the respective prior periods, were due to
decreases in both average deposit balances and the cost of deposits. The
decreases in the average deposit balances, as compared with the respective prior
periods, were primarily a result of our deposit pricing strategies and,
specifically, de-emphasis of higher-cost certificates of deposit. The decreases
in the cost of deposits resulted from a combination of factors, including an
increase in lower-cost transaction accounts and our deposit pricing strategies.
Our cost of deposits for the month of June 1999 was 4.00%. This cost was 50
basis points below the Eleventh District Cost of Funds Index, sometimes referred
to as COFI, of 4.50% for June 1999. Transaction account balances as a percentage
of retail deposits were 53.5% at June 30, 1999 as compared with 53.2% at March
31, 1999, 49.8% at December 31, 1998 and 34.6% at December 31, 1997. While our
deposits are no longer included in calculating COFI becaue we are a national
bank, we consider COFI to be a relevant comparison due to our past history as a
savings and loan.
28
<PAGE>
The following table summarizes the cost of deposits versus COFI and
transaction accounts as a percentage of retail deposits for the periods
indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Months Ended (Unaudited)
----------------------------------------------------------------------------
June 30, March 31, December 31, December 31,
1999 1999 1998 1997
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cost of deposits 4.00% 4.09% 4.20% 4.71%
COFI 4.50 4.52 4.66 4.95
---------------- ---------------- ----------------- -----------------
Spread below COFI (0.50%) (0.43%) (0.46%) (0.24%)
================ ================ ================= =================
Transaction accounts as a
percentage of retail deposits 53.5% 53.2% 49.8% 34.6%
================ ================ ================= =================
</TABLE>
While the spread below COFI for our deposits was 50 basis points for the
month of June 1999, the spread for the original Bay View Bank branches, on a
standalone basis, was 60 basis points below COFI for the month of June 1999. The
cost of deposits for the former EurekaBank branches, on a standalone basis, was
47 basis points below COFI for the month of June 1999, reflecting EurekaBank's
higher deposit pricing structure. Since the acquisition of America First Eureka
Holdings, Inc., sometimes referred to as AFEH, effective January 2, 1998, we
have reduced the cost of the EurekaBank deposits, along with the cost of the Bay
View Bank deposits, consistent with our overall deposit pricing strategies. We
expect that the cost of deposits for the former EurekaBank branches will
continue to decrease to levels consistent with the original Bay View Bank
branches.
The following table summarizes the cost of deposits versus COFI for the
original Bay View Bank branches and the former EurekaBank branches for the
periods indicated and reflects the narrowing difference between the original Bay
View Bank branches and the former EurekaBank branches:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Months Ended (Unaudited)
-----------------------------------------------------------------------------
June 30, March 31, December 31, September 30,
1999 1999 1998 1998
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Cost of deposits - BVB 3.90% 3.95% 3.97% 4.12%
Cost of deposits - EurekaBank 4.03 4.15 4.28 4.46
COFI 4.50 4.52 4.66 4.88
---------------- ---------------- ----------------- -----------------
Spread below COFI - BVB (0.60%) (0.57%) (0.69%) (0.76%)
================ ================= ================ =================
Spread below COFI - EurekaBank (0.47%) (0.37%) (0.38%) (0.42%)
================ ================= ================ =================
Difference 0.13 0.20 0.31 0.34
================ ================= ================ =================
</TABLE>
Borrowings
Interest expense on borrowings was $26.5 million for the second quarter of
1999 as compared with $24.4 million for the second quarter of 1998. Interest
expense on borrowings was $52.1 million for the first six months of 1999 as
compared with $45.5 million for the first six months of 1998. The average cost
of borrowings was 5.59% for the second quarter of 1999 as compared with 6.32%
for the second quarter of 1998. The average cost of borrowings was 5.65% for the
first six months of 1999 as compared with 6.39% for the first six months of
1998. The increases in interest expense on borrowings, as compared with the
respective prior periods, were primarily due to higher average balances of
Federal Home Loan Bank advances. Higher levels of Federal Home Loan Bank
advances were required due to the growth in our balance sheet combined with the
decrease in our average deposit balances as
29
<PAGE>
previously discussed. This volume-related increase in interest expense was
partially offset by a decline in the cost of borrowings attributable to lower
market interest rates and our refinancing and extending of maturities on a
significant portion of our Federal Home Loan Bank advances portfolio in October
1998. Our cost of borrowings, in accordance with GAAP, does not include the
impact of the cost associated with the $90 million of Capital Securities issued
on December 21, 1998. Had this expense been included, our cost of borrowings
would have been 5.79% for the second quarter of 1999 and 5.85% for the first six
months of 1999, representing an increase of 20 basis points for each period.
Changes in Rate and Volume
The following tables illustrate the changes in net interest income due to
changes in the rate and volume of our interest-earning assets and
interest-bearing liabilities for the three- and six-month periods ended June 30,
1999 as compared with the three- and six-month periods ended June 30, 1998.
Changes in rate and volume which cannot be segregated (e.g., changes in average
interest rate multiplied by average portfolio balance) have been allocated
proportionately between the change in rate and the change in volume.
<TABLE>
<CAPTION>
------------------------------------------------------------------
Three Months Ended June 30, 1999 vs. 1998 (Unaudited)
------------------------------------------------------------------
Rate Volume Total
Variance Variance Variance
------------------ -------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Loans and leases $ (1,444) $ 7,698 $ 6,254
Mortgage-backed securities (380) (4,111) (4,491)
Investment securities (487) 1,093 606
------------------ -------------------- -------------------
(2,311) 4,680 2,369
------------------ -------------------- -------------------
Interest expense:
Deposits (3,650) (475) (4,125)
Borrowings (2,111) 4,203 2,092
------------------ -------------------- -------------------
(5,761) 3,728 (2,033)
------------------ -------------------- -------------------
Net interest income $ 3,450 $ 952 $ 4,402
================== ==================== ===================
------------------------------------------------------------------
Six Months Ended June 30, 1999 vs. 1998 (Unaudited)
------------------------------------------------------------------
Rate Volume Total
Variance Variance Variance
------------------ -------------------- -------------------
(Dollars in thousands)
Interest income:
Loans and leases $ (1,711) $ 13,826 $ 12,115
Mortgage-backed securities (1,324) (9,024) (10,348)
Investment securities (928) 2,485 1,557
------------------ -------------------- -------------------
(3,963) 7,287 3,324
------------------ -------------------- -------------------
Interest expense:
Deposits (7,723) (3,797) (11,520)
Borrowings (4,186) 10,779 6,593
------------------ -------------------- -------------------
(11,909) 6,982 (4,927)
------------------ -------------------- -------------------
Net interest income $ 7,946 $ 305 $ 8,251
================== ==================== ===================
</TABLE>
30
<PAGE>
Provision For Losses On Loans And Leases
The provision for losses on loans and leases was $6.8 million for the
second quarter of 1999 as compared with $1.7 million for the second quarter of
1998. The provision for losses on loans and leases was $12.1 million for the
first six months of 1999 as compared with $2.4 million for the first six months
of 1998. The increases in the provision for losses on loans and leases, as
compared with the respective prior periods, were concentrated in the Home Equity
and Auto Platforms and were attributable to higher net charge-offs in these
platforms, to the continued change-out of our balance sheet towards higher risk,
yet, higher-yielding consumer and commercial assets and to growth in our loan
and lease portfolio.
Net charge-offs for the Home Equity Platform for the first six months of
1999 included approximately $2.9 million related to our original $67 million
portfolio of high loan-to-value home equity loans acquired from Emergent
Mortgage Corp. in August 1997. This portfolio of higher-yielding loans, which
totaled $32 million at June 30, 1999, also generates higher levels of
charge-offs as a result of their lower average credit quality (evidenced by an
average FICO score of 619).
Noninterest Income
Noninterest income for the second quarter of 1999 was $18.1 million as
compared with $6.1 million for the second quarter of 1998. Noninterest income
for the first six months of 1999 was $34.1 million as compared with $10.3
million for the first six months of 1998. The increases in noninterest income,
as compared with the respective prior periods, were attributable to higher
leasing income in the Auto Platform, resulting from the continued growth in our
auto leasing activities, combined with increases in the Banking Platform,
attributable to higher loan and account fees and investment sales commissions.
The Banking Platform's noninterest income for the first six months of 1999
included a $1.1 million state tax refund recognized during the first quarter of
1999, resulting from a favorable ruling on a tax refund claim for taxable years
otherwise closed.
Noninterest Expense
General and Administrative Expenses
General and administrative expenses for the second quarter of 1999 were
$25.9 million as compared with $29.2 million for the second quarter of 1998.
General and administrative expenses for the first six months of 1999 were $52.0
million as compared with $57.0 million for the first six months of 1998. The
lower level of general and administrative expenses for the second quarter of
1999, as compared with the second quarter of 1998, was largely due to the impact
of $4.2 million in special mention items incurred during the second quarter of
1998, primarily acquisition-related expenses associated with AFEH. The lower
level of general and administrative expenses for the first six months of 1999,
as compared with the first six months of 1998, was largely due to the impact of
$7.6 million in special mention items incurred during the first six months of
1998, primarily AFEH acquisition-related expenses.
