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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_______________
Commission file number 001-14879
BAY VIEW CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3078031
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1840 Gateway Drive
San Mateo, California 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 312-7200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.01 per share
Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X NO _
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of June 30, 1999, there were outstanding 18,677,637 shares of the
registrant's common stock. The aggregate market value of the voting stock held
by non-affiliates of the registrant, computed by reference to the closing price
of such stock as of June 30, 1999, was $361,252,825. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the registrant that such person is an affiliate of the
registrant).
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K/A - Portions of Definitive Proxy Statement for 1999 Annual
Meeting of Stockholders.
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FORM 10-K/A
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<S> <C>
Part I
Item 1. Business
General................................................................ 4
Lending Activities..................................................... 5
Securities Activities.................................................. 8
Retail Deposit Activities.............................................. 8
Borrowing Activities................................................... 8
Debt................................................................... 9
Competition............................................................ 9
Economic Conditions, Government Policies and Legislation............... 10
Supervision and Regulation............................................. 10
Employees.............................................................. 15
Executive Officers of the Registrant................................... 15
Item 2. Properties................................................................ 16
Item 3. Legal Proceedings......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................... 17
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 18
Item 6. Selected Financial Data - Five-Year Financial Information................. 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 61
Item 8. Financial Statements and Supplementary Data............................... 65
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................... 107
Part III
Item 10. Directors and Executive Officers of the Registrant........................ 107
Item 11. Executive Compensation.................................................... 107
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 107
Item 13. Certain Relationships and Related Transactions............................ 107
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 108
</TABLE>
Signatures
The purpose of this amendment on Form 10-K/A for the year ended December 31,
1998 of Bay View Capital Corporation is primarily to provide additional
disclosures related to earnings excluding amortization of intangible assets (see
page 40) and the methodology used by the Company in determining its allowance
for loan and lease losses (see pages 50 and 72). Bay View Capital Corporation
hereby amends its Form 10-K for the year ended December 31, 1998 in its entirety
and replaces it with the following:
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Forward-Looking Statements
Certain statements included in this Form 10-K/A or in future filings by Bay
View Capital Corporation (sometimes referred to as "the Company") with the
Securities and Exchange Commission, in our press releases or other shareholder
communications or in oral statements made with the approval of an authorized
executive officer, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to a number of
risks and uncertainties. You should not rely on these forward-looking statements
as predictions of future events.
You can identify forward-looking statements by looking for terminology such as
"believes," "expects," "may," "are expected to," "will," "will allow," "will
continue," "will likely result," "should," "would be," "seeks," "approximately,"
"intends," "plans," "projects," "estimates" or "anticipates" or similar
expressions or expressions of the negative thereof. The Company's discussions of
strategy, plans or intentions are also forward-looking in nature. Additionally,
all information related to projected results of operations, financial condition,
financial performance or other financial or statistical matters also constitutes
forward-looking statements.
Forward-looking statements depend on assumptions, data or methods that may be
incorrect or imprecise and may be incapable of being realized. In some
instances, forward-looking statements are based on consensus estimates of
analysts not affiliated with the Company.
The following factors, among others, could cause actual results and other
matters to differ materially from those covered in these forward-looking
statements:
. Increases in defaults by borrowers and other loan delinquencies;
. Increases in the provision for loan and lease losses;
. Failing to sustain or improve the performance of our subsidiaries;
. Failing to identify suitable future acquisition candidates;
. Failing to achieve the assumptions as defined in our strategic plans,
including any assumptions related to both contemplated and consummated
acquisitions;
. Changes in interest rates which may, among other things, adversely affect
net interest margins, the level of prepayments on loans and mortgage-backed
securities and interest rate risk;
. Competition in the banking, financial services and related industries;
. Government regulation and tax matters;
. The outcome of pending or threatened legal or regulatory disputes and
proceedings;
. Credit and other risks of lending and investment activities;
. Changes in conditions in the securities markets, including the value of the
Company's common stock;
. Changes in regional and national business and economic conditions and
inflation; and
. Unanticipated effects of Year 2000 on the Company and the economy.
As a result of the above, we cannot assure you that the Company's future
results of operations or financial condition or any other matters will be
consistent with those presented in any forward-looking statements. Accordingly,
the Company cautions 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.
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Part I
Item 1. Business
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General
Bay View Capital Corporation (the "Company" or "BVCC"), a Delaware
corporation, is a diversified financial services company incorporated in 1989.
The Company has been focused on the conversion of its assets to more traditional
commercial bank-like assets and expects to continue this process prospectively
(see "Strategic Overview" at Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion of these
conversion efforts). The Company's principal business activities consist of
three operating platforms: a Banking Platform, a Consumer Platform and a
Commercial Platform. The Company operates these platforms through its wholly
owned subsidiaries (i) Bay View Bank, N.A. ("BVB" or the "Bank"), a national
bank, (ii) Bay View Acceptance Corporation ("BVAC"), a Nevada corporation and a
subsidiary of BVB, underwriting and purchasing prime motor vehicle loans and
leases through its wholly owned subsidiaries Bay View Credit ("BVC"), Ultra
Funding, Inc. ("Ultra") and LFS-BV, Inc. ("LFS"), and (iii) Bay View Commercial
Finance Group ("BVCFG"), formerly Concord Growth Corporation, a California
corporation and a subsidiary of BVB, operating as a commercial finance company
offering factoring, asset-based lending and commercial leasing. The Company is
also the holding company for Bay View Securitization Corporation ("BVSC"), a
Delaware corporation formed for the purpose of issuing asset-backed securities
through a trust, Bay View Capital I, a Delaware Business Trust established for
the purpose of issuing the Company's Capital Securities, and during 1998, Regent
Financial Corporation ("Regent"), a California corporation providing item
processing services. MoneyCare, Inc. and Bay View Auxiliary Corporation, wholly
owned subsidiaries of BVB, sell uninsured investment products and act as trustee
under deeds of trust originated by BVB, respectively.
Effective January 2, 1998, the Company acquired America First Eureka Holdings,
Inc. ("AFEH") and its wholly owned subsidiary, EurekaBank, a federal savings
bank. The branches, systems and products of EurekaBank and BVB were fully
integrated during 1998 to form the largest independent bank operating
exclusively in the San Francisco Bay Area.
Bay View Bank
BVB is the basis of the Company's Banking Platform. On March 1, 1999, BVB
converted from a federal stock savings bank to a national bank. BVB was
organized in 1911, converted from a mutual savings bank to a federal stock
savings bank in 1986 and became a wholly owned subsidiary of the Company in
1989. BVB is a member of the Federal Home Loan Bank of San Francisco ("FHLBSF")
and the Federal Reserve System.
At December 31, 1998, BVB had 56 branches operating throughout the San
Francisco Bay Area and one branch in Southern California. Its principal business
consists of originating loans and leases and attracting deposits from the
general public. The Bank uses these deposits, together with borrowings and other
sources of funds, to fund the activities of the Banking, Consumer and Commercial
Platforms. All of the mortgage loans originated by BVB are secured by properties
located in California, primarily Northern California. The majority of BVB's real
estate loan originations are secured by multi-family residential properties. BVB
also originates real estate loans secured by commercial and industrial
properties, home equity loans and business loans. BVB discontinued its single-
family mortgage lending activity during 1996.
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Bay View Acceptance Corporation
BVAC, formed in 1997, represents the motor vehicle component of the Company's
Consumer Platform operating through its subsidiaries and its strategic alliance
partner.
Bay View Credit
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BVC was acquired by the Company effective June 1, 1996 in a business
combination accounted for under the purchase method of accounting. Previously,
BVC was a Federal Deposit Insurance Corporation ("FDIC")-insured industrial loan
company incorporated under the laws of the State of California. Effective
December 31, 1997, BVC ceased accepting deposits and was deregulated.
Based in Covina, California, BVC underwrites and purchases both new and used
fixed-rate prime motor vehicle loans through its loan production offices in
California and the Western United States.
Ultra Funding, Inc.
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Ultra was formed during 1997 and, effective October 1, 1997, acquired the
origination capabilities and certain assets of Ultra Funding, Ltd. ("Ultra
Funding"). From November 1996 through October 1997, the Company participated in
a strategic alliance with Ultra Funding whereby the Company had a right of first
refusal to purchase all of the motor vehicle loan contracts originated by Ultra
Funding which met the Company's underwriting criteria. Based in Austin, Texas,
Ultra underwrites and purchases new and used fixed-rate prime motor vehicle
loans.
LFS-BV, Inc.
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LFS was formed during 1998 for the purpose of underwriting and purchasing
motor vehicle leases through the Company's strategic alliance with Lendco
Financial Services ("Lendco"). The motor vehicle leases are accounted for as
operating leases. Based in Woodland Hills, California, Lendco originates fixed-
rate prime motor vehicle leases throughout the United States.
Bay View Commercial Finance Group
The Company created its Commercial Platform through the acquisition of EXXE
Data Corporation ("EXXE") and EXXE's wholly owned subsidiary, BVCFG, on March
17, 1997. The acquisition was accounted for under the purchase method of
accounting effective April 1, 1997. Subsequent to the acquisition, EXXE was
merged into BVCFG and liquidated and BVCFG became a subsidiary of the Company.
In connection with the conversion of BVB to a national bank, BVCFG became a
subsidiary of BVB effective March 1, 1999. BVCFG, based in San Mateo,
California, offers asset-based lending, factoring and commercial leasing through
its loan production offices throughout the United States.
Lending Activities
Banking Platform
Residential Lending
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Single-Family Mortgage Loans (one to four units). At December 31, 1998, loans
secured by single-family residential real estate totaled $1.6 billion,
representing 38.2% of the Company's gross loan and financing lease portfolio.
These loans are primarily adjustable rate mortgages ("ARMs") and generally have
terms of 30 years. While BVB discontinued single-family loan originations during
1996, its
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portfolio of single-family loans increased significantly during 1998 as a result
of the Company's acquisition of AFEH effective January 2, 1998.
Multi-Family Mortgage Loans (five or more units). At December 31, 1998, loans
secured by multi-family residential real estate totaled $1.0 billion,
representing 24.2% of the Company's gross loan and financing lease portfolio. In
general, these loans are ARMs with terms of 30 years, although some of these
loans have monthly payments calculated on a 30-year amortization period with a
balloon payment due at maturity, typically 15 years. The majority of the ARMs
originated by BVB prior to 1996 were indexed to the Eleventh District Cost of
Funds Index ("COFI"). During 1996, management re-directed its lending practices
and BVB moved away from COFI as its index for ARMs. Currently, BVB utilizes the
London Interbank Offered Rate ("LIBOR") and prime rate as its variable interest
rate indices for the majority of its multi-family loan originations.
BVB generally does not lend more than 75% of the appraised value of multi-
family residences on a first mortgage loan. The property's cash flow available
for loan payments is also a limiting factor on the approved loan amount for
multi-family residences. Properties securing multi-family loans are required to
generate cash flow sufficient to cover loan payments and other property
expenditures.
Commercial Real Estate Lending
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At December 31, 1998, loans secured by commercial real estate totaled $338.2
million, representing 8.1% of the Company's gross loan and financing lease
portfolio. Substantially all of BVB's commercial real estate loans are ARMs.
ARMs secured by commercial real estate are generally made upon the same terms
and conditions as ARMs secured by multi-family residences.
Most of BVB's commercial real estate loans consist of loans secured by
improved property such as office buildings, warehouses and retail sales
facilities. A majority of these loans are in amounts ranging from $250,000 to $1
million. BVB generally does not originate commercial real estate loans which
have a loan-to-value ("LTV") ratio exceeding 70%. The property's cash flow
available for loan payments is also a limiting factor on the approved loan
amount. Properties securing commercial real estate loans are required to
generate cash flow sufficient to cover loan payments and other property
expenditures.
Underwriting Policies and Procedures - Real Estate Loans
- --------------------------------------------------------
Multi-family and commercial real estate lending entails significant additional
risks compared to single-family residential mortgage lending. Income producing
property loans may involve large loan balances to single borrowers or groups of
related borrowers. In addition, repayment of loans secured by multi-family and
commercial real estate properties is typically dependent on the successful
operation of the properties, as well as favorable conditions in the real estate
market or the economy in general.
BVB originates multi-family and commercial real estate loans through internal
loan production personnel. As part of the loan underwriting process, staff
appraisers or qualified independent appraisers inspect and appraise the property
that would secure the loan. A loan underwriter analyzes the merits of the loan
based on information obtained relative to the borrower and property (e.g.,
income, credit history, assets, liabilities, cash flows, and the value of the
real property as stated on the appraisal report). Loans are then approved at
various levels of authority depending upon the amount and type of loan.
The majority of BVB's real estate loans are secured by properties located in
Northern California. BVB requires the American Land Title Association form of
title insurance on all loans secured by real property and requires that fire and
extended coverage casualty insurance in amounts sufficient to rebuild or replace
the improvements at current replacement costs be maintained on all properties
securing the
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loans. BVB also requires flood insurance for properties in flood hazard zones to
protect the property securing its interest. Consistent with regional industry
practices, BVB does not necessarily require earthquake insurance as part of its
general underwriting practices. BVB may in certain circumstances, however,
require mudslide, earthquake and/or other hazard insurance depending upon the
location of the property.
Consumer and Business Lending
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At December 31, 1998, other consumer and business loans generated within the
Banking Platform totaled $92.8 million, representing 2.2% of the Company's gross
loan and financing lease portfolio. The consumer loans are comprised primarily
of home equity lines of credit. The business loans are comprised of business
lending products (e.g., business term loans and lines of credit) which are
offered in conjunction with other services in order to expand BVB's customer
base and make BVB more competitive in the commercial banking environment.
Consumer Platform
Motor Vehicle Financing
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At December 31, 1998, the Consumer Platform's motor vehicle loans totaled
$546.8 million, representing 13.1% of the Company's gross loan and financing
lease portfolio. Additionally, the Consumer Platform's motor vehicle leases
totaled $183.5 million at December 31, 1998, representing 3.3% of the Company's
consolidated assets. BVAC underwrites and purchases new and used fixed-rate
prime motor vehicle loans and leases. The motor vehicle leases are accounted for
as operating leases and, accordingly, the leased asset is capitalized by the
Company and depreciated down to the estimated residual value over the term of
the lease.
BVAC underwrites all loans and leases that it purchases, utilizing custom
credit scoring systems. BVAC's underwriting standards 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 Credit Bureau
("FICO") scores. BVAC generally considers FICO scores of 680 or higher as prime-
quality loans. The Company generally purchases motor vehicle loans with FICO
scores averaging 700 or higher and motor vehicle leases with FICO scores
averaging 730 or higher.
The Company initially anticipated periodic securitizations and sales of its
motor vehicle loans. During the first quarter of 1997, $253 million of motor
vehicle loans were securitized and sold, with the premium from the sale recorded
as part of the acquisition of BVC. In conjunction with the Company's May 1997
announcement of the acquisition of AFEH and its wholly owned subsidiary,
EurekaBank, as discussed elsewhere herein, the Company discontinued the
securitization and sale of motor vehicle loans.
Home Equity Loans
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The Company began purchasing high loan-to-value ("HLTV") home equity loans in
1997. At December 31, 1998, HLTV home equity loans totaled $483.8 million,
representing 11.5% of the Company's gross loan and financing lease portfolio.
Similar to its motor vehicle lending and leasing activities, the Company's
underwriting standards for HLTV home equity loans also focus on debt-to-income
ratios and FICO scores. The Company generally purchases HLTV home equity loans
with FICO scores of 680 or higher.
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Commercial Platform
At December 31, 1998, the Commercial Platform's loan and lease portfolio
totaled $113.2 million, representing 2.7% of the Company's gross loan and
financing lease portfolio. Approximately $70 million of the Commercial
Platform's loans outstanding at December 31, 1998 represented asset-based loans
generated by BVCFG's asset-based lending division, Bay View Financial
Corporation ("BVFC"). The remaining balance was largely comprised of the
platform's factoring and commercial leasing activities. The Commercial Platform
employs strict underwriting procedures which include, among other things,
continuous reviews of the borrower's financial condition and periodic audits of
the receivables, equipment or other assets securing the loans and leases.
Securities Activities
The Company's securities activities primarily involve the purchase and sale of
mortgage-backed securities ("MBS") by BVB. BVB purchases securities to
supplement the Company's high-quality loan and lease production. The portfolio
includes MBS issued by Freddie Mac ("FHLMC"), Fannie Mae ("FNMA") and the
Government National Mortgage Association ("GNMA"). The portfolio also includes
senior tranches of private issue collateralized mortgage obligations ("CMOs")
which entail less prepayment risk than other CMO tranches.
Securities are classified as held-to-maturity or available-for-sale. The
Company does not maintain a trading portfolio. Securities in the held-to-
maturity category consist of securities purchased for long-term investment in
order to enhance the Company's ongoing stream of net interest income and core
earnings. Securities deemed held-to-maturity are classified as such because the
Company has both the intent and ability to hold the securities to maturity.
Securities purchased which may be sold prior to maturity are designated as
available-for-sale at the time of purchase.
Retail Deposit Activities
BVB attracts both short-term and long-term deposits from the general public by
offering a wide range of deposit products and services. BVB, through its branch
network, provides its banking customers with money market accounts, savings and
checking accounts, certificates of deposit, individual retirement accounts,
business checking accounts, and 24-hour automated teller machines ("ATMs").
Enhancing the value of BVB's retail branch franchise remains one of the
Company's primary objectives. BVB plans to continue to expand its retail banking
presence in Northern California through internal growth, new product development
and the acquisition of, or purchase of deposits from, other institutions. This
objective led to the Company's acquisition of AFEH. BVB's retail deposit
franchise is now the largest of any financial institution operating exclusively
in the San Francisco Bay Area.
Borrowing Activities
The Company's borrowing activities are primarily conducted by BVB. The Federal
Home Loan Bank ("FHLB") System functions in a reserve credit capacity for
qualifying financial institutions. As a FHLB member, BVB is required to own
capital stock in the FHLBSF and has the authority to apply for advances from the
FHLBSF utilizing FHLBSF capital stock, qualifying mortgage loans and MBS as
collateral.
The FHLBSF offers a full range of borrowing programs on its advances with
terms of up to ten years at competitive market rates. A prepayment penalty is
usually imposed for early repayment of FHLBSF
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advances. As a Federal Reserve member, BVB may also borrow from the Federal
Reserve Bank of San Francisco.
BVB also utilizes borrowings under reverse repurchase agreements with
securities dealers and the FHLBSF. Reverse repurchase agreements are sales of
securities owned by BVB to securities dealers or the FHLBSF with a commitment by
BVB to repurchase such securities for a predetermined price at a future date.
Debt
At December 31, 1998, the Company had approximately $240 million of debt
outstanding. This debt is comprised of (i) the Company's 9.76% Capital
Securities due December 31, 2028 issued in December 1998 by Bay View Capital I,
a statutory business trust sponsored by the Company, (ii) $100 million of 9.125%
Subordinated Notes due August 15, 2007 issued in August 1997 and (iii) $50
million of 8.42% Senior Debentures that matured on June 1, 1999 issued in May
1996.
Competition
Banking Platform
The Banking Platform faces strong competition both in originating loans and in
attracting deposits. Competition in originating multi-family and commercial real
estate mortgage loans, as well as consumer and other business loans, comes
primarily from other savings institutions, commercial banks and mortgage bankers
located throughout the San Francisco Bay Area. BVB competes for loan business
principally on the basis of interest rates, types of products, loan fees
charged, and the quality of customer service it provides to borrowers.
Competition in attracting deposits comes primarily from other savings
institutions, commercial banks, brokerage firms, mutual funds, credit unions,
and other non-bank financial services companies. The ability of BVB to attract
and retain deposits depends upon a number of factors which include interest
rates offered on deposit products, fees, types of deposit products, convenient
office locations, advertising, ATMs, and quality customer service.
BVB has ATMs located throughout the San Francisco Bay Area which provide 24-
hour cash availability to its customers. BVB also participates in the STAR/(R)/
System and the Plus/(R)/ Network, which link BVB's ATMs with those of a number
of major financial institutions. This linkage provides customers with cash
availability worldwide.
BVB also has a wholly owned subsidiary, MoneyCare, Inc., which offers
uninsured investment products through a third-party registered broker on a
commission basis, such as mutual funds and annuities, providing BVB's customers
with additional products to support their individual investment needs.
Consumer Platform
The Consumer Platform experiences strong competition for motor vehicle loans
and leases. This competition comes primarily from large, well-capitalized
lending institutions and finance companies. The platform competes for business
through identifying and serving unique market niches, through competitive and
flexible pricing and through initiatives related to products, service and
marketing. The Consumer Platform intends to expand origination capability and
market share through geographic expansion, strategic alliances and additional
business acquisitions, as warranted.
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Commercial Platform
The Commercial Platform experiences intense competition from other lending
institutions and commercial finance companies competing for market share.
Management has countered this impact by expanding the asset-based lending
segment of the platform through the addition of personnel with significant
industry experience, relocating the asset-based lending business to Southern
California, one of the top asset-based lending markets in the country, and
adding new and enhanced products to the Commercial Platform's product array. The
Commercial Platform intends to expand origination capability and market share
through geographic expansion, strategic alliances and additional business
acquisitions, as warranted.
Economic Conditions, Government Policies and Legislation
The Company's profitability, like that of most other financial institutions,
is primarily dependent on interest rate differentials. In general, the
difference between the interest rates paid by the Company on interest-bearing
liabilities, such as deposits and other borrowings, and the interest rates
received by the Company on interest-earning assets, such as loans, leases and
securities, comprise the major portion of the Company's earnings. These rates
are highly sensitive to many factors that are beyond the control of the Company,
such as inflation, recession and unemployment, and the impact of future changes
in domestic and foreign economic conditions that cannot be predicted.
The Company's business is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board" or the "FRB"). The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
through its open-market operations in U.S. government securities, by adjusting
the required level of reserves for depository institutions subject to its
reserve requirements and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, leases,
investments, and deposits, and also affect interest rates earned on interest-
earning assets and paid on interest-bearing liabilities. The nature and impact
on the Company of any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are enacted which
have the effect of increasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance between financial
services providers. Proposals to change the laws and regulations governing the
operations and taxation of savings institutions, national banks, bank holding
companies, and other financial institutions are frequently made in the U.S.
Congress, in the state legislatures and by various regulatory agencies. The
likelihood of any legislative or regulatory changes and the impact such changes
might have on the Company cannot be predicted. See "Supervision and Regulation"
for additional discussion on legislative and regulatory changes.
Supervision and Regulation
General
During 1998, the Company initiated the process to convert BVB from a savings
institution regulated by the Office of Thrift Supervision ("OTS") to a national
bank regulated by the Office of the Comptroller of the Currency ("OCC") and to
convert the holding company from a savings and loan holding company regulated by
the OTS to a bank holding company regulated by the FRB. On February 2, 1999, the
Company received all necessary approvals to effect these conversions which were
consummated on
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March 1, 1999. Throughout 1998, the Company, together with its subsidiaries, was
subject to examination, supervision and regulation by the OTS and the FDIC.
