BAY VIEW CAPITAL CORP
10-Q, 1999-11-12
SAVINGS INSTITUTION, FEDERALLY CHARTERED
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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 September 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)

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
(Title of Class)
Outstanding at October 29, 1999
18,684,137 shares

FORM 10-Q
INDEX

BAY VIEW CAPITAL CORPORATION

PART I.
FINANCIAL INFORMATION
Page(s)
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
10-16
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
17-61
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
62-65
   
PART II. OTHER INFORMATION
 

Other Information

66-67
     
  Signatures
67

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:

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

 

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements.

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

* Substantially restricted

The accompanying notes are an integral part of these consolidated financial statements.

 

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  Nine Months Ended
September 30,
 

1999

 

1998

 

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net income

$23,703 

  

$15,320 

Adjustments to reconcile net income to net cash provided by

 
 
 

   (used in) operating activities:
 
 
 

 Amortization of intangible assets

8,532 

  

8,475 

 Proceeds from sale of loans and leases held-for-sale

456,679 

  

- 

 Provision for losses on loans and leases and real estate owned

19,128 

  

5,025 

 Depreciation and amortization of premises and equipment

5,523 

  

4,979 

 Depreciation and amortization of investment in operating leased assets

23,785 

  

2,691 

 Amortization of premiums, net of discounts

18,159 

  

9,936 

 Gain on sale of loans and leases and securities, net

(2,379)

  

(1,067)

 Decrease (increase) in other assets

17,226 

  

(20,498)

 (Decrease) increase in other liabilities

7,179 

  

(33,238)

 Other, net

(5,421)

  

(3,248)
 
 

Net cash provided by (used in) operating activities

572,114 

  

(11,625)
 
 

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 

Acquisition of a subsidiary, net of cash and cash equivalents received

- 

  

82,129 

Acquisition of deposits, net of premium paid

110,807 

  

- 

Net decrease in loans and leases resulting from principal payments, net
    of originations

32,068 

  

434,764 

Purchase of loans and leases, net

(1,040,266)

  

(985,454)

Purchase of investment securities

(9,997)

  

(1,956)

Purchase of mortgage-backed securities

(80,474)

  

(67,703)

Principal payments on mortgage-backed securities

125,866 

  

223,411 

Proceeds from the sale of mortgage-backed securities available-for-sale

- 

  

234,080 

Proceeds from the sale of investment securities available-for-sale

- 

  

2,357 

Proceeds from maturity or call of investment securities held-to-maturity

- 

  

5,000 

Proceeds from the sale of real estate owned

3,063 

  

3,310 

Additions to premises and equipment

(2,650)

  

(10,356)

(Increase) decrease in investment in stock of the FHLB of San Francisco

8,949 

  

(4,227)

Increase in investment in stock of the Federal Reserve Bank

(13,395)

  

- 
 
 

Net cash used in investing activities

(866,029)

  

(84,645)
 
 

The accompanying notes are an integral part of these consolidated financial statements.

 

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)

  Nine Months Ended
September 30,
 

1999

 

1998

 

(Dollars in thousands)

CASH FLOWS FROM FINANCING ACTIVITIES

      

Net increase (decrease) in deposits

$295,903 
 

$(459,834)

Proceeds from advances from the FHLB of San Francisco

2,898,600 
 

4,312,700 

Repayment of advances from the FHLB of San Francisco

(3,090,200)
 

(3,814,490)

Proceeds from reverse repurchase agreements

218,001 
 

352,511 

Repayment of reverse repurchase agreements

(214,554)
 

(382,264)

Issuance of Subordinated Notes

50,000 
 

- 

Maturity of Senior Debentures

(50,000)
 

- 

Net increase (decrease) in other borrowings

114,045 
 

(10,941)

Repurchase of common stock

(8,381)
 

(15,462)

Proceeds from issuance of common stock

396 
 

3,127 

Dividends paid to stockholders

(5,762)
 

(6,043)
 
 

