SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): OCTOBER 20, 1999
BAY VIEW CAPITAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-17901 94-3078031
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(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification
incorporation) No.)
1840 GATEWAY DRIVE, SAN MATEO, CALIFORNIA 94404
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 573-7300
N/A
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(Former name or former address, if changed since last report.)
<PAGE>
Item 5. OTHER EVENTS.
On October 20, 1999, Bay View Capital Corporation (the "Company")
issued the press release attached hereto as Exhibit 99, announcing the Company's
third quarter earnings for the fiscal year ending December 31, 1999.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
99 Press Release dated October 20, 1999.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
Date: November 3, 1999 By: /s/ David A. Heaberlin
-------------------------------
David A. Heaberlin
Executive Vice President
and Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99 Press Release dated October 20, 1999.
Exhibit 99
[BAY VIEW LOGO]
NEWS RELEASE
October 20, 1999
BAY VIEW CAPITAL ANNOUNCES 92% INCREASE IN EPS TO $0.48
SAN MATEO, CALIFORNIA - Bay View Capital Corporation today reported net income
of $9.0 million, or $0.48 per diluted share, for the third quarter of 1999. This
compares with net income of $7.5 million, or $0.40 per diluted share, for the
second quarter of 1999 and $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 increase in net income and earnings per diluted share for the third
quarter of 1999, as compared with the second quarter of 1999, was primarily
driven by higher noninterest income. The increases in net income and earnings
per diluted share for the third quarter of 1999, as compared with the third
quarter of 1998, and for the first nine months of 1999, as compared with the
first nine months of 1998, were primarily driven by higher net interest income,
higher noninterest income and lower general and administrative expenses.
CONTRIBUTION BY PLATFORM
Our business activities are conducted from the following four platforms:
o 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 nine months of 1999 in connection with our
pending acquisition of Franchise Mortgage Acceptance Company, sometimes
referred to as FMAC. We anticipate presenting FMAC's franchise lending
activities as a separate business platform subsequent to our
consummation of the acquisition.
o A Home Equity Platform comprised of home equity loans and lines of
credit.
o An Auto Platform comprised of motor vehicle loans and leases.
o A Commercial Platform comprised of asset-based lending, factoring and
commercial leasing activities.
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.
1
<PAGE>
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
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.
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 September 30, 1999 (Unaudited)
-------------------------------------------------
Banking Home Equity Auto Commercial Total
------- ----------- ---- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
========
</TABLE>
<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 (2) 4,471 17 13,408 219 18,115
Direct general and administrative
expenses (1) (14,226) (1,013) (3,499) (2,060) (20,798)
Leasing expenses (2) - - (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 (1) (5,081)
Income tax expense (6,648)
---------
Net income $ 7,536
========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 (Unaudited)
------------------------------------------------------
Banking Home Equity Auto Commercial Total
------- ----------- ---- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
=======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 (Unaudited)
------------------------------------------------------
Banking Home Equity Auto Commercial Total
------- ----------- ---- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998 (Unaudited)
------------------------------------------------------
Banking Home Equity Auto Commercial Total
------- ----------- ---- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
========
</TABLE>
3
<PAGE>
(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:
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the third quarter of 1999 was $42.3 million as
compared with $42.7 million for the second quarter of 1999 and $39.3 million for
the third quarter of 1998. Net interest income for the first nine months of 1999
was $125.8 million as compared with $114.5 million for the first nine months of
1998. Net interest margin was 3.21% for the third quarter of 1999 as compared
with 3.28% for the second quarter of 1999 and 3.05% for the third quarter of
1998. Net interest margin was 3.23% for the first nine months of 1999 as
compared with 3.00% for the first nine months of 1998.
The decrease in net interest income and net interest margin for the third
quarter of 1999, as compared with the second quarter of 1999, was primarily due
to a $600,000 nonrecurring item which negatively impacted interest income during
the third quarter of 1999 combined with a slight increase in funding costs. The
nonrecurring item related to a reconciliation of principal and interest payment
activity reported by a third-party loan servicer. Excluding this nonrecurring
item, net interest income for the third quarter of 1999 was slightly higher as
compared with the second quarter of 1999. The slight increase in funding costs
was due to the recent increase in the interest rate environment and additional
funding sources utilized during the quarter. These additional funding sources,
including a warehouse line and $50 million of 10% Subordinated Notes issued by
Bay View Bank on August 18, 1999, were consistent with the funding strategies
previously announced in connection with our pending acquisition of FMAC. Net
interest income and net interest margin for the third quarter of 1999 were also
adversely impacted by the sale of $450 million in multi-family COFI-based loans
on July 30, 1999, whereby a portion of the proceeds were used to pay down
borrowings and the remaining proceeds were invested in lower-yielding short-term
investments awaiting redeployment in higher-yielding assets, including franchise
loans.
The increases in net interest income and net interest margin for the third
quarter of 1999, as compared with the third quarter of 1998, and the first nine
months of 1999, as compared with the first nine months of 1998, were
attributable to both increases in average interest-earning assets and increases
in net interest margin. The increases in average interest-earning assets reflect
the replacement of asset prepayments, including normal amortization, with asset
originations and purchases, including our purchases of franchise loans. The
increases in net interest margin reflect the overall impact of the continued
change in the mix of our interest-earning assets whereby our lower-yielding
mortgage-based asset prepayments are being replaced primarily with consumer and
commercial assets with higher risk-adjusted yields, including franchise loans.
Specifically, the average balance of interest-earning assets within the Banking
Platform decreased, as compared with respective prior periods, while the average
balances of interest-earning assets in the comparatively higher-yielding Home
Equity, Auto and Commercial Platforms increased. The increases in net interest
margin also reflect decreases in our funding costs during these periods,
attributable to our refinancing and extending of maturities on a significant
portion of our Federal Home Loan Bank advances portfolio in October 1998, to a
change in the mix of our liabilities, including an increase in lower-cost
transaction accounts, and to our deposit pricing strategies.
Edward H. Sondker, our President and Chief Executive Officer, commented,
"We are pleased to report another strong quarter. These results demonstrated
continued improvement in our underlying fundamentals including normalized net
interest income and margin, noninterest income and asset quality combined with a
very strong efficiency ratio. Our earnings benefited from a gain on the sale of
loans during the quarter which we expect will become a recurring element of our
operating activities as we implement funding and balance sheet management
strategies related to FMAC."
4
<PAGE>
The following tables illustrate net interest income and net interest
margin, by platform, for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended (Unaudited)
----------------------------------------------------------------
September 30, 1999 June 30, 1999 September 30, 1998
------------------- ------------------- -------------------
Net Net Net Net Net Net
Interest Interest Interest Interest Interest Interest
Income Margin Income Margin Income Margin
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform $23,608 2.56% $24,410 2.57% $21,923 2.18%
Home Equity Platform 8,320 4.73 8,530 5.27 7,362 5.43
Auto Platform (1) 6,437 3.57 6,305 3.96 7,232 5.73
Commercial Platform 3,925 11.32 3,501 11.96 2,747 15.18
------- ----- ------- ----- ------- -----
Total $42,290 3.21% $42,746 3.28% $39,264 3.05%
------- ----- ------- ----- ------- -----
</TABLE>
Nine Months Ended (Unaudited)
----------------------------------------------
September 30, 1999 September 30, 1998
---------------------- --------------------
Net Net Net Net
Interest Interest Interest Interest
Income Margin Income Margin
-------- -------- -------- --------
(Dollars in thousands)
Banking Platform $ 71,478 2.51% $ 71,511 2.24%
Home Equity Platform 25,021 5.00 14,491 5.40
Auto Platform (1) 18,834 3.91 20,706 6.50
Commercial Platform 10,486 11.89 7,834 16.58
-------- ----- -------- -----
Total $125,819 3.23% $114,542 3.00%
-------- ----- -------- -----
(1) The Auto Platform commenced its leasing activities effective April 1,
1998. The Auto Platform's net interest 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 was
included in noninterest income, but does include the associated funding
costs.