Until its conversion to a national bank, applicable OTS regulations
governed, among other things, BVB's lending and investment powers, the types of
deposit and/or loan accounts it was permitted to offer, the types of business in
which it could engage, and requirements for regulatory capital. The Company was
also subject to the regulations of the FRB with respect to required reserves and
certain other matters. As a result of the conversion, BVB will be subject to
regulations governing national banks. Unlike a federal savings bank, as a
national bank, BVB will not be subject to portfolio limits on the amount of
commercial and consumer loans that it may originate or purchase.
Regulation of National Banks
General. The OCC has extensive authority over the operations of national
banks. As part of this authority, BVB is required to file periodic reports with
the OCC and is subject to periodic examinations by the OCC. The OCC also has
extensive enforcement authority over parties affiliated with BVB such as
directors, officers, agents, and other parties providing services to the
institution.
Insurance of Accounts and Regulation by the FDIC. BVB was a member of the
Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC,
and will remain a member as a national bank. BVB's deposits are insured up to
applicable limits by the FDIC. As insurer, the FDIC has adopted a risk-based
deposit insurance system that assesses deposit insurance premiums for all FDIC-
insured banks and thrifts according to the level of risk involved in an
institution's activities. An institution's risk category is based upon whether
the institution is classified as "well-capitalized", "adequately-capitalized" or
"undercapitalized" and within each risk category there are three subcategories
based upon an institution's risk classification. As a well-capitalized
institution, BVB does not currently pay any deposit insurance premiums. It does
pay an annual assessment on its level of deposits, as do all other SAIF-insured
institutions, to fund repayment of obligations issued to resolve the thrift
crisis in the 1980s. The assessment rate is about six basis points of insured
deposits.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to the
aforementioned designated reserve level, or such higher reserve ratio as
established by the FDIC. In addition, the FDIC may impose special assessments on
SAIF members to repay amounts borrowed from the United States Treasury or for
any other reason deemed necessary by the FDIC.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain noninterest-bearing reserves at specified levels
against their transaction accounts (e.g., checking accounts). Throughout 1998
and at December 31, 1998, BVB was in compliance with these reserve requirements.
Federal Home Loan Bank System. BVB is a member of the FHLBSF, one of 12
regional FHLBs. Each FHLB serves as a reserve, or central bank, for its members
within its assigned geographic region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB system. It makes
loans (i.e., advances) to members in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and procedures
are subject to the regulation and oversight of the Federal Housing Finance
Board. All advances from the FHLBSF are required to be secured by sufficient
collateral as determined by the FHLBSF. In addition, all long-term advances from
the FHLBSF are restricted to providing funds for residential home financing. BVB
will remain a member of the FHLBSF as a national bank.
11
<PAGE>
Limitations on Dividends. As a national bank, BVB may pay dividends in any
one calendar year equal to its net earnings in that calendar year plus the net
earnings for the previous two calendar years less any dividends during this
three-year period that have been paid. Any dividends in excess of this amount
must receive the prior approval of the OCC. In addition, a dividend may not be
paid if BVB is or would be undercapitalized as a result of the dividend.
Regulatory Capital Requirements. National banks, such as BVB, are required
to maintain a minimum level of regulatory capital. The OCC has established
capital standards, including a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to national banks. The OCC is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis. At December 31, 1998, BVB was
deemed well-capitalized under the OTS regulations as well as the OCC
regulations. See Note 15 to the Consolidated Financial Statements,
"Stockholders' Equity and Regulatory Capital Requirements," at Item 8.
"Financial Statements and Supplementary Data" for further discussion.
Community Reinvestment Act and Fair Lending Developments. BVB is subject to
certain fair lending laws and reporting obligations involving home mortgage
lending operations and Community Reinvestment Act ("CRA") activities. The CRA
generally requires the federal banking agencies to evaluate the record of a
financial institution in meeting the credit needs of its local communities,
including low- and moderate-income neighborhoods. A financial institution may be
subject to substantial penalties and corrective measures for a violation of
certain fair lending laws. The federal banking agencies may take compliance with
such laws and CRA obligations into account when regulating and supervising other
activities. During 1998, the OTS rated BVB "satisfactory" in complying with its
CRA obligations.
Regulation of Bank Holding Companies
General. As a bank holding company, the Company is subject to comprehensive
regulation by the FRB under the Bank Holding Company Act of 1956, as amended
(the "BHCA"), and the regulations of the FRB. As a bank holding company, the
Company is required to file periodic reports with the FRB and is subject to
periodic examinations by the FRB. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil monetary penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries, including its
bank subsidiaries. In general, enforcement actions may be initiated for
violations of law and regulation as well as for unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of strength for
its subsidiary banks. Under this policy the FRB may require, and has required in
the past, bank holding companies to contribute additional capital to
undercapitalized subsidiary banks.
Under the BHCA, a bank holding company must obtain FRB approval before,
among other matters: (i) acquiring, directly or indirectly, ownership or control
of any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares) or (ii) acquiring all or
substantially all of the assets of another bank or bank holding company.
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-banking
activities which, by statute or by FRB regulation or order, have been identified
as activities closely related to the business of banking or
12
<PAGE>
managing or controlling banks, such as all types of lending; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of credit-
related insurance; leasing property on a full-payout, non-operating basis; and
providing securities brokerage services for customers. The scope of permissible
activities may be expanded from time to time by the FRB. Such activities may
also be affected by federal legislation.
Dividends. A FRB policy statement on the payment of cash dividends by bank
holding companies states that a bank holding company should pay cash dividends
only to the extent that its net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the holding company's capital needs, asset quality and overall financial
condition. The FRB has also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action regulations adopted
by the FRB, the FRB may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
undercapitalized.
Bank holding companies are required to give the FRB prior written notice of
any purchase or redemption of the company's outstanding equity securities if the
consideration paid for the purchase or redemption, when combined with the
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the company's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute, among other things, an unsafe or unsound practice. This
notification requirement does not apply to any company that is well-capitalized,
well-managed and is not subject to any unresolved supervisory issues.
Regulatory Capital Requirements. The FRB has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks. As a savings and loan holding company, the
Company was not subject to any minimum capital requirements. At December 31,
1998, the Company was deemed well-capitalized under the FRB capital
requirements.
Other Regulations
Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking
agencies possess broad powers to take corrective and other supervisory action as
deemed appropriate against an insured depository institution and its holding
company. Federal laws require each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including, but not limited to, those institutions which fall below one or more
of the prescribed minimum required capital ratios. The federal banking agencies
have promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well-capitalized, adequately-capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
A depository institution that, based upon its capital levels, is classified
as well-capitalized, adequately-capitalized or undercapitalized may be treated
as though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition, or an unsafe or unsound practice, warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as critically undercapitalized unless its
capital ratios actually warrant such treatment.
In addition to measures taken under the prompt corrective action
provisions, banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in conducting
their businesses, or for violation of any law, rule, regulation, condition
imposed in writing
13
<PAGE>
by the agency, or term of a written agreement with the agency. Enforcement
actions may include the appointment of a conservator or receiver, the issuance
of a cease and desist order that can be judicially enforced, the termination of
deposit insurance (in the case of a depository institution), the imposition of
civil monetary penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties, and the enforcement
of such actions through injunctions or restraining orders based upon a judicial
determination that the agency would be harmed if such equitable relief was not
granted.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines to assist in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to, among other things: (i)
internal controls, information systems and internal audit systems, (ii) loan
documentation, (iii) credit underwriting, and (iv) asset growth. Any institution
that is found to be lacking sufficient controls in these areas is required to
promptly take appropriate action.
Interstate Banking and Branching. Federal law permits the FRB to approve an
application of an adequately-capitalized and adequately-managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state. The
FRB may not approve the acquisition of a bank, however, that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. Federal law also prohibits the FRB from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. States may limit
the percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% statewide concentration limit.
Additionally, the federal banking agencies are authorized to approve
interstate merger transactions without regard to whether such transactions are
prohibited by the law of any state, unless the home state of one of the banks
opted out prior to June 1, 1997, by enacting a law which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving out-of-
state banks. Interstate acquisitions of branches are permitted only if the law
of the state in which the branch is located permits such acquisitions.
Interstate mergers and branch acquisitions are also subject to the nationwide
and statewide insured deposit concentration limits described above. The OCC may
approve interstate branching de novo by national banks only in states which
specifically allow for such branching.
Legislative and Regulatory Proposals. Any changes in the regulatory
structure to which the Company is subject, whether by any of the federal banking
agencies or Congress, could have a material effect on the Company, and the
Company cannot predict what, if any, future actions may be taken by legislative
or regulatory authorities or what impact such actions may have. The Clinton
Administration and Congressional leaders have been considering measures to
restructure the regulation of banks. Pending legislation, if ultimately enacted
into law, would provide for sweeping financial modernization of the banking
system. Among the changes being considered is removing certain restrictions
contained in the Glass-Steagall Act of 1933 and the BHCA, thereby allowing
qualified financial holding companies to control banks, securities firms,
insurance companies, and other financial firms. Conversely, securities firms,
insurance companies and other financial firms would be allowed to own or
affiliate with commercial banks. There can be no assurance of when, or if, the
legislation described will be enacted, or if enacted, what form such legislation
will ultimately take.
14
<PAGE>
Employees
At December 31, 1998, the Company had a total of 944 employees on a full-
time equivalent ("FTE") basis, consisting of both full-time and permanent part-
time employees, as follows:
<TABLE>
<S> <C>
Bay View Bank 590
Bay View Acceptance Corporation 156
Bay View Capital Corporation 111
Bay View Commercial Finance Group 59
Regent Financial Corporation 28
---
Total 944
===
</TABLE>
The Company's employees are not represented by any unions or covered by any
collective bargaining agreements. The Company considers its relations with its
employees to be satisfactory.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Registrant.
<TABLE>
<CAPTION>
Year
Name Age Position Appointed
- --------------------------------- --------- ----------------------------------------------------- ---------------
<S> <C> <C> <C>
Edward H. Sondker 51 Director, President and Chief Executive Officer 1995
Richard E. Arnold 58 Executive Vice President and Director of Sales and 1997
Banking Administration
John N. Buckley 41 Executive Vice President and Chief Credit 1994
Administrator
Robert J. Flax 49 Executive Vice President, General Counsel and 1985
Corporate Secretary
David A. Heaberlin 49 Executive Vice President and Chief Financial 1995
Officer
Ronald L. Reed 52 Executive Vice President and Director of 1997
Management Information Systems and Loan Servicing
Carolyn Williams-Goldman 37 Executive Vice President and Director of 1998
Administration
Scott H. Ray 34 Senior Vice President and Controller 1998
</TABLE>
The business experience of each of the executive officers of the Company is
as follows:
Mr. Sondker has served as a Director, President and Chief Executive Officer
of the Company since 1995. Previously, he served as President and Chief
Executive Officer of Independence One Bank of California, FSB, a subsidiary of
Michigan National Corporation. From 1985 to 1990, he was the President and Chief
Executive Officer of La Jolla Bank & Trust Company. Prior to 1985, Mr. Sondker
held executive and management positions with a community bank holding company in
Kansas City, Missouri.
Mr. Arnold, Executive Vice President, has served as Director of Sales and
Banking Administration since 1997. Prior to joining the Company, he served as an
Executive Vice President of First Interstate Bank and was responsible for all
branch banking activities in Northern California. Prior to joining First
Interstate Bank in 1990, he held executive and management positions at Security
Pacific Bank in a career that spanned over 30 years.
15
<PAGE>
Mr. Buckley, Executive Vice President, has served as Chief Credit
Administrator since 1995 and Manager of Credit Administration and Asset
Management since 1994. He joined the Company in September 1993. Previously, he
served at Bank of America in various capacities from 1985 to 1993. His last
position was Vice President and Regional Credit Administrator for the Real
Estate Industries Division at Bank of America.
Mr. Flax, Executive Vice President, has served as General Counsel of BVB
since 1985 and has served in various capacities since joining BVB in 1980. He
has served as General Counsel and Corporate Secretary of the Company since its
formation in 1989. Before joining BVB, he was a trial attorney in private
practice in San Francisco from 1976 to 1980.
Mr. Heaberlin, Executive Vice President, has served as Chief Financial
Officer of the Company since 1995 and Chief Operating Officer of BVB since 1997.
Previously, he served as Senior Vice President and Chief Financial Officer for
First California/Mortgage Service America. During 1993 and 1994, he was
Executive Vice President and Treasurer of ITT Residential Capital Corporation.
Prior to his service with ITT, he was a financial executive for various entities
including Bowery Bank, Exchange National Bank of Chicago, Financial Corporation
of Santa Barbara, and Numerica Financial. He has over 20 years experience in
commercial banking, savings banks and the financial services industry. Mr.
Heaberlin is a Certified Public Accountant.
Mr. Reed, Executive Vice President, has served as Director of Management
Information Systems and Loan Servicing since 1997. Previously, he served as
Chief Information Officer for Weyerhaeuser and WMC Mortgage Corporation. He has
over 30 years of corporate management, information technology and servicing
experience and has also held senior management positions with Technology
Management Corporation, American Savings Bank and Home Savings of America / HF
Ahmanson.
Ms. Williams-Goldman, Executive Vice President, has served as Director of
Administration since 1998 and Director of Human Resources since 1995. She joined
the Company as Associate Counsel in 1994. Previously, she served as Vice
President and Counsel at First Nationwide Bank in San Francisco. Prior to her
service with First Nationwide Bank, she was an Associate in the Business Law and
Banking Practice Groups of Winthrop, Stimson, Putnam & Roberts. She is a member
of the State Bars of California and New York.
Mr. Ray, Senior Vice President, has served as Controller of the Company and
Chief Financial Officer of BVB since 1998. Previously, he served as Executive
Vice President and Chief Financial Officer for Silicon Valley Bancshares. Mr.
Ray is a Certified Public Accountant and has 14 years of professional experience
in both public accounting and private industry, including 12 years affiliated
with the financial services industry.
There is no family relationship among the above officers. All executive
officers serve at the discretion of the Board of Directors.
Item 2. Properties
- --------------------
As of December 31, 1998, the Company occupied a total of 65 offices and
branches, including its administrative corporate office, under operating lease
arrangements expiring at various dates through the year 2012. In most instances,
these leases include options to renew or extend at market rates and terms. BVB
owns the property in which four of its branches are located. In 1996, the
Company sold its corporate office complex and entered into an operating lease
arrangement for new facilities. Also in 1996, BVC's corporate office complex was
sold and BVC entered into an operating lease agreement for
16
<PAGE>
new facilities. The Company also owns leasehold improvements, furniture and
equipment at its offices and branches, all of which are used in the Company's
business activities.
Item 3. Legal Proceedings
- ---------------------------
There were no legal proceedings requiring disclosure pursuant to this item
pending at December 31, 1998, or at the date of this report.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matters were submitted for a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1998.
17
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
At December 31, 1998, the Company's common stock was traded on the Nasdaq
National Market under the stock symbol "BVCC." At December 31, 1998, there were
19,113,637 shares of the Company's common stock outstanding, which were owned by
1,535 shareholders of record.
During 1998, the Company initiated the process to change the listing of its
common stock and Capital Securities from the Nasdaq National Market to the New
York Stock Exchange ("NYSE"). The Company also initiated the process to begin
trading its Subordinated Notes on the NYSE. The Company's securities commenced
trading on the NYSE effective April 1, 1999.
The following table illustrates quarterly stock price activity and
dividends declared for 1998 and 1997 (amounts have been adjusted for a 2-for-1
stock split in the form of a 100% stock dividend paid in June 1997):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
1998
----------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Stock price - high $ 37.25 $ 38.00 $ 31.75 $ 21.69
Stock price - low $ 29.38 $ 29.50 $ 17.00 $ 12.50
Dividends $ 0.10 $ 0.10 $ 0.10 $ 0.10
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
1997
----------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Stock price - high $ 28.63 $ 26.75 $ 28.13 $ 36.25
Stock price - low $ 20.63 $ 22.63 $ 24.88 $ 27.69
Dividends $ 0.08 $ 0.08 $ 0.08 $ 0.10
</TABLE>
The ability of the Company to pay dividends is subject to certain
restrictions and limitations pursuant to applicable laws and regulations. See
"Supervision and Regulation - Limitations on Dividends" at Item 1. "Business"
and Note 15 to the Consolidated Financial Statements, "Stockholders' Equity and
Regulatory Capital Requirements," at Item 8. "Financial Statements and
Supplementary Data."
18
<PAGE>
Item 6. Selected Financial Data - Five-Year Financial Information
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------------
Selected Balance Sheet Information /(1)/ 1998 1997 1996 1995 1994
------------- --------------- --------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total assets $ 5,596,232 $ 3,246,476 $ 3,300,262 $ 3,004,496 $ 3,166,529
Mortgage-backed securities 635,389 470,261 577,613 731,378 921,680
Loans and leases, net 4,191,269 2,373,113 2,474,717 2,062,268 2,054,563
Deposits 3,269,637 1,677,135 1,763,967 1,819,840 1,707,376
Borrowings 1,833,116 1,355,976 1,245,537 941,465 1,219,958
Capital Securities 90,000 - - - -
Stockholders' equity 377,811 173,627 200,062 207,977 217,315
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Selected Results of Operations Year Ended December 31,
-------------------------------------------------------------------------
Information /(1)/ 1998 1997 1996 1995 1994
------------- --------------- --------------- ------------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 406,363 $ 242,244 $ 241,755 $ 216,463 $ 197,326
Interest expense (251,762) (154,908) (160,773) (160,547) (130,401)
------------- --------------- --------------- ------------- -------------
Net interest income 154,601 87,336 80,982 55,916 66,925
Provision for losses on loans and leases (9,114) (1,952) (1,898) (4,284) (2,367)
Gain (loss) on sale of loans and securities 1,060 925 (1,453) (2,510) (1,081)
Leasing income 11,341 - - - -
Other income 18,671 11,830 10,017 8,652 8,619
General and administrative expenses (113,567) (71,913) (58,955) (57,016) (47,287)
Dividend expense on Capital Securities (244) - - - -
Leasing expense (7,682) - - - -
SAIF recapitalization assessment - - (11,750) - -
Income from real estate owned, net 181 543 4,806 1,081 95
Recovery of (provision for) losses on real
estate 59 585 103 (749) (145)
Amortization of intangible assets (11,372) (4,088) (2,606) (3,944) (2,418)
------------- --------------- --------------- ------------- -------------
Income (loss) before income tax expense 43,934 23,266 19,246 (2,854) 22,341
Income tax (expense) benefit (21,215) (9,245) (8,277) 708 (7,828)
Extraordinary items, net of tax - - - (2,544) -
------------- --------------- --------------- ------------- -------------
Net income (loss) $ 22,719 $ 14,021 $ 10,969 $ (4,690) $ 14,513
============= =============== =============== ============= =============
Earnings (loss) per diluted share:
Income (loss) before extraordinary items $ 1.12 $ 1.06 $ 0.79 $ (0.15) $ 1.01
Net income (loss) $ 1.12 $ 1.06 $ 0.79 $ (0.32) $ 1.01
Dividends declared per share $ 0.40 $ 0.34 $ 0.305 $ 0.30 $ 0.30
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
At And For The Year Ended December 31,
-------------------------------------------------------------------------
Selected Other Information /(1)/ 1998 1997 1996 1995 1994
------------- --------------- --------------- ------------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net interest margin 3.03% 2.86% 2.57% 1.86% 2.34%
Efficiency ratio 63.88% 71.85% 64.79% 88.30% 62.60%
Return on average assets 0.41% 0.45% 0.34% (0.15)% 0.49%
Return on average equity 5.87% 7.32% 5.39% (2.11)% 6.79%
Ratio of total equity to total assets 6.75% 5.35% 6.06% 6.92% 6.86%
Book value per share $ 19.77 $ 14.38 $ 14.98 $ 14.65 $ 15.16
Dividend payout ratio 35.57% 30.53% 38.61% (93.75)% 29.70%
Nonperforming assets $ 18,020 $ 15,766 $ 24,310 $ 38,811 $ 50,577
Ratio to total assets 0.32% 0.49% 0.74% 1.29% 1.60%
Troubled debt restructurings $ 777 $ 731 $ 509 $ 15,641 $ 13,948
Ratio to total assets 0.01% 0.02% 0.02% 0.52% 0.44%
</TABLE>
/(1)/ Includes the acquisitions of BVC effective June 1, 1996, BVCFG effective
April 1, 1997, Ultra effective October 1, 1997, and AFEH effective January
2, 1998.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------
Results of Operations
- ---------------------
INDEX
<TABLE>
<CAPTION>
<S> <C>
Strategic Overview....................................................... 21
The Company's Mission Statement........................................ 21
The Company's Strategy................................................. 21
Banking Platform Strategy.............................................. 21
Consumer Platform Strategy............................................. 22
Commercial Platform Strategy........................................... 23
Capital Redeployment Strategies........................................ 23
New York Stock Exchange................................................ 24
Results of Operations.................................................... 25
Net Interest Income and Net Interest Margin............................ 25
Interest Income........................................................ 29
Interest Expense....................................................... 30
Provision for Losses on Loans and Leases............................... 32
Noninterest Income..................................................... 33
Noninterest Expense.................................................... 33
Income Taxes........................................................... 37
Special Mention Items.................................................. 38
Non-GAAP Performance Measures............................................ 40
Earnings Excluding Amortization of Intangible Assets................... 40
Normalized Net Interest Margin......................................... 42
Balance Sheet Analysis................................................... 43
Securities............................................................. 43
Loans and Leases....................................................... 46
Deposits............................................................... 52
Borrowings............................................................. 53
Liquidity................................................................ 55
Capital Resources........................................................ 55
Year 2000................................................................ 57
Impact of New Accounting Standards....................................... 59
Impact of Inflation and Changing Prices.................................. 60
</TABLE>
20
<PAGE>
Strategic Overview
The Company is a diversified financial services company that operates from
three platforms:
. A Banking Platform, which includes BVB and which is comprised
primarily of single-family, multi-family and commercial mortgage
loans, MBS and retail and business deposit products and services.
. A Consumer Platform, which is comprised of motor vehicle loans and
leases underwritten and purchased by BVAC and its subsidiaries. The
platform also includes home equity loans purchased by the Company.
. A Commercial Platform, which is comprised of the asset-based lending,
factoring and commercial leasing activities of BVCFG.
The Company's Mission Statement
To build a diversified financial services company by investing in niche
businesses with risk-adjusted returns that enhance shareholder value.
The Company's Strategy
The Company's strategy centers around the continued transition to
traditional commercial banking activities and the resulting expansion of its net
interest margin. In order to realize this objective, the Company's actions
include the following:
. Replacing lower-yielding mortgage loans and MBS with consumer and
commercial loans and leases with higher risk-adjusted returns, shorter
maturities and less sensitivity to interest rate fluctuations.
. Enhancing BVB's deposit base by reducing higher-cost deposits and
expanding lower-cost transaction accounts by emphasizing relationship
banking and capitalizing on cross-selling opportunities with
customers.
. De-emphasizing the less profitable elements of the Company's
activities, including ceasing single-family mortgage loan originations
and reducing BVB's wholesale activities.