Net cash provided by (used in) financing activities

208,048 
 

(20,696)
 
 
 
 
 
 

Net decrease in cash and cash equivalents

(85,867)
 

(116,966)

Cash and cash equivalents at beginning of period

205,186 
 

231,822 
 

Cash and cash equivalents at end of period

$119,319 
 

$ 114,856 
 

Cash paid for:
 
 
 

    Interest

$187,346 
 

$195,377 

    Income taxes

$- 
 

$-

 
 
 
 

Supplemental non-cash investing and financing activities:
 
 
 

    Loans transferred to real estate owned

$2,049 
 

$4,203 

    Loans transferred from held-for-investment to held-for-sale

$510,730 
 

$- 
 
 
 
 

The acquisition of a subsidiary involved the following:
 
 
 

    Common stock issued

$- 
 

$210,000 

    Liabilities assumed

- 
 

2,103,341 

    Fair value of assets acquired, other than cash and cash equivalents

- 
 

(2,128,109)

    Goodwill

- 

 

(103,103)
 
 

    Net cash and cash equivalents received

$- 
 

$ 82,129 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 under the laws of 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., formerly wholly owned subsidiaries of Bay View Acceptance Corporation, 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 September 30, 1999 and December 31, 1998, the results of our operations for the three- and nine-month periods ended September 30, 1999 and 1998, and our cash flows for the nine-month periods ended September 30, 1999 and 1998. These 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 nine-month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)

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:

 

Three Months Ended

 

Nine Months Ended

 

September 30,
1999

 

September 30,
1998

 

September 30,
1999

 

September 30,
1998

 

(Amounts in thousands, except per share amounts)

Net earnings available to common
    stockholders

$9,034
 

$5,025
 

$23,703
 

$15,320

Weighted-average common shares
    outstanding

18,749
 

20,095
 

18,884
 

20,224

Add: Dilutive potential common
    shares

116
 

240
 

137
 

346
 
 
 
 

Diluted weighted-average common
    shares outstanding

18,865
 

20,335
 

19,021
 

20,570
 
 
 
 

Basic earnings per share

$0.48
 

$0.25
 

$1.25
 

$0.76
 
 
 
 

Diluted earnings per share

$0.48
 

$0.25
 

$1.25
 

$0.74
 
 
 
 

Note 3 - Stock Options

At September 30, 1999, Bay View Capital Corporation had five stock-based incentive 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."

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)

The following table illustrates the stock options available for grant as of September 30, 1999:

 

1986 Stock
Option and
Incentive Plan

 

1995 Stock
Option and
Incentive Plan

 

1989 Non-
Employee
Director Stock
Option and
Incentive Plan

 

1998-2000
Performance
Stock Plan

 

1998 Non-
Employee
Director Stock
Option and
Incentive Plan

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)

  

(93,000)

  

(42,000)

Forfeited

290,574 

  

300,299 

  

20,000 

  

- 

  

- 

Expired

(1,188)

  

- 

  

- 

  

- 

  

- 
 
 
 
 
 
Total available for grant
- 
200,299 
- 
307,000 
158,000 
 
 
 
 
 

At September 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:

 

Number of
Option Shares

 

Exercise Price
Range

 

Weighted-Average
Price

Outstanding at December 31, 1998

2,145,700 

  

$ 7.88 - 35.20

  

$ 21.55

Granted

337,000 

  

18.17 - 19.53

  

18.95

Exercised

(30,500)

  

8.72 - 17.00

  

12.99

Forfeited

(140,700)

  

17.00 - 34.41

  

26.64
 
 
 
Outstanding at September 30, 1999

2,311,500 

  

$ 7.88 - 35.20

  

$ 20.97
 
 
 

On October 14, 1999, our shareholders approved an additional 500,000 shares available for grant under the Amended and Restated 1995 Stock Option and Incentive Plan subject to the close of our acquisition of Franchise Mortgage Acceptance Corporation, sometimes referred to as FMAC, which occurred on November 1, 1999 (see Note 5).