The following table illustrates interest-earning assets, excluding our
auto-related operating leased assets, by platform, as of the dates indicated:
(Unaudited)
--------------------------------
At At
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
Banking Platform $3,667,598 $3,816,993
Home Equity Platform 737,132 657,148
Auto Platform 733,617 570,128
Commercial Platform (1) 148,526 94,888
---------- ----------
Total $5,286,873 $5,139,157
---------- ----------
(1) Amounts exclude asset-based commercial participation loans originated
by the Commercial Platform for the Banking Platform totaling $58.6
million at September 30, 1999 and $18.3 million at December 31, 1998.
5
<PAGE>
The following tables illustrate average interest-earning assets, excluding
our auto-related operating leased assets, by platform, for the periods
indicated:
Average Balances for the Three Months Ended
(Unaudited)
--------------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- ------------ -------------
(Dollars in thousands)
Banking Platform $3,738,678 $3,814,044 $4,076,379
Home Equity Platform 708,391 648,230 545,782
Auto Platform 707,299 622,487 500,615
Commercial Platform (1) 137,297 117,408 71,827
---------- ---------- ----------
Total $5,291,665 $5,202,169 $5,194,603
========== ========== ==========
Average Balances for the
Nine Months Ended (Unaudited)
--------------------------------
September 30, September 30,
1999 1998
-------------- -------------
(Dollars in thousands)
Banking Platform $3,779,465 $4,232,096
Home Equity Platform 669,032 358,561
Auto Platform 639,819 425,209
Commercial Platform (1) 117,997 63,148
---------- ----------
Total $5,206,313 $5,079,014
========== ==========
(1) Amounts exclude asset-based commercial participation loans originated
by the Commercial Platform for the Banking Platform. The average
balance of these loans was $53.0 million for the three months ended
September 30, 1999, $52.0 million for the three months ended June 30,
1999 and $7.8 million for the three months ended September 30, 1998.
The average balance of these loans was $43.9 million for the nine
months ended September 30, 1999 and $3.1 million for the nine months
ended September 30, 1998.
BANKING PLATFORM
The Banking Platform's net interest income for the third quarter of 1999
was $23.6 million as compared with $24.4 million for the second quarter of 1999
and $21.9 million for the third quarter of 1998. The platform's net interest
income was $71.5 million for both the first nine months of 1999 and 1998. The
platform's net interest margin for the third quarter of 1999 was 2.56% as
compared with 2.57% for the second quarter of 1999 and 2.18% for the third
quarter of 1998. The platform's net interest margin for the first nine months of
1999 was 2.51% as compared with 2.24% for the first nine months of 1998.
The decrease in net interest income for the third quarter of 1999, as
compared with the second quarter of 1999, was attributable to decreases in both
average interest-earning assets and net interest margin. The decrease in average
interest-earning assets was largely due to $450 million in loan sales whereby a
portion of the proceeds were used to pay down borrowings and the remaining
proceeds were invested in lower-yielding short-term investments awaiting
redeployment in higher-yielding assets, including franchise loans. The loan
sales-related decrease in average interest-earning assets was partially offset
by loan originations and purchases exceeding prepayments. Loan originations and
purchases were comprised primarily of consumer and commercial assets, including
franchise loans. The slight decrease in net interest margin was due to a
$600,000 nonrecurring item which negatively impacted interest income and
slightly higher funding costs, partially offset by higher loan yields. The
increase in net interest income for the third quarter of 1999, as compared with
the third quarter of 1998, was attributable to an increase in net interest
margin, primarily due to lower funding costs, partially offset
6
<PAGE>
by a decrease in average interest-earning assets, due to loan sales and asset
prepayments exceeding loan originations and purchases. Net interest income for
the first nine months of 1999 remained relatively constant, as compared with the
first nine months of 1998, as an increase in net interest margin, due to a
combination of higher loan yields and lower funding costs, was offset by a
decrease in average interest-earning assets, due to loan sales and asset
prepayments exceeding loan originations and purchases.
On July 30, 1999, $450 million in multi-family COFI-based mortgage loans
classified as held-for-sale were sold, resulting in a $2.6 million pre-tax gain
recorded in noninterest income. This sale significantly reduced both our
northern California geographic concentration risk and our interest rate risk
exposure related to COFI-based assets. Additionally, during the third quarter of
1999, $50 million in home equity loans and $7 million in single-family mortgage
loans 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
fourth quarter of 1999. A $220,000 pre-tax loss was recorded upon the transfer
of these loans to held-for-sale during the third quarter of 1999.
HOME EQUITY PLATFORM
The Home Equity Platform's net interest income for the third quarter of
1999 was $8.3 million as compared with $8.5 million for the second quarter of
1999 and $7.4 million for the third quarter of 1998. The platform's net interest
income for the first nine months of 1999 was $25.0 million as compared with
$14.5 million for the first nine months of 1998. The platform's net interest
margin for the third quarter of 1999 was 4.73% as compared with 5.27% for the
second quarter of 1999 and 5.43% for the third quarter of 1998. The platform's
net interest margin for the first nine months of 1999 was 5.00% as compared with
5.40% for the first nine months of 1998.
The decrease in net interest income for the third quarter of 1999, as
compared with the second quarter of 1999, was primarily due to a decrease in net
interest margin. This decrease in net interest margin was attributable to a
combination of factors including slightly higher funding costs and purchases of
higher-quality, yet lower-yielding loans, including 100% insured home equity
loans, combined with continued origination of conventional home equity loans
through our branches, that is, loans with a combined loan-to-value ratio of less
than 100%. In addition, we purchased $97 million in conventional home equity
loans during the third quarter of 1999. The increases in net interest income for
the third quarter of 1999, as compared with the third quarter of 1998, and for
the first nine months of 1999, as compared with the first nine months of 1998,
were primarily due to increases in average interest-earning assets, largely
resulting from home equity loan purchases, partially offset by decreases in net
interest margin. The decreases in net interest margin were due to lower yields,
as discussed above, partially offset by lower funding costs.
At September 30, 1999, the Home Equity Platform's loans totaled $705
million, including $446 million in high loan-to-value home equity loans. High
loan-to-value home equity loans totaled $465 million at June 30, 1999 and $420
million at September 30, 1998. At September 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 bureau scores, sometimes referred to as FICO
scores. At September 30, 1999, our high loan-to-value home equity loan portfolio
had an average total debt-to-income ratio of approximately 39% and an average
FICO score of approximately 673. We do not anticipate increasing our exposure to
high loan-to-value home equity loans beyond their current levels.
7
<PAGE>
AUTO PLATFORM
The Auto Platform's net interest income for the third quarter of 1999 was
$6.4 million as compared with $6.3 million for the second quarter of 1999 and
$7.2 million for the third quarter of 1998. The platform's net interest income
for the first nine months of 1999 was $18.8 million as compared with $20.7
million for the first nine months of 1998. The platform's net interest margin
for the third quarter of 1999 was 3.57% as compared with 3.96% for the second
quarter of 1999 and 5.73% for the third quarter of 1998. The platform's net
interest margin for the first nine months of 1999 was 3.91% as compared with
6.50% for the first nine months of 1998.
The slight increase in net interest income for the third quarter of 1999,
as compared with the second quarter of 1999, was attributable to an increase in
average interest-earning assets, due to loan originations and purchases
exceeding prepayments, partially offset by a decrease in net interest margin.
The decrease in net interest margin was primarily attributable to the funding
costs associated with the platform's auto leasing activities as the Auto
Platform's net interest margin includes these funding costs but excludes the
revenue impact of our auto leasing activities, as discussed below. The net
interest margin was also negatively impacted by the yield compression associated
with competition and an increase in transaction account costs. The decreases in
net interest income for the third quarter of 1999, as compared with the third
quarter of 1998, and for the first nine months of 1999, as compared with the
first nine months of 1998, were attributable to decreases in net interest margin
partially offset by increases in average interest-earning assets due to
originations and purchases exceeding prepayments. The decreases in net interest
margin were attributable to the funding costs associated with the platform's
auto leasing activities, lower asset yields resulting from the platform's
migration to higher-quality, but lower-yielding loans, the yield compression
associated with competition, and an increase in transaction account costs.