. Maintaining the capital of both BVB and the Company at or above the
well-capitalized level, as defined for regulatory purposes, and
returning any excess capital at BVB to the holding company for
redeployment.
. Redeploying the Company's excess capital in businesses intended to
generate assets with higher risk-adjusted returns than those typically
provided by mortgage loans and MBS.
Banking Platform Strategy
The Banking Platform's primary objective is to enhance the value of BVB's
retail branch franchise through internal growth, new and enhanced products and
services, acquisitions, and purchases of deposits. This objective led to the
Company's acquisition of AFEH and its wholly owned subsidiary, EurekaBank, a
federal savings bank, on January 2, 1998. Pursuant to the Merger Agreement, the
21
<PAGE>
Company paid $90 million in cash and $210 million in stock (8,076,923 shares of
the Company's common stock) to America First Financial Fund 1987-A Limited
Partnership, the sole shareholder of AFEH, for a total purchase price of $300
million.
The acquisition of AFEH was accounted for under the purchase method of
accounting. The amount of goodwill recorded was $104 million, which is being
amortized on a straight-line basis over 20 years and which excludes core deposit
intangibles ("CDI") of approximately $12 million, which are being amortized on a
straight-line basis over 10 years. This goodwill amount represents the excess
of the total purchase price over the estimated fair value of net assets
acquired. See Note 2 to the Consolidated Financial Statements, "Merger-Related
Activity," at Item 8. "Financial Statements and Supplementary Data" for further
discussion of the merger including pro forma financial statement disclosures.
The branches, systems and products of EurekaBank and BVB were fully
integrated during 1998 to form the largest independent bank operating
exclusively in the San Francisco Bay Area.
Another key objective of the Banking Platform is growing lower-cost
transaction accounts (e.g., checking, savings and money market accounts) instead
of higher-cost certificates of deposit, as a source of financing for the
Company, including the activities of the Consumer Platform and the Commercial
Platform. Transaction accounts at BVB as a percentage of total retail deposits
increased to 49.8% at December 31, 1998 as compared with 34.6% and 30.3% at
December 31, 1997 and 1996, respectively.
Consistent with its continued focus on transitioning to traditional
commercial banking activities, the Company initiated the process during 1998 to
convert BVB from a savings institution regulated by the OTS to a national bank
regulated by the OCC and to convert the holding company from a savings and loan
holding company regulated by the OTS to a bank holding company regulated by the
FRB. On February 2, 1999, the Company received all necessary approvals to effect
these conversions which were consummated on March 1, 1999. These conversions
culminate the Company's formal transformation to a commercial banking entity.
The new national bank charter provides the Company the ability to continue, as
well as expand, its focus on traditional commercial banking activities.
Consumer Platform Strategy
Motor Vehicle Financing
- -----------------------
The Consumer Platform's strategy is to underwrite and purchase high-
quality, fixed-rate loans and leases secured by new and used motor vehicles. In
executing this strategy, BVAC seeks to identify niche opportunities in the
increasingly competitive motor vehicle finance industry.
One such niche includes motor vehicle loans where the borrower desires a
higher relative loan amount and/or a longer term than is offered by many other
motor vehicle financing sources. In return for the flexibility of the product
it offers, BVAC charges interest rates higher than those typically offered by
traditional sources of motor vehicle financing, such as banks and captive
finance companies, while applying its traditional underwriting criteria, on a
case-by-case basis, to mitigate any potential loan or lease losses. The
Consumer Platform also pursues geographic and product niches in its more
conventional loan and lease financing businesses.
In March 1998, the Company announced agreements with Lendco Financial
Services to purchase motor vehicle operating leases from Lendco. The Company
began purchasing leases from Lendco during April 1998. The agreements related to
this strategic alliance also provide the Company with an option to acquire
Lendco. The Company continues to evaluate the viability of such an acquisition.
22
<PAGE>
Home Equity Loans
- -----------------
On June 10, 1998, the Company announced that it had executed a definitive
agreement to acquire PSB Lending Corp. ("PSBL"), an indirect originator of HLTV
home equity loans. On August 27, 1998, the Company announced that it had
cancelled the proposed acquisition of PSBL, due to the OTS implementing
restrictions on the amount of HLTV home equity loans an insured thrift may own.
These restrictions were such that they would prevent the Company from achieving
its original acquisition-related economic assumptions. The Company does not
anticipate significantly increasing its exposure to HLTV home equity loans
beyond current levels.
Commercial Platform Strategy
The Commercial Platform's strategy is to be a preeminent nationwide
provider of commercial lending and leasing products and services. In December
1997, the Company announced an expansion of the Commercial Platform including
the formation of a new asset-based lending group known as BVFC. Specifically,
the Company expanded the asset-based lending segment of the Commercial Platform
by adding personnel with significant industry experience, relocating the asset-
based lending business to Southern California, one of the top asset-based
lending markets in the country, and adding new and enhanced products to the
asset-based lending segment's product array. This expansion represents a
significant step in achieving the Company's goal of establishing a $250 million
to $300 million asset balance in the Commercial Platform by the end of the year
2001.
In April 1998, the Company entered into a strategic alliance with Signature
Financial Group ("Signature"), a Danville, California-based company specializing
in small-ticket equipment leases nationwide. The Company began purchasing
leases from Signature during the second quarter of 1998. The agreement also
provides the Company with an option to acquire Signature. The Company continues
to evaluate the viability of such an acquisition.
Capital Redeployment Strategies
Stock Repurchase Program
- ------------------------
The Company's outstanding shares of common stock at December 31, 1998 and
1997 were 19,113,637 shares and 12,070,474 shares, respectively. The year-over-
year increase in the number of outstanding shares of common stock was
principally attributable to the issuance of shares in conjunction with the
Company's acquisition of AFEH in January 1998, partially offset by the
repurchase of shares. The weighted-average shares outstanding (including
potential dilutive common shares) used for computing earnings per diluted share
increased to 20,335,000 shares for the year ended December 31, 1998 as compared
with 13,203,000 shares for the year ended December 31, 1997.
During 1995, the Company's Board of Directors authorized the repurchase of
up to 1,200,000 shares of the Company's common stock. This authorization was
subsequently increased in 1996 to a total of 1,600,000 shares. As of December
31, 1996, the Company had completed its share repurchases by repurchasing
1,600,000 shares of its common stock at an average price of $15.99 per share.
In January 1997, the Company's Board of Directors authorized the repurchase
of $25 million in shares of the Company's common stock, and in May 1997, an
additional $25 million was authorized. During 1997, the Company repurchased
$39.8 million in shares representing 1,399,000 shares of its common stock at an
average price of $28.48 per share. In December 1997, the Company's Board of
Directors rescinded the remaining share repurchase authorization. In January
1998, the Company's treasury shares were reissued in conjunction with the
acquisition of AFEH.
23
<PAGE>
In August 1998, the Company's Board of Directors authorized the repurchase
of up to $50 million in shares of the Company's common stock. During 1998, the
Company repurchased $24.1 million in shares representing 1,196,500 shares of its
common stock at an average price of $20.11 per share. At December 31, 1998, the
Company had approximately $25.9 million in remaining authorization available for
future share repurchases. The Company intends to continue share repurchases
prospectively, and to measure acquisition and other strategic and business
opportunities relative to the risk-free returns associated with share
repurchases.
Other Capital Strategies
- ------------------------
On August 28, 1997, the Company issued $100 million in Subordinated Notes
(the "Notes") registered under the Securities Act of 1933, as amended (the
"Securities Act"). The Notes are unsecured obligations of the Company and are
subordinated in right of payment to all existing and future senior indebtedness,
as defined, of the Company. The Notes mature on August 15, 2007, with a call
provision upon a change of control or upon the occurrence of certain other
events, at the option of the Company. The issuance has a stated coupon of 9.125%
and yields 9.225%. The all-in cost of the Notes was 9.62%. A portion of the
proceeds was used to finance the acquisition of AFEH.
On December 21, 1998, the Company issued $90 million in 9.76% Capital
Securities (the "Securities") due December 31, 2028 through Bay View Capital I
(the "Trust"). The Securities, which were sold in a public underwritten
offering, pay quarterly cumulative cash distributions at an annual rate of 9.76%
of the liquidation value of $25 per share. The Securities represent undivided
beneficial interests in the Trust, which was established by the Company for the
purpose of issuing the Securities. The Company owns all of the issued and
outstanding common securities of the Trust. Proceeds of the offering and from
the issuance of common securities were invested by the Trust in 9.76% Junior
Subordinated Deferrable Interest Debentures ("Junior Debentures") due December
31, 2028 issued by the Company with an aggregate principal amount of $92.8
million. The primary asset of the Trust is the Junior Debentures. The
obligations of the Trust with respect to the Securities are fully and
unconditionally guaranteed by the Company to the extent provided in the
Guarantee Agreement with respect to the Securities. The Company may use $50
million of the offering proceeds to repay its Senior Debentures upon their
maturity in June 1999 and anticipates using the balance for general corporate
purposes. The all-in cost of the Securities was 9.95%. The Securities have the
added benefit of qualifying as Tier 1 capital for regulatory purposes.
The Securities were issued pursuant to a Universal Shelf Registration
Statement ("Shelf Registration") filed by the Company during the third quarter
of 1998 with the Securities and Exchange Commission. The Shelf Registration
provides for the issuance of up to $450 million in debt and equity securities,
including, but not limited to, senior debt, subordinated debt, capital
securities, and common stock. The Shelf Registration was filed by the Company
to facilitate the timely issuance of any of the aforementioned securities
subject to market conditions and the needs of the Company as it executes its
business strategies, including the consummation of accretive acquisition
opportunities. The Shelf Registration, combined with $50 million registered in
a previous filing, enables the Company to issue up to $500 million in debt and
equity securities, $90 million of which was utilized in connection with the
issuance of the Securities.
New York Stock Exchange
During 1998, the Company initiated the process to change the listing of its
common stock and Capital Securities from the Nasdaq National Market to the New
York Stock Exchange. The Company also initiated the process to begin trading
its Subordinated Notes on the NYSE. In addition to an expected reduction of
volatility in the Company's securities, the move to the NYSE should save
investors money
24
<PAGE>
through better execution resulting in lower transaction costs. The Company's
common stock, Capital Securities (issued by the Trust) and Subordinated Notes
commenced trading on the NYSE effective April 1, 1999.
Results of Operations
Consolidated net income was $22.7 million, or $1.12 per diluted share, for
the year ended December 31, 1998 as compared with $14.0 million, or $1.06 per
diluted share, for 1997 and $11.0 million, or $0.79 per diluted share, for 1996.
The Company's results reflect the acquisitions of AFEH effective January 2,
1998, Ultra effective October 1, 1997, BVCFG effective April 1, 1997, and BVC
effective June 1, 1996. In addition to acquisitions, the increases in the
Company's earnings were also a result of the continued expansion of net interest
margin and operating efficiencies realized.
Net Interest Income and Net Interest Margin
Net interest income represents the difference between interest earned on
loans, leases and investments and interest paid on funding sources, including
deposits and borrowings, and is the principal source of revenue for the Company.
Net interest margin is the amount of net interest income expressed as a
percentage of average interest-earning assets.
Net interest income was $154.6 million for the year ended December 31, 1998
as compared with $87.3 million for 1997 and $81.0 million for 1996. Net interest
margin was 3.03% for the year ended December 31, 1998 as compared with 2.86% for
1997 and 2.57% for 1996. The increases in net interest income and net interest
margin were attributable to the Company's acquisitions, the continuing shift
from traditional mortgage-based assets to consumer and commercial assets with
higher risk-adjusted yields and a decline in the Company's funding costs,
partially offset by the impact of AFEH's lower-yielding portfolio of mortgage
loans.
As each of the Company's three platforms are funded by the deposits and
borrowings of BVB and the debt of the Company, the cost of funds for each
platform is deemed equal to the consolidated Company's cost of funds in the
computation of net interest income and net interest margin by platform.
The following table illustrates net interest income and net interest
margin, by platform, for the years indicated:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- -----------------------------
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 $106,363 2.50% $67,456 2.41% $70,331 2.36%
Consumer Platform /(1) (2)/ 38,442 5.02 12,310 5.67 10,651 5.80
Commercial Platform /(2)/ 9,796 12.94 7,570 19.05 - -
-------- ----- ------- ------ ------- -----
Total $154,601 3.03% $87,336 2.86% $80,982 2.57%
======== ===== ======= ====== ======= =====
</TABLE>
/(1)/ Net interest income for the Consumer Platform does not include any
funding costs associated with the Company's auto leasing activities, as
the corresponding net auto leasing income, as defined, and average
balances are excluded from the computation of net interest income in
accordance with generally accepted accounting principles ("GAAP"). See
Note 23 to the Consolidated Financial Statements, "Segment and Related
25
<PAGE>
Information," at Item 8. "Financial Statements and Supplementary Data"
for net interest income for the Consumer Platform including the funding
costs associated with the Company's auto leasing activities.
/(2)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was
created with the acquisition of BVCFG in April 1997.
The following table illustrates interest-earning assets, excluding the
Company's auto-related operating leased assets, by platform, as of the dates
indicated:
<TABLE>
<CAPTION>
-------------------------------
At December 31,
-------------------------------
1998 1997
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Banking Platform $3,946,337 $2,714,159
Consumer Platform /(1)/ 1,079,612 371,158
Commercial Platform /(1)/ 113,210 54,120
---------- ----------
Total $5,139,159 $3,139,437
========== ==========
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was created
with the acquisition of BVCFG in April 1997.
The following table illustrates average interest-earning assets, excluding
the Company's auto-related operating leased assets, by platform, for the years
indicated:
<TABLE>
<CAPTION>
-----------------------------------------------
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Banking Platform $4,261,240 $2,797,970 $2,991,097
Consumer Platform /(1)/ 761,144 217,011 176,693
Commercial Platform /(1)/ 75,629 39,739 -
---------- ---------- ----------
Total $5,098,013 $3,054,720 $3,167,790
========== ========== ==========
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was created
with the acquisition of BVCFG in April 1997.
Banking Platform
- ----------------
The Banking Platform's net interest margin was 2.50% for the year ended
December 31, 1998 as compared with 2.41% for 1997 and 2.36% for 1996. The
increases in net interest margin over prior years were primarily a result of a
decline in the Company's funding costs. The Company's funding costs declined
due to an increase in lower cost transaction accounts, deposit pricing
strategies, the interest rate environment, and the run-off of jumbo and brokered
certificates of deposit. The improvement in net interest margin for 1998, as
compared with 1997, was partially offset by a decline in asset yields. The
decline in asset yields was a result of various factors, including the impact of
EurekaBank's lower-yielding portfolio of mortgage loans acquired by the Company
effective January 2, 1998, $200 million of lower-yielding mortgage loans
acquired by the Company in June 1998, primarily to assist BVB in meeting its CRA
requirements, and continued prepayments of higher-yielding mortgage loans and
MBS.
26
<PAGE>
Consumer Platform
- -----------------
The Consumer Platform's net interest margin was 5.02% for the year ended
December 31, 1998 as compared with 5.67% for 1997 and 5.80% for 1996. The
decreases in net interest margin were primarily due to lower asset yields in the
Consumer Platform's motor vehicle financing activities. The impact of these
lower asset yields was partially offset by a decline in the Company's funding
costs and the purchases of higher-yielding HLTV home equity loans beginning in
August 1997. The lower asset yields in the Consumer Platform's motor vehicle
financing activities were attributable to the effect of competition, tighter
underwriting standards and continued purchases of high-quality recreational
vehicle loans with lower yields relative to auto loans.
Commercial Platform
- -------------------
The Commercial Platform's net interest margin was 12.94% for the year ended
December 31, 1998 as compared with 19.05% for 1997. This platform was created
as a result of the Company's acquisition of BVCFG effective April 1, 1997. The
decrease in net interest margin was principally a result of expansion-related
growth during 1998 in the platform's asset-based loans, including asset-based
participation loans, and purchases of equipment leases beginning in April 1998,
both of which generate lower risk-adjusted yields relative to the Commercial
Platform's factoring activities, partially offset by a decline in the Company's
funding costs.
Average Balance Sheet
- ---------------------
The following table illustrates certain information relating to the
Company's consolidated statements of financial condition and reflects the
average yields on interest-earning assets and average rates on interest-bearing
liabilities for the years indicated. Such yields and rates are derived by
dividing interest income or interest expense by the average balances of
interest-earning assets or interest-bearing liabilities, respectively, for the
years indicated. Average balances of interest-earning assets and interest-
bearing liabilities were calculated by averaging the relevant month-end amounts
for the respective years.
27
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------------
1998 1997
----------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ---------- ------------ ------------ ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
- ------
Interest-earning assets:
Loans $4,174,976 $347,086 8.32% $2,369,200 $197,898 8.35%
Mortgage-backed securities /(1)/ 743,545 48,225 6.50 531,493 34,317 6.46
Investments /(1)/ 179,492 11,052 6.17 154,027 10,029 6.51
---------- -------- ----- ---------- -------- -----
Total interest-earning assets 5,098,013 406,363 7.98 3,054,720 242,244 7.93
-------- ----- -------- -----
Other assets 394,623 76,674
---------- ----------
Total assets $5,492,636 $3,131,394
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Deposits $3,375,777 149,656 4.44 1,646,683 76,484 4.64
Borrowings /(2)/ 1,663,972 102,106 6.15 1,242,442 78,424 6.31
---------- -------- ----- ---------- -------- -----
Total interest-bearing liabilities 5,039,749 251,762 5.00 2,889,125 154,908 5.36
-------- ----- -------- -----
Other liabilities 66,062 50,834
---------- ----------
Total liabilities 5,105,811 2,939,959
Stockholders' equity 386,825 191,435
---------- ----------
Total liabilities and stockholders'
equity $5,492,636 $3,131,394
========== ==========
Net interest income/net interest
spread $154,601 2.98 $ 87,336 2.57%
======== ===== ======== =====
Net interest-earning assets $ 58,264 $ 165,595
========== ==========
Net interest margin /(3)/ 3.03% 2.86%
===== =====
<CAPTION>
-----------------------------------------
-----------------------------------------
1996
-----------------------------------------
Average Average
Balance Interest Yield/Rate
------------ ---------- ------------
<S> <C> <C> <C>
Assets
- ------
Interest-earning assets:
Loans $2,387,063 $192,443 8.12%
Mortgage-backed securities /(1)/ 654,671 42,081 6.43
Investments /(1)/ 126,056 7,231 5.74
---------- -------- -----
Total interest-earning assets 3,167,790 241,755 7.67
-------- -----
Other assets 31,761
----------
Total assets $3,199,551
==========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Deposits $1,971,128 100,225 5.08
Borrowings /(2)/ 979,069 60,548 6.18
---------- -------- -----
Total interest-bearing liabilities 2,950,197 160,773 5.45
-------- -----
Other liabilities 45,677
----------
Total liabilities 2,995,874
Stockholders' equity 203,677
----------
Total liabilities and stockholders'
equity $3,199,551
==========
Net interest income/net interest
spread $ 80,982 2.22%
======== =====
Net interest-earning assets $ 217,593
==========
Net interest margin /(3)/ 2.57%
=====
</TABLE>
/(1)/ Average balances and yields for securities classified as available-for-
sale are based on historical amortized cost.
/(2)/ Interest expense for borrowings includes interest expense on interest
rate swaps of $2.4 million, $2.8 million and $2.6 million for the years
ended December 31, 1998, 1997 and 1996, respectively. Interest expense
for borrowings excludes dividend expense on the Company's Capital
Securities.
/(3)/ Net interest income divided by average interest-earning assets.
28
<PAGE>
Interest Income
Loans and Leases
- ----------------
Interest income on loans and leases was $347.1 million for the year ended
December 31, 1998 as compared with $197.9 million for 1997 and $192.4 million
for 1996. The average yield on loans and leases was 8.32% for the year ended
December 31, 1998 as compared with 8.35% for 1997 and 8.12% in 1996. The
increase in interest income on loans and leases for 1998, as compared with 1997,
was largely a result of the acquisitions of AFEH, Ultra and BVCFG, combined with
internally generated platform loan growth. The increase in interest income on
loans and leases for 1997, as compared with 1996, was due to the acquisition of
BVCFG and its portfolio of loans with higher risk-adjusted yields, partially
offset by the effect of the securitization and sale of a $253 million motor
vehicle loan portfolio in January 1997.
The following table illustrates interest income on loans and leases, by
platform, for the years indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Amount Yield Amount Yield Amount Yield
---------- --------- ---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform $257,762 7.73% $165,846 7.83% $172,370 7.88%
Consumer Platform /(1)/ 75,798 9.96 22,437 10.64 20,073 10.91
Commercial Platform /(1)/ 13,526 17.88 9,615 24.20 - -
-------- ----- -------- ----- -------- -----
Total $347,086 8.32% $197,898 8.35% $192,443 8.12%
======== ===== ======== ===== ======== =====
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was
created with the acquisition of BVCFG in April 1997.
Banking Platform
The Banking Platform's average loan yield was 7.73% for the year ended
December 31, 1998 as compared with 7.83% for 1997 and 7.88% for 1996. The
decrease in the platform's average loan yield for 1998, as compared with 1997,
was due to various factors, including the impact of EurekaBank's lower-yielding
portfolio of mortgage loans, acquired effective January 2, 1998, combined with
the purchase of $200 million of lower-yielding mortgage loans in June 1998,
primarily to assist BVB in meeting its CRA requirements, and the continued
prepayments of higher-yielding mortgage loans. The decrease in the platform's
average loan yield for 1997, as compared with 1996, was primarily due to the
impact of prepayments.
Consumer Platform
The Consumer Platform's average loan yield was 9.96% for the year ended
December 31, 1998 as compared with 10.64% for 1997 and 10.91% for 1996. The
decreases in the platform's average loan yields were due to lower yields on
motor vehicle loan originations and purchases, partially offset by purchases,
beginning in August 1997, of higher-yielding HLTV home equity loans. The lower
yields on motor vehicle loan originations and purchases were attributable to the
effect of competition, tighter underwriting standards and the continued
purchases of high-quality recreational vehicle loans with lower yields relative
to auto loans. The decrease in the platform's average loan yield for 1997, as
compared
29
<PAGE>
with 1996, was also due to the securitization and sale of the $253 million motor
vehicle loan portfolio in January 1997.
Commercial Platform
The Commercial Platform's average loan yield was 17.88% for the year ended
December 31, 1998 as compared with 24.20% for 1997. The decrease in the
platform's average loan yield was largely the result of growth in the platform's
asset-based lending segment, including asset-based participation loans, and
equipment leases which generate lower risk-adjusted yields relative to the
platform's factoring segment. This platform was created as a result of the
Company's acquisition of BVCFG effective April 1997.
Mortgage-Backed Securities
- --------------------------
Interest income on the Company's MBS was $48.2 million for the year ended
December 31, 1998 as compared with $34.3 million for 1997 and $42.1 million for
1996. The average yield on MBS was 6.50% for the year ended December 31, 1998
as compared with 6.46% for 1997 and 6.43% for 1996. The increases in interest
income and yield on MBS for 1998, as compared with 1997, were primarily
attributable to the acquisition of EurekaBank's MBS portfolio, which reflected
yields higher than BVB's pre-AFEH acquisition MBS portfolio, combined with
purchases of higher-yielding CMOs during 1998, partially offset by prepayments
of higher-yielding MBS. The decrease in interest income on MBS for 1997, as
compared with 1996, was due to lower average balances resulting from sales and
prepayments during 1996 and 1997.