Note 4 - Dividend Declaration

Bay View Capital Corporation declared a quarterly common stock cash dividend of $0.10 per common share on September 23, 1999, which was paid on October 22, 1999 to common stockholders of record as of October 8, 1999. The dividend, totaling approximately $2.0 million, was accrued as of September 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 FMAC. The merger closed on November 1, 1999. Under the terms of the definitive agreement, as amended on August 25, 1999, we acquired all of the common stock of FMAC for consideration valued at approximately $275 million. Each share of FMAC common stock was exchanged for, at the election of the holder, either $9.80 in cash or 0.5444 shares stock. In total, the elections for cash were limited to

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)

15% of the shares of FMAC common stock outstanding immediately prior to closing and the elections for our common stock were limited to 85% of the shares of FMAC common stock outstanding immediately prior to closing. Upon consummation of the merger, we contributed substantially all of FMAC's assets and liabilities to newly formed subsidiaries of Bay View Bank.

Note 6 - Segment and Related Information

We have four operating segments, referred to as business platforms. The platforms were determined primarily based upon the characteristics of the underlying interest-earning assets. Each platform is comprised of interest-earning assets with similar characteristics, including marketing and distribution channels, pricing, credit risk, and interest rate sensitivity. Our platforms are as follows:

A Banking Platform which is 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 nine months of 1999 in connection with our acquisition of FMAC. The Banking Platform's revenues are substantially derived from customers in northern California.

A Home Equity Platform which is comprised of home equity loans and lines of credit. The Home Equity Platform's revenues are derived from customers throughout the United States.

An Auto Platform which is comprised of motor vehicle loans and leases. The Auto Platform's revenues are substantially derived from customers in California and the western United States.

A Commercial Platform which is comprised of asset-based lending (excluding asset-based commercial participation loans), factoring and commercial leasing activities. The Commercial Platform's revenues are derived from customers throughout the United States.

Each of our business platforms contributes to our overall profitability. We evaluate the performance of our segments based on contribution by platform. 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 operating 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 expense associated with our 9.76% Capital Securities issued on December 21, 1998.

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)

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 an 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.

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 consolidated net income for the periods indicated. Reconciling items generally include indirect corporate overhead and income tax expense.

 

Three Months Ended September 30, 1999 (Unaudited)

 

Banking

 

Home Equity

 

Auto

 

Commercial

 

Total

 
(Dollars in thousands)
                   

Net interest income (1)

$23,608 
 
$8,320  
 
$6,437  
 
$3,925  
 
$42,290 

Provision for losses on loans and leases
-  
 
(5,050)
 
(1,650)
 
(300)
 
(7,000)

Noninterest income (2)

7,014  
 
21  
 
16,828  
 
392  
 
24,255  

Direct general and administrative
  expenses (1)

(14,702)
 
(1,071)
 
(3,258)
 
(2,102)
 
(21,133)

Leasing expenses (2)

- 
 
- 
 
(11,313)
 
- 
 
(11,313)

Dividend expense on Capital Securities
(1,877)
 
(356)
 
-  
 
-  
 
(2,233)

Net income on real estate owned
83  
 
-  
 
-  
 
-  
 
83  

Amortization of intangible assets
(2,055)
 
-  
 
(340)
 
(350)
 
(2,745)
 
 
 
 
 

Contribution by platform
$12,071 
 
$1,864  
 
$6,704  
 
$1,565  
 
22,204  
 
 
 
 
   

Indirect corporate overhead (1)

 
 
 
 
 
 
 
 
(5,636)

Income tax expense

 
 
 
 
 
 
 
 
(7,534)
                 

Net income

 
 
 
 
 
 
 
 
$9,034  
 
 
 
 
 
 
 
 
 
                   

At September 30, 1999:

 
 
 
 
 
 
 
 
 

Interest-earning assets plus operating
  leased assets
$ 3,667,598 
 
$ 737,132 
 
$ 1,133,069 
 
$ 148,526 
 
$ 5,686,325 
 
 
 