Excluding the special mention items incurred during 1999 and 1998, as
discussed below, the increases in general and administrative expenses, as
compared with the respective prior periods, were attributable to continued
growth in our business platforms and inflationary pressures, including our
annual salary increases which were effective March 1, 1999.
31
<PAGE>
Special mention items for the second quarter of 1999 included approximately
$180,000 in initial fees related to the listing of our securities on the New
York Stock Exchange, approximately $150,000 in third party Year 2000
compliance-related costs and approximately $50,000 in acquisition-related costs
associated with FMAC. Special mention items for the first quarter of 1999
included approximately $440,000 in severance payments and costs associated with
restructuring activities in the Auto Platform, approximately $380,000 in
collection-based fees associated with the previously mentioned $1.1 million
state tax refund and approximately $115,000 in third party Year 2000
compliance-related costs. Special mention items for the second quarter of 1998
included approximately $3.5 million in AFEH acquisition-related expenses and
approximately $700,000 in other expenses, including restructuring charges in the
Auto Platform and third party Year 2000 compliance-related costs. Special
mention items for the first quarter of 1998 included approximately $3.4 million
in AFEH acquisition-related expenses.
The following tables illustrate general and administrative expenses, by
platform, for the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------
Three Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Banking Platform $ 14,226 $ 16,327
Home Equity Platform 1,013 573
Auto Platform 3,499 4,730
Commercial Platform 2,060 1,909
------------------ -----------------
Subtotal 20,798 23,539
Indirect corporate overhead /1/ 5,081 5,691
------------------ -----------------
Total $ 25,879 $ 29,230
================== =================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
Six Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Banking Platform $ 28,503 $ 31,518
Home Equity Platform 2,039 915
Auto Platform 7,502 8,561
Commercial Platform 3,980 3,912
------------------ -----------------
Subtotal 42,024 44,906
Indirect corporate overhead /1/ 10,011 12,066
------------------ -----------------
Total $ 52,035 $ 56,972
================== =================
</TABLE>
/1/ Amount represents indirect corporate expenses not specifically
identifiable with, or allocable to, our business platforms.
32
<PAGE>
The following tables illustrate general and administrative expenses,
excluding the special mention items as previously discussed, by platform, for
the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------
Three Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Banking Platform $ 14,226 $ 14,489
Home Equity Platform 1,013 573
Auto Platform 3,499 4,071
Commercial Platform 2,060 1,909
------------------ -----------------
Subtotal 20,798 21,042
Indirect corporate overhead /1/ 4,702 3,952
------------------ -----------------
Total $ 25,500 $ 24,994
================== =================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
Six Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Banking Platform $ 28,126 $ 27,582
Home Equity Platform 2,039 915
Auto Platform 7,063 7,836
Commercial Platform 3,980 3,912
------------------ -----------------
Subtotal 41,208 40,245
Indirect corporate overhead /1/ 9,515 9,127
------------------ -----------------
Total $ 50,723 $ 49,372
================== =================
</TABLE>
/1/ Amount represents indirect corporate expenses not specifically
identifiable with, or allocable to, our business platforms.
Banking Platform
- ----------------
The decrease in the Banking Platform's general and administrative expenses,
excluding special mention items, for the second quarter of 1999, as compared to
the second quarter of 1998, was due to cost savings initiatives and efficiencies
realized in connection with our January 2, 1998 acquisition of AFEH, partially
offset by inflationary pressures. The increase in the Banking Platform's general
and administrative expenses, excluding special mention items, for the first six
months of 1999, as compared with the first six months of 1998, was primarily due
to inflationary pressures, including our annual salary increases which were
effective March 1, 1999, partially offset by cost savings initiatives and
efficiencies.
Home Equity Platform
- --------------------
The increases in the Home Equity Platform's general and administrative
expenses, excluding special mention items, as compared with the respective prior
periods, were attributable to the increased cost associated with the significant
increase in the Home Equity Platform's average loan balance during these
periods.
33
<PAGE>
Auto Platform
- -------------
The decreases in the Auto Platform's general and administrative expenses,
excluding special mention items, as compared with the respective prior periods,
were due to efficiencies realized from integrating the operations of this
platform with the operations of our consolidated entity and from other
restructuring and cost savings initiatives, partially offset by platform growth
and inflationary pressures.
Commercial Platform
- -------------------
The slight increases in the Commercial Platform's general and
administrative expenses, excluding special mention items, as compared with the
respective prior periods, were due to platform growth and inflationary
pressures, partially offset by efficiencies realized from integrating the
operations of this platform with the operations of our consolidated entity and
from other restructuring and cost savings initiatives.
Indirect Corporate Overhead
- ---------------------------
The increases in indirect corporate overhead, excluding special mention
items, as compared with the respective prior periods, were largely due to
inflationary pressures and higher expenses within the bank holding company
necessary to support our expanding business activities.
The following tables illustrate the ratio of general and administrative
expenses to average total assets, including securitized assets, on an annualized
basis for the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------
Three Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
General and administrative expenses $ 25,879 $ 29,320
Average total assets, including securitized assets $ 5,844,682 $ 5,511,761
------------------ -----------------
Annualized general and administrative expenses to
average total assets, including securitized assets 1.77% 2.12%
================== =================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
Six Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
General and administrative expenses $ 52,035 $ 56,972
Average total assets, including securitized assets $ 5,758,327 $ 5,521,066
------------------ -----------------
Annualized general and administrative expenses to
average total assets, including securitized assets 1.81% 2.06%
================== =================
</TABLE>
34
<PAGE>
The decreases in the ratio of annualized general and administrative
expenses to average total assets, including securitized assets, for the second
quarter of 1999, as compared with the second quarter of 1998, and for the first
six months of 1999, as compared with the first six months of 1998, were
attributable to both lower general and administrative expenses and higher
average total assets, including securitized assets.
The following tables illustrate the ratio of general and administrative
expenses to average interest-earning assets, including our auto-related
operating leased assets and securitized assets, by platform, on an annualized
basis for the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------
Three Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
<S> <C> <C>
Banking Platform 1.49% 1.56%
Home Equity Platform 0.63% 0.66%
Auto Platform 1.43% 3.34%
Commercial Platform 7.02% 11.82%
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
Six Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
<S> <C> <C>
Banking Platform 1.50% 1.46%
Home Equity Platform 0.63% 0.69%
Auto Platform 1.62% 3.24%
Commercial Platform 7.36% 13.30%
</TABLE>
The decrease in the ratio of annualized general and administrative
expenses to average interest-earning assets for the Banking Platform for the
second quarter of 1999, as compared with the second quarter of 1998, was due to
lower general and administrative expenses partially offset by lower average
interest-earning assets. The increase in the ratio for the Banking Platform for
the first six months of 1999, as compared with the first six months of 1998, was
due to lower average interest-earning assets partially offset by lower general
and administrative expenses. The decreases in the ratios for the Home Equity
Platform, as compared with the respective prior periods, were due to a
combination of higher average interest-earning assets and a change in the
composition of our home equity loan portfolio to an increased proportion of non
high loan-to-value home equity loans originated through our branches and 100%
insured high loan-to-value home equity loans, both of which have lower
associated servicing costs. The decreases in the ratios for the Auto Platform,
as compared with the respective prior periods, were a result of higher average
interest-earning assets due to platform growth and lower general and
administrative expenses. The decreases in the ratios for the Commercial
Platform, as compared with respective prior periods, were due to higher average
interest-earning assets resulting from platform growth, partially offset by
slightly higher general and administrative expenses.
35
<PAGE>
Efficiency Ratio
- ----------------
Another measure that management uses to monitor our level of general and
administrative expenses is the efficiency ratio. The efficiency ratio is
calculated by dividing the amount of general and administrative expenses by
operating revenues, defined as net interest income, as adjusted to include
expenses associated with the Capital Securities, loan fees and charges, the
excess of our leasing-related rental income over leasing-related depreciation
expense, and other noninterest income, excluding securities gains and losses.
This ratio reflects the level of general and administrative expenses required to
generate $1 of operating revenue.
The following tables illustrate the efficiency ratio for the periods
indicated:
<TABLE>
<CAPTION>
---------------------------------------
Three Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
General and administrative expenses $ 25,879 $ 29,230
Operating revenues, as defined $ 50,705 $ 43,558
------------------ -----------------
Efficiency ratio 51.0% 67.1%
================== =================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
Six Months Ended (Unaudited)
---------------------------------------
June 30, June 30,
1999 1998
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
General and administrative expenses $ 52,035 $ 56,972
Operating revenues, as defined $ 99,412 $ 84,572
------------------ -----------------
Efficiency ratio 52.3% 67.4%
================== =================
</TABLE>
The improvement in the efficiency ratio for the second quarter of 1999, as
compared with the second quarter of 1998, and for the first six months of 1999,
as compared with the first six months of 1998, was due to higher net interest
income, higher net leasing-related rental income, higher noninterest income,
including the previously mentioned $1.1 million state tax refund recognized
during the first quarter of 1999, and lower general and administrative expenses,
partially offset by expenses associated with the Capital Securities issued on
December 21, 1998.