Investment Securities
- ---------------------
Interest and dividend income on the Company's investment securities was
$11.1 million for the year ended December 31, 1998 as compared with $10.0
million for 1997 and $7.2 million for 1996. The average yield on investment
securities was 6.17% for the year ended December 31, 1998 as compared with 6.51%
for 1997 and 5.74% for 1996. The increase in interest and dividend income on
investment securities for 1998, as compared with 1997, was primarily due to
higher average short-term investment balances related to the Company's
acquisition of AFEH, partially offset by lower yields due to the declining
interest rate environment. The increase in interest and dividend income on
investment securities for 1997, as compared with 1996, was primarily due to the
impact of higher average balances and yields.
Interest Expense
Deposits
- --------
Interest expense on the Company's deposits was $149.7 million for the year
ended December 31, 1998 as compared with $76.5 million for 1997 and $100.2
million for 1996. The average cost of deposits was 4.44% for the year ended
December 31, 1998 as compared with 4.64% for 1997 and 5.08% in 1996. The
increase in interest expense on deposits for 1998, as compared with 1997, was
due to the acquisition of EurekaBank's deposit portfolio, partially offset by a
decrease in deposit costs due to an increase in lower-cost transaction accounts,
deposit pricing strategies, the declining interest rate environment during the
year, and the run-off of higher cost jumbo and brokered certificates of
deposits. The increase in transaction accounts and run-off of higher cost jumbo
and brokered certificates of deposits were consistent with the Banking
Platform's strategic objective to grow lower-cost transaction accounts, instead
of higher-cost certificates of deposit, as a source of funding for the Company.
The decrease in interest expense on deposits for 1997, as compared with 1996,
was a result of a decrease in deposit costs, lower average certificate of
deposit balances and the redemption of the higher-cost component of BVC
30
<PAGE>
deposits acquired in June 1996 (approximately $267 million) at year-end 1996.
The decreases in deposit costs were primarily due to favorable repricing of
certificates of deposit and an increase in lower-cost transaction accounts as a
percentage of total deposits.
The cost of the Company's deposits for December 1998 was 4.20%. This cost was
46 basis points below COFI. The Company's cost of deposits was 24 basis points
below COFI at December 31, 1997 and 1996. Transaction accounts as a percentage
of total retail deposits increased to 49.8% at December 31, 1998 as compared
with 34.6% and 30.3% at December 31, 1997 and 1996, respectively.
The following table illustrates the Company's cost of deposits compared to
COFI for the periods indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Months Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------ -------------------
<S> <C> <C> <C>
Cost of deposits 4.20% 4.71% 4.60%
COFI 4.66 4.95 4.84
-------------------- ------------------ -------------------
Spread below COFI (0.46%) (0.24%) (0.24%)
==================== ================== ===================
</TABLE>
While the spread below COFI for the Company's deposits was 46 basis points for
December 1998, the spread for the original Bay View Bank branches, on a stand-
alone basis, was 69 basis points below COFI for December 1998. The cost of
deposits for the original EurekaBank branches, on a stand-alone basis, was 38
basis points below COFI for December 1998, reflecting EurekaBank's higher
deposit pricing structure. Since the acquisition of AFEH, effective January 2,
1998, the Company has reduced the cost of the EurekaBank deposits, along with
the cost of the Bay View Bank deposits, consistent with the Company's overall
pricing strategies. The Company expects that the cost of deposits for the
original EurekaBank branches will continue to decrease to levels consistent with
the original Bay View Bank branches.
The following table illustrates the cost of deposits versus COFI for the
original Bay View Bank branches and EurekaBank branches for the periods
indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Months Ended
-----------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cost of deposits - BVB 3.97% 4.12% 4.22% 4.41%
Cost of deposits - EurekaBank 4.28% 4.46% 4.56% 4.66%
COFI 4.66% 4.88% 4.88% 4.92%
--------------- --------------- --------------- ---------------
Spread below COFI - BVB (0.69%) (0.76%) (0.66 ) (0.51%)
=============== =============== =============== ===============
Spread below COFI - EurekaBank (0.38%) (0.42%) (0.32%) (0.26%)
=============== =============== =============== ===============
</TABLE>
Borrowings
- ----------
Interest expense on the Company's borrowings, excluding the 9.76% Capital
Securities issued in December 1998, was $102.1 million for the year ended
December 31, 1998 as compared with $78.4 million for 1997 and $60.5 million for
1996.
The increase in interest expense on borrowings for 1998, as compared with
1997, was primarily due to higher average balances resulting from funding
strategies employed by the Company subsequent to its acquisition of AFEH
effective January 2, 1998, combined with a full year of interest expense on $100
31
<PAGE>
million in Subordinated Notes issued in August 1997 (9.62% all-in cost),
partially offset by a decrease in borrowing costs primarily due to lower market
interest rates on FHLB advances due to the declining interest rate environment.
The increase in interest expense on borrowings for 1997, as compared with 1996,
was due to higher average balances arising from a decrease in average deposits
combined with the Subordinated Notes issued in August 1997, a full year of
interest expense on $50 million in Senior Debentures issued in May 1996 (8.91%
all-in cost) and higher average borrowing costs. While average deposit balances
decreased $325 million from 1996 to 1997, for reasons previously discussed,
total average assets decreased only $68 million, which resulted in higher
average borrowing balances for funding purposes.
The following table illustrates the changes in net interest income due to
changes in the rate and volume of the Company's interest-earning assets and
interest-bearing liabilities. The variances include the effects of the Company's
acquisitions. Changes in rate and volume which cannot be segregated (i.e.,
changes in weighted-average interest rate multiplied by average portfolio
balance) have been allocated proportionately to the change in rate and the
change in volume.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year Ended December 31, 1998 vs. 1997
---------------------------------------------------------------------------
Rate Volume Total
Variance Variance Variance
---------------------- ---------------------- ----------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Loans and leases $ (707) $ 149,895 $ 149,188
Mortgage-backed securities 213 13,695 13,908
Investments (472) 1,495 1,023
---------------------- ---------------------- ----------------------
(966) 165,085 164,119
---------------------- ---------------------- ----------------------
Interest expense:
Deposits (2,324) 75,496 73,172
Borrowings (1,913) 25,595 23,682
---------------------- ---------------------- ----------------------
(4,237) 101,091 96,854
---------------------- ---------------------- ----------------------
Change in net interest income $ 3,271 $ 63,994 $ 67,265
====================== ====================== ======================
---------------------------------------------------------------------------
Year Ended December 31, 1997 vs. 1996
---------------------------------------------------------------------------
(Dollars in thousands)
Interest income:
Loans and leases $ 7,380 $ (1,925) $ 5,455
Mortgage-backed securities 190 (7,954) (7,764)
Investments 1,055 1,743 2,798
---------------------- ---------------------- ----------------------
8,625 (8,136) 489
---------------------- ---------------------- ----------------------
Interest expense:
Deposits (8,180) (15,561) (23,741)
Borrowings 1,276 16,600 17,876
---------------------- ---------------------- ----------------------
(6,904) 1,039 (5,865)
---------------------- ---------------------- ----------------------
Change in net interest income $ 15,529 $ (9,175) $ 6,354
====================== ====================== ======================
</TABLE>
Provision For Losses on Loans and Leases
The provision for losses on loans and leases was $9.1 million for the year
ended December 31, 1998 as compared with $2.0 million for 1997 and $1.9 million
for 1996. The increases in the provision for losses on loans and leases were a
result of the Company's acquisitions combined with internally generated loan and
lease growth, principally in consumer and commercial loans and leases. The
provision levels reflect the composition and quality of the Company's loan and
lease portfolio, including
32
<PAGE>
the continued transition to consumer and commercial assets with higher risk-
adjusted yields relative to traditional mortgage assets, but also higher
corresponding credit losses. See "Balance Sheet Analysis -Allowance for Loan and
Lease Losses" for further discussion.
Noninterest Income
Noninterest income was $31.1 million for the year ended December 31, 1998 as
compared with $12.8 million for 1997 and $8.6 million for 1996. Noninterest
income included net gains on sales of loans and securities of $1.1 million and
$925,000 in 1998 and 1997, respectively. Noninterest income for 1996 included
$1.5 million in net losses on sales of loans and securities.
The increase in noninterest income for 1998, as compared with 1997, was
attributable to various factors, including higher account fees and investment
product sales commissions related to the acquisition of AFEH effective January
2, 1998, higher loan prepayment fees and higher leasing income from the
Company's auto leasing activities which began in April 1998. As previously
mentioned, noninterest income for the year ended December 31, 1998 included
approximately $1.1 million in net gains on sales of securities. This $1.1
million reflected approximately $2.0 million in gains on sales of MBS and a
$940,000 loss during the third quarter of 1998 on the settlement of forward sale
contracts relating to MBS. These forward sale contracts were initially designed
to hedge a portfolio of mortgage loans. With the market and interest rate
volatility during 1998, the correlation between the hedge and the underlying
portfolio of loans was disrupted triggering the loss. The forward sale
contracts were settled during the third quarter of 1998. The Company's only
remaining derivative contracts in effect at December 31, 1998 were interest rate
exchange agreements.
The increase in noninterest income for 1997, as compared with 1996, was
partially a result of an increase in loan prepayment fees and fees attributable
to commercial finance assets due to the acquisition of BVCFG effective April 1,
1997. Also, in January 1997, BVC securitized and sold $253 million of motor
vehicle loans and recognized a gain of $925,000 representing the improvement in
the fair value of the loans as a result of changes in market interest rates
between the acquisition date and the sale date.
During 1996, BVB sold $57.6 million in MBS and recognized a loss of $507,000.
Also, in conjunction with the anticipated securitization of BVC's auto loan
portfolio, BVC entered into a short sale of Treasury securities during the
fourth quarter of 1996 to hedge the valuations from movements in interest rates.
A loss of $293,000 was recorded in the fourth quarter of 1996 associated with
this short sale of Treasury securities.
Noninterest Expense
General and Administrative
- --------------------------
General and administrative expenses were $113.6 million for the year ended
December 31, 1998 as compared with $71.9 million for 1997 and $59.0 million for
1996. The increases in general and administrative expenses were largely a
result of the Company's growth, including its acquisitions of AFEH, Ultra,
BVCFG, and BVC combined with inflationary pressures, including annual salary
increases.
General and administrative expenses, by platform, include an allocation of
certain indirect corporate expenses. The Company refined its cost allocation
methodology during 1998 which resulted in additional indirect general and
administrative expenses being allocated from the Banking Platform to the
Consumer and Commercial Platforms. The Company continues to refine its cost
allocation methodology and anticipates further refinements during future
periods.
33
<PAGE>
The following table illustrates general and administrative expenses, by
platform, for the years indicated:
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Banking Platform $ 86,410 $ 56,796 $ 52,607
Consumer Platform /(1)/ 18,305 8,706 6,348
Commercial Platform /(1)/ 8,852 6,411 -
-------------- -------------- --------------
Total $ 113,567 $ 71,913 $ 58,955
============== ============== ==============
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997 and motor vehicle leases in April
1998. The Commercial Platform was created with the acquisition of BVCFG in
April 1997.
The increases in the Banking Platform's general and administrative
expenses were largely attributable to the acquisition and integration of AFEH,
continued growth in the platform, inflationary pressures, including annual
salary increases, and special mention items totaling $9.6 million, $8.0 million
and $6.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively, as discussed elsewhere herein. The increases in the Consumer
Platform's general and administrative expenses were attributable to the
continued growth in the platform, including the acquisitions of BVC in June 1996
and Ultra in October 1997, the Company's auto leasing activities which began in
April 1998, additional allocations of certain indirect general and
administrative expenses, and inflationary pressures. The increase in the
Commercial Platform's general and administrative expenses were largely the
result of the platform being created with the acquisition of BVCFG in April 1997
combined with continued growth in the platform, including the previously
discussed expansion of the asset-based lending segment of the platform,
additional allocations of certain indirect general and administrative expenses,
and inflationary pressures.
As discussed above, general and administrative expenses include certain
special mention items. These special mention items generally include expenses
recognized during the year that we believe are significant and/or unusual in
nature and therefore, useful to you in evaluating our performance and trends.
These expenses may or may not be nonrecurring in nature.
General and administrative expenses included special mention items
totaling $10.4 million for the year ended December 31, 1998 as compared with
$8.8 million for 1997 and $6.1 million for 1996. The following table illustrates
general and administrative expenses excluding special mention items for the
years indicated:
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
-------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
General and administrative expenses $ 113,567 $ 71,913 $ 58,955
Special mention items (10,435) (8,795) (6,134)
-------------- ------------- ------------
General and administrative expenses
excluding special mention items $ 103,132 $ 63,118 $ 52,821
============== ============= ============
</TABLE>
34
<PAGE>
The following table illustrates general and administrative expenses
excluding special mention items, by platform, for the years indicated:
<TABLE>
<CAPTION>
------------------------------------------------------
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
----------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Banking Platform $ 76,859 $ 48,843 $ 46,473
Consumer Platform /(1)/ 17,421 8,752 6,348
Commercial Platform /(1)/ 8,852 5,523 -
----------------- -------------- ---------------
Total $ 103,132 $ 63,118 $ 52,821
================= ============== ===============
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997 and motor vehicle leases in April
1998. The Commercial Platform was created with the acquisition of BVCFG
in April 1997.
The increases in the Banking Platform's general and administrative
expenses excluding special mention items were largely attributable to the
acquisition of AFEH effective January 2, 1998, continued growth in the platform
and inflationary pressures, including annual salary increases. The increases in
the Consumer Platform's general and administrative expenses excluding special
mention items were attributable to the continued growth in the platform,
including the acquisitions of BVC in June 1996 and Ultra in October 1997, the
Company's auto leasing activities which began in April 1998, additional
allocations of certain indirect general and administrative expenses, and
inflationary pressures. The increase in the Commercial Platform's general and
administrative expenses excluding special mention items were largely the result
of the platform being created with the acquisition of BVCFG in April 1997
combined with continued growth in the platform, including the previously
discussed expansion of the asset-based lending segment of the platform,
additional allocations of certain indirect general and administrative expenses,
and inflationary pressures.
The following table illustrates general and administrative expenses
excluding special mention items as a percentage of average assets (including
securitized assets), by platform, for the years indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Banking Platform 1.51% 1.71% 1.56%
Consumer Platform /(1)/ 1.91% 2.20% 3.11%
Commercial Platform /(1)/ 9.14% 10.05% -
-------------------- ------------------- --------------------
Total 1.88% 1.90% 1.65%
==================== =================== ====================
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997 and motor vehicle leases in April
1998. The Commercial Platform was created with the acquisition of BVCFG
in April 1997.
The lower expense ratios for each platform in 1998, as compared with
1997, were a result of asset growth for all platforms, including the Company's
acquisition of AFEH, and the corresponding efficiencies realized. The increase
in the ratio for the Banking Platform for 1997, as compared with 1996, was due
to higher general and administrative expenses related to the Company's growth
combined with inflationary pressures and a slight decrease in average assets.
The decrease in the ratio for the
35
<PAGE>
Consumer Platform for 1997, as compared with 1996, was due to an increase in
average assets related to the growth of the platform.
Another measure that management uses to monitor the Company's level of
general and administrative expenses is the efficiency ratio. The efficiency
ratio is calculated by dividing the amount of general and administrative
expenses excluding special mention items by operating revenues, defined as net
interest income, as adjusted to include the expense associated with the Capital
Securities, loan fees and charges, the excess of the Company's 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 excluding special mention items required to
generate $1 of operating revenue.
The following table illustrates the Company's efficiency ratio for the
years indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Efficiency ratio 58.0% 61.8% 58.0%
==================== =================== ===================
</TABLE>
The improvement in the efficiency ratio for 1998, as compared with 1997,
was largely due to efficiencies resulting from the Company's acquisition of
AFEH. The increase in the efficiency ratio for 1997, as compared with 1996, was
due to higher levels of general and administrative expenses excluding special
mention items associated with inflationary pressures, the Company's acquisitions
and expansion within the Consumer and Commercial Platforms.
AFEH Cost Savings
- -----------------
The Company had previously estimated that it would realize approximately
$21 million in annual cost savings related to its acquisition of AFEH. This
amount represented 46% of EurekaBank's approximately $47 million in annualized
general and administrative expenses. The Company also estimated that it would
realize approximately 75% of this cost savings in 1998 and 100% in 1999.
The following table illustrates the cost savings realized in 1998:
<TABLE>
<CAPTION>
--------------------
(Dollars in
thousands)
--------------------
<S> <C>
AFEH's annualized 1997 G&A expenses (based on 3/rd/ quarter of 1997) /(1)/ $46,692
Banking Platform's annualized 1997 G&A expenses excluding special mention
items (based on 4/th/ quarter of 1997) 47,200
--------------------
Combined annualized 1997 G&A expenses excluding special mention items 93,892
Banking Platform's 1998 G&A expenses excluding special mention items 76,859
--------------------
1998 cost savings $17,033
====================
Percentage of projected $21 million annual cost savings 81%
=====================
</TABLE>
/(1)/ The 3rd quarter of 1997 was utilized for the purpose of this analysis as
it was more reflective of an annualized rate due to AFEH winding down its
operations during the fourth quarter of 1997.
Based on the above computation, the Company appears to be on track
towards achieving the $21 million in projected annual cost savings, in spite of
normal inflationary pressures, including annual salary increases.
36
<PAGE>
Capital Securities
- ------------------
On December 21, 1998, the Company issued $90 million in Capital Securities
through Bay View Capital I. The Securities, which were sold in an underwritten
public offering, pay quarterly cumulative cash distributions at an annual rate
of 9.76% of the liquidation value of $25 per share. Dividend expense on the
Securities was $244,000 for the year ended December 31, 1998, which represents
accrued dividends from the issuance date through the end of the year.
Leasing Expense
- ---------------
Leasing expense represents expense related to the Company's auto leasing
activities, which began in April 1998. As the leases are accounted for as
operating leases, the corresponding assets are capitalized and depreciated down
to their estimated residual values over their lease terms. The depreciation
expense is included in leasing expense, along with both the amortization of
capitalized initial direct lease costs and the provision for estimated losses
incurred upon the final disposition of leased vehicles. Leasing expenses were
$7.7 million for the year ended December 31, 1998.
SAIF Recapitalization Assessment
- --------------------------------
Federal legislation to recapitalize and fully fund the Savings Association
Insurance Fund ("SAIF") was signed into law on September 30, 1996. As a result
of the legislation, BVB, whose deposits are insured by the SAIF, was required to
pay a one-time special assessment of $11.7 million pre-tax ($6.7 million after-
tax, or $0.485 per share) in the third quarter of 1996. The legislation had no
direct effect on BVC, as its deposits were insured under the Bank Insurance
Fund.
Pursuant to this legislation, premiums on SAIF-insured deposits for BVB were
subsequently reduced which translated into lower annual deposit insurance costs.
Real Estate Owned
- -----------------
Income from operations of real estate owned and the Company's net recovery of
losses on real estate owned were a combined $240,000 for the year ended December
31, 1998 as compared with $1.1 million for 1997 and $4.9 million for 1996. The
decreases were primarily due to higher real estate owned balances in 1997 and
1996, resulting in higher gains on sales and income from operations.
Amortization of Intangible Assets
- ---------------------------------
Amortization of intangible assets was $11.4 million for the year ended
December 31, 1998 as compared with $4.1 million for 1997 and $2.6 million for
1996. The increases in amortization of intangible assets were due to the
additional amortization of goodwill and core deposit intangibles generated in
conjunction with the Company's aforementioned acquisitions, all of which were
accounted for under the purchase method of accounting.
Income Taxes
Income tax expense was $21.2 million for the year ended December 31, 1998 as
compared with $9.2 million for 1997 and $8.3 million for 1996. The Company's
effective income tax rate was 48.3% for 1998 as compared with 39.7% for 1997 and
43.0% for 1996. The increase in the effective income tax rate for 1998, as
compared with 1997, was primarily due to an increase in nondeductible goodwill
amortization. The decrease in the effective income tax rate for 1997, as
compared with 1996, was
37
<PAGE>
primarily due to benefits resulting from enterprise zone interest exclusions as
well as favorable adjustments recognized upon finalization of various tax
audits.
Special Mention Items
The Company's net income for the years indicated below included certain items
which deserve special mention. These special mention items generally include
income and expense items recognized during the year 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.
1998
- ----
The impact of special mention items during the year ended December 31, 1998
was a net expense of $10.4 million ($6.1 million after-tax, or $0.30 per diluted
share).
. $7.5 million related to the acquisition and integration of AFEH and related
systems, operations and reengineering projects.
. $1.35 million related to the cancellation of the Company's proposed
acquisition of PSBL. This amount included investment banking, legal and
accounting fees incurred by the Company, as well as certain expense
reimbursements to PSBL.
. $600,000 representing a legal settlement related to the Company's decision
in the second quarter of 1997 to terminate a data processing contract. In
1996, the Company entered into a contract to convert to a new third-party
data processing service provider. During the second quarter of 1997,
however, the Company announced its impending acquisition of AFEH and
subsequently decided to remain with its existing service provider, the then
current data processing service provider for both BVB and EurekaBank.
Accordingly, the Company terminated this new data processing contract.
. $900,000 in other expenses, including approximately $650,000 in third-party
Year 2000 compliance-related expenses. See "Year 2000" for further
discussion.
1997
- ----
The impact of special mention items during the year ended December 31, 1997
was a net expense of $9.6 million ($5.6 million after-tax, or $0.42 per diluted
share).
. $7.7 million in pre-merger charges related to the acquisition of AFEH
including:
. $6.2 million in related systems, operations and reengineering
projects.
. $1.1 million payment to the Company's Senior Debenture holders. The
Company's $50 million in Senior Debentures, issued in May 1996,
contain certain covenants, including restrictions on stock
repurchases. In conjunction with the proposed acquisition of AFEH
announced in May 1997, the Company negotiated covenant modifications
with the Company's Senior Debenture holders to allow the repurchase of
additional shares of stock.
. $450,000 write-off of deferred expenses related to a shelf
registration statement on Form S-3 for $500 million of automobile
receivable-backed securities filed with the Securities and Exchange
Commission in November 1996. With the Company's decision in 1997 to
cease the securitization of motor vehicle loans, the Company wrote-off
the remaining unamortized expenses.
. $1.2 million in charges related to the expansion and reorganization of
BVCFG and BVC.
. $1.0 million in incremental costs related to the Company's issuance of $100
million in Subordinated Notes in August 1997. The debt proceeds were
intended for corporate funding
38
<PAGE>
purposes, including funding for the AFEH acquisition. The incremental costs
represent the effective all-in cost of the debt in excess of the estimated
reinvestment rate of the debt proceeds for the period prior to the
consummation of the AFEH acquisition.