The Auto Platform's net interest margin, calculated in accordance with
generally accepted accounting principles, commonly 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.
Additionally, the Auto Platform's net interest margin does not reflect the tax
benefit associated with its leasing activities related to the losses generated
for income tax purposes during the early lease periods. For a discussion of
normalized net interest income and net interest margin, which include the
revenue impact of our auto leasing activities, see "Non-GAAP Performance
Measures - Normalized Net Interest Income and Net Interest Margin."
COMMERCIAL PLATFORM
The Commercial Platform's net interest income for the third quarter of 1999
was $3.9 million as compared with $3.5 million for the second quarter of 1999
and $2.7 million for the third quarter of 1998. The platform's net interest
income for the first nine months of 1999 was $10.5 million as compared with $7.8
million for the first nine months of 1998. The platform's net interest margin
for the third quarter of 1999 was 11.32% as compared with 11.96% for the second
quarter of 1999 and 15.18% for the third quarter of 1998. The platform's net
interest margin for the first nine months of 1999 was 11.89% as compared with
16.58% for the first nine months of 1998.
The increase in net interest income for the third quarter of 1999, as
compared with the second quarter of 1999, was due to an increase in the
platform's average interest-earning assets, attributable to continued growth and
expansion within the platform, partially offset by a decrease in net interest
margin. The decrease in net interest margin was 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 and an increase
in transaction account costs. The increases in net interest income for the third
quarter of 1999, as compared with the third quarter of 1998, and for the first
nine months of 1999, as compared with the first nine months of 1998, were due to
increases in the platform's average interest-earning assets partially offset by
a decrease in net interest margin. The decrease in net interest margin was due
to lower asset yields, as discussed above, and an increase in transaction
account costs.
8
<PAGE>
FUNDING COSTS
Our funding costs, which include deposits and borrowings, were 4.60% for
the third quarter of 1999 as compared with 4.59% for the second quarter of 1999
and 5.03% for the third quarter of 1998. Our funding costs for the first nine
months of 1999 were 4.62% as compared with 5.06% for the first nine months of
1998.
The slight increase in funding costs for the third quarter of 1999, as
compared with the second quarter of 1999, was due to increases in both the costs
of deposits and borrowings. The increase in deposit costs was primarily due to
an increase in higher-cost brokered certificates of deposit. The increase in
borrowing costs was due to new funding sources utilized during the quarter,
including a warehouse line and $50 million of 10% Subordinated Notes due 2009
issued by Bay View Bank on August 18, 1999, partially offset by the maturity of
$50 million of 8.42% Senior Debentures on June 1, 1999. The decreases in funding
costs for the third quarter of 1999, as compared with the third quarter of 1998,
and for the first nine months of 1999, as compared with the first nine months of
1998, were due to declines in both the costs of deposits and borrowings. The
decline in the cost of deposits resulted from a combination of factors,
including an increase in lower-cost transaction accounts and our deposit pricing
strategies, partially offset by higher-cost brokered certificates of deposit.
The decline in the cost of borrowings was primarily attributable to lower market
interest rates during late 1998 and our refinancing and extending of maturities
on a significant portion of our Federal Home Loan Bank advances portfolio in
October 1998, partially offset by the cost of new funding sources as discussed
above.
Our cost of borrowings, in accordance with GAAP, does not include the
impact of the costs associated with the $90 million of 9.76% Capital Securities
issued on December 21, 1998. Had this expense been included, our funding costs
would have been 4.69% for the third quarter of 1999, 4.68% for the second
quarter of 1999 and 4.71% for the first nine months of 1999, representing an
increase of 9 basis points for each period.
Our cost of retail deposits for the month of September 1999 was 3.98%. This
cost was 58 basis points below the Eleventh District Cost of Funds Index,
sometimes referred to as COFI, of 4.56% for August 1999, the most recent data
available. Although our deposits are no longer included in COFI because we are a
national bank, we consider COFI to be a relevant market comparison. While our
cost of retail deposits for the month of September increased slightly, our
spread below COFI continued to widen. Transaction account balances as a
percentage of retail deposits were 52.0% at September 30, 1999 as compared with
53.5% at June 30, 1999, 49.8% at December 31, 1998 and 34.6% at December 31,
1997. The decrease in the percentage of transaction account balances was largely
due to the impact of our purchase of two Luther Burbank Savings branches on
September 25, 1999 that had a proportionately lower percentage of transaction
accounts relative to total retail deposits. Additionally, our retail
certificates of deposit increased through internal growth as we introduced new
products during the third quarter of 1999 to generate additional deposits.
The following table summarizes our cost of retail deposits versus COFI and
transaction accounts as a percentage of retail deposits for the periods
indicated:
<TABLE>
<CAPTION>
Months Ended (Unaudited)
-------------------------------------------------------------
September 30, June 30, December 31, December 31,
1999 1999 1998 1997
------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Cost of retail deposits 3.98% 3.95% 4.20% 4.64%
COFI 4.56 4.48 4.66 4.95
----- ----- ----- -----
Spread below COFI (0.58%) (0.53%) (0.46%) (0.31%)
===== ===== ===== =====
Transaction accounts as a
percentage of retail deposits 52.0% 53.5% 49.8% 34.6%
===== ===== ===== =====
</TABLE>
9
<PAGE>
"Our slight increase in funding costs this quarter reflects recent market
conditions as well as our new funding sources," said David A. Heaberlin, our
Executive Vice President and Chief Financial Officer. "We remain confident in
our ability to fund future growth, including franchise loans, through existing
and new warehouse lines combined with continued growth in deposits, including
business deposits. We are particularly pleased with our ability to build
business banking relationships as we continue our transition to a commercial
bank. In fact, we are on track to double our business deposits during 1999 to
approximately $150 million. In addition, we expect to expand our warehouse
facilities to nearly $1 billion in committed lines during the fourth quarter of
1999."
PREPAYMENTS
Our asset prepayments, including normal amortization, are primarily
mortgage-based assets. Prepayments, including normal amortization, for the third
quarter of 1999 were approximately $356 million, representing an annualized rate
of 26.3%, as compared with approximately $404 million during the second quarter
of 1999, representing an annualized rate of 30.9%, and approximately $430
million during the third quarter of 1998, representing an annualized rate of
32.9%. Prepayments for the first nine months of 1999 were approximately $1.2
billion, representing an annualized rate of 30.9%, as compared with prepayments
of approximately $1.2 billion for the first nine months of 1998, representing an
annualized rate of 32.9%. The lower annualized prepayment rate for the third
quarter of 1999, as compared with the both the second quarter of 1999 and the
third quarter of 1998, reflects both a decrease in refinancings resulting from
the recent rise in market interest rates and the seasoning of our mortgage-based
asset portfolio combined with the impact of growth in our loan and lease
portfolio during the first nine months of 1999. Prepayments during the third
quarter of 1999 were more than offset by loan and lease originations and
purchases during the quarter of $831 million. The lower annualized prepayment
rate for the first nine months of 1999, as compared with the first nine months
of 1998, reflects the impact of growth in our loan and lease portfolio.
Prepayments during the first nine months of 1999 were more than offset by loan
and lease originations and purchases of $2.0 billion combined with $80 million
in purchases of government agency securities.
LOAN AND LEASE ORIGINATIONS AND PURCHASES
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 nine 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 nine months of 1999 included $793 million in FMAC franchise loans.