Leasing Expenses
Leasing expenses represent expenses related to our auto leasing activities
which began in April 1998. Because 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. Leasing expenses were $8.9 million for the second quarter of
1999 as compared $708,000 for the second quarter
36
<PAGE>
of 1998. Leasing expenses for the first six months of 1999 were $15.6 million as
compared with $708,000 for the first six months of 1998.
Capital Securities
On December 21, 1998, we issued $90 million in Capital Securities through
Bay View Capital I, a business trust formed to issue the securities. The Capital
Securities, which were sold in an underwritten public offering, pay quarterly
cumulative cash distributions at an annual rate of 9.76% of the liquidation
value of $25 per share. Dividend expense on the Capital Securities was $2.2
million for the second quarter of 1999 and $4.5 million for the first six months
of 1999.
Real Estate Owned Operations and Net Losses (Recoveries) on Real Estate
The net income related to our real estate owned operations, including net
losses (recoveries) on real estate, for the second quarter of 1999 was $57,000
as compared with $199,000 for the second quarter of 1998. Net income related to
our real estate owned operations, including net losses (recoveries) on real
estate, was $23,000 for the first six months of 1999 as compared with $186,000
for the first six months of 1998.
Amortization of Intangible Assets
Amortization expense related to intangible assets was $2.9 million for the
second quarters of 1999 and 1998. Amortization expense related to intangible
assets for the first six months of 1999 was $5.8 million as compared with $5.6
million for the first six months of 1998. The slight increase in amortization
expense for the first six months of 1999, as compared with the first six months
of 1998, was due to the effect of various purchase accounting adjustments,
primarily related to tax items, made throughout 1998 that increased the level of
goodwill generated from our January 2, 1998 acquisition of AFEH.
Income Tax Expense
Income tax expense was $6.6 million for the second quarter of 1999 as
compared with $4.9 million for the second quarter of 1998. Income tax expense
was $12.9 million for the first six months of 1999 as compared with $9.9 million
for the first six months of 1998. Our effective tax rate was 46.9% for the
second quarter of 1999 as compared with 48.5% for the second quarter of 1998.
Our effective tax rate for the first six months of 1999 was 46.9% as compared
with 48.9% for the first six months of 1998. The decreases in the effective tax
rates, as compared with the respective prior periods, were primarily due to
decreases in the impact of nondeductible goodwill amortization resulting from
higher levels of pre-tax income.
Non-GAAP Performance Measures
The following measures of earnings excluding amortization of intangible
assets, normalized net interest income and normalized net interest margin, and
their corresponding ratios, are not measures of performance in accordance with
GAAP. These measures should not be considered alternatives to net income, net
interest income and net interest margin as indicators of our operating
performance. These measures are included because we believe they are useful
tools to assist you in assessing our performance and trends. These measures may
not be comparable to similarly titled measures reported by other companies.
37
<PAGE>
Earnings Excluding Amortization Of Intangible Assets
Earnings excluding amortization of intangible assets represent net income
excluding charges related to the amortization of intangible assets, largely
goodwill. This illustration is intended to approximate what our earnings would
have been excluding the non-cash expense associated with amortization of
goodwill and other intangible assets generated from our acquisitions, all of
which have been accounted for under the purchase method of accounting.
Goodwill is generated from acquisitions accounted for under the purchase
method of accounting. Under the purchase method of accounting, the assets
acquired and liabilities assumed are recorded at their fair values. The excess
of the consideration paid for the acquisition, including certain
acquisition-related costs, over the fair value of net assets acquired is
recorded as goodwill. This goodwill is then amortized as an expense in the
acquiring company's income statement over a period not exceeding 40 years, and
generally not exceeding 25 years for financial institutions.
The purchase method of accounting differs significantly from the
pooling-of-interests method of accounting for acquisitions. Under the
pooling-of-interests method of accounting, the assets and liabilities of the
company being acquired are combined with the assets and liabilities of the
acquiring company at their recorded cost and as a result, no goodwill is
generated. As no goodwill is generated, a company that has accounted for its
acquisitions under the pooling-of-interests method of accounting incurs no
goodwill amortization expense.
The purchase and the pooling-of-interests methods of accounting are not
alternatives for accounting for acquisitions. Instead, generally accepted
accounting principles prescribe which method must be applied depending upon the
characteristics of the underlying acquisition. Our acquisitions of Bay View
Credit, Bay View Commercial Finance Group, Ultra Funding, Inc., and EurekaBank
were all accounted for under the purchase method of accounting.
As a result of the two distinct methods of accounting for acquisitions
discussed above, it may be difficult for investors and other interested parties
to compare the operating results of companies that have accounted for
acquisitions under the purchase method of accounting with companies that have
accounted for acquisitions under the pooling-of-interests method of accounting.
In response to this situation, we have illustrated what our earnings would
have been excluding the non-cash expense associated with amortization of the
intangible assets generated from our acquisitions. While this disclosure is not
intended to represent what our operating results would have been had our
acquisitions been accounted for under the pooling-of-interests method of
accounting, due to other differences between the two methods, we do believe it
represents a reasonable approximation of what our results would have been.
38
<PAGE>
The following tables illustrate the reconciliation of net income to
earnings excluding amortization of intangible assets, and the corresponding
annualized performance return measures, for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended (Unaudited)
--------------------------------------------------
June 30, June 30,
1999 1998
--------------------- ----------------------
(Dollars in Thousands, except
per share amounts)
<S> <C> <C>
Net income /1/ $ 7,536 $ 5,234
Amortization of intangible assets, net of tax 2,513 2,474
--------------------- ----------------------
Earnings excluding amortization $ 10,049 $ 7,708
===================== ======================
Earnings per diluted share $ 0.40 $ 0.25
===================== ======================
Earnings excluding amortization per diluted share $ 0.53 $ 0.37
===================== ======================
Return on average assets /2/ 0.52% 0.39%
===================== ======================
Return on average equity /2/ 7.95% 5.35%
===================== ======================
Earnings excluding amortization - return on average
assets /3/ 0.69% 0.57%
===================== ======================
Earnings excluding amortization - return on average
equity /3/ 10.60% 7.88%
===================== ======================
Earnings excluding amortization - return on average
tangible assets /4/ 0.71% 0.59%
===================== ======================
Earnings excluding amortization - return on average
tangible equity /4/ 16.13% 12.21%
===================== ======================
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------
Six Months Ended (Unaudited)
--------------------- ----- ----------------------
June 30, June 30
1999 1998
--------------------- ----------------------
(Amounts in thousands, except per share amounts)
<S> <C> <C>
Net income /1/ $ 14,669 $ 10,294
Amortization of intangible assets, net of tax 5,024 4,877
--------------------- ======================
Earnings excluding amortization $ 19,693 $ 15,171
===================== ======================
Earnings per diluted share $ 0.77 $ 0.50
===================== ======================
Earnings excluding amortization per diluted share $ 1.03 $ 0.73
===================== ======================
Return on average assets /2/ 0.52% 0.38%
===================== ======================
Return on average equity /2/ 7.73% 5.29%
===================== ======================
Earnings excluding amortization - return on average
assets /3/ 0.69% 0.56%
===================== ======================
Earnings excluding amortization - return on average
equity /3/ 10.37% 7.80%
===================== ======================
Earnings excluding amortization - return on average
tangible assets /4/ 0.71% 0.58%
===================== ======================
Earnings excluding amortization - return on average
tangible equity /4/ 15.86% 12.17%
===================== ======================
</TABLE>
/1/ Net income for the periods indicated includes certain special mention
items, as discussed above.
/2/ Return on average assets is defined as net income divided by average
assets. Return on average equity is defined as net income divided by
average equity.
/3/ Earnings excluding amortization - return on average assets is defined as
earnings excluding amortization of intangible assets divided by average
assets. Earnings excluding amortization - return on average equity is
defined as earnings excluding amortization of intangible assets divided by
average equity.
/4/ Earnings excluding amortization - return on average tangible assets is
defined as earnings excluding amortization of intangible assets divided by
average tangible assets. Earnings excluding amortization - return on
average tangible equity is defined as earnings excluding amortization of
intangible assets divided by average tangible equity. Average tangible
assets are defined as average assets less average intangible assets.
Average tangible equity is defined as average equity less average
intangible assets.
NORMALIZED NET INTEREST INCOME AND NET INTEREST MARGIN
Normalized net interest income and net interest margin include net rental
income from our auto leasing activities (that is, the excess of rental income
over depreciation expense on auto-related leased assets), which are principally
funded by our deposits, and also include expenses related to our Capital
Securities. Because our auto leases are accounted for as operating leases, the
rental income is reflected as noninterest income and the related expenses,
including depreciation expense, are reflected as noninterest expenses, in
accordance with GAAP. The expenses related to our Capital Securities are
reflected as noninterest expenses, also in accordance with GAAP.