. $800,000 expense accrual for long-term incentive plan awards due to an
increase in the Company's stock price.
. $415,000 recovery related to a real estate joint venture previously
written-off.
. $650,000 benefit associated with the decision to remain with Fiserv (the
current data processor for BVB and EurekaBank) and the corresponding
reversal of a 1996 accrual for the aforementioned termination of BVB's data
processing contract.
1996
- ----
The impact of special mention items for the year ended December 31, 1996 was a
net expense of $11.8 million ($6.8 million after-tax, or $0.49 per diluted
share).
. $11.7 million SAIF recapitalization assessment.
. $4.8 million gain from the sale of, and income received from, certain real
estate owned properties.
. $2.4 million contribution to pre-tax net income resulting from purchase
accounting valuations associated with the BVC assets being held for sale.
. $2.8 million accrual for termination of data processing contracts and the
write-down of computer hardware relating to the Company's long-term
information services technology agreement with a new third-party data
processing service provider.
. $1.3 million loss accrual for lease obligations in excess of related
sublease rentals resulting from unfavorable lease terms.
. $1.2 million expense accrual for long-term incentive plan awards.
. $800,000 loss on sale of MBS and short sale of Treasury securities.
. $500,000 additional write-down due to the sale of the Company's corporate
office complex which closed in 1996. The Company had provided a write-down
of $7.1 million on this property in 1995.
. $350,000 write-off of core deposit intangibles and fixed assets due to a
branch closure.
. $300,000 accrual for downsizing loan operations, relocation of
administrative functions and other items.
39
<PAGE>
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 an indicator of the Company's
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. This illustration is intended to approximate what the Company's
earnings would have been excluding the non-cash expense associated with
amortization of goodwill and other intangible assets generated from the
Company's acquisitions, all of which have been accounted for under the purchase
method of accounting.
Goodwill is generated from acquisitions accounted for under the purchase
method of accounting. Under the purchase method of accounting, the assets
acquired and liabilities assumed are recorded at their fair values. The excess
of the consideration paid for the acquisition, including certain acquisition-
related costs, over the fair value of net assets acquired is recorded as
goodwill. This goodwill is then amortized as an expense in the acquiring
company's income statement over a period not exceeding 40 years, and generally
not exceeding 25 years for financial institutions.
The purchase method of accounting differs significantly from the pooling-of-
interests method of accounting for acquisitions. Under the pooling-of-interests
method of accounting, the assets and liabilities of the company being acquired
are combined with the assets and liabilities of the acquiring company at their
recorded cost and as a result, no goodwill is generated. As no goodwill is
generated, a company that has accounted for its acquisitions under the pooling-
of-interests method of accounting incurs no goodwill amortization expense.
The purchase and the pooling-of-interests methods of accounting are not
alternatives for accounting for acquisitions. Instead, generally accepted
accounting principles prescribe which method must be applied depending upon the
characteristics of the underlying acquisition. The Company's acquisitions of
BVC, BVCFG, Ultra, and AFEH were all accounted for under the purchase method of
accounting.
As a result of the two distinct methods of accounting for acquisitions
discussed above, it may be difficult for investors and other interested parties
to compare the operating results of companies that have accounted for
acquisitions under the purchase method of accounting with companies that have
accounted for acquisitions under the pooling-of-interests method of accounting.
In response to this situation, we have illustrated what our earnings would
have been excluding the non-cash expense associated with amortization of the
intangible assets generated from our acquisitions. While this disclosure is not
intended to represent what our operating results would have been had our
acquisitions been accounted for under the pooling-of-interests method of
accounting, due to other differences between the two methods, we do believe it
represents a reasonable approximation of what our results would have been.
40
<PAGE>
The following table illustrates the reconciliation of net income to
earnings excluding amortization of intangible assets, and the corresponding
performance return measures, for the years indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands, except
per share amounts)
<S> <C> <C> <C>
Net income/(1)/ $22,719 $14,021 $10,969
Amortization of intangible assets, net of tax 9,855 2,936 1,746
------- ------- -------
Earnings excluding amortization $32,574 $16,957 $12,715
======= ======= =======
Earnings per diluted share $ 1.12 $ 1.06 $ 0.79
======= ======= =======
Earnings excluding amortization per diluted share $ 1.60 $ 1.28 $ 0.91
======= ======= =======
Return on average assets/(2)/ 0.41% 0.45% 0.34%
======= ======= =======
Return on average equity/(2)/ 5.87% 7.32% 5.39%
======= ======= =======
Earnings excluding amortization - return on
average assets/(3)/ 0.59% 0.54% 0.40%
======= ======= =======
Earnings excluding amortization - return on
average equity/(3)/ 8.42% 8.86% 6.24%
======= ======= =======
Earnings excluding amortization - return on
average tangible assets/(4)/ 0.61% 0.55% 0.40%
======= ======= =======
Earnings excluding amortization - return on
average tangible equity/(4)/ 13.07% 10.04% 6.72%
======= ======= =======
</TABLE>
/(1)/ Net income for the periods indicated includes certain special mention
items, as discussed above.
/(2)/ Return on average assets is defined as net income divided by average
assets. Return on average equity is defined as net income divided by
average equity.
/(3)/ Earnings excluding amortization - return on average assets is defined as
earnings excluding amortization of intangible assets divided by average
assets. Earnings excluding amortization - return on average equity is
defined as earnings excluding amortization of intangible assets divided by
average equity.
/(4)/ Earnings excluding amortization - return on average tangible assets is
defined as earnings excluding amortization of intangible assets divided by
average tangible assets. Earnings excluding amortization - return on
average tangible equity is defined as earnings excluding amortization of
intangible assets divided by average tangible equity. Average tangible
assets are defined as average assets less average intangible assets.
Average tangible equity is defined as average equity less average
intangible assets.
The following table illustrates earnings excluding amortization of
intangible assets contributed, by platform, for the years indicated:
<TABLE>
<CAPTION>
-----------------------------
Year Ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Banking Platform $22,498 $12,258 $ 9,992
Consumer Platform/(1)/ 8,943 3,836 2,723
Commercial Platform/(1)/ 1,133 863 -
------- ------- -------
Total $32,574 $16,957 $12,715
======= ======= =======
</TABLE>
41
<PAGE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997 and motor vehicle leases in April
1998. The Commercial Platform was created with the acquisition of BVCFG in
April 1997.
The increases in earnings excluding amortization of intangible assets for
the Banking Platform was attributable to a combination of factors including the
Company's acquisition of AFEH, effective January 2, 1998, continued growth in
the platform and a decrease in the Company's funding costs, as previously
discussed, partially offset by higher levels of general and administrative
expenses, as previously discussed. The increases in earnings excluding
amortization of intangible assets for the Consumer Platform were attributable to
the continued growth of the platform, which was created with the acquisitions of
BVC and Ultra, the Company's auto leasing activities which began in April 1998,
an increasing level of home equity loans resulting from purchases of HLTV home
equity loans by the Company beginning in August 1997, and a decrease in the
Company's funding costs. The benefits associated with the aforementioned items
were partially offset by higher provisions for loan and lease losses reflecting
the growth in the loan and lease portfolio and higher levels of general and
administrative expenses, as previously discussed. The increase in earnings
excluding amortization of intangible assets for the Commercial Platform for the
year ended December 31, 1998, as compared with 1997, was attributable to the
loan growth associated with the expansion of the asset-based lending segment of
the platform during 1998 partially offset by a higher level of general and
administrative expenses, as previously discussed.
Normalized Net Interest Margin
The Company's net interest margin, calculated in accordance with GAAP,
excludes the impact of the Company's auto leasing activities which began in
April 1998 and which are principally funded by the Company's deposits and other
borrowings, and also excludes the dividend expense related to the Company's
Capital Securities which were issued on December 21, 1998. As the auto leases
are accounted for as operating leases, the rental income and related expenses,
including depreciation expense, are reflected as noninterest income and
noninterest expense, respectively, in accordance with GAAP. Had the Company's
net auto leasing income, as defined, and the dividend expense related to the
Capital Securities, along with their corresponding average balances, been
included in the computation of net interest margin, and had nonrecurring
interest income and expense been excluded from the computation of net interest
margin, the Company's normalized net interest margin would have been 3.08% for
the year ended December 31, 1998, which compares with a net interest margin of
3.03% for the year ended December 31, 1998 computed in accordance with GAAP.
The following table illustrates interest-earning assets, including the
Company's auto-related operating leased assets, by platform, as of the dates
indicated:
<TABLE>
<CAPTION>
-----------------------------
At At
December 31, December 31,
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform $ 3,946,337 $ 2,714,159
Consumer Platform 1,263,065 371,158
Commercial Platform 113,210 54,120
------------ ------------
Total $ 5,322,612 $ 3,139,437
============ ============
</TABLE>
42
<PAGE>
The following table illustrates average interest-earning assets, including the
Company's auto-related operating leased assets, by platform, for the years
indicated:
<TABLE>
<CAPTION>
-------------------------------------
Year Ended December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Banking Platform $4,261,240 $2,797,970 $2,991,097
Consumer Platform 826,966 217,011 176,693
Commercial Platform 75,629 39,739 -
---------- ---------- ----------
Total $5,163,835 $3,054,720 $3,167,790
========== ========== ==========
</TABLE>
Balance Sheet Analysis
The Company's total assets at December 31, 1998 and 1997 were $5.6 billion and
$3.2 billion, respectively. The increase in assets was largely attributable to
the $2.3 billion in total assets acquired through the Company's acquisition of
AFEH effective January 2, 1998.
Securities
The Company's securities activities are primarily conducted by BVB. BVB has
historically purchased securities to supplement the Company's high-quality loan
production. The majority of the securities purchased are high-quality MBS,
including securities issued by the FHLMC, FNMA and GNMA and senior tranches of
private issue CMOs. Since MBS are collateralized by mortgages, these assets
qualify under the OTS regulations which, until BVB's conversion to a national
bank effective March 1, 1999, required BVB to hold certain levels of mortgage-
related assets. The Company also holds investment securities such as U.S.
government agency notes and other short-term securities.
The following table illustrates the Company's securities portfolio as of the
dates indicated:
<TABLE>
<CAPTION>
-----------------------------------
At December 31,
-----------------------------------
1998 1997 1996
-------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Available-for-sale
- ------------------
Investment securities $ 5,319 $ 5,639 $ 13,802
Mortgage-backed securities:
FHLMC, FNMA, GNMA 13,143 54,402 83,154
CMOs 473 - -
-------- -------- ---------
Total $ 18,935 $ 60,041 $ 96,956
======== ======== =========
Held-to-maturity
- ----------------
Investment securities $ - $ 5,000 $ 15,204
Mortgage-backed securities:
FHLMC, FNMA, GNMA 403,512 410,905 488,557
Other financial intermediaries 41,759 4,954 5,902
CMOs 176,502 - -
-------- -------- ---------
Total $621,773 $420,859 $509,663
======== ======== =========
</TABLE>
43
<PAGE>
The Company sold $237 million in MBS from its available-for-sale portfolio
during 1998, including securities acquired in connection with the Company's
acquisition of AFEH. A portion of these MBS was replaced by approximately $202
million in CMOs purchased during 1998, which were classified as held-to-
maturity. During 1997, the Company sold $20.5 million in MBS from its
available-for-sale portfolio. During 1996, the Company sold $57.6 million of
MBS including $2.6 million of MBS which were scheduled to mature within three
months of sale. The $2.6 million of MBS was sold from the Company's held-to-
maturity portfolio and the remaining $55.0 million from the available-for-sale
portfolio. There were no purchases of MBS in 1997 or 1996. The Company does not
maintain a trading portfolio. The unrealized loss on securities classified as
available-for-sale included in stockholders' equity was $202,000 and $72,000
(net of tax) at December 31, 1998 and 1997, respectively.
At December 31, 1998, there were no securities held by the Company which were
issued by a single party, excluding securities issued by the U.S. government or
U.S. government agencies and corporations, which exceeded 10% of the Company's
stockholders' equity balance.
MBS pose risks not associated with fixed maturity bonds, primarily related to
the ability of the borrower to prepay the underlying loan with or without
penalty. This risk, known as prepayment risk, may cause the MBS to remain
outstanding for a period of time different than that assumed at the time of
purchase. When interest rates decline, prepayments generally tend to increase,
causing the average expected remaining maturity of the MBS to decline.
Conversely, if interest rates rise, prepayments tend to decrease, lengthening
the average expected remaining maturity of the MBS.
The following table illustrates the remaining contractual principal maturities
and weighted average yields on MBS held by the Company as of December 31, 1998.
The weighted average yield is computed using the amortized cost of available-
for-sale securities, which are reported at fair value. Expected remaining
maturities of MBS will generally differ from their contractual maturities
because borrowers may have the right to prepay obligations with or without
penalties.
44
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
After After
One Year Through Five Years Through
Within One Year Five Years Ten Years After Ten Years
--------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
FNMA and GNMA $ - - $ - - $ 748 6.60% $ 12,509 5.82%
CMOs - - - - - - 473 4.89%
--------- ---- ------ ---- -------- ----- -------- ----
Total amortized cost $ - - $ - - $ 748 6.60% $ 12,982 5.79%
========= ==== ====== ==== ======== ===== ======== ====
Fair value $ - $ - $ 759 $ 12,857
========= ====== ======== ========
Held-to-maturity:
FHLMC, FNMA
And GNMA $ 1,915 5.28% $2,160 7.27% $139,392 6.11% $260,046 6.14%
Other financial
Intermediaries - - 67 8.28% 3,127 11.55% 38,564 7.13%
CMOs - - - - - - 176,502 6.62%
--------- ---- ------ ---- -------- ----- -------- ----
Total amortized cost $ 1,915 5.28% $2,227 7.30% $142,519 6.23% $475,112 6.40%
========= ==== ====== ==== ======== ===== ======== ====
Fair value $ 1,911 $2,261 $142,462 $474,738
========= ====== ======== ========
<CAPTION>
----------------------------
Total
----------------------------
Weighted
Average
Amount Yield
--------- ---------
<S> <C> <C>
Available-for-sale:
FNMA and GNMA $ 13,257 5.86%
CMOs 473 4.89%
Total amortized cost $ 13,730 5.83%
======== ====
Fair value $ 13,616
========
Held-to-maturity:
FHLMC, FNMA
And GNMA $403,513 6.13%
Other financial
Intermediaries 218,260 7.46%
CMOs 41,758 6.62%
-------- ----
Total amortized cost $621,773 6.36%
======== ====
Fair value $621,372
========
</TABLE>
45
<PAGE>
Loans and Leases
Loan and Lease Portfolio Composition
- ------------------------------------
The Company's loan and lease portfolio reflects the activity of the Company's
three platforms. The Banking Platform consists of single-family, multi-family
and commercial real estate loans and consumer and small business loans. The
Company ceased its single-family loan origination operations during 1996 in
conjunction with its strategic redirection as discussed in "Lending Activities"
at Item 1. "Business". The Consumer Platform engages in high-quality indirect
auto lending and leasing and also purchases high-quality HLTV home equity loans.
The Commercial Platform engages in asset-based lending, factoring and equipment
leasing.
The following table illustrates the composition of the Company's loan and
lease portfolio (before premiums and discounts, deferred fees and costs and the
allowance for loan and lease losses) as of the dates indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
At December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Banking Platform:
Single-family mortgage $1,600,690 $ 550,506 $ 692,086 $ 731,310 $ 733,265
Multi-family mortgage 1,015,980 1,026,148 1,048,291 995,038 980,849
Commercial mortgage 338,220 348,754 381,822 333,236 337,483
---------- ---------- ---------- ---------- ----------
Total mortgage 2,954,890 1,925,408 2,122,199 2,059,584 2,051,597
Consumer Loans 92,766 61,478 68,018 34,453 30,357
---------- ---------- ---------- ---------- ----------
3,047,656 1,986,886 2,190,217 2,094,037 2,081,954
Consumer Platform/(1)/:
Motor vehicle loans 546,806 298,627 315,439 396 1,126
HLTV home equity loans 483,793 67,092 - - -
---------- ---------- ---------- ---------- ----------
1,030,599 365,719 315,439 396 1,126
Commercial Platform/(1)/:
Commercial loans and leases 113,210 54,120 - - -
---------- ---------- ---------- ---------- ----------
Total $4,191,465 $2,406,725 $2,505,656 $2,094,433 $2,083,080
========== ========== ========== ========== ==========
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was created
with the acquisition of BVCFG in April 1997.
The increase in Banking Platform's single-family mortgage loans at
December 31, 1998, as compared with December 31, 1997, was due to the
acquisition of EurekaBank's mortgage loan portfolio in conjunction with the
purchase of AFEH effective January 2, 1998, partially offset by mortgage loan
prepayments. The increases in the Consumer and Commercial Platforms' loans at
December 31, 1998, as compared with December 31, 1997, were consistent with the
Company's continued focus on growing its portfolio of higher-yielding consumer
and commercial assets. Further, the increase in the Commercial Platform's loan
balance was primarily attributable to the aforementioned growth in its asset-
based lending segment, which generates lower yields relative to its factoring
segment.
The percentage of mortgage loans to total loans and financing leases for
each of the years in the five-year period beginning with the period ended
December 31, 1998 was 70.5%, 80.0%, 84.7%, 98.3%, and 98.5%, respectively. The
percentage of motor vehicle and other consumer loans to total loans and
financing leases for each of the years in the five-year period beginning with
the period ended December 31, 1998 was 26.8%, 17.8%, 15.3%, 1.7%, and 1.5%,
respectively. The percentage of commercial loans and financing leases to total
loans and financing leases at December 31, 1998 and 1997 was 2.7% and 2.2%,
respectively. The decreases in percentages
46
<PAGE>
of mortgage loans and the corresponding increases in percentages of consumer and
commercial loans and financing leases were consistent with the Company's
strategy to replace lower-yielding mortgage loans with consumer and commercial
loans and financing leases with higher risk-adjusted returns, shorter maturities
and less sensitivity to interest rate fluctuations.
The following table illustrates the composition of the Company's fixed- and
adjustable-rate loan and lease portfolio (before premiums and discounts,
deferred fees and costs and the allowance for loan and lease losses) as of the
dates indicated:
<TABLE>
<CAPTION>
-------------------------------------
At December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Fixed-rate loans and leases:
Mortgage $ 620,603 $ 295,068 $ 329,358
Motor vehicle and other consumer 607,015 332,226 336,812
HLTV home equity 483,793 67,092 -
Commercial 19,192 15,029 -
---------- ---------- ----------
1,730,603 709,415 666,170
Adjustable-rate loans and leases:
Mortgage 2,334,287 1,630,340 1,792,841
Motor vehicle and other consumer 32,557 27,879 46,645
Commercial 94,018 39,091 -
---------- ---------- ----------
2,460,862 1,697,310 1,839,486
---------- ---------- ----------
Total $4,191,465 $2,406,725 $2,505,656
========== ========== ==========
</TABLE>
The following table illustrates the remaining contractual maturity
distribution of the Company's fixed- and adjustable-rate loan and lease
portfolio (before premiums and discounts, deferred fees and costs and the
allowance for loan and lease losses) at December 31, 1998:
<TABLE>
<CAPTION>
---------------------------------------------------
At December 31, 1998
---------------------------------------------------
After One
Year
One Year Through After Five
or Less Five Years Years Total
-------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed-rate loans and leases:
Mortgage $ 1,902 $ 8,963 $ 609,738 $ 620,603
Motor vehicle and other consumer 4,883 314,941 287,191 607,015
HLTV home equity 1 2,483 481,309 483,793
Commercial 19,192 - - 19,192
------- -------- ---------- ----------
25,978 326,387 1,378,238 1,730,603
Adjustable-rate loans and leases:
Mortgage 2,094 28,352 2,303,841 2,334,287
Motor vehicle and other consumer 2,619 5,335 24,603 32,557
Commercial 30,935 63,083 - 94,018
------- -------- ---------- ----------
35,648 96,770 2,328,444 2,460,862
------- -------- ---------- ----------
Total $61,626 $423,157 $3,706,682 $4,191,465
======= ======== ========== ==========
</TABLE>
47
<PAGE>
Loan and Lease Originations and Purchases
- -----------------------------------------
The Company's strategy is to supplement its loan production with purchases
of high-quality loans and leases with higher risk-adjusted yields. The following
table illustrates loans and leases, including operating leased assets,
originated and purchased for the years indicated:
<TABLE>
<CAPTION>
-----------------------------------
Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Loan and lease originations:
Real estate $ 150,677 $148,808 $257,377
Motor vehicle/(1)/ 565,272 312,863 118,897
Commercial/(1)/ 75,584 17,672 -
Other 69,091 17,717 29,075
---------- -------- --------
Total originations 860,624 497,060 405,349
---------- -------- --------
Loan purchases:
Real estate 421,458 50,967 35,974
HLTV home equity/(1)/ 454,901 69,996 -
Motor vehicle/(1)/ 71,773 - -
---------- -------- --------
Total purchases 948,132 120,963 35,974
---------- -------- --------
Total originations and purchases $1,808,756 $618,023 $441,323
========== ======== ========
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997 and motor vehicle leases in April
1998. The Commercial Platform was created with the acquisition of BVCFG in
April 1997.
The Company's loan and lease origination and purchase activity is
consistent with the Company's strategy of focusing on generating assets within
the Consumer and Commercial Platforms which provide higher risk-adjusted yields
compared to the traditional mortgage-based assets within the Banking Platform.
The Banking Platform originates multi-family and commercial real estate loans,
consumer loans and business loans. Single-family mortgage loan origination
operations ceased during 1996. The real estate loan purchases in 1998 included
$200 million of loans acquired primarily to assist BVB in meeting its CRA
regulatory requirements. The Consumer Platform originates motor vehicle loans
and leases and purchases HLTV home equity loans. The Commercial Platform
originates asset-based and factoring loans and equipment leases.
Credit Quality
- --------------
The Company defines nonperforming assets ("NPAs") as nonaccrual loans,
real estate owned, defaulted MBS, and other repossessed assets. The Company
defines nonaccrual loans as loans 90 days or more delinquent as to principal and
interest payments (unless the principal and interest are well secured and in the
process of collection) and loans less than 90 days delinquent designated as
nonperforming when the Company determines that the full collection of principal
and/or interest is doubtful. Troubled debt restructurings ("TDRs") are defined
as loans that have been modified (due to borrower financial difficulties) to
allow a stated interest rate and/or a monthly payment rate lower than those
prevailing in the market. Interest on nonaccrual loans and leases that was not
recorded in income was $492,000, $209,000 and $735,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Actual interest recognized by
the Company on these nonaccrual loans and leases was not significant in 1998,
1997 or 1996.