10
<PAGE>
The following tables illustrate loans and leases originated and purchased,
including auto-related leased assets, for the periods indicated:
Three Months Ended (Unaudited)
--------------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- ---------- -------------
(Dollars in thousands)
Loan and Lease Originations:
Real estate $ 96,885 $ 61,937 $ 42,581
Home equity 20,351 19,299 13,244
Motor vehicle 173,284 181,330 182,318
Commercial 48,320 37,332 18,872
Other 35,595 5,248 4,681
-------- -------- --------
Total originations 374,435 305,146 261,696
-------- -------- --------
Loan Purchases:
Real estate 9,603 1,141 3,477
Home equity 111,666 33,273 92,451
Motor vehicle 56,572 39,451 17,652
FMAC franchise loans 278,258 185,219 -
-------- -------- --------
Total purchases 456,099 259,084 113,580
-------- -------- --------
Total $830,534 $564,230 $375,276
======== ======== ========
Nine Months Ended (Unaudited)
--------------------------------
September 30, September 30,
1999 1998
------------- -------------
(Dollars in thousands)
Loan and Lease Originations:
Real estate $ 207,468 $ 114,907
Home equity 48,859 31,070
Motor vehicle 517,285 428,009
Commercial 128,828 47,437
Other 45,351 12,596
---------- ----------
Total originations 947,791 634,019
---------- ----------
Loan Purchases:
Real estate 19,456 413,891
Home equity 162,834 385,884
Motor vehicle 108,179 56,399
FMAC franchise loans 793,000 -
---------- ----------
Total purchases 1,083,469 856,174
---------- ----------
Total $2,031,260 $1,490,193
========== ==========
PROVISION FOR LOSSES ON LOANS AND LEASES
The provision for losses on loans and leases was $7.0 million for the third
quarter of 1999 as compared with $6.8 million for the second quarter of 1999 and
$2.8 million for the third quarter of 1998. The provision for losses on loans
and leases was $19.1 million for the first nine months of 1999 as compared with
$5.1 million for the first nine months of 1998. The increases in the provision
for losses on loans and leases for the second and third quarters of 1999, as
compared with the third quarter of 1998, and for the first nine months of 1999,
as compared with the first nine months of 1998, were concentrated in the Home
Equity and Auto Platforms and were attributable to higher net charge-offs in
these platforms, the continued change-out of our balance sheet towards
higher-risk, yet higher-yielding consumer and commercial assets, and growth in
our loan and lease portfolio.
11
<PAGE>
CREDIT QUALITY
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:
(Unaudited)
-----------------------------------
September 30, December 31,
1999 1998
--------------- --------------
(Dollars in thousands)
Nonaccrual loans and leases $10,408 $14,700
Real estate owned 1,639 2,666
Other repossessed assets 1,593 654
------- -------
Total $13,640 $18,020
======= =======
The following table illustrates, by platform, nonperforming assets and
nonperforming assets as a percentage of consolidated assets, excluding loans and
leases held-for-sale:
Nonperforming Assets
as a Percentage of Consolidated Assets (Unaudited)
----------------------------------------------------
September 30, 1999 December 31, 1998
------------------------ ------------------------
(Dollars in thousands)
Banking Platform $ 8,871 0.15% $15,293 0.27%
Home Equity Platform 2,625 0.04 1,287 0.02
Auto Platform 1,298 0.02 1,090 0.02
Commercial Platform 846 0.02 350 0.01
------- ---------- ------- ----------
Total $13,640 0.23% $18,020 0.32%
======= ========== ======= ==========
The following table illustrates, by platform, loans and leases delinquent
60 days or more as a percentage of gross loans and leases, excluding loans and
leases held-for-sale:
Loans and Leases Delinquent 60 Days or More
as a Percentage of Gross Loans and Leases
(Unaudited)
---------------------------------------------
September 30, 1999 December 31, 1998
-------------------- --------------------
(Dollars in thousands)
Banking Platform $ 8,340 0.19% $15,928 0.38%
Home Equity Platform 6,663 0.15 4,048 0.09
Auto Platform 1,536 0.04 1,676 0.04
Commercial Platform 846 0.02 350 0.01
------- ---- ------- ----
Total $17,385 0.40% $22,002 0.52%
======= ==== ======= ====
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
12
<PAGE>
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 this 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 that have occurred as of the date of the financial statements.
The process of determining the necessary level of allowances is subjective and
requires considerable judgement.
The allowance for loan and lease losses at September 30, 1999 was $45.3
million as compared with $44.5 million at June 30, 1999 and $45.4 million at
December 31, 1998. The allowance for loan and lease losses is maintained at a
level that we believe is appropriate based on our estimate of probable losses in
the portfolio of loans and leases held-for-investment. This assessment is based
on many factors including prevailing economic conditions, identified losses
within the portfolio, historical loss experience, asset concentrations, levels
and trends in classified assets, loan and lease delinquencies, and industry
data.
The following table illustrates the allowance for loan and lease losses as
a percentage of nonperforming assets and gross loans and leases, excluding loans
and leases held-for-sale:
<TABLE>
<CAPTION>
Allowance for Loan and Lease Losses as a
Percentage of Specified Assets (Unaudited)
-----------------------------------------------
September 30, 1999 December 31, 1998
----------------------- ----------------------
(Dollars in thousands)
-----------------------------------------------
ASSETS Percent Assets Percent
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Nonperforming assets $ 13,640 332% $ 18,020 252%
Gross loans and leases, excluding loans
and leases held-for-sale $4,387,690 1.03% $4,191,465 1.08%
</TABLE>
The following table illustrates the changes in the allowance for loan and
lease losses for the periods indicated:
<TABLE>
<CAPTION>
(Unaudited)
------------------------------------------------------------------
Three Months Three Months Nine Months Year
Ended Ended Ended Ended
September 30, June 30, September 30, December 31,
-------------- ------------ ------------- ------------
1999 1999 1999 1998
-------------- ------------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $ 44,453 $ 44,147 $ 45,405 $ 38,458
Reserves related to acquisitions - - - 11,374
Charge-offs:
Real Estate and Other (78) (194) (666) (2,480)
Home Equity (4,236) (5,294) (14,165) (7,152)
Auto (1,654) (1,727) (5,651) (8,604)
Commercial (976) (456) (1,536) (828)
-------- -------- -------- --------
(6,944) (7,671) (22,018) (19,064)
Recoveries:
Real Estate and Other 11 175 330 2,290
Home Equity 356 415 959 456
Auto 419 467 1,388 2,599
Commercial 51 120 171 178
-------- -------- -------- --------
837 1,177 2,848 5,523
Net charge-offs (6,107) (6,494) (19,170) (13,541)
Provision for loan and lease losses 7,000 6,800 19,111 9,114
-------- -------- -------- --------
Ending balance $ 45,346 $ 44,453 $ 45,346 $ 45,405
-------- -------- -------- --------
Net charge-offs to average loans and leases
(annualized) 0.55% 0.59% 0.58% 0.32%
======== ======== ======== ========
</TABLE>
13
<PAGE>
Net charge-offs decreased for the third quarter of 1999, as compared with
the second quarter of 1999, due to lower net charge-offs in the Home Equity
Platform partially offset by higher net charge-offs in the Commercial Platform.
The decrease in charge-offs in the Home Equity Platform was largely due to the
seasoning of our portfolio. The increase in net charge-offs in the Commercial
Platform was primarily related to our leasing activities.
NONINTEREST INCOME
Noninterest income for the third quarter of 1999 was $24.3 million as
compared with $18.1 million for the second quarter of 1999 and $9.0 million for
the third quarter of 1998. Noninterest income for the first nine months of 1999
was $58.3 million as compared with $19.3 million for the first nine months of
1998. The increase in noninterest income for the third quarter of 1999, as
compared with the second quarter of 1999, was generally attributable to higher
leasing income in the Auto Platform resulting from the continued growth in our
auto leasing activities. The increases in noninterest income for the third
quarter of 1999, as compared with the third quarter of 1998, and for the first
nine months of 1999, as compared with the first nine months of 1998, were
generally attributable to higher leasing income, higher loan fees and charges
and higher investment sales commissions. The Banking Platform's noninterest
income included a $2.4 million net gain on the sale of loans during the third
quarter of 1999 and 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the third quarter of 1999 were
$26.8 million as compared with $25.9 million for the second quarter of 1999 and
$30.2 million for the third quarter of 1998. General and administrative expenses
for the first nine months of 1999 were $78.8 million as compared with $87.2
million for the first nine months of 1998. General and administrative expenses
for the third quarter of 1999 included $660,000 in special mention items, as
compared with $380,000 in special mention items during the second quarter of
1999 and $2.8 million in special mention items during the third quarter of 1998,
as discussed below. General and administrative expenses for the first nine
months of 1999 included $2.0 million in special mention items as compared with
$10.4 million in special mention items during the first nine months of 1998, as
discussed below. Special mention items generally include 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.