40
<PAGE>
Normalized net interest income for the second quarter of 1999 was $45.7
million as compared with $38.8 million for the second quarter of 1998.
Normalized net interest income for the first six months of 1999 was $88.1
million as compared with $75.7 million for the first six months of 1998.
Normalized net interest margin for the second quarter of 1999 was 3.31% as
compared with 3.07% for the second quarter of 1998. Normalized net interest
margin for the first six months of 1999 was 3.23% as compared with 2.99% for the
first six months of 1998.
The following tables illustrate normalized net interest income and net
interest margin, by platform, for the periods indicated:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Three Months Ended (Unaudited)
-------------------------------------------------------------------
June 30, 1999 June 30, 1998
-------------------------------- -------------------------------
Normalized Normalized Normalized Normalized
Net Net Net Net
Interest Interest Interest Interest
Income Margin Income Margin
-------------- -------------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Banking Platform $ 22,528 2.38% $ 24,011 2.29%
Home Equity Platform 8,286 5.16 4,611 5.28
Auto Platform /1/ 11,330 4.87 7,551 6.73
Commercial Platform 3,539 12.22 2,601 16.15
-------------- -------------- ------------- --------------
Total $ 45,683 3.31% $ 38,774 3.07%
============== ============== ============= ==============
<CAPTION>
-------------------------------------------------------------------
Six Months Ended (Unaudited)
-------------------------------------------------------------------
June 30, 1999 June 30, 1998
-------------------------------- -------------------------------
Normalized Normalized Normalized Normalized
Net Net Net Net
Interest Interest Interest Interest
Income Margin Income Margin
-------------- -------------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Banking Platform $ 44,198 2.33% $ 49,588 2.27%
Home Equity Platform 16,086 5.00 7,129 5.37
Auto Platform /1/ 21,293 4.93 13,904 6.99
Commercial Platform 6,547 12.22 5,087 17.44
-------------- -------------- ------------- --------------
Total $ 88,124 3.23% $ 75,708 2.99%
============== ============== ============= ==============
</TABLE>
/1/ The Auto Platform commenced its leasing activities effective April 1, 1998.
The Auto Platform's margin does not reflect the tax benefit associated with
its leasing activities (that is, the losses generated for income tax
purposes during the early lease periods).
The increases in normalized net interest income and net interest margin,
as compared with the respective prior periods, were largely attributable to
higher net rental income from our auto leasing activities, the declines in our
funding costs, and increases in average interest-earning assets, partially
offset by growth in our auto leases, which generate yields that are lower at the
inception of the lease and then increase over the term of the lease, combined
with the impact of the Capital Securities issued on December 21, 1998.
41
<PAGE>
The following table illustrates interest-earning assets, including our
auto-related operating leased assets, by platform, as of the dates indicated:
<TABLE>
<CAPTION>
------------------------------------
(Unaudited)
---------------- -- ----------------
At At
June 30, December 31,
1999 1998
---------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Banking Platform $ 3,858,406 $ 3,816,993
Home Equity Platform 651,306 657,148
Auto Platform 998,864 753,581
Commercial Platform 124,821 94,888
---------------- ----------------
Total $ 5,633,397 $ 5,322,610
================ ================
</TABLE>
The following tables illustrate average interest-earning assets, including
our auto-related operating leased assets, by platform, for the periods
indicated:
<TABLE>
<CAPTION>
-------------------------------------
Three Months Ended (Unaudited)
-------------------------------------
June 30, June 30,
1999 1998
---------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Banking Platform $ 3,814,044 $ 4,177,742
Home Equity Platform 648,230 349,074
Auto Platform 921,836 449,657
Commercial Platform 117,408 64,578
---------------- -----------------
Total $ 5,501,518 $ 5,041,051
================ =================
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Six Months Ended (Unaudited)
------------------------------------
June 30, June 30,
1999 1998
---------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Banking Platform $ 3,804,811 $ 4,309,954
Home Equity Platform 649,025 264,951
Auto Platform 861,912 400,419
Commercial Platform 108,187 58,809
---------------- ----------------
Total average interest-earning assets $ 5,423,935 $ 5,034,133
================ ================
</TABLE>
42
<PAGE>
Balance Sheet Analysis
Our total assets were $5.9 billion at June 30, 1999 as compared with $5.6
billion at December 31, 1998. The increase in total assets was largely due to
loan and lease originations and purchases of approximately $1.2 billion during
the first six months of 1999 exceeding prepayments on loans and mortgage-backed
securities of approximately $804 million during this same period. Loan purchases
for the first six months of 1999 included approximately $515 million in
franchise loans purchased from FMAC in connection with our pending acquisition
of FMAC.
SECURITIES
We maintain a portfolio of mortgage-backed securities, including securities
issued by Freddie Mac, Fannie Mae and the Government National Mortgage
Association and senior tranches of collateralized mortgage obligations.
The following table illustrates our securities portfolio as of the dates
indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
(Unaudited)
-----------------------------------------------------------------------------
June 30, 1999 December 31, 1998
----------------------------------- ------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale
- ------------------
Investment securities $ 5,107 $ 4,828 $ 5,544 $ 5,319
--------------- ---------------- ---------------- ----------------
Mortgage-backed securities:
Issued by Freddie Mac, Fannie Mae
and the Government National
Mortgage Association 11,462 11,383 13,257 13,143
Collateralized mortgage
obligations 383 383 473 473
--------------- ---------------- ---------------- ----------------
11,845 11,766 13,730 13,616
--------------- ---------------- ---------------- ----------------
Held-to-maturity
- ----------------
Mortgage-backed securities:
Issued by Freddie Mac, Fannie Mae
and the Government National
Mortgage Association 413,419 408,901 403,512 402,740
Issued by other financial
intermediaries 28,709 28,802 41,759 42,349
Collateralized mortgage
obligations 160,251 153,375 176,502 176,283
--------------- ---------------- ---------------- ----------------
602,379 591,078 621,773 621,372
--------------- ---------------- ---------------- ----------------
$ 619,331 $ 607,672 $ 641,047 $ 640,307
=============== ================ ================ ================
</TABLE>
We purchased $75 million in mortgage-backed securities issued by the
Government National Mortgage Association during the second quarter of 1999.
There were no purchases of mortgage-backed securities during the first quarter
of 1999 or during the first six months of 1998. There were no sales of
mortgage-backed securities during the first six months of 1999. We sold $9.4
million and $22.9 million in mortgage-backed securities from our available-for
sale portfolio during the first and second quarters of 1998, respectively,
consistent with our interest rate risk management strategies. The decrease in
43
<PAGE>
mortgage-backed securities at June 30, 1999, as compared with December 31, 1998,
was primarily due to prepayments partially offset by the purchase of $75 million
in mortgage-backed securities.
Mortgage-backed securities pose risks not associated with fixed maturity
bonds, primarily related to the ability of the borrower to prepay the underlying
loan with our without penalty. This risk,known as prepayment risk, may cause the
mortgage-backed securities to remain outstanding for a period of time different
than that assumed at the time of purchase. When interest rates decline,
prepayments generally tend to increase, causing the average expected remaining
maturity of the mortgage-backed securities to decline. Conversely, if interest
rates rise, prepayments tend to decrease, lengthening the average expected
remaining maturity of the mortgage-backed securities.
LOANS AND LEASES
The following table illustrates our loan and lease portfolio as of the
dates indicated:
<TABLE>
<CAPTION>
------------------------------------------------
(Unaudited)
------------------------------------------------
June 30, December 31,
1999 1998
---------------------- ----------------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform:
Mortgage loans
Single-family $ 1,185,048 $ 1,515,413
Multi-family 990,290 1,015,980
Commercial real estate 325,342 338,220
---------------------- ----------------------
Total mortgage loans 2,500,680 2,869,613
Franchise loans 487,112 -
Asset-based commercial participation loans 54,113 7,042
Other 27,574 50,319
---------------------- ----------------------
Total Banking Platform 3,069,479 2,926,974
Home Equity Platform 619,148 622,797
Auto Platform 638,838 546,806
Commercial Platform 124,821 94,888
---------------------- ----------------------
Total loans and leases, gross 4,452,286 4,191,465
Premiums and discounts and deferred fees and costs 65,754 45,209
Allowance for losses on loans and leases (44,453) (45,405)
---------------------- ----------------------
Total loans and leases, net $ 4,473,587 $ 4,191,269
====================== ======================
</TABLE>
During the second quarter of 1999, $514 million in multi-family loans
indexed to COFI were transferred from loans and leases held-for-investment to
loans and leases held-for-sale in anticipation of our sale of these loans during
the third quarter of 1999. Approximately $450 million of these loans were
subsequently sold in July 1999. This sale, which was consistent with the funding
assumptions previously announced related to our pending acquisition of FMAC,
significantly reduces both our northern California geographic concentration risk
and our interest rate risk exposure related to COFI-indexed assets.