48
<PAGE>
Overall credit quality has continued to remain strong as evidenced by the
NPA and delinquency trends presented below. The following table illustrates the
Company's NPAs and TDRs as of the dates indicated:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $14,700 $10,991 $16,125 $10,755 $36,321
Real estate owned 2,666 4,146 7,387 24,476 14,255
Defaulted MBS - - - 3,580 -
Other repossessed assets 654 629 798 - 1
------- ------- ------- ------- -------
Nonperforming assets 18,020 15,766 24,310 38,811 50,577
Troubled debt restructurings 777 731 509 15,641 13,948
------- ------- ------- ------- -------
Total $18,797 $16,497 $24,819 $54,452 $64,525
======= ======= ======= ======= =======
</TABLE>
The following table illustrates NPAs and NPAs as a percentage of
consolidated total assets, by platform, as of the dates indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Nonperforming Assets as a Percentage of Consolidated Total Assets
------------------------------------------------------------------------------------
At December 31, 1998 At December 31, 1997 At December 31, 1996
--------------------- -------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform $15,294 0.27% $14,345 0.45% $23,323 0.71%
Consumer Platform/(1)/ 2,376 0.04% 748 0.02% 987 0.03%
Commercial Platform/(1)/ 350 0.01% 673 0.02% - -
------- ---- ------- ---- ------- ----
Total $18,020 0.32% $15,766 0.49% $24,310 0.74%
======= ==== ======= ==== ======= ====
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was created
with the acquisition of BVCFG in April 1997.
The following table illustrates loans and leases delinquent 60 days or
more as a percentage of gross loans and leases, by platform, as of the dates
indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Loans and Leases Delinquent 60 Days or More as a Percentage of
Gross Loans and Leases
--------------------------------------------------------------------------------
At December 31, 1998 At December 31, 1997 At December 31, 1996
-------------------- -------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Banking Platform $15,928 0.38% $21,526 0.90% $22,460 0.90%
Consumer Platform /(1)/ 5,724 0.13% 1,045 0.04% 548 0.02%
Commercial Platform/ (1)/ 350 0.01% 673 0.03% - -
------- ---- ------- ---- ------- ----
Total $22,002 0.52% $23,244 0.97% $23,008 0.92%
======= ==== ======= ==== ======= ====
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was created
with the acquisition of BVCFG in April 1997.
49
<PAGE>
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 the Company follows underwriting and credit
monitoring procedures which it believes are appropriate in both growing and
managing the loan and lease portfolio, in the event of nonperformance by these
other parties, the Company's potential exposure to credit losses could
significantly affect the Company's consolidated financial position and results
of operations.
Lending money involves an inherent risk of nonpayment. Management seeks to
reduce such credit risk by administering lending policies and underwriting
procedures combined with its monitoring of the loan and lease portfolio. The
allowance for loan and lease losses represents management's estimate of probable
inherent losses which have occurred as of the date of the financial statements.
The process of determining the necessary levels of allowances for loan and lease
losses is subjective and requires considerable judgement. In accordance with
applicable guidelines, this process results in an allowance for loan and lease
losses that consists of three components as described below:
1. Reserves for loans and leases that have been individually evaluated and
identified as loans or leases which have probable losses. These loans and
leases are generally larger-balance commercial or income producing real
estate loans or leases which are evaluated on an individual basis.
Reserves for these loans and leases are attributable to specific weaknesses
in these loans or leases evidenced by factors such as a deterioration in
the borrower's ability to meet its obligations, a deterioration in the
quantity or quality of the collateral securing the loan or lease, payment
delinquency, or other events of default under the terms of the loan or
lease agreement or promissory note.
2. Reserves for groups of smaller-balance homogenous loans and leases that are
collectively evaluated for impairment and for groups of performing larger-
balance loans and leases which currently exhibit no identifiable
weaknesses. The smaller-balance homogenous loans and leases generally
consist of single-family mortgage loans and consumer loans, including auto
loans, home equity loans and lines of credit and unsecured personal loans.
The larger-balance loans and leases generally consist of commercial or
income producing real estate loans and leases. These loans and leases have
specific characteristics which indicate that it is probable that a loss has
been incurred in a group of loans or leases with those similar
characteristics. Reserves for these groups of loans and leases are
determined based on a combination of factors including historical loss
experience, asset concentrations, levels and trends of classified assets,
and loan and lease delinquencies. Reserves for these groups of loans also
include an additional reserve for certain products introduced more recently
by the Company, such as high loan-to-value home equity loans, where the
Company does not have extensive historical data, other than industry
experience, upon which to base its reserve levels. This additional reserve
is intended to provide for those situations where the Company's experience
may be different than industry experience.
3. Unallocated Reserves. Management determines the unallocated portion of the
allowance for loan and lease losses based on factors that are not
necessarily associated with a specific credit, group of loans or leases or
loan or lease category. These factors include, but are not limited to,
management's evaluation of economic conditions in regions where the Company
lends money, loan and lease concentrations, lending policies or
underwriting procedures, and trends in delinquencies and nonperforming
assets. The unallocated portion of the allowance for loan and lease losses
reflects management's efforts to ensure that the overall allowance
appropriately reflects the probable losses inherent in the loan and lease
portfolio.
The allowance for loan and lease losses at December 31, 1998 was $45.4
million as compared with $38.5 million at December 31, 1997 and $29.0 million at
December 31, 1996. The increase in the allowance for loan and lease losses at
December 31, 1998, as compared with December 31, 1997, was largely due to the
reserves acquired in conjunction with the Company's acquisition of AFEH. The
increase in the allowance for loan and lease losses at December 31, 1997, as
compared with December 31, 1996, was due to a combination of factors including
reserves for the Commercial Platform acquired effective April 1997 combined with
the expansion of the Consumer Platform.
50
<PAGE>
The following table illustrates the allowance for loan and lease losses as
a percentage of NPAs, gross loans and leases and total assets as of the dates
indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Allowance for Loan and Lease Losses as a Percentage of Specified Assets
------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1996
----------------------- ----------------------- ------------------------
(Dollars in thousands)
Assets Percent Assets Percent Assets Percent
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming assets $ 18,020 252% $ 15,766 244% $ 24,310 150%
Gross loans and leases $4,191,465 1.08% $2,406,725 1.60% $2,505,656 1.46%
Total assets $5,596,232 0.81% $3,246,476 1.18% $3,300,262 1.10%
</TABLE>
The decrease in the allowance for loan and lease losses as a percentage of
gross loans and leases and total assets at December 31, 1998, as compared with
December 31, 1997, was largely a result of the Company's acquisition of AFEH
effective January 2, 1998. AFEH's $1.5 billion loan portfolio consisted
primarily of single-family and multi-family residential mortgage loans which
have lower credit risk as compared with consumer and commercial assets, and thus
had a corresponding lower allowance for loan losses relative to gross loans and
total assets than that of the Company. At December 31, 1997, AFEH's allowance
for loan losses as a percentage of gross loans and total assets was 0.74% and
0.50%, respectively.
The following table illustrates the allowance for loan and lease losses
for the years indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance $ 38,458 $ 29,013 $ 30,014 $ 29,115 $ 33,790
Reserves related to acquisitions 11,374 14,162 2,860 - -
Charge-offs:
Real estate and other (2,851) (2,699) (6,401) (4,879) (8,514)
Consumer /(1)/ (15,387) (4,057) - - -
Commercial /(1)/ (828) (1,685) - - -
------------ ------------ ------------ ------------ ------------
(19,066) (8,441) (6,401) (4,879) (8,514)
Recoveries:
Real estate and other 2,264 706 642 1,494 1,472
Consumer /(1)/ 3,085 955 - - -
Commercial /(1)/ 176 111 - - -
------------ ------------ ------------ ------------ ------------
5,525 1,772 642 1,494 1,472
Net charge-offs (13,541) (6,669) (5,759) (3,385) (7,042)
Provision for loan and lease losses 9,114 1,952 1,898 4,284 2,367
------------ ------------ ------------ ------------ ------------
Ending balance $ 45,405 $ 38,458 $ 29,013 $ 30,014 $ 29,115
============ ============ ============ ============ ============
Net charge-offs to average total loans
and leases 0.32% 0.28% 0.24% 0.16% 0.37%
============ ============ ============ ============ ============
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was created
with the acquisition of BVCFG in April 1997.
51
<PAGE>
The following table illustrates the allocation of the allowance for loan
and lease losses among specific classes of loans and leases:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
% of % of % of % of % of
Total Total Total Total Total
Loans Loans Loans Loans Loans
and and and and and
Amount Leases Amount Leases Amount Leases Amount Lease Amount Leases
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate and
other $ 31,536 72.7% $ 29,026 82.5% $ 27,969 87.4% $ 29,541 99.9% $ 28,560 99.9%
Consumer /(1)/ 7,825 24.6 3,240 15.2 1,044 12.6 473 0.1 555 0.1
Commercial /(1)/ 6,044 2.7 6,192 2.3 - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 45,405 100.0% $ 38,458 100.0% $ 29,013 100.0% $ 30,014 100.0% $ 29,115 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
/(1)/ The Consumer Platform was created with the acquisitions of BVC in June
1996 and Ultra in October 1997. The Consumer Platform began purchasing
HLTV home equity loans in August 1997. The Commercial Platform was created
with the acquisition of BVCFG in April 1997.
While the Company believes that the allowance for loan and lease losses is
adequate to cover estimated losses in its asset portfolios, there can be no
assurance in this regard. Future adjustments may be necessary and earnings
could be significantly affected if circumstances differ substantially from the
assumptions used in making such determinations. The Company will continue to
monitor the adequacy of the allowance for loan and lease losses related to
problem assets. The Company monitors the impact of the economic environment on
its lending activities on an ongoing basis. If the economy and/or real estate
markets weaken in future periods, no assurance can be given that the Company's
future loss experience will approximate its current estimates. In addition,
various regulatory agencies review the Company's allowance for loan and lease
losses as an integral part of their examination process. Such agencies may
require the Company to recognize additions to this allowance for loan and lease
losses based on their judgment relating to information available to them at the
time of their examination.
Deposits
Deposits are gathered by BVB in support of the Company's business
activities in each of its platforms. A summary of deposits follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
At December 31, 1998
----------------------------------------------------------------------
% of Weighted
Amount Total Average Rate
------------------- ------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Transaction accounts $ 1,627,275 49.8% 3.15%
Retail certificates of deposit 1,642,362 50.2 5.20%
------------------- ------------------- -------------------
Total $ 3,269,637 100.0% 4.20%
=================== =================== ===================
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
At December 31, 1998
----------------------------------------------------------------------
% of Weighted
Amount Total Average Rate
------------------- ------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Transaction accounts $ 553,820 33.0% 2.97%
Retail certificates of deposit 1,045,152 62.3 5.51%
------------------- ------------------- -------------------
Total retail deposits 1,598,972 95.3 4.65%
Brokered certificates of deposit 78,163 4.7 5.82%
------------------- ------------------- -------------------
Total $ 1,677,135 100.0% 4.71%
=================== =================== ===================
</TABLE>
The increase in total deposits at December 31, 1998, as compared with
December 31, 1997, was primarily due to the acquisition of EurekaBank's deposit
portfolio in conjunction with the Company's purchase of AFEH effective January
2, 1998. The increase in the percentage of transaction accounts as a percentage
of total deposits was consistent with management's strategy of reducing higher-
cost deposits and expanding lower-cost transaction accounts as funding sources
for the Company's business activities.
Increasing the value of BVB's retail branch franchise is one of
management's primary objectives. Management believes that expanding BVB's retail
deposit base, particularly transaction accounts, will enhance the Company's
results of operations by lowering its consolidated cost of funds, increasing fee
income and expanding opportunities for cross-selling products and services,
although there can be no assurance in this regard. As of December 31, 1998,
through BVB, the Company increased its percentage of transaction accounts in
relation to total retail deposits to 49.8% as compared with 34.6% and 30.3% at
December 31, 1997 and 1996, respectively.
Retail certificates of deposit of $100,000 or more, by time remaining until
maturity, were as follows:
<TABLE>
<CAPTION>
---------------------------
At December 31,
---------------------------
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 148,798 $ 216,815
Over three through six months 77,782 73,230
Over six through twelve months 111,090 60,658
Over twelve months 53,587 26,136
------------ ------------
Total $ 391,257 $ 376,839
============ ============
</TABLE>
Borrowings
In addition to deposits, the Company funds its business activities through
other borrowings, on a collateralized and noncollateralized basis, such as
advances from the FHLBSF and securities sold under agreements to repurchase
(also known as reverse repurchase agreements).
In December 1998, the Company issued $90 million in Capital Securities
yielding 9.76% (all-in cost was 9.95%). A portion of the proceeds from the
Capital Securities were used to redeem the Company's $50 million of 8.42% Senior
Debentures which matured on June 1, 1999 and the remainder for general corporate
purposes. In August 1997, the Company issued $100 million in Subordinated Notes
with a stated coupon of 9.125% and a yield of 9.225% (all-in cost was 9.62%). A
portion of the proceeds from the Subordinated Notes was used to partially fund
the Company's acquisition of AFEH. In May 1996, the Company issued $50 million
in Senior Debentures yielding 8.42% (all-in cost was 8.91%). A portion of the
proceeds from the Senior Debentures was used to fund the Company's acquisition
of BVC.
53
<PAGE>
The following table illustrates the Company's borrowings as of the dates
indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
At December 31,
--------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances from FHLBSF $ 1,653,300 $ 1,110,270 $ 977,750
Securities sold under agreements to repurchase 25,302 90,134 210,640
Subordinated Notes, net 99,437 99,372 -
Senior Debentures 50,000 50,000 50,000
Other borrowings 5,077 6,200 7,147
Capital Securities 90,000 - -
-------------------- -------------------- --------------------
Total $ 1,923,116 $ 1,355,976 $ 1,245,537
==================== ==================== ====================
</TABLE>
Short-term borrowings are defined as borrowings due within one year or less.
The following table illustrates the Company's short-term borrowings as of the
dates indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
At December 31,
--------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances from FHLBSF $ 729,100 $ 985,270 $ 774,480
Securities sold under agreements to repurchase 25,302 90,134 210,640
-------------------- -------------------- --------------------
Total $ 754,202 $ 1,075,404 $ 985,120
==================== ==================== ====================
Weighted average interest rate of total short-
term borrowings outstanding at period end 5.07% 5.88% 5.66%
==================== ==================== ====================
</TABLE>
The following table illustrates the maximum outstanding balance for each type
of short-term borrowing at any month end during 1998, 1997 and 1996, and the
average balances and weighted average interest rates on short-term borrowings
for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances from FHLBSF $ 1,575,460 $ 1,042,480 $ 774,480
Securities sold under agreements to repurchase $ 153,148 $ 201,551 $ 220,281
Average amount of total short-term borrowings
outstanding during the year $ 1,168,410 $ 1,056,836 $ 762,258
Weighted average interest rate of total short-term
borrowings outstanding during the year 5.54% 5.75% 5.66%
==================== ==================== ====================
</TABLE>
54
<PAGE>
Liquidity
The objective of the Company's liquidity management program is to ensure
that funds are available in a timely manner to meet loan demand and depositors'
needs, and to service other liabilities as they come due, without causing an
undue amount of cost or risk, and without causing a disruption to normal
operating conditions.
The Company regularly assesses the amount and likelihood of projected
funding requirements through a review of factors such as historical deposit
volatility and funding patterns, present and forecasted market and economic
conditions, and existing and planned Company business activities. The Company's
Asset/Liability Committee ("ALCO") provides oversight to the liquidity
management process and recommends policy guidelines, subject to Board of
Directors approval, and courses of action to address the Company's actual and
projected liquidity needs.
The ability to attract a stable, low-cost base of deposits is a significant
source of liquidity. Other sources of liquidity available to the Company include
short-term borrowings, which consist of advances from the FHLBSF, reverse
repurchase agreements and other short-term borrowing arrangements. The Company's
liquidity requirements can also be met through the use of its portfolio of
liquid assets. Liquid assets, as defined by the Company, include cash and cash
equivalents in excess of the minimum levels necessary to carry out normal
business operations, federal funds sold, commercial paper, and other short-term
investments.
In analyzing the Company's liquidity during 1998, reference is made to the
Company's Consolidated Statements of Cash Flows at Item 8. "Financial Statements
and Supplementary Data."
The Company utilizes certain measurements in connection with managing its
liquidity. One such measure is the liquidity ratio as defined by OTS
regulations, which was applicable to BVB until its conversion to a national bank
effective March 1, 1999. Savings institutions are required to maintain a
specified liquidity ratio (presently 4.00%) of cash and securities to total
deposits and borrowings due in one year or less. Historically, BVB has
maintained its liquid assets above the minimum requirements imposed by the OTS
regulations and at a level believed adequate to meet the requirements of normal
banking activities, including repayment of maturing debt and potential deposit
outflows. BVB maintained average liquidity ratios of 5.41% and 5.42% for the
months ended December 31, 1998 and 1997, respectively.
In conjunction with the acquisition of AFEH, the Company acquired $181
million in net operating loss ("NOL") carryforwards. The associated tax benefit
of these NOL carryforwards is approximately $63 million and has been recorded as
a deferred tax asset in the accompanying Statements of Financial Condition at
Item 8. "Financial Statements and Supplementary Data." The Company initially
estimated that approximately $11 million of NOL carryforwards would be utilized
in 1998 to reduce its federal income tax liability. However, the level of tax
deductions in excess of book expenses, primarily related to AFEH acquisition-
related expenses and the Company's auto leasing activities, produced a taxable
loss in 1998 resulting in no NOL carryforwards being utilized. To the extent the
Company has future taxable income, NOL carryforwards may be utilized to reduce
its current federal income tax liability and thus enhance future liquidity
levels.
Capital Resources
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that the Company and BVB are in
compliance with all regulatory capital guidelines. The primary sources of new
capital for the Company during 1998 were the retention of earnings and common
stock issued in conjunction with the Company's acquisition of AFEH.
Additionally, on December 21, 1998, the Company issued $90 million in
Capital Securities through Bay View Capital I. The Securities, which were sold
in an underwritten public offering, pay quarterly cumulative cash distributions
at an annual rate of 9.76% of the liquidation value of $25 per share. A portion
of the proceeds from
55
<PAGE>
the Capital Securities were used to redeem the Company's $50 million of 8.42%
Senior Debentures which matured on June 1, 1999 and the remainder for general
corporate purposes. The Securities have the added benefit of qualifying as Tier
1 capital for regulatory purposes. The Capital Securities are presented as a
separate line item in the consolidated balance sheet of the Company under the
caption "Guaranteed Preferred Beneficial Interest in the Company's Junior
Subordinated Debentures." For additional related discussion, see Note 13 to the
Consolidated Financial Statements, "Capital Securities," at Item 8. "Financial
Statements and Supplementary Data."
Stockholders' equity totaled $377.8 million at December 31, 1998 as
compared with $173.6 million at December 31, 1997. This increase was largely due
to common stock issued in conjunction with the acquisition of AFEH on January 2,
1998, combined with the Company's earnings, partially offset by dividends
declared and common stock repurchased. Tangible stockholders' equity, which
excludes intangible assets, was $243.7 million at December 31, 1998 as compared
with $144.1 million at December 31, 1997. This increase was due to common stock
issued in conjunction with the acquisition of AFEH, the Company's earnings and
the amortization of intangible assets, partially offset by dividends declared,
common stock repurchased and additional intangible assets generated in
conjunction with the acquisition of AFEH. The Company does not have any material
commitments for capital expenditures as of December 31, 1998.
The following table illustrates the reconciliation of the Company's
stockholders' equity to tangible stockholders' equity as of the dates indicated:
<TABLE>
<CAPTION>
---------------------------
At December 31,
---------------------------
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Stockholders' equity $ 377,811 $ 173,627
Intangible assets (134,088) (29,507)
------------ ------------
Tangible stockholders' equity $ 243,723 $ 144,120
============ ============
Book value per share $ 19.77 $ 14.38
============ ============
Tangible book value per share $ 12.75 $ 11.94
============ ============
</TABLE>
The following table illustrates the changes in the Company's tangible
stockholders' equity for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning tangible stockholders' equity $ 144,120 $ 189,865 $ 202,142
Net income 22,719 14,021 10,969
AFEH acquisition 210,000 - -
Intangible assets generated from acquisitions accounted
for under the purchase method of accounting (115,734) (21,656) (6,968)
Amortization of intangible assets 11,372 4,088 2,606
Repurchase of common stock (24,063) (39,855) (16,971)
Exercise of stock options 3,269 2,617 1,864
Cash dividends declared (8,069) (4,280) (4,132)
Other 109 (680) 355
-------------------- -------------------- --------------------
Ending tangible stockholders' equity $ 243,723 $ 144,120 $ 189,865
==================== ==================== ====================
</TABLE>
Intangible assets generated from acquisitions accounted for under the
purchase method of accounting are deducted from stockholders' equity as part of
the calculation to arrive at tangible stockholders' equity. Conversely,
56
<PAGE>
the amortization of intangible assets increases tangible stockholders' equity as
well as the Company's Tier 1 regulatory capital.
In 1998, BVB was subject to capital adequacy guidelines issued by the OTS.
Under these capital guidelines, the minimum total risk-based capital ratio and
Tier 1 risk-based capital ratio requirements are 10.0% and 6.0%, respectively,
of risk-weighted assets and certain off-balance sheet items for a well-
capitalized savings institution. The OTS also has required minimum capital
leverage ratio guidelines. The ratio is determined using Tier 1 capital divided
by period-end total assets, as adjusted. The guidelines require a minimum of
5.0% for a well-capitalized savings institution. The capital ratio computations
for national banks are virtually identical to those for savings institutions.
BVB's capital ratios were in excess of regulatory guidelines for a well-
capitalized savings institution as of December 31, 1998, 1997 and 1996. Capital
ratios for BVB are illustrated in the following table as of the dates indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------
At December 31,
----------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Total risk-based capital ratio 10.42% 10.87% 10.74%
Tier 1 risk-based capital ratio 9.24% 9.67% 9.49%
Tier 1 leverage ratio 6.37% 6.36% 5.64%
</TABLE>
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
the Company's 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 the
operations of the Company and its suppliers and customers.
The potential impact of the 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, the Company may be adversely affected by this problem, depending
on whether it and the entities with which it does business address the issue
successfully. The impact of Year 2000 issues on the Company will then depend not
only on corrective actions that the Company takes, 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, or receive services or data
from, the Company, or whose financial condition or operational capability is
important to the Company.
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 the Year 2000 issue 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 BVB. 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
57
<PAGE>
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.
The Company's State of Readiness
- --------------------------------
The Company relies upon third-party software vendors and data processing
service providers for the majority of its electronic data processing and does
not operate any proprietary programs which are critical to the Company's
operations. Thus, the focus of the Company is to monitor the progress of its
primary software and data processing service providers toward resolving Year
2000 compliance issues and perform tests associated with actual data of the
Company in simulated processing of future-sensitive dates.
The Company's Year 2000 compliance program has been divided into phases,
each of them common to all sections of the process: (i) inventorying Year 2000
items; (ii) assessing the Year 2000 compliance of items determined to be
material to the Company; (iii) upgrading or replacing material items that are
determined not to be Year 2000 compliant and testing material items; (iv)
designing and implementing contingency and business continuation plans; and (v)
assessing the status of third-party risks.
In the first phase, the Company conducted a thorough evaluation of current
information technology systems, software and embedded technologies, resulting in
the identification of 14 mission critical systems that could be affected by Year
2000 issues. Non-information technology systems such as climate control systems,
elevators and vault security equipment, were also surveyed. This phase of the
Year 2000 compliance program is substantially complete.