Excluding special mention items, the increase in general and administrative
expenses for the third quarter of 1999, as compared to the second quarter of
1999, was largely attributable to higher compensation expense as we have
recently filled several open positions, including the associated recruiting
costs, and higher media advertising and public relations expenses. Excluding
special mention items, the decrease in general and administrative expenses for
the third quarter of 1999, as compared with the third quarter of 1998, was
attributable to cost savings initiatives implemented and other efficiencies
realized, partially offset by inflationary pressures, including our annual
salary increases which were effective March 1, 1999. Excluding special mention
items, general and administrative expenses remained relatively constant for the
first nine months of 1999, as compared with the first nine months of 1998, as
continued growth in our business platforms and inflationary pressures were
offset by cost savings initiatives and other efficiencies.
14
<PAGE>
Special mention items for the third quarter of 1999 included approximately
$350,000 in severance payments, approximately $190,000 in third-party Year 2000
compliance-related costs and approximately $120,000 in acquisition-related
costs. 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.
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 third quarter of 1998 included approximately
$1.35 million in expenses related to the cancellation of our proposed
acquisition of PSB Lending Corporation, a $600,000 legal settlement related to
the termination of a third-party data processing service contract, approximately
$160,000 in Auto Platform restructuring charges, and $680,000 in other expenses,
primarily third-party Year 2000 compliance-related costs and certain acquisition
and integration expenses related to our January 2, 1998 acquisition of America
First Eureka Holdings, Inc., sometimes referred to as AFEH. Special mention
items for the second quarter of 1998 included approximately $3.5 million in AFEH
acquisition-related expenses, approximately $590,000 in restructuring charges in
the Auto Platform and approximately $110,000 in other expenses, including
third-party Year 2000 compliance-related costs. Special mention items for the
first quarter of 1998 included approximately $3.3 million in AFEH
acquisition-related expenses and approximately $66,000 in restructuring charges
in the Auto Platform.
The following tables illustrate general and administrative expenses, by
platform, for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended (Unaudited)
----------------------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Banking Platform $14,702 $14,226 $16,094
Home Equity Platform 1,071 1,013 750
Auto Platform 3,258 3,499 4,041
Commercial Platform 2,102 2,060 2,252
------- ------- -------
Subtotal 21,133 20,798 23,137
Indirect corporate overhead (1) 5,636 5,081 7,109
------- ------- -------
Total $26,769 $25,879 $30,246
======= ======= =======
</TABLE>
Nine Months Ended (Unaudited)
------------------------------
September 30, September 30,
1999 1998
------------- -------------
(Dollars in thousands)
Banking Platform $43,205 $47,612
Home Equity Platform 3,110 1,665
Auto Platform 10,760 12,602
Commercial Platform 6,082 6,164
------- -------
Subtotal 63,157 68,043
Indirect corporate overhead (1) 15,647 19,175
------- -------
Total $78,804 $87,218
======= =======
(1) Amount represents indirect corporate expenses not specifically
identifiable with, or allocable to, our business platforms.
15
<PAGE>
The following tables illustrate general and administrative expenses,
excluding the special mention items as previously discussed, by platform, for
the periods indicated:
Excluding Special Mention Items for the
Three Months Ended (Unaudited)
----------------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- --------- -------------
(Dollars in thousands)
Banking Platform $14,702 $14,226 $15,207
Home Equity Platform 1,071 1,013 750
Auto Platform 3,258 3,499 3,883
Commercial Platform 2,102 2,060 2,252
------- ------- -------
Subtotal 21,133 20,798 22,092
Indirect corporate overhead (1) 4,975 4,702 5,319
------- ------- -------
Total $26,108 $25,500 $27,411
======= ======= =======
Excluding Special Mention Items for the
Nine Months Ended (Unaudited)
---------------------------------------
September 30, September 30,
1999 1998
------------- -------------
(Dollars in thousands)
Banking Platform $42,828 $42,789
Home Equity Platform 3,110 1,665
Auto Platform 10,321 11,719
Commercial Platform 6,082 6,164
------- -------
Subtotal 62,341 62,337
Indirect corporate overhead (1) 14,490 14,446
------- -------
Total $76,831 $76,783
======= =======
(1) Amount represents indirect corporate expenses not specifically
identifiable with, or allocable to, our business platforms.
BANKING PLATFORM
The increase in the Banking Platform's general and administrative expenses,
excluding special mention items, for the third quarter of 1999, as compared with
the second quarter of 1999, was due primarily to higher compensation expense
related to filling open positions and higher media advertising and public
relations expenses. The decrease in general and administrative expenses for the
third quarter of 1999, as compared with the third quarter of 1998, was due to
cost savings initiatives implemented and other efficiencies realized, partially
offset by inflationary pressures, including our annual salary increases which
were effective March 1, 1999. General and administrative expenses remained
relatively constant for the first nine months of 1999, as compared with the
first nine months of 1998, as inflationary pressures were 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 directly attributable to the increased cost associated with the
increases in the Home Equity Platform's average loan balances during these
periods.
16
<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 the impact of
platform growth and inflationary pressures.
COMMERCIAL PLATFORM
The slight increase in the Commercial Platform's general and administrative
expenses, excluding special mention items, for the third quarter of 1999, as
compared with the second quarter of 1999, was due to platform growth and
inflationary pressures. The slight decreases in the Commercial Platform's
general and administrative expenses for the third quarter of 1999, as compared
with the third quarter of 1998, and for the first nine months of 1999, as
compared with the first nine months of 1998, were due to cost savings
initiatives and efficiencies largely offset by the impact of platform growth and
inflationary pressures.
INDIRECT CORPORATE OVERHEAD
The increase in indirect corporate overhead, excluding special mention
items, for the third quarter of 1999, as compared with the second quarter of
1999, was largely due to higher compensation expense related to filling open
positions, including the associated recruiting costs. The decrease in indirect
corporate overhead, excluding special mention items, for the third quarter of
1999, as compared with the third quarter of 1998, was due to cost savings
initiatives partially offset by inflationary pressures, including our annual
salary increases which were effective March 1, 1999. General and administrative
expenses, excluding special mention items, remained relatively constant for the
first nine months of 1999, as compared with the first nine months of 1998, as
inflationary pressures and higher expenses in the bank holding company necessary
to support our expanding business activities were offset by cost savings
initiatives.
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)
-------------------------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
General and administrative expenses $ 26,769 $ 25,879 $ 30,246
Average total assets, including securitized assets $5,921,272 $5,844,682 $5,689,949
---------- ---------- ----------
Annualized general and administrative expenses to
average total assets, including securitized assets 1.81% 1.77% 2.13%
========== ========== ==========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended (Unaudited)
----------------------------------
September 30, September 30,
1999 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
General and administrative expenses $ 78,804 $ 87,218
Average total assets, including securitized assets $5,812,642 $5,573,768
---------- ----------
Annualized general and administrative expenses to
average total assets, including securitized assets 1.81% 2.09%
========== ==========
</TABLE>
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:
Three Months Ended (Unaudited)
------------------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- ----------- -------------
Banking Platform 1.57% 1.49% 1.58%
Home Equity Platform 0.60% 0.63% 0.55%
Auto Platform 1.16% 1.43% 2.37%
Commercial Platform 6.12% 7.02% 12.54%
Nine Months Ended (Unaudited)
-------------------------------------
September 30, September 30,
1999 1998
------------- -------------
Banking Platform 1.52% 1.50%
Home Equity Platform 0.62% 0.62%
Auto Platform 1.44% 2.91%
Commercial Platform 6.87% 13.01%
The increase in the ratio for the Banking Platform for the third quarter of
1999, as compared with the second quarter of 1999, was a result of higher
general and administrative expenses and lower average interest-earning assets.