44
<PAGE>
Management's strategy is to supplement our loan and lease production with
purchases of high-quality consumer and commercial loans and leases with higher
risk-adjusted yields relative to mortgage-based assets. Our loan and lease
production for the first six months of 1999 was consistent with our strategy of
focusing on generating high-quality consumer and commercial assets combined with
generating high-quality assets within the Banking Platform (for example,
multi-family and commercial mortgage and business loans). Loan purchases for the
first six months of 1999 included $515 million in FMAC franchise loans. The
following tables illustrate loans and leases originated and purchased, including
auto-related operating leased assets, for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended (Unaudited)
--------------------------------------------------
June 30, June 30,
1999 1998
------------------------ ------------------------
(Dollars in thousands)
<S> <C> <C>
Loan and Lease Originations:
Real estate $ 61,937 $ 45,593
Home equity 19,299 12,683
Motor vehicle 181,330 145,815
Commercial 37,332 19,507
Other 5,248 6,302
------------------------ ------------------------
Total Originations 305,146 229,900
------------------------ ------------------------
Loan Purchases:
Real estate 1,141 405,919
Home equity 33,273 160,526
Motor vehicle 39,451 20,760
FMAC franchise loans 185,219 -
------------------------ ------------------------
Total Purchases 259,084 587,205
------------------------ ------------------------
Total $ 564,230 $ 817,105
======================== ========================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------
Six Months Ended (Unaudited)
---------------------------------------------------
June 30, June 30,
1999 1998
------------------------ -------------------------
(Dollars in thousands)
<S> <C> <C>
Loan and Lease Originations:
Real estate $ 110,583 $ 72,326
Home equity 28,508 17,826
Motor vehicle 344,001 245,691
Commercial 80,508 28,565
Other 9,756 7,915
------------------------ -------------------------
Total Originations 573,356 372,323
------------------------ -------------------------
Loan Purchases:
Real estate 9,853 410,414
Home equity 51,168 293,433
Motor vehicle 51,607 38,747
FMAC franchise loans 514,742 -
------------------------ -------------------------
Total Purchases 627,370 742,594
------------------------ -------------------------
Total $ 1,200,726 $ 1,114,917
======================== =========================
</TABLE>
45
<PAGE>
Credit Quality
We define nonperforming assets as nonaccrual loans, real estate owned and
other repossessed assets. We define 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 we determine that the full
collection of principal and/or interest is doubtful. Troubled debt
restructurings are defined as 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 improve as evidenced by the
nonperforming assets and delinquency trends presented below. The following table
illustrates our nonperforming assets:
<TABLE>
<CAPTION>
-------------------------------------
(Unaudited)
-------------------------------------
June 30, December 31,
1999 1998
------------------ -----------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans and leases $ 12,019 $ 14,700
Real estate owned 1,548 2,666
Other repossessed assets 1,502 654
------------------ -----------------
Nonperforming assets 15,069 18,020
Troubled debt restructurings 769 777
------------------ -----------------
Total $ 15,838 $ 18,797
================== =================
</TABLE>
The following table illustrates, by platform, nonperforming assets and
nonperforming assets as a percentage of total assets, excluding loans
held-for-sale:
<TABLE>
<CAPTION>
---------------------------------------------------------
Nonperforming Assets
As A Percentage Of Consolidated Assets (Unaudited)
---------------------------------------------------------
June 30, 1999 December 31, 1998
-------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $ 10,785 0.20% $ 15,293 0.27%
Home Equity Platform 2,573 0.05 1,287 0.02
Auto Platform 1,126 0.02 1,090 0.02
Commercial Platform 585 0.01 350 0.01
----------- ------------ ----------- -----------
Total $ 15,069 0.28% $ 18,020 0.32%
=========== ============ =========== ===========
</TABLE>
46
<PAGE>
The following table illustrates, by platform, loans and leases delinquent
60 days or more as a percentage of gross loans and leases, excluding loans
held-for-sale:
<TABLE>
<CAPTION>
--------------------------------------------------------
Loans and Leases Delinquent 60 Days or More
as a Percentage of Gross Loans and Leases
(Unaudited)
--------------------------------------------------------
June 30, 1999 December 31, 1998
-------------------------- --------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $ 11,573 0.30% $ 15,928 0.38%
Home Equity Platform 6,383 0.16 4,048 0.09
Auto Platform 1,191 0.03 1,676 0.04
Commercial Platform 585 0.01 350 0.01
----------- ------------ ------------ ----------
Total $ 19,732 0.50% $ 22,002 0.52%
=========== ============ ============ ==========
</TABLE>
Allowance for Loan and Lease Losses
Credit risk is defined as the possibility of sustaining a loss because
other parties to the financial instrument fail to perform in accordance with the
terms of the contract. While we follow underwriting and credit monitoring
procedures which we believe are appropriate in both growing and managing the
loan and lease portfolio, in the event of nonperformance by these other parties,
our potential exposure to credit losses could significantly affect our
consolidated financial position and results of operations.
Lending money involves an inherent risk of nonpayment. Management seeks to
reduce such credit risk by administering lending policies and underwriting
procedures combined with its monitoring of the loan and lease portfolio. The
allowance for loan and lease losses represents management's estimate of probable
inherent losses which have occurred as of the date of the financial statements.
The process of determining the necessary levels of allowances for loan and lease
losses is subjective and requires considerable judgement. In accordance with
applicable guidelines, this process results in an allowance for loan and lease
losses that consists of three components as described below:
1. Reserves for loans and leases that have been individually evaluated and
identified as loans or leases which have probable losses. These loans and
leases are generally larger-balance commercial or income producing real
estate loans or leases which are evaluated on an individual basis. Reserves
for these loans and leases are attributable to specific weaknesses in these
loans or leases evidenced by factors such as a deterioration in the
borrower's ability to meet its obligations, a deterioration in the quantity
or quality of the collateral securing the loan or lease, payment
delinquency, or other events of default under the terms of the loan or
lease agreement or promissory note.
2. Reserves for groups of smaller-balance homogenous loans and leases that are
collectively evaluated for impairment and for groups of performing larger-
balance loans and leases which currently exhibit no identifiable
weaknesses. The smaller-balance homogenous loans and leases generally
consist of single-family mortgage loans and consumer loans, including auto
loans, home equity loans and lines of credit and unsecured personal loans.
The larger-balance loans and leases generally consist of commercial or
income producing real estate loans and leases. These loans and leases have
specific characteristics which indicate that it is probable that a loss has
been incurred in a group of loans or leases with those similar
characteristics. Reserves for these groups of loans and leases are
determined based on a combination of factors including historical loss
experience, asset concentrations, levels and trends of classified assets,
and loan and lease delinquencies. Reserves for
47
<PAGE>
these groups of loans and leases also include an additional reserve for
certain products introduced more recently by us, such as high loan-to-value
home equity loans, where we do not have extensive historical data, other
than industry experience, upon which to base our reserve levels. This
additional reserve is intended to provide for those situations where our
experience may be different than industry experience.
3. Unallocated Reserves. Management determines the unallocated portion of the
allowance for loan and lease losses based on factors that are not
necessarily associated with a specific credit, group of loans or leases or
loan or lease category. These factors include, but are not limited to,
management's evaluation of economic conditions in regions where we lend
money, loan and lease concentrations, lending policies or underwriting
procedures, and trends in delinquencies and nonperforming assets. The
unallocated portion of the allowance for loan and lease losses reflects
management's efforts to ensure that the overall allowance appropriately
reflects the probable losses inherent in the loan and lease portfolio.
The allowance for losses on loans and leases at June 30, 1999 was $44.5
million as compared with $45.4 million at December 31, 1998. The decrease in the
allowance for losses on loans and leases was due to net charge-offs exceeding
the provision for losses on loans and leases during the first six months of
1999.