In the second phase, results from the systems inventory were assessed to
determine the Year 2000 impact and what actions were required to obtain Year
2000 compliance. For the Company's internal systems, actions needed ranged from
third-party vendor application upgrades to PC, server and network equipment
replacement. Further, the Company surveyed information regarding Year 2000
readiness for its 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. This phase of the Year 2000 process is ongoing and is
expected to be completed by the end of the first quarter of 1999. The software
conversion phase of the Company's mission critical systems is substantially
complete. Each of the upgrades or replacements, to the extent economically
feasible, is run through a test environment to see how well it integrates with
the Company's overall data processing environment. Final "future-date" testing
of system upgrades and replacements was substantially completed by the end of
the first quarter of 1999.
The fourth phase relates to contingency plans. While the Company is
reasonably certain that its internal Year 2000 compliance program will be
successfully accomplished on time, there could be other external operational
issues regarding the Year 2000 process that may prevent the Company from
successfully implementing its Year 2000 compliance program. If these other
external operational issues occur and remain unresolved, the Company could be
required to implement a contingency plan for Year 2000 compliance. The Company's
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 continuing. These
evaluations will be followed with contingency plans, which are ongoing and
expected to be finalized in the second quarter of 1999, with follow up reviews
scheduled through the remainder of 1999.
58
<PAGE>
The Company's total costs associated with required modifications to become
Year 2000 compliant are estimated at approximately $1.6 million, a portion of
which has been and will continue to be a reallocation of internal resources and,
therefore, does not necessarily represent incremental expense to the Company.
The total amount of pre-tax costs incurred by the Company through December 31,
1998 related to the Year 2000 issue was approximately $650,000.
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 the Company's
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,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity and financial condition. The Company's Year 2000
compliance program will reduce levels of uncertainty about the Year 2000 issue
including questions as to the compliance and readiness of its material third-
party providers. The Company believes that, with the implementation of new
and/or upgraded business systems and completion of the Year 2000 compliance
program as scheduled, the possibility of significant interruptions of normal
operations has been significantly reduced.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of derivatives depends on the intended use of the
derivative. The Company currently utilizes interest rate exchange (i.e., swap)
agreements to hedge cash flows associated with current and anticipated
transactions. To the extent these interest rate exchange agreements qualify as a
cash flow hedge under SFAS 133, the effective portion of the derivative's gain
or loss would be initially reported as a component of other comprehensive income
(outside of earnings) and subsequently reclassified into earnings when the
forecasted transaction affected earnings. SFAS 133 will be effective for the
Company for the fiscal quarter beginning July 1, 1999. The Company is in the
process of evaluating the impact that the adoption of SFAS 133 will have on its
consolidated financial condition, results of operations or cash flows.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" ("SFAS 134"), which amends the disclosure
requirements of SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." SFAS 134 conforms the subsequent accounting for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise with
the subsequent accounting for securities retained after the securitization of
other types of assets by a nonmortgage banking enterprise. SFAS 134 will be
effective for the Company for the fiscal quarter beginning January 1, 1999. The
Company does not expect that the adoption of SFAS 134 will have a material
impact on its consolidated financial condition, results of operations or cash
flows.
59
<PAGE>
Impact of Inflation and Changing Prices
The Company's consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time. Due to the fact that most assets and
liabilities of a financial institution are monetary in nature, interest rates
have a more significant impact on a financial institution's performance than do
general levels of inflation. Interest rates do not necessarily move in the same
direction or magnitude as the prices of goods and services.
60
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Asset/Liability Management
The objective of the Company's asset/liability management activities is to
improve earnings by adjusting the type and mix of assets and liabilities to
effectively address changing conditions and risks. Through overall management of
its balance sheet and by controlling various risks, the Company seeks to
optimize its financial returns within safe and sound parameters. The Company's
operating strategies for attaining this objective include managing net interest
margin through appropriate risk/return pricing of assets and liabilities,
increasing transaction accounts as a percentage of interest-bearing liabilities
and reducing the Company's cost of funds, utilizing the Company's strong capital
position to boost its earnings power through acquisition of quality assets with
higher risk-adjusted yields, controlling noninterest expense, enhancing
noninterest income, and utilizing improved information systems to facilitate the
analysis of the profitability of business platforms. The Company also utilizes
interest rate exchange agreements and other hedging strategies to reduce the
Company's exposure to fluctuations in interest rates and performs internal
analyses to measure, evaluate and monitor risk.
Interest Rate Risk
A key objective of asset/liability management is to manage interest rate risk
associated with changing asset and liability cash flows and market interest rate
movements. Interest rate risk occurs when interest rate sensitive assets and
liabilities do not reprice simultaneously and in equal volumes. The Company's
ALCO provides oversight to the Company's interest rate risk management process
and recommends policy guidelines regarding exposure to interest rates for
approval by the Board of Directors. Adherence to these policies is monitored on
an ongoing basis, and decisions related to the management of interest rate
exposure are made when appropriate in accordance with Company policies.
Financial institutions are subject to interest rate risk to the degree that
interest-bearing liabilities reprice or mature on a different basis and at
different times than interest-earning assets. The Company's strategy has been to
reduce the sensitivity of its earnings to interest rate fluctuations by more
closely matching the effective maturities or repricing characteristics of its
assets and liabilities. Certain assets and liabilities, however, may react in
different degrees to changes in market interest rates. Further, interest rates
on certain types of assets and liabilities may fluctuate prior to changes in
market interest rates, while rates on other types may lag behind. Additionally,
certain assets, such as adjustable rate mortgages, have features, including
payment and rate caps, which restrict changes in their interest rates. The
Company considers the anticipated effects of these factors when implementing its
interest rate risk management objectives.
The Company pursues both on- and off-balance sheet strategies that should, in
the long run, mitigate its exposure to fluctuations in interest rates. The
Company has initiated numerous actions over the past three years which have
significantly reduced the Company's exposure to fluctuations in interest rates.
The Company's interest rate risk should continue to be reduced in the future as
the Company continues to transition to shorter-term, less interest rate
sensitive consumer and commercial assets, as the Company continues to increase
transaction accounts and as the Company continues to lengthen maturities on its
FHLB advances to better match the duration of its interest-earning assets.
Interest Rate Exchange Agreements (Swaps)
- -----------------------------------------
The Company uses interest rate exchange agreements (i.e., swaps) to reduce the
interest rate risk related to certain assets and liabilities. Interest rate
swaps involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying notional amounts. At December
31, 1998 and 1997, the Company was a party to interest rate swaps with notional
principal amounts of $366 million and $449 million,
61
<PAGE>
respectively, which involve the receipt of floating interest rates (based on
three-month LIBOR) and payment of fixed interest rates on the underlying
notional amounts.
Forward Sale Contracts
- ----------------------
During 1998, the Company entered into forward sale contracts of MBS to hedge a
portfolio of mortgage loans. With the market and interest rate volatility during
1998, the correlation between the hedge and the underlying portfolio of assets
was disrupted, triggering the Company's settlement of the forward sale contracts
and resulting in a $940,000 recognized loss for the year ended December 31,
1998. There were no forward sale contracts in effect as of December 31, 1998.
Treasury Rate Lock Agreements
- -----------------------------
During 1997, the Company entered into $105 million in Treasury rate lock
agreements to hedge the anticipated issuance of $100 million in Subordinated
Notes. These agreements guaranteed a stated rate of interest for a stated period
of time and the Company paid the difference between the lock rate and the
effective Treasury rate on the settlement date. In conjunction with the Treasury
rate lock agreements, approximately $307,000 was deferred and is being
recognized as an adjustment of interest expense over the ten year life of the
Subordinated Notes.
Interest rate risk is the most significant market risk impacting the Company,
however, other types of market risk also affect the Company in the normal course
of its business activities. The impact on the Company resulting from other
market risks is deemed immaterial and no separate quantitative information
related to such market risks is presented herein. The Company does not maintain
a portfolio of trading securities and does not intend to engage in such
activities in the foreseeable future.
Interest Rate Sensitivity
The Company's monitoring activities related to managing interest rate risk
include both interest rate sensitivity "gap" analysis and the use of a
simulation model. While traditional gap analysis provides a simple picture of
the interest rate risk embedded in the balance sheet, it provides only a static
view of interest rate sensitivity at a specific point in time and does not
measure the potential volatility in forecasted results relating to changes in
market interest rates over time. Accordingly, the Company combines the use of
gap analysis with use of a simulation model which provides a dynamic assessment
of interest rate sensitivity.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated to reprice within a specific time
period and the amount of interest-bearing liabilities anticipated to reprice
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets repricing within a specific time period exceeds
the amount of interest-bearing liabilities repricing within that same time
period. Positive cumulative gaps suggest that earnings will increase when
interest rates rise. Negative cumulative gaps suggest that earnings will
increase when interest rates fall.
62
<PAGE>
The following table sets forth information regarding asset and liability
repricing for the Company as of December 31, 1998:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Repricing Period
----------------------------------------------------------------------
Under Over Over Over
One One to Three Three to Five Five
Year Years Years Years Total
---------- -------------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Assets
- ------
Cash and investments $ 264,087 $ - $ - $ - $ 264,087
Mortgage-backed securities and loans
and leases /(1)/ 2,979,431 1,097,234 506,629 472,222 5,055,516
---------- ---------- --------- --------- ----------
Total interest rate sensitive assets $3,243,518 $ 1,097,234 $ 506,629 $ 472,222 $5,319,603
========== =========== ========= ========= ==========
Liabilities
- -----------
Deposits:
Transaction accounts $1,627,275 $ - $ - $ - $1,627,275
Certificates of deposit 1,433,744 174,802 32,302 1,514 1,642,362
Borrowings 823,890 450,310 324,978 323,938 1,923,116
---------- ----------- --------- --------- ----------
Total interest rate sensitive liabilities $3,884,909 $ 625,112 $ 357,280 $ 325,452 $5,192,753
---------- ----------- --------- --------- ----------
Repricing gap-positive (negative) before impact
of interest rate swaps $ (641,391) $ 472,122 $ 149,349 $ 146,770 $ 126,850
==========
Impact of interest rate swaps 281,500 (154,000) (25,000) (102,500)
---------- ----------- --------- ---------
(359,891) 318,122 124,349 44,270
---------- ----------- --------- ---------
Cumulative repricing gap-positive (negative) $ (359,891) $ (41,769) $ 82,580 $ 126,850
========== =========== ========= =========
</TABLE>
/(1)/ Based on assumed annual prepayment and amortization rates which
approximate the Company's historical experience.
63
<PAGE>
One application of the aforementioned simulation model involves measurement of
the impact of market interest rate changes on the net present value of estimated
cash flows from the Company's assets, liabilities and off-balance sheet items,
defined as the Company's market value of equity ("MVE"). This analysis assesses
the changes in market values of interest rate sensitive financial instruments
which would occur in response to an instantaneous and sustained increase or
decrease in market interest rates of 100, 200, 300, and 400 basis points ("bp").
At December 31, 1998, the Company's MVE exposure related to the aforementioned
changes in market interest rates was within Company policy guidelines as
illustrated in the following table:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Changes in Market Value of Equity
---------------------------------------------------------------------------
Projected effect: +100 bp +200 bp +300 bp +400 bp
--------------- ------------- ------------------ ---------------
<S> <C> <C> <C> <C>
MVE without swaps $380,705 $350,976 $309,830 $265,380
MVE with swaps $383,879 $363,502 $331,176 $295,046
Impact of swaps $ 3,174 $ 12,526 $ 21,346 $ 29,666
Change in MVE with swaps as a percentage
of base MVE (2.68%) (7.84%) (16.04%) (25.20%)
Policy guideline (10.00%) (20.00%) (30.00%) (45.00%)
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Projected effect: -100 bp -200 bp -300 bp -400 bp
--------------- ------------- ------------------ ---------------
<S> <C> <C> <C> <C>
MVE without swaps $421,629 $446,951 $479,187 $517,597
MVE with swaps $404,354 $418,501 $438,870 $464,673
Impact of swaps $(17,275) $(28,450) $(40,317) $(52,924)
Change in MVE with swaps as a percentage
of base MVE 2.52% 6.10% 11.27% 17.81%
Policy guideline (10.00%) (15.00%) (20.00%) (25.00%)
</TABLE>
The preceding table indicates that in the event of an instantaneous and
sustained increase in market interest rates, the Company's MVE would be expected
to decrease, and that in the event of an instantaneous and sustained decrease in
market interest rates, the Company's MVE would be expected to increase.
The aforementioned simulation model also provides the ALCO with the ability to
simulate the Company's net interest income ("NII"). In order to measure, as of
December 31, 1998, the sensitivity of the Company's forecasted NII to changing
interest rates, both a rising and falling interest rate scenario were projected
and compared to a base market interest rate forecast derived from the treasury
yield curve. For the rising and falling interest rate scenarios, the base market
interest rate forecast was increased or decreased, on an instantaneous and
sustained basis, by 100 and 200 bp. At December 31, 1998, the Company's NII
exposure related to the aforementioned changes in market interest rates was
within Company policy guidelines as illustrated in the following table:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Increase/(Decrease) in Net Interest Income
--------------------------------------------------------------------------------------------
Projected effect: -200 bp -100 bp +100 bp +200 bp
------------------- ------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
NII without swaps $179,902 $172,865 $165,057 $160,414
NII with swaps $172,089 $167,133 $163,489 $160,928
Impact of swaps $ (7,813) $ (5,732) $ (1,568) $ 514
% Increase (decrease) from base
NII, with swaps 4.78% 1.76% (0.46%) (2.02%)
Policy guideline (15.00%) (10.00%) (10.00%) (15.00%)
</TABLE>
The computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, asset prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.
Actual amounts may differ from those projections set forth above should market
conditions vary from the underlying assumptions used.
64
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Bay View Capital Corporation and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
---------------------------------------
At December 31,
---------------------------------------
1998 1997
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and deposits due from depository institutions $ 37,296 $ 40,885
Short-term investments 167,890 190,937
---------- ----------
205,186 231,822
Securities available-for-sale:
Investment securities 5,319 5,639
Mortgage-backed securities 13,616 54,402
Securities held-to-maturity:
Investment securities (fair value: 1997 - $5,015) - 5,000
Mortgage-backed securities (fair value: 1998 - $621,372; 1997 - $413,980) 621,773 415,859
Loans and leases, net of allowance for losses: 1998 - $45,405;
1997 - $38,458 4,191,269 2,373,113
Investment in operating leased assets, net 183,453 -
Investment in stock of FHLB of San Francisco 90,878 61,012
Real estate owned, net 2,666 4,146
Premises and equipment, net 24,727 16,164
Intangible assets 134,088 29,507
Other assets 123,257 49,812
---------- ----------
Total Assets $5,596,232 $3,246,476
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts $1,627,275 $ 553,820
Certificates of deposit 1,642,362 1,123,315
---------- ----------
3,269,637 1,677,135
Advances from FHLB of San Francisco 1,653,300 1,110,270
Securities sold under agreements to repurchase 25,302 90,134
Subordinated Notes, net 99,437 99,372
Senior Debentures 50,000 50,000
Other borrowings 5,077 6,200
Other liabilities 25,668 39,738
---------- ----------
Total Liabilities 5,128,421 3,072,849
---------- ----------
Guaranteed Beneficial Interest in the Company's Junior
Subordinated Debentures ("Capital Securities") 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, 1998 - 20,376,251 shares and 1997 - 15,125,874 shares;
outstanding, 1998 - 19,113,637 shares and 1997 - 12,070,474 shares 204 151
Additional paid-in capital 251,010 103,052
Retained earnings (substantially restricted) 155,715 141,065
Treasury stock, at cost, 1998 - 1,262,614 shares and 1997 - 3,055,400 shares (25,157) (66,352)
Accumulated other comprehensive income:
Unrealized loss on securities available-for-sale, net of tax (202) (72)
Debt of Employee Stock Ownership Plan (3,759) (4,217)
---------- ----------
Total Stockholders' Equity 377,811 173,627
---------- ----------
Total Liabilities and Stockholders' Equity $5,596,232 $3,246,476
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
65
<PAGE>
Bay View Capital Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
----------------------------------------
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------- ---------- -------------
(Dollars in thousands, except per share
amounts)
<S> <C> <C> <C>
Interest income:
Interest on loans and leases $347,086 $197,898 $192,443
Interest on mortgage-backed securities 48,225 34,317 42,081
Interest and dividends on investment securities 11,052 10,029 7,231
-------- -------- --------
406,363 242,244 241,755
Interest expense:
Interest on deposits 149,656 76,484 100,225
Interest on senior debentures and notes 14,106 7,716 2,623
Interest on borrowings 88,000 70,708 57,925
-------- -------- --------
251,762 154,908 160,773
Net interest income 154,601 87,336 80,982
Provision for losses on loans and leases 9,114 1,952 1,898
-------- -------- --------
Net interest income after provision for losses on loans and leases 145,487 85,384 79,084
Noninterest income:
Leasing income 11,341 - -
Loan fees and charges 7,411 5,679 4,930
Account fees 6,122 2,799 1,891
Sales commissions 3,994 2,502 1,772
Gain (loss) on sale of loans and securities 1,060 925 (1,453)
Other, net 1,144 850 1,424
-------- -------- --------
31,072 12,755 8,564
Noninterest expense:
General and administrative:
Compensation and employee benefits 56,105 35,646 27,956
Occupancy and equipment 20,644 10,677 9,865
Professional services 9,382 5,278 1,645
Data processing service bureau 3,994 2,811 4,243
Marketing 3,572 2,612 1,568
Deposit insurance premiums and regulatory fees 2,908 1,475 4,911
Other, net 16,962 13,414 8,767
-------- -------- --------
113,567 71,913 58,955
Dividend expense on Capital Securities 244 - -
Leasing expense 7,682 - -
SAIF recapitalization assessment - - 11,750
Income from real estate owned, net (181) (543) (4,806)
Recovery of losses on real estate (59) (585) (103)
Amortization of intangible assets 11,372 4,088 2,606
-------- -------- --------
132,625 74,873 68,402
Income before income tax expense 43,934 23,266 19,246
Income tax expense 21,215 9,245 8,277
-------- -------- --------
Net income $ 22,719 $ 14,021 $ 10,969
======== ======== ========
Basic earnings per share $ 1.13 $ 1.09 $ 0.80
======== ======== ========
Diluted earnings per share $ 1.12 $ 1.06 $ 0.79
======== ======== ========
Average basic shares outstanding 20,035 12,860 13,703
======== ======== ========
Average diluted shares outstanding 20,335 13,203 13,900
======== ======== ========
Net income $ 22,719 $ 14,021 $ 10,969
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available-for-sale, net of tax expense (benefit)
of ($92), $464 and ($22) for 1998, 1997 and 1996, respectively (130) 641 (30)
-------- -------- --------
Comprehensive income $ 22,589 $ 14,662 $ 10,939
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
66
<PAGE>
Bay View Capital Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Additional
Number of Common Paid-in Retained
Shares Stock Capital Earnings /(1)/
------------- ----------- -------------- -------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Balance at December 31, 1995 14,803 $148 $ 97,484 $124,487
Repurchase of common stock - - - -
Repurchase of common stock for retirement plan - - 1,090 -
Exercise of stock options, including tax benefits 202 2 1,862 -
Cash dividends declared ($0.305 per share) - - - (4,132)
Unrealized loss, net of tax - - - -
Repayment of debt - - - -
Net income - - - 10,969
-------- ----- -------- --------
Balance at December 31, 1996 15,005 150 100,436 131,324
Repurchase of common stock - - - -
Exercise of stock options, including tax benefits 121 1 2,616 -
Cash dividends declared ($0.34 per share) - - - (4,280)
Unrealized gain, net of tax - - - -
Repayment of debt - - - -
Net income - - - 14,021
-------- ----- -------- --------
Balance at December 31, 1997 15,126 151 103,052 141,065
Issuance of common stock (AFEH acquisition):
From shares held in treasury - - - -
From authorized but unissued shares 5,087 51 144,691 -
Repurchase of common stock - - - -
Exercise of stock options, including tax benefits 163 2 3,267 -
Cash dividends declared ($0.40 per share) - - - (8,069)
Unrealized loss, net of tax - - - -
Repayment of debt - - - -
Net income - - - 22,719
-------- ----- -------- --------
Balance at December 31, 1998 20,376 $204 $251,010 $155,715
======== ===== ======== ========
<CAPTION>
-----------------------------------------------------------------------
Debt of
Unrealized Gain Employee
(Loss) on Securities Stock Total
Treasury Available-for-Sale Ownership Stockholders'
Stock (net of tax) Plan Equity
------- -------------------- --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ (8,436) (683) (5,023) $207,977
Repurchase of common stock (16,971) - - (16,971)
Repurchase of common stock for retirement plan (1,090) - - -
Exercise of stock options, including tax benefits - - - 1,864
Cash dividends declared ($0.305 per share) - - - (4,132)
Unrealized loss, net of tax - (30) - (30)
Repayment of debt - - 385 385
Net income - - - 10,969
-------- ----- ------- -------
Balance at December 31, 1996 (26,497) (713) (4,638) 200,062
Repurchase of common stock (39,855) - - (39,855)
Exercise of stock options, including tax benefits - - - 2,617
Cash dividends declared ($0.34 per share) - - - (4,280)
Unrealized gain, net of tax - 641 - 641
Repayment of debt - - 421 421
Net income - - - 14,021
-------- ----- ------- -------
Balance at December 31, 1997 (66,352) (72) (4,217) 173,627
Issuance of common stock (AFEH acquisition):
From shares held in treasury 65,258 - - 65,258
From authorized but unissued shares - - - 144,742
Repurchase of common stock (24,063) - - (24,063)
Exercise of stock options, including tax benefits - - - 3,269
Cash dividends declared ($0.40 per share) - - - (8,069)
Unrealized loss, net of tax - (130) - (130)
Repayment of debt - - 458 458
Net income - - - 22,719
-------- ----- ------- --------
Balance at December 31, 1998 $(25,157) $(202) $(3,759) $377,811
======== ===== ======= ========
</TABLE>
/(1)/ Substantially restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
67
<PAGE>
Bay View Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
------------------------------------------
Year Ended December 31,
------------------------------------------
1998 1997 1996
------------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,719 $ 14,021 $ 10,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Write-down on disposal of premises and equipment - 18 1,767
Amortization of intangible assets 11,372 4,088 2,606
Proceeds from loans securitized and sold - 265,203 9,668
Provision for losses on loans and leases and real estate owned 9,055 1,367 1,795
Depreciation and amortization of premises and equipment 6,780 2,974 2,210
Depreciation and amortization of investment in operating leased assets 6,612 - -
Amortization of premiums, net of discounts 15,735 4,139 5,160
(Gain) loss on sale of loans and securities (1,060) (925) 1,160
(Increase) decrease in other assets (6,863) (7,421) 1,866
Increase (decrease) in other liabilities (39,424) (54,707) 40,545
Other, net (2,628) (1,696) (2,345)
-------- ------- -------
Net cash provided by operating activities 22,298 227,061 75,401
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash and cash equivalents received 82,129 (9,975) (61,505)
Net (increase) decrease in loans and leases resulting from originations,
net of principal payments 451,171 (57,327) 41,391
Purchase of loans and leases (948,132) (120,963) (35,974)
Purchase of mortgage-backed securities (201,714) - -
Purchase of investment securities (1,956) (5,639) (3,041)
Principal payments on mortgage-backed securities 284,627 83,643 91,748
Proceeds from sale of mortgage-backed securities available-for-sale 239,707 20,465 54,458
Proceeds from sale of mortgage-backed securities held-to-maturity - - 2,602
Proceeds from sale of investment securities available-for-sale 2,357 - -
Proceeds from maturities/calls of investment securities available-for-sale - 13,802 15,000
Proceeds from maturities/calls of investment securities held-to-maturity 5,000 10,204 24,493
Proceeds from sale of real estate owned 5,357 12,528 32,690
Proceeds from sale of leasing portfolio held-for-sale - - 59,848
Proceeds from sale of premises and equipment - - 10,648
Additions to premises and equipment (11,110) (11,694) (1,577)
Increase in investment in stock of FHLB of San Francisco (9,303) (9,121) (10,558)
-------- ------- -------
Net cash provided by (used in) investing activities (101,867) (74,077) 220,223
-------- ------- -------
</TABLE>
68
<PAGE>
Bay View Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
-------------------------------------------
Year Ended December 31,
-------------------------------------------
1998 1997 1996
---------- ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit outflows (420,141) (86,832) (245,268)
Redemption of Bay View Credit deposits - - (267,500)
Proceeds from advances from FHLB of San Francisco 5,320,200 5,509,532 1,644,226
Repayment of advances from FHLB of San Francisco (4,833,170) (5,377,012) (1,433,266)
Proceeds from reverse repurchase agreements 377,813 519,338 373,272
Repayment of reverse repurchase agreements (442,645) (639,844) (329,370)
Issuance of Subordinated Notes, net of discount - 99,350 -
Issuance of Senior Debentures - - 50,000
Net change in other borrowings (11,123) (10,865) (4,406)
Issuance of Capital Securities 90,000 - -
Repurchase of common stock (24,063) (39,855) (16,971)
Proceeds from issuance of common stock 3,269 2,617 1,864
Dividends paid to stockholders (7,207) (4,419) (4,137)
----------- ----------- -----------
Net cash provided by (used in) financing activities 52,933 (27,990) (231,556)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (26,636) 124,994 64,068
Cash and cash equivalents at beginning of year 231,822 106,828 42,760
----------- ----------- -----------
Cash and cash equivalents at end of year $ 205,186 $ 231,822 $ 106,828
=========== =========== ===========
Cash paid during the year for:
Interest $ 253,528 $ 148,615 $ 164,315
Income taxes $ 118 $ 14,674 $ 4,951
Supplemental non-cash investing and financing activities:
Loans transferred to real estate owned $ 4,956 $ 8,252 $ 10,065
Loans originated to sell real estate owned $ - $ 1,904 $ 5,011
The acquisitions of subsidiaries involved the following:
Common stock issued $ 210,000 $ - $ -
Liabilities assumed 2,103,352 13,667 476,492
Fair value of assets acquired, other than cash and cash equivalents (2,127,646) (1,986) (531,029)
Goodwill (103,577) (21,656) (6,968)
----------- ----------- -----------
Acquisition of subsidiaries, net of cash and cash equivalents received $ 82,129 $ (9,975) $ (61,505)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
69
<PAGE>
Bay View Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements include the consolidated accounts of Bay
View Capital Corporation, a holding company incorporated in the state of
Delaware (the "Company" or "BVCC"), and its wholly owned subsidiaries: Bay View
Bank ("BVB"), a federally chartered capital stock savings bank; Bay View
Commercial Finance Group ("BVCFG"), formerly Concord Growth Corporation, a
California corporation; Bay View Securitization Corporation ("BVSC"), a Delaware
corporation; Bay View Capital I, a Delaware Business Trust; and Regent Financial
Corporation ("Regent"), a California corporation. BVB includes its wholly owned
subsidiaries: Bay View Acceptance Corporation ("BVAC"), a Nevada corporation;
MoneyCare, Inc., a California corporation; and Bay View Auxiliary Corporation, a
California corporation. BVAC includes its wholly owned subsidiaries: Bay View
Credit ("BVC"), a California corporation; Ultra Funding, Inc. ("Ultra"), a
California corporation; and LFS-BV, Inc. ("LFS"), a Nevada corporation. All
significant intercompany accounts and transactions have been eliminated. As used
herein, the terms "Company" or "BVCC" refer to the Company and its consolidated
subsidiaries unless otherwise indicated.