 
   

Noninterest-earning assets
 
 
 
 
 
 
 
 
259,679 
                 

Total assets

 
 
 
 
 
 
 
 

$ 5,946,004 
 
 
 
 
 
 
 
 
 

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)

 

Three Months Ended September 30, 1998 (Unaudited)

 

Banking

 

Home Equity

 

Auto

 

Commercial

 

Total

 

(Dollars in thousands)
                   

Net interest income

$21,923 
 

$7,362
 

$7,232 
 

$2,747 
 

$39,264 

Provision for losses on loans and leases

- 
 

(925)
 

(1,829)
 

- 
 

(2,754)

Noninterest income (2)

4,661 
 

19
 

4,077 
 

239 
 

8,996 

Direct general and administrative expenses (1)

(16,094)
 

(750)
 

(4,041)
 

(2,252)
 

(23,137)

Leasing expenses (2)

- 
 

-
 

(2,459)
 

- 
 

(2,459)

Net income on real estate owned

2 
 

-
 

4

 

2 
 

8 

Amortization of intangible assets

(2,212)
 

-
 

(289)
 

(363)
 

(2,864)
 
 
 
 
 

Contribution by platform

$8,280 
 

$5,706
 

$2,695

 

$373

 

17,054 
 
 
 
 
   

Indirect corporate overhead (1)

 
 
 
 
 
 
 
 

(7,109)

Income tax expense
 
 
 
 
 
 
 
 

(4,920)
                 

Net income
 
 
 
 
 
 
 
 

$5,025 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

At September 30, 1998:
 
 
 
 
 
 
 
 
 

Interest-earning assets plus operating leased assets

$ 3,886,015 
 

$ 598,771
 

$ 663,222 
 

$ 83,381

 

$ 5,231,389 
 
 
 
 
   

Noninterest-earning assets
 
 
 
 
 
 
 
 

290,985 
                 

Total assets
 
 
 
 
 
 
 
 

$ 5,522,374 
 
 
 
 
 
 
 
 
 

 

Nine Months Ended September 30, 1999 (Unaudited)

 

Banking

 

Home Equity

 

Auto

 

Commercial

 

Total

 

(Dollars in thousands)
                   

Net interest income (1)

$71,478 
 

$25,021 
 

$18,834 
 

$10,486 
 

$125,819 

Provision for losses on loans and leases

- 
 

(13,658)
 

(4,700)
 

(753)
 

(19,111)

Noninterest income (1) (2)

16,967 
 

62 
 

40,421 
 

887 
 

58,337 

Direct general and administrative expenses (1)

(43,205)
 

(3,110)
 

(10,760)
 

(6,082)
 

(63,157)

Leasing expenses (2)

- 
 

- 
 

(26,932)
 

- 
 

(26,932)

Dividend expense on Capital Securities

(5,687)
 

(1,015)
 

- 
 

- 
 

(6,702)

Net income on real estate owned

106 
 

- 
 

- 
 

- 
 

106 

Amortization of intangible assets

(6,483)
 

- 
 

(973)
 

(1,076)
 

(8,532)
 
 
 
 
 

Contribution by platform

$33,176 
 

$7,300

 

$15,890 
 

$3,462 
 

59,828 
 
 
 
 
   

Indirect corporate overhead (1)

 
 
 
 
 
 
 
 

(15,647)

Income tax expense
 
 
 
 
 
 
 
 

(20,478)
                 

Net income

 
 
 
 
 
 
 
 

$23,703 
 
 
 
 
 
 
 
 
 

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)

 
Nine Months Ended September 30, 1998 (Unaudited)
 

Banking

Home Equity

Auto

Commercial

Total

 

(Dollars in thousands)
           

Net interest income

$71,511 

$14,491 

$20,706 

$7,834 

$114,542 

Provision for losses on loans and leases

- 

(1,470)

(3,644)

- 

(5,114)

Noninterest income (2)