The following table illustrates the allowance for loan and lease losses as
a percentage of nonperforming assets and gross loans and leases, excluding loans
held-for-sale:
<TABLE>
<CAPTION>
---------------------------------------------------------
Allowance for Losses on Loans and Leases as a
Percentage of Specified Assets (Unaudited)
---------------------------------------------------------
June 30, 1999 December 31, 1998
---------------------------------------------------------
(Dollars in thousands)
---------------------------------------------------------
Assets Percent Assets Percent
------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Nonperforming assets $ 15,069 295% $ 18,020 252%
Gross loans and leases, excluding loans held-for-sale $ 3,937,892 1.13% $ 4,191,465 1.08%
</TABLE>
48
<PAGE>
The following table illustrates the changes in the allowance for losses on
loans and leases for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------
(Unaudited)
--------------------------------------------------------------
Three Months Six Months Year
Ended Ended Ended
June 30, June 30, December 31,
1999 1999 1998
------------------- ------------------ -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 44,147 $ 45,405 $ 38,458
Reserves related to acquisitions - - 11,374
Charge-offs:
Real Estate and Other (194) (588) (2,480)
Home Equity (5,294) (9,928) (7,152)
Auto (1,727) (3,997) (8,604)
Commercial (456) (560) (828)
------------------- ------------------ -----------------
(7,671) (15,073) (19,064)
Recoveries:
Real Estate and Other 175 319 2,290
Home Equity 415 602 456
Auto 467 969 2,599
Commercial 120 120 178
------------------- ------------------ -----------------
1,177 2,010 5,523
Net charge-offs (6,494) (13,063) (13,541)
Provision for loan and lease losses 6,800 12,111 9,114
------------------- ------------------ -----------------
Ending balance $ 44,453 $ 44,453 $ 45,405
=================== ================== =================
Net charge-offs to average loans and
leases (annualized) 0.59% 0.60% 0.32%
=================== ================== =================
</TABLE>
DEPOSITS
As a primary part of our business, we generate deposits for the purpose of
funding loans, leases and securities. The following table illustrates deposits
as of the dates indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
(Unaudited)
--------------------------------------------------------------------------------------
June 30, 1999 December 31, 1998
------------------------------------------ -------------------------------------------
% 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 $ 1,759,996 52.6% 3.18% $ 1,627,275 49.8% 3.15%
Retail certificates of deposit 1,530,161 45.7 4.84 1,642,362 50.2 5.20
Brokered certificates of deposit 56,718 1.7 5.08 - - -
================ =========== ============= =============== ============ =============
Total $ 3,346,875 100.0% 4.00% $ 3,269,637 100.0% 4.20%
================ =========== ============= =============== ============ =============
</TABLE>
49
<PAGE>
Borrowings
We utilize collateralized advances from the Federal Home Loan Bank of San
Francisco and other borrowings, such as senior and subordinated debt, capital
securities, and securities sold under agreements to repurchase (also known as
reverse repurchase agreements), on a collateralized and noncollateralized basis,
for various purposes including the funding of loans, leases and securities as
well as to support the execution of our business strategies.
The following table illustrates outstanding borrowings as of the dates
indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------
(Unaudited)
----------------------------------------------------------
June 30, 1999 December 31, 1998
--------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C>
Advances from the Federal Home Loan Bank of
San Francisco $ 1,900,400 $ 1,653,300
Securities sold under agreements to repurchase 51,205 25,302
Subordinated Notes, net 99,469 99,437
Senior Debentures - 50,000
Other borrowings 4,190 5,077
Capital Securities 90,000 90,000
--------------------------- ---------------------------
Total $ 2,145,264 $ 1,923,116
=========================== ===========================
</TABLE>
Our $50 million 8.42% Senior Debentures matured on June 1, 1999. The higher
borrowing level at June 30, 1999, as compared with December 31, 1998, was due to
the growth in our assets during the first six months of 1999, including the
purchase of FMAC franchise loans, in excess of our growth in deposits.
Liquidity
The objective of our liquidity management program is to ensure that funds
are available in a timely manner to meet loan demand and depositors' needs, and
to service other liabilities as they come due, without causing an undue amount
of cost or risk, and without causing a disruption to normal operating
conditions.
We regularly assess the amount and likelihood of projected funding
requirements through a review of factors such as historical deposit volatility
and funding patterns, present and forecasted market and economic conditions, and
existing and planned business activities. Our Asset and Liability Committee
provides oversight to the liquidity management process and recommends policy
guidelines, subject to Board of Directors approval, and courses of action to
address our actual and projected liquidity needs.
The ability to attract a stable, low-cost base of deposits is a significant
source of liquidity. Other sources of liquidity available to us include
short-term borrowings, which consist of advances from the Federal Home Loan Bank
of San Francisco, reverse repurchase agreements and other short-term borrowing
arrangements. Our liquidity requirements can also be met through the use of our
portfolio of liquid assets. Liquid assets, as defined by us, include cash and
cash equivalents in excess of the minimum levels necessary to carry out normal
business operations, federal funds sold, commercial paper, and other short-term
investments
50
<PAGE>
Capital Resources
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that the Bay View Capital Corporation and
Bay View Bank are in compliance with all regulatory capital guidelines. The
primary source of new capital during the second quarter of 1999 was the
retention of earnings.
On December 21, 1998, we issued $90 million in Capital Securities through
Bay View Capital I. The Capital Securities, which were sold in an underwritten
public offering, pay quarterly cumulative cash distributions at an annual rate
of 9.76% of the liquidation value of $25 per share. We used $50 million of the
proceeds to repay our 8.42% Senior Debentures upon their maturity in June 1999
and the remainder for general corporate purposes. The Capital Securities have
the added benefit of qualifying as Tier 1 capital for regulatory purposes. The
Capital Securities are presented as a separate line item in our consolidated
balance sheet under the caption "Guaranteed Preferred Beneficial Interest in the
Company's Junior Subordinated Debentures."
Stockholders' equity totaled $381.1 million at June 30, 1999 as compared
with $377.8 million at December 31, 1998. This increase was largely due to our
earnings during the first six months of 1999, partially offset by dividends
declared and common stock repurchased. Tangible stockholders' equity, which
excludes intangible assets, was $252.5 million at June 30, 1999 as compared with
$243.7 million at December 31, 1998. This increase was largely due to our
earnings combined with the amortization of intangible assets, partially offset
by dividends declared and common stock repurchased.
The following table illustrates the reconciliation of our stockholders'
equity to tangible stockholders' equity as of the dates indicated:
<TABLE>
<CAPTION>
--------------------------------------
(Unaudited)
--------------------------------------
At At
June 30, December 31,
1999 1998
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Stockholders' equity $ 381,054 $ 377,811
Intangible assets (128,572) (134,088)
----------------- -----------------
Tangible stockholders' equity $ 252,482 $ 243,723
================= =================
Book value per share $ 20.40 $ 19.77
================= =================
Tangible book value per share $ 13.52 $ 12.75
================= =================
</TABLE>
51
<PAGE>
The following table illustrates the changes in our tangible stockholders'
equity for the periods indicated:
<TABLE>
<CAPTION>
------------------------------------
(Unaudited)
------------------------------------
Six Months Year
Ended Ended
June 30, December 31,
1999 1998
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Beginning tangible stockholders' equity $ 243,723 $ 144,120
Net income 14,669 22,719
Acquisition of AFEH - 210,000
Intangible assets generated from acquisitions accounted
for under the purchase method of accounting - (115,734)
Amortization of intangible assets 5,787 11,372
Repurchase of common stock (8,381) (24,063)
Exercise of stock options 311 3,269
Cash dividends declared (3,845) (8,069)
Other 218 109
----------------- -----------------
Ending tangible stockholders' equity $ 252,482 $ 243,723
================= =================
</TABLE>
Intangible assets generated from our acquisitions accounted for under the
purchase method of accounting are deducted from stockholders' equity in the
above calculation to arrive at tangible stockholders' equity. Conversely, the
amortization of intangible assets increases tangible stockholders' equity as
well as Bay View Capital Corporation's and Bay View Bank's Tier 1 regulatory
capital.
Bay View Bank is subject to various regulatory capital guidelines
administered by the Office of the Comptroller of the Currency. Under these
capital guidelines, the minimum total risk-based capital ratio and Tier 1
risk-based capital ratio requirements are 8.00% and 4.00%, respectively, of
risk-weighted assets and certain off-balance sheet items. The minimum Tier 1
leverage ratio requirement is 4.00% of quarterly average assets, as adjusted.
Additionally, the Federal Deposit Insurance Corporation Improvement Act of
1991 defines five capital tiers: well-capitalized, adequately-capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized, depending upon the capital level of the institution. Each
federal banking agency, including the Office of the Comptroller of the Currency,
is required to implement prompt corrective actions for "undercapitalized"
institutions that it regulates.
52
<PAGE>
Bay View Bank's regulatory capital levels at June 30, 1999 exceeded both
the minimum requirements as well as the requirements necessary to be considered
well-capitalized as illustrated in the following table:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(Unaudited)
-----------------------------------------------------------------------------------------
Minimum Well-capitalized
Actual Requirement Requirement
------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------ ----------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $ 404,308 7.14% $ 226,404 4.00% $ 283,006 5.00%
Tier 1 Risk-based $ 404,308 9.31% $ 173,722 4.00% $ 260,583 6.00%
Total Risk-based $ 448,781 10.33% $ 347,444 8.00% $ 434,305 10.00%
</TABLE>
Bay View Capital Corporation's regulatory capital levels at June 30, 1999
also exceeded both the Federal Reserve Board's minimum requirements as well as
the requirements necessary to be considered well-capitalized by the Federal
Reserve Board as illustrated in the following table:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(Unaudited)
-----------------------------------------------------------------------------------------
Minimum Well-capitalized
Actual Requirement Requirement
------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------- ----------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $ 325,723 5.76% $ 226,060 4.00% - -
Tier 1 Risk-based $ 325,723 7.37% $ 176,712 4.00% $ 265,068 6.00%
Total Risk-based $ 478,214 10.82% $ 353,424 8.00% $ 441,780 10.00%
</TABLE>
Share Repurchases
In August 1998, our Board of Directors authorized a total of $50 million in
share repurchases. During the second quarter of 1999, we repurchased 155,000
shares at an average cost of $18.51 per share. Since August 1998, we have
repurchased 1,656,500 shares at an average cost of $19.59. At June 30, 1999, we
had approximately $17.6 million in remaining authorization available for future
share repurchases. We intend to continue share repurchases prospectively, and to
measure acquisition and other investment opportunities relative to the risk-free
returns associated with share repurchases.