The decrease in the ratio for the Banking Platform for the third quarter of
1999, as compared with the third 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 nine
months of 1999, as compared with the first nine months of 1998, was due to lower
average interest-earning assets partially offset by lower general and
administrative expenses. The decrease in the ratio for the Home Equity Platform
for the third quarter of 1999, as compared with the second quarter of 1999, was
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
traditional home equity loans originated through our branches and 100% insured
home equity loans, both of which have lower associated servicing costs. The
increase in the ratio for the Home Equity Platform for the third quarter of
1999, as compared with the third quarter of 1998, was due to higher general and
administrative expenses partially offset by higher average interest-earning
assets. 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, including auto-related operating leased assets and securitized 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 primarily to higher average interest-earning assets
resulting from platform growth.
18
<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, 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)
------------------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
General and administrative expenses $26,769 $25,879 $30,246
Operating revenues, as defined $51,861 $50,705 $45,488
------- ------- -------
Efficiency ratio 51.6% 51.0% 66.5%
======= ======= =======
</TABLE>
Nine Months Ended (Unaudited)
---------------------------------
September 30, September 30,
1999 1998
------------- -------------
(Dollars in thousands)
General and administrative expenses $ 78,804 $ 87,218
Operating revenues, as defined $149,564 $134,751
-------- --------
Efficiency ratio 52.7% 64.7%
======== ========
The increase in the efficiency ratio for the third quarter of 1999, as
compared with the second quarter of 1999, was primarily due to a higher level of
general and administrative expenses, including $660,000 in special mention
items, and lower net interest income, partially offset by higher net
leasing-related rental income and higher noninterest income. Excluding the
previously mentioned $600,000 nonrecurring adjustment to net interest income,
the efficiency ratio for the third quarter of 1999 would have been 51.0%. The
improvement in the efficiency ratio for the third quarter of 1999, as compared
with the third quarter of 1998, and for the first nine months of 1999, as
compared with the first nine months of 1998, was due to higher net interest
income, higher net leasing-related rental income, higher noninterest income,
including the $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 9.76% 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 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 $11.3 million for the third quarter of
1999 as compared with $8.9 million for the second quarter of 1999 and $2.5
19
<PAGE>
million for the third quarter of 1998. Leasing expenses for the first nine
months of 1999 were $26.9 million as compared with $3.2 million for the first
nine months of 1998.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization expense related to intangible assets was $2.7 million for the
third quarter of 1999 as compared with $2.9 million for both the second quarter
of 1999 and the third quarter of 1998. Amortization expense related to
intangible assets was $8.5 million for both the first nine months of 1999 and
the first nine months of 1998. The slight decrease in amortization expense for
the third quarter of 1999, as compared with the second quarter of 1999, was due
to lower amortization expense in the Banking Platform related to a pool of core
deposit intangibles that were fully amortized during the second quarter of 1999.
INCOME TAX EXPENSE
Income tax expense was $7.5 million for the third quarter of 1999 as
compared with $6.6 million for the second quarter of 1999 and $4.9 million for
the third quarter of 1998. Income tax expense was $20.5 million for the first
nine months of 1999 as compared with $14.8 million for the first nine months of
1998. Our effective tax rate was 45.5% as compared with 46.9% for the second
quarter of 1999 and 49.5% for the third quarter of 1998. Our effective tax rate
for the first nine months of 1999 was 46.4% as compared with 49.1% for the first
nine 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.
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.
20
<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)
------------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- ------------ ---------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C>
Net income(1) $ 9,034 $ 7,536 $ 5,025
Amortization of intangible assets, net of tax 2,433 2,513 2,474
---------- ---------- ----------
Earnings excluding amortization $ 11,467 $ 10,049 $ 7,499
========== ========== ==========
Earnings per diluted share $ 0.48 $ 0.40 $ 0.25
---------- ---------- ----------
Earnings excluding amortization per diluted share $ 0.61 $ 0.53 $ 0.37
---------- ---------- ----------
Return on average assets(2) 0.62% 0.52% 0.36%
========== ========== ==========
Return on average equity(2) 9.36% 7.95% 5.17%
---------- ---------- ----------
Earnings excluding amortization - return on
average assets(3) 0.78% 0.69% 0.54%
========== ========== ==========
Earnings excluding amortization - return on
average equity(3) 11.88% 10.60% 7.71%
---------- ---------- ----------
Earnings excluding amortization - return on
average tangible assets(4) 0.80% 0.71% 0.55%
========== ========== ==========
Earnings excluding amortization - return on
average tangible equity(4) 17.74% 16.13% 11.91%
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended (Unaudited)
----------------------------------
September 30, September 30,
1999 1998
------------- --------------
(Amounts in thousands, except per share
amounts)
<S> <C> <C>
Net income (1) $ 23,703 $ 15,320
Amortization of intangible assets, net of tax 7,459 7,349
---------- ----------
Earnings excluding amortization $ 31,162 $ 22,669
========== ==========
Earnings per diluted share $ 1.25 $ 0.74
========== ==========
Earnings excluding amortization per diluted share $ 1.64 $ 1.10
========== ==========
Return on average assets (2) 0.55% 0.37%
========== ==========
Return on average equity (2) 8.28% 5.25%
========== ==========
Earnings excluding amortization - return on
average assets (3) 0.72% 0.55%
========== ==========
Earnings excluding amortization - return on
average equity (3) 10.88% 7.77%
========== ==========
Earnings excluding amortization - return on
average tangible assets (4) 0.74% 0.57%
========== ==========
Earnings excluding amortization - return on
average tangible equity (4) 16.50% 12.08%
========== ==========
</TABLE>
21
<PAGE>
(1) Net income for the periods indicated include 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 9.76% 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. Normalized net interest income also excludes nonrecurring
interest income and expense items.
Normalized net interest income for the third quarter of 1999 was $47.2
million as compared with $45.7 million for the second quarter of 1999 and $40.8
million for the third quarter of 1998. Normalized net interest income for the
first nine months of 1999 was $135.3 million as compared with $116.5 million for
the first nine months of 1998. Normalized net interest margin for the third
quarter of 1999 was 3.34% as compared with 3.31% for the second quarter of 1999
and 3.11% for the third quarter of 1998. Normalized net interest margin for the
first nine months of 1999 was 3.26% as compared with 3.03% for the first nine
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)
-------------------------------------------------------------------------------------------
September 30, 1999 June 30, 1999 September 30, 1998
-------------------------- --------------------------- --------------------------
Normalized Normalized Normalized Normalized Normalized Normalized
Net Net Net Net Net Net
Interest Interest Interest Interest Interest Interest
Income Margin Income Margin Income Margin
---------- ---------- ---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform $22,338 2.43% $22,528 2.38% $21,923 2.18%
Home Equity Platform 7,965 4.53 8,286 5.16 7,362 5.43
Auto Platform (1) 12,941 4.71 11,330 4.87 8,746 5.93
Commercial Platform 3,925 11.32 3,539 12.22 2,747 15.18
------- ----- ------- ----- ------- -----
Total $47,169 3.34% $45,683 3.31% $40,778 3.11%
======= ===== ======= ===== ======= =====
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended (Unaudited)
---------------------------------------------------------------------------
September 30, 1999 September 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 $ 66,536 2.34% $ 71,511 2.24%
Home Equity Platform 24,051 4.82 14,491 5.40
Auto Platform (1) 34,234 4.85 22,650 6.54
Commercial Platform 10,472 11.89 7,834 16.58
-------- ----- -------- -----
Total $135,293 3.26% $116,486 3.03%
======== ===== ======== =====
</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 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 9.76% Capital
Securities issued on December 21, 1998.
FMAC ACQUISITION
On March 11, 1999, we signed a definitive merger agreement with southern
California-based FMAC. Under the terms of the definitive agreement, as amended
on August 25, 1999, we will acquire all of the common stock of FMAC for
consideration valued at approximately $275 million. Each share of FMAC common
stock will be exchanged for, at the election of the holder, either $9.80 in
cash, or 0.5444 shares of our common stock. In total, the elections for cash are
limited to 15% of the shares of FMAC common stock outstanding immediately prior
to closing and the elections for our common stock are limited to 85% of the
shares of FMAC common stock outstanding immediately prior to closing. The
definitive 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. We have received all
regulatory and shareholder approvals for the merger, which is targeted to close
on November 1, 1999. Upon consummation of the transaction, we will contribute
substantially all of FMAC's assets and liabilities to our wholly owned
subsidiary, Bay View Bank.