12,192 

198 

6,385 

552 

19,327 

Direct general and administrative expenses (1)

(47,612)

(1,665)

(12,602)

(6,164)

(68,043)

Leasing expenses (2)

- 

- 

(3,167)

- 

(3,167)

Net income on real estate owned

88 

- 

4 

102 

194 

Amortization of intangible assets

(6,517)

- 

(869)

(1,089)

(8,475)
 

Contribution by platform

$29,662 

$11,554 

$6,813 

$1,235 

49,264 
 
 

Indirect corporate overhead (1)

 
 
 
 

(19,175)

Income tax expense
 
 
 
 

(14,769)
         

Net income
 
 
 
 

$15,320   
         

(1)  Amounts include certain special mention items which are discussed at "Net Interest Income and Net Interest Margin", "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.

(2)  The Auto Platform commenced its leasing activities effective April 1, 1998. The Auto Platform commenced its leasing activities effective April 1, 1998.

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 to four business platforms in order to facilitate a more effective presentation and analysis of our different business activities. These platforms are as follows:

Mission/Strategies

Our mission is to build a diversified financial services company by investing in niche businesses with risk-adjusted returns that enhance shareholder value. Our strategies center around our continued transition to commercial banking activities and the expected expansion of our net interest margin. In order to realize this objective, our actions include the following:

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 September 30, 1999, the Banking Platform had approximately $3.7 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 52.0% at September 30, 1999 as compared with 49.8% at December 31, 1998. Total retail deposits at Bay View Bank were $3.4 billion at September 30, 1999 as compared with $3.3 billion at December 31, 1998.

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 $117 million in deposits. In accordance with the agreement, we paid a 5.25% deposit premium. The transaction closed on September 25, 1999 and these two branches are now operating 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 September 30, 1999, the Home Equity Platform had approximately $737 million in interest-earning assets as compared with approximately $657 million at December 31, 1998. The Home Equity Platform's portfolio included $446 million in high loan-to-value home equity loans at September 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.

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 September 30, 1999, the Auto Platform had approximately $1.1 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 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 did not exercise this option, we intend to continue purchasing motor vehicle loans and leases from Lendco Financial Services through June 30, 2000, when our contractual agreement expires.

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 September 30, 1999, the Commercial Platform had approximately $149 million in interest-earning assets as compared with approximately $95 million at December 31, 1998. The Commercial Platform also originates asset-based commercial participation loans for the Banking Platform. These loans totaled approximately $59 million at September 30, 1999 and $18 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. Since the merger, FMAC and Bankers Mutual have operated as separate subsidiaries of Bay View Bank. FMAC's insurance agency service will operate as a separate subsidiary of our holding company, Bay View Capital Corporation. The acquisition provides us with significant asset generation capabilities consistent with our strategic direction. In addition, 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 consumer and commercial assets with higher risk-adjusted yields. 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.

Results of Operations

Net income for the third quarter of 1999 was $9.0 million, or $0.48 per diluted share, as compared with $5.0 million, or $0.25 per diluted share, for the third quarter of 1998. Net income for the first nine months of 1999 was $23.7 million, or $1.25 per diluted share, as compared with $15.3 million, or $0.74 per diluted share, for the first nine months of 1998. The increases in net income and earnings per diluted share, as compared with the respective prior periods, were primarily driven by higher net interest income, higher noninterest income and lower general and administrative expenses.

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 operating 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 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.

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.

 
Three Months Ended September 30, 1999 (Unaudited)
 

Banking

Home Equity

Auto

Commercial

Total

 

(Dollars in thousands)

           

Net interest income (1)

$23,608 

$8,320 

$6,437 

$3,925 

$42,290 

Provision for losses on loans and leases

- 

(5,050)

(1,650)

(300)

(7,000)

Noninterest income (2)

7,014 

21 

16,828 

392 

24,255 

Direct general and administrative expenses (1)

(14,702)

(1,071)

(3,258)

(2,102)

(21,133)

Dividend expense on Capital Securities

(1,877)

(356)