New York Stock Exchange
Effective April 1, 1999, we changed the listing of our securities from
Nasdaq to the New York Stock Exchange. Our securities commenced trading on the
New York Stock Exchange under the ticker symbols: BVC for our common stock, BVS
for our Capital Securities, and BVC 07 for our Subordinated Notes due August
2007. In addition to reducing volatility in our securities, the move to the New
York Stock Exchange is expected to save our investors money through better trade
execution resulting in lower transaction costs.
53
<PAGE>
Year 2000
General
- -------
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, any of
our computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000 which, in turn, could
result in system failures or miscalculations causing disruptions in our
operations and the operations of our suppliers and customers.
The potential impact of Year 2000 compliance issues on the financial
services industry could be material, as virtually every aspect of the industry
and processing of transactions will be affected. Due to the size of the task
facing the financial services industry and the interdependent nature of its
transactions, we may be adversely affected by this problem, depending on whether
we and the entities with which we do business address the issue successfully.
The impact of Year 2000 issues on us will depend not only on corrective actions
that we take, but also on the way in which Year 2000 issues are addressed by
governmental agencies, businesses and other third parties that provide services
or data to us, or receive services or data from us, or whose financial condition
or operational capability is important to us.
Financial institution regulators have continued to increase their focus
upon Year 2000 compliance issues and have issued guidance concerning the
responsibilities of an institution's senior management and directors. The
Federal Financial Institutions Examination Council, an oversight authority for
financial institutions, has issued several interagency statements on Year 2000
project management awareness. These statements require financial institutions
to, among other things, examine the Year 2000 implications of their reliance on
vendors and the potential impact of Year 2000 issues on their customers,
suppliers and borrowers. These statements also require each federally regulated
financial institution to survey its exposure, measure its risk and prepare a
plan to address the Year 2000 issue. In addition, federal banking regulators
have issued safety and soundness guidelines to be followed by insured depository
institutions, such as Bay View Bank. The federal banking agencies have asserted
that Year 2000 testing and certification is a key safety and soundness issue in
conjunction with regulatory examinations and thus, that an institution's failure
to appropriately address the Year 2000 issue could result in supervisory action,
including a reduction of the institution's supervisory ratings, the denial of
applications for approval of mergers or acquisitions or the imposition of civil
monetary penalties.
54
<PAGE>
Our State of Readiness
- ----------------------
We rely upon third-party software vendors and data processing service
providers for the majority of our electronic data processing and do not operate
any proprietary programs which are critical to our operations. Thus, our focus
is to monitor the progress of our primary software and data processing service
providers toward resolving Year 2000 compliance issues and perform tests
associated with our actual data in simulated processing of future-sensitive
dates.
Our Year 2000 compliance program has been divided into the following
phases:
1. Inventorying Year 2000 items;
2. Assessing the Year 2000 compliance of items determined to be material to
us;
3. Upgrading or replacing material items that are determined not to be Year
2000 compliant and testing material items;
4. Designing and implementing contingency and business continuation plans; and
5. Assessing the status of third-party risks.
In the first phase, we conducted a thorough evaluation of current
information technology systems, software and embedded technologies, resulting in
the identification of 16 mission critical systems that could be affected by Year
2000 issues. Non-information technology systems such as climate control systems,
elevators and vault security equipment were also surveyed. This phase of the
Year 2000 compliance program is substantially complete.
In the second phase, results from the systems inventory were assessed to
determine the Year 2000 impact and what actions were required to obtain Year
2000 compliance. For our internal systems, actions needed ranged from
third-party vendor application upgrades to PC, server and network equipment
replacement. Further, we surveyed information regarding Year 2000 readiness for
our material third-party suppliers of information systems and services. This
phase of the Year 2000 compliance program is substantially complete.
The third phase includes the upgrading, replacement and/or refinement of
systems and testing. The software conversion of our mission critical systems is
substantially complete. Each of the upgrades or replacements, to the extent
economically feasible, is tested to see how well it integrates with our overall
data processing environment. Final "future-date" testing of system upgrades and
replacements is substantially complete.
The fourth phase relates to contingency plans. While we are reasonably
certain that our internal Year 2000 compliance program will be successful, there
could be other external operational issues regarding the Year 2000 process that
may prevent us from successfully implementing our Year 2000 compliance program.
If these other external operational issues occur and remain unresolved, we could
be required to implement a contingency plan for Year 2000 compliance. Our Year
2000 contingency plans are substantially complete.
The final phase, assessing external third-party risks, includes the process
of identifying and prioritizing critical suppliers and customers at the direct
interface level, as well as other material relationships with third parties,
including various exchanges, clearing houses, other banks, telecommunication
companies, and public utilities. This evaluation includes communicating with the
third parties about their plans and progress in addressing Year 2000 issues.
Detailed evaluations of the
55
<PAGE>
most critical third parties are continuing with follow-up reviews scheduled
through the remainder of 1999.
Our total costs associated with required modifications to become Year 2000
compliant are estimated at approximately $1.8 million, a portion of which has
been, and will continue to be, a reallocation of internal resources and,
therefore, does not represent incremental expense to us. The total amount of
pre-tax costs incurred through June 30, 1999 related to the Year 2000 issue was
approximately $1.1 million.
Risks
- -----
Failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect our results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting primarily from the uncertainty of
the Year 2000 readiness of third-party suppliers and customers, we are unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on our results of operations, liquidity and financial
condition. Our Year 2000 compliance program will reduce levels of uncertainty
about Year 2000 issues including questions as to the compliance and readiness of
our material third-party providers. We believe that the implementation of new
and/or upgraded business systems and completion of the Year 2000 compliance
program has significantly reduced the possibility of significant interruptions
to normal operations.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," 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. We currently utilize interest rate exchange
agreements to hedge cash flows associated with current and anticipated
transactions. To the extent these interest rate exchange agreements qualify as a
cash flow hedge under Statement No. 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. Statement No. 133,
as amended by Statement of Financial Accounting Standards No. 137, will be
effective for the fiscal quarter beginning January 1, 2001. We are in the
process of evaluating the impact that the adoption of Statement No. 133 will
have on our consolidated financial condition, results of operations or cash
flows.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which amends the disclosure requirements of
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities." Statement No. 134 conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. Statement No. 134 was effective January 1, 1999 and had no
material impact on our consolidated financial condition, results of operations
or cash flows.
56
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Asset and Liability Management
The objective of our asset and 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
our balance sheet and by controlling various risks, we seek to optimize our
financial returns within safe and sound parameters. Our operating strategies for
attaining this objective include managing net interest margin through
appropriate risk/return pricing of assets and liabilities, increasing
transaction accounts as a percentage of interest-bearing liabilities and
reducing our cost of funds, utilizing our strong capital position to boost our
earnings power through the origination or purchase of quality assets with higher
risk-adjusted yields, controlling noninterest expense, enhancing noninterest
income, and utilizing improved information systems to facilitate the analysis of
the profitability of business platforms. We also utilize interest rate exchange
agreements and other hedging strategies to reduce our exposure to fluctuations
in interest rates and perform internal analyses to measure, evaluate and monitor
risk.
Interest Rate Risk
A key objective of asset and liability management is to manage interest
rate risk associated with changing asset and liability cash flows and market
interest rate movements. Interest rate risk occurs when interest rate sensitive
assets and liabilities do not reprice simultaneously and in equal volumes. Our
Asset and Liability Committee provides oversight to our interest rate risk
management process and recommends policy guidelines regarding exposure to
interest rates for approval by our Board of Directors. Adherence to these
policies is monitored on an ongoing basis, and decisions related to the
management of interest rate exposure are made when appropriate in accordance
with our policies.
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. Our strategy has been to reduce
the sensitivity of our earnings to interest rate fluctuations by more closely
matching the effective maturities or repricing characteristics of our assets and
liabilities. Certain assets and liabilities, however, may react in different
degrees to changes in market interest rates. Further, interest rates on certain
types of assets and liabilities may fluctuate prior to changes in market
interest rates, while rates on other types may lag behind. Additionally, certain
assets, such as adjustable-rate mortgages, have features, including payment and
rate caps, which restrict changes in their interest rates. We consider the
anticipated effects of these factors when implementing our interest rate risk
management objectives.