LUTHER BURBANK SAVINGS BRANCH ACQUISITIONS
On July 8, 1999, we announced a definitive agreement with Luther Burbank
Savings, a savings bank headquartered in Santa Rosa, California, whereby we
acquired 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.
BAY VIEW BANK SUBORDINATED NOTES ISSUANCE
On August 18, 1999, Bay View Bank, our wholly owned subsidiary, issued $50
million of 10% Subordinated Notes. The Subordinated Notes, which mature in
August 2009, qualify as Tier 2 capital for regulatory purposes,
23
<PAGE>
supporting future asset growth. The proceeds from the notes will be used for,
among other things, the payment of dividends to us to partially fund our pending
acquisition of FMAC and for our general corporate purposes.
SHARE REPURCHASE PROGRAM
In August 1998, our Board of Directors authorized a total of $50 million in
share repurchases. Since August 1998, we have repurchased 1,656,500 shares at an
average cost of $19.59. At September 30, 1999, we had approximately $17.6
million in remaining authorization available for future share repurchases. We
intend to continue share repurchases prospectively, subject to our projected and
actual capital needs, and to measure acquisition and other investment
opportunities relative to the risk-free returns associated with share
repurchases.
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.
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.
24
<PAGE>
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 most critical third parties are substantially
complete 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 $1.9 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 September 30, 1999 related to the Year 2000 issue
was approximately $1.3 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 major interruptions to
normal operations.
GENERAL
Bay View Capital Corporation is a $5.9 billion diversified financial
services holding company headquartered in San Mateo, California. Our business
activities are concentrated within three principal subsidiaries: Bay View Bank,
which includes our Banking and Home Equity Platforms; Bay View Acceptance
Corporation, our Auto Platform; and Bay View Commercial Finance Group, our
Commercial Platform.
Bay View Bank operates 57 full-service branches throughout the greater San
Francisco Bay Area and one branch in southern California. Bay View Acceptance
Corporation operates loan production offices in California, Texas and throughout
the western United States. Bay View Commercial Finance Group operates loan
production offices throughout the United States.
25
<PAGE>
FORWARD-LOOKING STATEMENTS
This press release 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:
o the demand for our products;
o actions taken by our competitors;
o tax rate changes, new tax laws and revised tax law interpretations;
o adverse changes occurring in securities markets;
o inflation and changes in prevailing interest rates that reduce our
margins or the fair value of the financial instruments we hold;
o economic or business conditions, either nationally or in our market
areas, that are worse than we expect;
o legislative or regulatory changes that adversely affect our business;
o our inability to identify suitable future acquisition candidates;
o the timing, impact and other uncertainties of our future acquisitions
and our success or failure in the integration of their operations;
o our ability to enter new geographic and product markets successfully
and capitalize on available growth opportunities;
o technological changes, including the year 2000 issue, that are more
difficult or expensive than we expect;
o increases in delinquencies and defaults by our borrowers;
o increases in our provision for losses on loans and leases;
o increased costs or other difficulties relating to the pending
acquisition of Franchise Mortgage Acceptance Company;
o our inability to sustain or improve the performance of our
subsidiaries;
o our inability to achieve the financial goals in our strategic plans,
including any financial goals related to both contemplated and
consummated acquisitions;
o the outcome of lawsuits or regulatory disputes;
o credit and other risks of lending, leasing and investment activities;
and
o 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.
26
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
1999 1998
-------------- -------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 45,382 $ 37,296
Short-term investments 73,937 167,890
----------- -----------
119,319 205,186
Securities available-for-sale:
Investment securities 4,024 5,319
Mortgage-backed securities 11,002 13,616
Securities held-to-maturity:
Investment securities 9,997 -
Mortgage-backed securities 576,396 621,773
Loans and leases held-for-sale 56,730 -
Loans and leases held-for-investment, net of allowance for losses 4,414,117 4,191,269
Investment in operating leased assets, net 399,452 183,453
Investment in stock of the FHLB of San Francisco 81,929 90,878
Investment in stock of the Federal Reserve Bank 13,395 -
Real estate owned, net 1,639 2,666
Premises and equipment, net 21,852 24,727
Intangible assets 131,300 134,088
Other assets 104,852 123,257
----------- -----------
Total assets $ 5,946,004 $ 5,596,232
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts $ 1,755,989 $ 1,627,275
Retail certificates of deposit 1,620,784 1,642,362
Brokered certificates of deposit 299,574 -
----------- -----------
3,676,347 3,269,637
Advances from the FHLB of San Francisco 1,461,700 1,653,300
Securities sold under agreements to repurchase 28,749 25,302
Other borrowings 119,122 5,077
Subordinated Notes, net 149,485 99,437
Senior Debentures - 50,000
Other liabilities 31,949 25,668
----------- -----------
Total liabilities 5,467,352 5,128,421
=========== ===========
Guaranteed Preferred Beneficial Interest in our 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, 9/30/99-20,406,751 shares; 12/31/98-20,376,251 shares;
outstanding, 9/30/99-18,684,137 shares; 12/31/98-19,113,637 shares 204 204
Additional paid-in capital 251,406 251,010
Retained earnings (substantially restricted) 173,670 155,715
Treasury stock, at cost, 9/30/99-1,722,614 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) (281) (202)
Debt of Employee Stock Ownership Plan (2,809) (3,759)
----------- -----------
Total stockholders' equity 388,652 377,811
----------- -----------
Total liabilities and stockholders' equity $ 5,946,004 $ 5,596,232
=========== ===========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
---------------------------------------
September 30, June 30, September 30,
1999 1999 1998
------------- ---------- -------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Interest on loans and leases $ 92,583 $ 90,914 $ 91,531
Interest on mortgage-backed securities 9,573 8,798 10,054
Interest and dividends on investment securities 2,742 3,004 2,983
--------- --------- ---------
104,898 102,716 104,568
Interest expense:
Interest on deposits 35,984 33,475 36,507
Interest on borrowings 23,629 23,337 25,270
Interest on Senior Debentures and Notes 2,995 3,158 3,527
--------- --------- ---------
62,608 59,970 65,304
Net interest income 42,290 42,746 39,264
Provision for losses on loans and leases 7,000 6,800 2,754
--------- --------- ---------
Net interest income after provision for losses on loans and leases 35,290 35,946 36,510
Noninterest income:
Leasing income 16,556 13,094 3,637
Loan fees and charges 2,128 1,783 1,500
Account fees 1,783 1,778 1,806
Sales commissions 1,266 1,300 1,111
Gain (loss) on sale of loans and leases and securities 2,398 (19) 655
Other, net 124 179 287
--------- --------- ---------
24,255 18,115 8,996
Noninterest expense:
General and administrative 26,769 25,879 30,246
Leasing expenses 11,313 8,938 2,459
Dividend expense on Capital Securities 2,233 2,234 -
Real estate owned operations, net (83) (57) (27)
Net recoveries on real estate - - 19
Amortization of intangible assets 2,745 2,883 2,864
--------- --------- ---------
42,977 39,877 35,561
Income before income tax expense 16,568 14,184 9,945
Income tax expense 7,534 6,648 4,920
--------- --------- ---------
Net income $ 9,034 $ 7,536 $ 5,025
========= ========= =========
Basic earnings per share $ 0.48 $ 0.40 $ 0.25