- 

- 

(2,233)

Net income on real estate owned

83 

- 

- 

- 

83 

Amortization of intangible assets

(2,055)

- 

(340)

(350)

(2,745)
 

Contribution by platform

$12,071 

$1,864 

$6,704 

$1,565 

22,204 
 
 

Indirect corporate overhead (1)

 
 
 
 

(5,636)

Income tax expense
 
 
 
 

(7,534)
         

Net income

 
 
 
 

$9,034 
         

 

 
Three Months Ended September 30, 1998 (Unaudited)
  Banking
Home Equity
Auto
Commercial
Total
 

(Dollars in thousands)

           

Net interest income

$21,923 

$7,362 

$7,232 

$2,747

$39,264 

Provision for losses on loans and leases

- 

(925)

(1,829)

- 

(2,754)

Noninterest income (2)

4,661 

19 

4,077 

239 

8,996 

Direct general and administrative expenses (1)

(16,094)

(750)

(4,041)

(2,252)

(23,137)

Leasing expenses (2)

- 

- 

(2,459)

- 

(2,459)

Net income on real estate owned

2 

- 

4 

2 

8 

Amortization of intangible assets

(2,212)

- 

(289)

(363)

(2,864)
 

Contribution by platform

$8,280 

$5,706 

$2,695 

$373 

17,054 
 

Indirect corporate overhead (1)

 
 
 
 

(7,109)

Income tax expense
 
 
 
 

(4,920)
         

Net income
 
 
 
 

$5,025 

         
 
Nine Months Ended September 30, 1999 (Unaudited)
  Banking
Home Equity
Auto

Commercial

Total
 

(Dollars in thousands)

           

Net interest income (1)

$71,478 

$25,021 

$18,834 

$10,486 

$125,819 

Provision for losses on loans and leases

- 

(13,658)

(4,700)

(753)

(19,111)

Noninterest income (1) (2)

16,967 

62 

40,421 

887 

58,337 

Direct general and administrative expenses (1)

(43,205)

(3,110)

(10,760)

(6,082)

(63,157)

Leasing expenses (2)

- 

- 

(26,932)

- 

(26,932)

Dividend expense on Capital Securities

(5,687)

(1,015)

- 

- 

(6,702)

Net income on real estate owned

106 

- 

- 

-  

106 

Amortization of intangible assets

(6,483)

- 

(973)

(1,076)

(8,532)
 

Contribution by platform

$33,176 

$7,300 

$15,890

$3,462 

59,828 
 
 

Indirect corporate overhead (1)

 
 
 
 

(15,647)

Income tax expense
 
 
 
 

(20,478)
         

Net income

 
 
 
 

$23,703 
         

  Nine Months Ended September 30, 1998 (Unaudited)
  Banking
Home Equity
Auto
Commercial
Total
 

(Dollars in thousands)

           

Net interest income

$71,511 

$14,491 

$20,706 

$7,834 

$114,542 

Provision for losses on loans and leases

- 

(1,470)

(3,644)

- 

(5,114)

Noninterest income (2)

12,192 

198 

6,385 

552 

19,327 

Direct general and administrative expenses (1)

(47,612)

(1,665)

(12,602)

(6,164)

(68,043)

Leasing expenses (2)

- 

- 

(3,167)

- 

(3,167)

Net income on real estate owned

88 

- 

4 

102 

194 

Amortization of intangible assets

(6,517)

- 

(869)

(1,089)

(8,475)
 

Contribution by platform

$29,662 

$11,554 

$6,813 

$1,235 

49,264 
 

Indirect corporate overhead (1)

 
 
 
 

(19,175)

Income tax expense
 
 
 
 

(14,769)
         

Net income
 
 
 
 

$15,320 
         

(1) Amounts include certain special mention items which are discussed at "Net Interest Income and Net Interest Margin" , "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.

(2) The Auto Platform commenced its leasing activities effective April 1, 1998.

A discussion of each of the significant components of contribution by platform follows:

  



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