We pursue both on- and off-balance sheet strategies that should, in the
long run, mitigate our exposure to fluctuations in interest rates. We have
initiated numerous actions over the past few years which have significantly
reduced our exposure to fluctuations in interest rates. Our interest rate risk
should continue to be reduced in the future as we continue to transition to less
interest rate sensitive consumer and commercial assets, as we continue to
increase transaction accounts and as we continue our efforts to match maturities
on our Federal Home Loan Bank advances and other funding sources with the
durations of our interest-earning assets.
Interest Rate Exchange Agreements (Swaps)
We use interest rate exchange agreements (i.e., swaps) to reduce the
interest rate risk related to certain assets and liabilities. Interest rate
swaps involve the exchange of fixed-rate and floating-rate
57
<PAGE>
interest payment obligations without the exchange of the underlying notional
amounts. We were a party to interest rate swaps with notional principal amounts
of $258 million at June 30, 1999 and $366 million at December 31, 1998 which
involve the receipt of floating interest rates (based on three-month LIBOR) and
payment of fixed interest rates on the underlying notional amounts.
Interest rate risk is the most significant market risk impacting us,
however, other types of market risk also affect us in the normal course of our
business activities. The impact on us resulting from other market risks is
immaterial and no separate quantitative information related to such market risks
is necessary. We do not maintain a portfolio of trading securities and do not
intend to engage in such activities in the foreseeable future.
Interest Rate Sensitivity
Our monitoring activities related to managing interest rate risk include
both interest rate sensitivity "gap" analysis and the use of a simulation model.
While traditional gap analysis provides a simple picture of the interest rate
risk embedded in the balance sheet, it provides only a static view of interest
rate sensitivity at a specific point in time and does not measure the potential
volatility in forecasted results relating to changes in market interest rates
over time. Accordingly, we combines the use of gap analysis with the use of a
simulation model which provides a dynamic assessment of interest rate
sensitivity.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated to reprice within a specific time
period and the amount of interest-bearing liabilities anticipated to reprice
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets repricing within a specific time period exceeds
the amount of interest-bearing liabilities repricing within that same time
period. Positive cumulative gaps suggest that earnings will increase when
interest rates rise. Negative cumulative gaps suggest that earnings will
increase when interest rates fall.
58
<PAGE>
The following table illustrates our combined asset and liability
repricing as of June 30, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------------
Repricing Period (Unaudited)
---------------------------------------------------------
Under Between Between
One One and Three and
Year Three Years Five Years
----------------- ----------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
- ------
Cash and investments $ 145,550 $ 3,707 $ -
Mortgage-backed securities and loans and leases /1/ 2,928,965 1,397,102 446,477
----------------- ----------------- ----------------
Total interest rate sensitive assets $ 3,074,515 $ 1,400,809 $ 446,477
================= ================= ================
Liabilities
- -----------
Deposits:
Transaction accounts $ 1,759,996 $ - $ -
Certificates of deposit 1,251,122 320,990 13,107
Borrowings 1,053,487 443,859 324,910
----------------- ----------------- ----------------
Total interest rate sensitive liabilities $ 4,064,605 $ 764,849 $ 338,017
================= ================= ================
Repricing gap-positive (negative) before impact of interest
rate swaps $ (990,090) $ 635,960 $ 108,460
Impact of interest rate swaps 265,000 (150,000) (25,000)
----------------- ----------------- ----------------
$ (725,090) 485,960 83,460
================= ================= ================
Cumulative repricing gap-positive (negative) $ (725,090) $ (239,130) $ (155,670)
================= ================= ================
<CAPTION>
Over
Five
Years Total
---------------- ---------------
<S> <C> <C>
Assets:
- ------
Cash and investments $ 13,110 $ 162,367
Mortgage-backed securities and loans and leases /1/ 698,486 5,471,030
---------------- ---------------
Total interest rate sensitive assets $ 711,596 $ 5,633,397
================ ===============
Liabilities
- -----------
Deposits: $ - $ 1,759,996
Transaction accounts 1,660 1,586,879
Certificates of deposit 323,008 2,145,264
Borrowings ---------------- ---------------
$ 324,668 $ 5,492,139
Total interest rate sensitive liabilities ================ ===============
Repricing gap-positive (negative) before impact of interest rate swaps $ 386,928 $ 141,528
===============
Impact of interest rate swaps (90,000)
----------------
296,928
================
Cumulative repricing gap-positive (negative) $ 141,258
================
</TABLE>
/1/ Based on assumed annual prepayment and amortization rates which
approximate our historical experience.
59
<PAGE>
The simulation model discussed above also provides the Asset and Liability
Committee with the ability to simulate our net interest income. In order to
measure, as of June 30, 1999, the sensitivity of our forecasted net interest
income to changing interest rates, both a rising and falling interest rate
scenario were projected and compared to a base market interest rate forecast
derived from the treasury yield curve. For the rising and falling interest rate
scenarios, the base market interest rate forecast was increased or decreased, on
an instantaneous and sustained basis, by 100 and 200 basis points. At June 30,
1999, our net interest income exposure related to these hypothetical changes in
market interest rates was within our policy guidelines as illustrated in the
following table:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Increase/(Decrease) in Net Interest Income (Unaudited)
--------------------------------------------------------------------------------
Projected effect: -200 BP -100 BP +100 BP +200 BP
---------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net interest income without swaps $ 202,594 $ 196,706 $ 181,687 $ 172,809
Net interest income with swaps $ 195,556 $ 191,658 $ 180,620 $ 173,732
Impact of swaps $ (7,038) $ (5,048) $ (1,067) $ 924
% Increase (decrease) from base
net interest income, with swaps 4.60% 2.52% (3.39%) (7.07%)
Policy guideline (15.00%) (10.00%) (10.00%) (15.00%)
</TABLE>
The computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, asset prepayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions we may undertake in response to changes in interest
rates. Actual amounts may differ from those projections set forth above should
market conditions vary from the underlying assumptions used.
60
<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
27, 1999, the stockholders considered the following proposal:
I. The election of two directors of the Company.
The following directors were re-elected:
George H. Krauss
John R. McKean
The vote on the election of the directors at the annual meeting
was as follows:
For Withheld or Against
George H. Krauss 18,177,751 183,062
John R. McKean 18,173,642 187,171
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. The Registrant did not file any reports on Form 8-K during the
three months ended June 30, 1999.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
----------------------------
Registrant
DATE: August 16, 1999 BY: /s/ David A. Heaberlin
-------------------------
David A. Heaberlin
David A. Heaberlin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
BY: /s/ Scott H. Ray
-------------------
Scott H. Ray
Senior Vice President and Controller
(Principal Accounting Officer)
62
<PAGE>
EXHIBIT 12
BAY VIEW CAPITAL CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
6/30/99 6/30/98
<S> <C> <C>
Earnings:
Earnings before income tax expenses $ 27,613 $ 20,144
Add:
Interest on advances and other borrowings 56,600 45,538
Interest component of rental expense 958 1,076
-------- --------
Earnings before fixed charges excluding
interest on customer deposits 85,171 66,758
Interest on customer deposits 67,077 78,597
-------- --------
Earnings before fixed charges $152,248 $145,355
======== ========
Fixed charges:
Interest on advances and other borrowings $ 56,600 $ 45,538
Interest component of rental expense 958 1,076
-------- --------
Fixed charges excluding interest on
customer deposits 57,558 46,614
Interest on customer deposits 67,077 78,597
-------- --------
Total fixed charges $124,635 $125,211
======== ========
Ratio of earnings to fixed charges including interest
on customer deposits 1.22 1.16
Ratio of earnings to fixed charges excluding interest
on customer deposits 1.48 1.43
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 40,733
<INT-BEARING-DEPOSITS> 19,959
<FED-FUNDS-SOLD> 28,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,594
<INVESTMENTS-CARRYING> 602,379
<INVESTMENTS-MARKET> 607,672
<LOANS> 4,473,587
<ALLOWANCE> 44,453
<TOTAL-ASSETS> 5,903,328
<DEPOSITS> 3,346,875
<SHORT-TERM> 1,033,805
<LIABILITIES-OTHER> 30,135
<LONG-TERM> 1,111,459
0
0
<COMMON> 204
<OTHER-SE> 380,850
<TOTAL-LIABILITIES-AND-EQUITY> 5,903,328
<INTEREST-LOAN> 90,914
<INTEREST-INVEST> 11,802
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 102,716
<INTEREST-DEPOSIT> 33,475
<INTEREST-EXPENSE> 59,970
<INTEREST-INCOME-NET> 42,746
<LOAN-LOSSES> 6,800
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 39,877
<INCOME-PRETAX> 14,184
<INCOME-PRE-EXTRAORDINARY> 14,184
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,536
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 3.28
<LOANS-NON> 12,019
<LOANS-PAST> 0
<LOANS-TROUBLED> 769
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 44,147
<CHARGE-OFFS> (7,671)
<RECOVERIES> 1,177
<ALLOWANCE-CLOSE> 44,453
<ALLOWANCE-DOMESTIC> 44,453
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