========= ========= =========
Diluted earnings per share $ 0.48 $ 0.40 $ 0.25
========= ========= =========
Average basic shares outstanding 18,749 18,746 20,095
========= ========= =========
Average diluted shares outstanding 18,865 18,874 20,335
========= ========= =========
Net income $ 9,034 $ 7,536 $ 5,025
Other comprehensive income, net of tax:
Unrealized loss on securities available-for-sale,
net of tax benefit of $48, $56 and $608 for the
three months ended September 30, 1999, June 30,
1999 and September 30, 1998, respectively (68) (80) (862)
--------- --------- ---------
Comprehensive income $ 8,966 $ 7,456 $ 4,163
========= ========= =========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Nine Months Ended
-----------------------------
September 30, September 30,
1999 1998
------------- -------------
(Amounts in thousands, except
per share amounts)
<S> <C> <C>
Interest income:
Interest on loans and leases $ 270,615 $ 257,447
Interest on mortgage-backed securities 27,769 38,598
Interest and dividends on investment securities 9,251 7,935
--------- ---------
307,635 303,980
Interest expense:
Interest on deposits 103,061 115,105
Interest on borrowings 69,075 63,753
Interest on Senior Debentures and Notes 9,680 10,580
--------- ---------
181,816 189,438
Net interest income 125,819 114,542
Provision for losses on loans and leases 19,111 5,114
--------- ---------
Net interest income after provision for losses on loans and leases 106,708 109,428
Noninterest income:
Leasing income 39,308 4,689
Loan fees and charges 5,912 4,938
Account fees 5,215 4,725
Sales commissions 3,747 2,965
Gain on sale of loans and leases and securities 2,379 1,067
Other, net 1,776 943
--------- ---------
58,337 19,327
Noninterest expense:
General and administrative 78,804 87,218
Leasing expenses 26,932 3,167
Dividend expense on Capital Securities 6,702 -
Real estate owned operations, net (123) (105)
Net losses (recoveries) on real estate 17 (89)
Amortization of intangible assets 8,532 8,475
--------- ---------
120,864 98,666
Income before income tax expense 44,181 30,089
Income tax expense 20,478 14,769
--------- ---------
Net income $ 23,703 $ 15,320
========= =========
Basic earnings per share $ 1.25 $ 0.76
========= =========
Diluted earnings per share $ 1.25 $ 0.74
========= =========
Average basic shares outstanding 18,884 20,224
========= =========
Average diluted shares outstanding 19,021 20,570
========= =========
Net income $ 23,703 $ 15,320
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available-for-sale,
net of tax expense (benefit) of ($56) and $1 for the nine
months ended September 30, 1999 and September 30, 1998,
respectively (79) 2
--------- ---------
Comprehensive income $ 23,624 $ 15,322
========= =========
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
BAY VIEW CAPITAL CORPORATION
SELECTED FINANCIAL DATA
(UNAUDITED)
September 30, June 30, December 31,
1999 1999 1998
------------- ------------ --------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C>
PER SHARE DATA:
Book value per share $ 20.80 $ 20.40 $ 19.77
Tangible book value per share $ 13.77 $ 13.52 $ 12.75
LOANS AND LEASES RECEIVABLE:
Banking Platform:
Mortgage loans
Single-family $ 1,114,332 $ 1,185,048 $ 1,515,413
Multi-family 596,945 990,290 1,015,980
Commercial real estate 322,031 325,342 338,220
Franchise loans 747,657 487,112 -
Asset-based participation loans 58,601 54,113 18,322
Other 38,046 27,574 39,039
----------- ----------- -----------
2,877,612 3,069,479 2,926,974
Home Equity Platform 704,895 619,148 622,797
Auto Platform 713,387 638,838 546,806
Commercial Platform 148,526 124,821 94,888
----------- ----------- -----------
Gross loans and leases 4,444,420 4,452,286 4,191,465
Premiums and discounts and deferred fees and costs 71,773 65,754 45,209
Allowance for loan and lease losses (45,346) (44,453) (45,405)
----------- ----------- -----------
Net loans and leases $ 4,470,847 $ 4,473,587 $ 4,191,269
=========== =========== ===========
OTHER DATA:
Employees (FTE): Bay View Capital Corporation 121 112 111
Bay View Bank, N.A 597 591 618
Bay View Acceptance Corporation 153 147 156
Bay View Commercial Finance Group 66 64 59
----------- ----------- -----------
Total 937 914 944
=========== =========== ===========
GAAP capital ratio (1) 6.5% 6.5% 6.8%
Bay View Bank regulatory capital ratios
Tier 1 leverage ratio N/A (2) 7.14% 6.37%
Tier 1 risk-based ratio N/A (2) 9.31% 9.24%
Total risk-based ratio N/A (2) 10.33% 10.42%
Bay View Capital Corporation regulatory capital ratios
Tier 1 leverage ratio N/A (2) 5.76% N/A (3)
Tier 1 risk-based ratio N/A (2) 7.37% N/A (3)
Total risk-based ratio N/A (2) 10.82% N/A (3)
</TABLE>
(1) GAAP capital ratio is defined as total stockholders' equity divided by
total assets.
(2) September 30, 1999 regulatory capital ratios are not yet available.
(3) Prior to March 1, 1999, the holding company was not subject to these
specific capital requirements.
30
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Yields and Rates (Unaudited)
---------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ---------- ---------- ----------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans and leases receivable $ 4,468,535 $ 92,583 8.23% $4,373,323 $ 91,531 8.36%
Mortgage-backed securities (1) 594,194 9,573 6.47 632,638 10,054 6.36
Investments (1) 228,936 2,742 5.26 188,642 2,983 6.29
----------- --------- ---- ---------- -------- ----
Total interest-earning assets 5,291,665 104,898 7.90 5,194,603 104,568 8.04
--------- ---- -------- ----
Other assets 583,043 398,032
----------- ----------
Total assets $ 5,874,708 $5,592,635
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 3,526,246 $ 35,984 4.05% $ 3,287,430 $ 36,507 4.40%
Borrowings (2) 1,864,073 26,624 5.66 1,869,790 28,797 6.12
----------- --------- ---- ---------- -------- ----
Total interest-bearing liabilities 5,390,319 62,608 4.60 5,157,220 65,304 5.03
--------- ---- -------- ----
Other liabilities 98,233 46,433
----------- -----------
Total liabilities 5,488,552 5,203,653
Stockholders' equity 386,156 388,982
----------- -----------
Total liabilities and stockholders' equity $ 5,874,708 $ 5,592,635
----------- -----------
Net interest income/net interest spread $ 42,290 3.30% $ 39,264 3.01%
========= ===== ======== =====
Net interest-earning assets (liabilities) $ (98,654) $ 37,383
----------- ----------
Net interest margin (3) 3.21% 3.05%
===== =====
</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 $0.7 million and $0.4 million for the three months ended
September 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.
31
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Yields and Rates (Unaudited)
---------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ---------- ---------- ----------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans and leases receivable $ 4,392,919 $ 270,615 8.24% $4,124,300 $257,447 8.33%
Mortgage-backed securities (1) 584,325 27,769 6.35 787,617 38,598 6.53
Investments (1) 229,069 9,251 5.15 167,097 7,935 6.28
----------- --------- ---- ---------- -------- ----
Total interest-earning assets 5,206,313 307,635 7.89 5,079,014 303,980 7.98
--------- ---- -------- ----
Other assets, 548,686 380,169
----------- ----------
Total assets $ 5,754,999 $5,459,183
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 3,388,587 $ 103,061 4.07% $ 3,424,222 $115,105 4.49%
Borrowings (2) 1,860,477 78,755 5.64 1,577,733 74,333 6.29
----------- --------- ---- ----------- -------- ----
Total interest-bearing liabilities 5,249,064 181,816 4.62 5,001,955 189,438 5.06
--------- ---- -------- ----
Other liabilities 124,083 68,314
----------- -----------
Total liabilities 5,373,147 5,070,269
Stockholders' equity 381,852 388,914
----------- -----------
Total liabilities and stockholders' equity $ 5,754,999 $ 5,459,183
----------- -----------
Net interest income/net interest spread $ 125,819 3.27% $114,542 2.92%
========= ===== ======== =====
Net interest-earning assets (liabilities) $ (42,751) $ 77,060
----------- ----------
Net interest margin (3) 3.23% 3.00%
===== =====
</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 $2.7 million and $1.6 million for the nine months ended
september 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.
32