Nature of Operations
The Company is a diversified financial services company headquartered in San
Mateo, California. BVB is a federally chartered capital stock savings bank with
56 branches throughout the San Francisco Bay Area and one branch in Southern
California. BVAC operates as a consumer finance company throughout the United
States. BVCFG operates as a commercial finance company throughout the United
States. BVSC was formed for the purpose of issuing asset-backed securities
through a trust. Regent provides item processing services.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. A material estimate that is particularly susceptible to possible
change in the near term relates to the determination of the allowance for loan
and lease losses. An estimate of possible changes or range of possible changes
cannot be made.
Cash and Cash Equivalents
Cash and cash equivalents, as reported in the consolidated statements of
financial condition and statements of cash flows, consist of highly liquid
financial instruments, with maturities of 90 days or less at the time of
purchase, that are readily convertible into cash and are so near their maturity
that they present insignificant risk of changes in value.
Securities
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting
for Certain Investments in Debt and Equity Securities," establishes the
classification of investments into three categories: held-to-maturity,
available-for-sale and trading. Securities classified as held-to-maturity are
recorded at amortized cost, adjusted for the amortization of premiums and
accretion of discounts, because management intends and the Company has the
ability to hold these securities to maturity. Securities that are held to meet
investment objectives such as interest rate risk and liquidity management, but
which may be sold as necessary to implement management strategies, are
classified as available-for-sale and are reported at fair value. Fair value for
these securities is obtained principally from published information or quotes by
registered securities brokers. Securities for which quotes are not readily
available are valued based on the present value of discounted estimated future
cash flows. The Company does not have a trading portfolio.
70
<PAGE>
Securities are identified as either available-for-sale or held-to-maturity
at purchase and are accounted for accordingly. Unrealized losses on securities
held-to-maturity are realized and charged against earnings when it is determined
that a decline in value which is other than temporary has occurred. Net
unrealized gains and losses on securities available-for-sale are excluded from
earnings and reported, net of applicable income taxes, as a separate component
of stockholders' equity. Gains and losses on sales of securities are recorded in
earnings at the time of sale and are determined by the difference between the
net sale proceeds and the amortized cost of the security, using the specific
identification method.
Discounts and premiums on securities are amortized into interest income
using a method approximating the effective interest method over the estimated
life of the security, adjusted for actual prepayments. Interest on securities is
accrued as income only to the extent considered collectible.
Loans and Leases
Loans and leases originated or purchased by the Company are identified as
either held-for-sale or held-for-investment at, or prior to, origination or
purchase and are recorded at cost including premiums or discounts and net of
deferred fees and costs and the allowance for loan and lease losses, as
applicable. Loans and leases classified as held-for-investment are carried at
amortized cost and are not adjusted to the lower of cost or market because
management intends, and the Company has the ability, to hold these loans and
leases to maturity. Loans and leases classified as held-for-sale are carried at
the lower of cost or market on an aggregate basis. Market value for these loans
and leases is based on prices for similar loans and leases in the secondary
market. Interest on loans and leases is accrued as income only to the extent
considered collectible. Generally, the Company discontinues interest accruals on
loans and leases 90 days or more past due. Interest income on nonaccrual loans
and leases is recognized on a cash basis.
The Company charges fees for originating loans and leases at the time the
loan or lease is granted. The Company recognizes these origination fees, net of
certain direct costs, as a yield adjustment over the life of the related loan or
lease using the effective interest method. Amortization of net deferred
origination fees is discontinued on nonperforming loans and leases. When a loan
or lease is sold or paid off, unamortized net origination fees are included in
income at that time.
Statement of Financial Accounting Standards No. 114 ("SFAS 114"),
"Accounting by Creditors for Impairment of a Loan," as amended by Statement of
Financial Accounting Standards No. 118 ("SFAS 118"), "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," established
standards for impaired loans. A loan is impaired when, based on current
information and events, it is probable that the Company is unable to collect all
amounts due according to the contractual terms of the loan agreement. The
Company generally considers nonperforming loans and troubled debt restructurings
as impaired loans. Nonperforming loans are defined as loans 90 days or more
delinquent as to principal and interest payments (unless the principal and
interest are well secured and in the process of collection) and loans less than
90 days delinquent are designated as nonperforming when the Company determines
that the full collection of principal and/or interest is doubtful. Troubled debt
restructurings are loans which have been modified based on interest rate
concessions and/or payment concessions. SFAS 114 is not applicable to large
groups of homogeneous loans that are collectively evaluated for impairment. The
Company considers its single-family residential and consumer loans as
homogeneous loans for purposes of the application of SFAS 114.
Charge-offs are recorded when the valuation of the impaired loan is less
than the recorded investment in the loan. In determining charge-offs for
specific loans, management evaluates the creditworthiness and financial status
of the borrower and also analyzes cash flows and current property appraisals.
SFAS 114 requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The Company's
impaired loans are generally measured based on the fair value of the collateral
because they are collateral dependent.
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan. The Company recognizes interest income on impaired
loans on a cash basis.
71
<PAGE>
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision
charged to expense and is maintained at a level that the Company believes is
sufficient to cover estimated probable losses in the portfolio. In determining
the level of the allowance for loan and lease losses, the Company adheres to an
internal asset review system and an established loss reserve methodology. This
methodology provides for three reserve components. The first component
represents reserves for loans and leases that have been individually evaluated
and identified as having probable losses. The second component represents
reserves for groups of loans and leases that are collectively evaluated for
impairment. The Company determines reserves for these groups of loans and leases
based on factors such as prevailing economic conditions, historical loss
experience, asset concentrations, levels and trends of classified assets, and
loan and lease delinquencies. The last component is unallocated reserves,
representing reserves based on factors that are not necessarily associated with
a specific credit, group of loans or leases or loan or lease category. These
factors include an evaluation of economic conditions where the Company lends
money, loan and lease concentrations, lending policies or underwriting
procedures, and trends in delinquencies and nonperforming assets. The
unallocated reserve reflects the Company's efforts to ensure that the overall
allowance appropriately reflects the probable losses inherent in the loan and
lease portfolio.
While the Company uses currently available information to provide for
losses on loans and leases, additions to the allowance for loan and lease losses
may be necessary based on new information and/or future economic conditions.
Loan Sales and Servicing
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," establishes standards under which, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
Under SFAS 125, the Company records a servicing asset for the present value of
the retained interest in a transferred asset representing servicing fees net of
related costs. Any retained interest in excess of such servicing fees is
recorded on a net present value basis as an available-for-sale security and
stated at fair value. SFAS 125 was effective, on a prospective basis, for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. Prior to January 1, 1997, when a
participating interest in loans sold had an average contractual interest rate,
adjusted for normal servicing fees, which was different than the agreed-upon
yield to the purchaser, the sales price was adjusted by the present value of the
differential for the estimated remaining life of the loans (capitalized excess
servicing). Any resulting net premium or discount was amortized to interest
income over the estimated remaining life of the loans based on a methodology
that approximates the effective interest method. The aggregate amount of
servicing assets arising from loan sales was $902,000 and $1.2 million at
December 31, 1998 and 1997, respectively. At December 31, 1998, there was no
impairment relating to servicing assets. Amortization of servicing assets and
any related impairments are included in noninterest income and noninterest
expense as the associated servicing revenue is received and expenses are
incurred. The Company's retained interest was $4.6 million and $5.4 million at
December 31, 1998 and 1997, respectively, and was classified as an
available-for-sale security. Gains or losses on the sale of loans are recorded
in earnings at the time of sale.
72
<PAGE>
Investment in Operating Leased Assets
The Company purchases motor vehicles subject to leases which are
characterized as operating leases in accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." The corresponding asset is
recorded as a fixed asset and depreciated over the lease term to its estimated
residual value. This depreciation and other related expenses, including the
amortization of initial direct costs, which are deferred and amortized over the
lease term, are classified as noninterest expense. Lease payments received are
recorded as noninterest income. At December 31, 1998, future minimum lease
payments to be received by the Company under operating leases were $31.7
million, $31.6 million, $29.5 million, $20.7 million, $9.2 million, and $723,000
for the years ended December 31, 1999, 2000, 2001, 2002, 2003, and thereafter,
respectively.
The Company continually reviews and adjusts, as necessary, the estimated
residual value relating to its leased assets through an evaluation of factors
such as prevailing and anticipated economic conditions, historical loss
experience and delinquencies.
Real Estate Owned
Real estate owned is comprised of property acquired through foreclosure and
is recorded at the lower of cost (i.e., net loan value) or fair value less
estimated costs to sell, as of the date of foreclosure. The difference, if any,
is charged-off against the allowance for loan and lease losses. Thereafter, a
specific valuation allowance is established and charged to noninterest expense
for adverse changes in the fair value of the property. Revenues and other
expenses associated with real estate owned are realized and reported as a
component of noninterest expense when incurred.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
basis over the estimated useful lives for each of the various asset categories.
These useful lives range from two to ten years. The Company had $1.3 million and
$2.0 million, net, of capitalized lease obligations at December 31, 1998 and
1997, respectively.
Intangible Assets
Core deposit premiums arise from the acquisition of deposits and are
amortized by the Company on a straight-line basis over the estimated life of the
deposit base acquired, generally eight to ten years. The Company continually
evaluates the periods of amortization to determine whether later events and
circumstances warrant revised estimates. In addition, the market value of core
deposit premiums is re-evaluated on an annual basis to assess the recoverability
of their carrying value for inclusion as a component of regulatory capital.
Goodwill arises from acquisitions and represents the excess of the total
purchase price over the fair value of net assets acquired. Goodwill is amortized
to expense on a straight-line basis over periods of up to 20 years. On a
periodic basis, the Company reviews its goodwill for events or changes in
circumstances that may indicate that the estimated undiscounted future cash
flows from these acquisitions will be less than the carrying amount of the
goodwill. If it becomes probable that impairment exists, a reduction in the
carrying amount is recognized.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangible assets to be held and
used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition.
Measurement of an impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold and use are based on the fair
value of the asset. Long-lived assets and certain identifiable intangible assets
to be disposed of are reported at the lower of carrying amount or fair value
less costs to sell.
73
<PAGE>
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which are considered financing activities. The
obligations to repurchase the securities are reflected as liabilities, and the
related underlying securities for the agreements, which are pledged as
collateral and held by the counterparties, are included in the Company's
securities portfolio as recorded assets.
Income Taxes
The Company and its subsidiaries file consolidated federal income tax
returns in which the taxable income or loss of the Company is combined with that
of its subsidiaries. Consolidated, combined and separate company state tax
returns are filed in certain states, as applicable, including California. Each
subsidiary's share of income tax expense (benefit) is based on the amount which
would be payable (receivable) if separate returns were filed.
The Company's income tax provisions are based upon income taxes payable for
the current period as well as current period changes in deferred income taxes.
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory income tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities. The effect on deferred income
taxes for a change in tax rates is recognized through the provision for income
taxes during the period of enactment.
Derivative Financial Instruments
The Company uses interest rate derivative financial instruments primarily
to hedge mismatches in the rate and maturity of loans and securities and their
funding sources and to reduce interest rate risk on anticipated transactions.
These instruments serve to reduce rather than increase the Company's exposure to
movements in interest rates. At the inception of the hedge, the Company
identifies an individual asset, liability or anticipated transaction or an
identifiable group of essentially similar assets or liabilities that expose the
Company to interest rate risk at the consolidated or subsidiary level. Interest
rate derivatives are accounted for by the deferral method only if they are
designated as a hedge and are expected to be and are effective in substantially
reducing interest rate risk arising from the assets, liabilities or anticipated
transactions identified as exposing the Company to risk. To qualify as an
effective hedge, derivative financial instruments must meet specific correlation
tests (i.e., the change in their fair values must be within 80 to 120 percent of
the opposite change in the fair values of the hedged item or anticipated
transaction). For interest rate exchange agreements ("swaps") to qualify as an
effective hedge, their notional amount, interest rate index and life must
closely match the related terms of the hedged assets or liabilities. If a
periodic assessment indicates that the derivative no longer provides an
effective hedge, any previously unrecognized hedge gain or loss and any net
settlement upon the close-out or termination of the derivative contract that
offsets changes in the value of the hedged asset or liability is deferred and
amortized to earnings over the life of the underlying hedged asset or liability
with any excess gain or loss attributable to the excess of the notional amount
over the hedged amount recognized in noninterest income.
Amounts payable or receivable for interest rate swaps are accrued with the
passage of time, the effect of which is included in interest income or expense
reported on the hedged asset or liability. If a hedged asset or liability
settles before maturity of the hedging interest rate derivative, the derivative
is closed out or settled, and any previously unrecognized hedge gain or loss and
any net settlement upon the close-out or termination of the interest rate
derivative is recognized in earnings. If interest rate derivatives used in an
effective hedge are closed out or terminated before the hedged item settles, any
previously unrecognized hedge gain or loss and any net settlement upon the
close-out or termination of the interest rate derivative is deferred and
amortized to earnings over the life of the underlying hedged asset or liability.
When an anticipated transaction occurs, the derivatives hedging the
anticipated transaction are closed out or settled, and any previously
unrecognized hedge gain or loss and any net settlement upon the close-out or
termination of the derivative is deferred and amortized to earnings over the
life of the underlying hedged asset or liability. If the anticipated transaction
is a sale of assets, the derivatives hedging the anticipated transaction are
closed out or settled, and any previously unrecognized hedge gain or loss and
any net settlement upon the close-out or termination of the derivative is
accounted for as part of the gain or loss on the sale of the underlying hedged
asset. If the anticipated transaction does not occur, the derivatives hedging
the anticipated transaction are closed out or settled, and are accounted for as
a gain or loss on the hedge.
74
<PAGE>
In connection with its use of interest rate exchange agreements, the
Company is exposed to loss of future interest differential payments (credit
risk) in the event of nonperformance by the counterparties to the agreements.
The Company manages the credit risk associated with its interest rate exchange
agreements by adhering to a strict counterparty selection process and by
establishing maximum exposure limits with each individual counterparty. The
Company does not anticipate nonperformance by its counterparties.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," establishes financial accounting and
reporting standards for stock-based compensation plans, including employee stock
purchase plans, stock options and restricted stock. SFAS 123 encourages all
entities to adopt a fair value method of accounting for stock-based compensation
plans, whereby compensation cost is measured at the grant date based on the fair
value of the award and is realized as an expense over the service or vesting
period. However, SFAS 123 also allows an entity to continue to measure
compensation cost for these plans using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees."
The Company accounts for its stock-based awards to employees and directors
using the intrinsic value method of accounting in accordance with APB 25. Under
the intrinsic value method, compensation cost is generally the excess, if any,
of the quoted market price of the stock at the grant or other measurement date
over the amount which must be paid to acquire the stock.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, ("SFAS 128"),
"Measurement of Earnings Per Share," establishes standards for computing and
reporting Basic Earnings Per Share ("EPS") and Diluted EPS. Basic EPS is
calculated by dividing net earnings for the period by the weighted-average
common shares outstanding for that period. There is no adjustment to the number
of outstanding shares for potential dilutive instruments, such as stock options.
Diluted EPS takes into account the potential dilutive impact of such instruments
and uses the average share price for the period in determining the number of
incremental shares to add to the weighted-average number of shares outstanding.
All prior period earnings per share amounts have been restated to reflect the
adoption of SFAS 128.
The following table illustrates the calculation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C>
Net earnings available to common stockholders $ 22,719 $ 14,021 $ 10,969
Weighted average shares outstanding 20,035 12,860 13,703
Add: Dilutive potential common shares 300 343 197
Diluted weighted average shares outstanding 20,335 13,203 13,900
------------------- ------------------- -------------------
Basic earnings per share $ 1.13 $ 1.09 $ 0.80
=================== =================== ===================
Diluted earnings per share $ 1.12 $ 1.06 $ 0.79
=================== =================== ===================
</TABLE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative. The Company currently
utilizes derivative instruments to hedge cash flows associated with current and
anticipated transactions. To the extent these derivative instruments qualify as
a cash flow hedge under SFAS 133, the effective portion of the derivative's gain
or loss would be initially reported as a component of other comprehensive income
75
<PAGE>
(outside of earnings) and subsequently reclassified into earnings when the
related transaction affects earnings. SFAS 133 will be effective for the Company
for the fiscal year beginning January 1, 2000. The Company is in the process of
evaluating the impact that the adoption of SFAS 133 will have on its
consolidated financial condition, results of operations or cash flows.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134 ("SFAS 134"), "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," which amends the disclosure requirements of SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." SFAS 134 conforms the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. SFAS 134 will be effective for the Company for
the fiscal quarter beginning January 1, 1999. The Company does not expect that
the adoption of SFAS 134 will have a material impact on its consolidated
financial condition, results of operations or cash flows.
Reclassifications
Certain reclassifications have been made to prior year balances in order to
conform to the current year presentation. Such reclassifications had no effect
on the results of operations or stockholders' equity.
Note 2. Merger-Related Activity
California Thrift & Loan
Effective June 1, 1996, the Company acquired all of the outstanding common
stock of CTL Credit, Inc. and its wholly owned subsidiary, California Thrift &
Loan ("CTL"), for cash.
CTL was a Federal Deposit Insurance Corporation ("FDIC")-insured California
industrial loan company with a focus on consumer lending. The acquisition was
accounted for using the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." In an
acquisition accounted for under the purchase method of accounting, the purchase
price is allocated to assets acquired and liabilities assumed based on their
estimated fair values at the time of consummation of the transaction.
The total purchase price of approximately $62 million exceeded the
estimated fair value of net assets acquired by approximately $7 million, which
was recorded as goodwill and which is being amortized on a straight-line basis
over seven years. The Company issued $50 million of 8.42% Senior Debentures in
May 1996, a portion of which was used to partially finance the acquisition.
Effective December 31, 1997, CTL was deregulated and renamed Bay View
Credit. BVC is a subsidiary of BVAC, a subsidiary of BVB. All references to this
subsidiary from this point forward herein will reflect its new name, Bay View
Credit.
Concord Growth Corporation
The Company completed its acquisition of EXXE Data Corporation ("EXXE") and
its wholly owned commercial finance subsidiary, Concord Growth Corporation
("CGC"), on March 17, 1997. At the close of the transaction, EXXE became a
stand-alone subsidiary of the Company. Subsequent to the close of the
transaction, EXXE was merged into CGC and liquidated and CGC became a first-tier
stand-alone subsidiary of the Company. The former holders of EXXE capital stock,
warrants and options received an initial aggregate cash payment of $19.8 million
and will be entitled to potential future cash payments, of up to $34 million,
depending upon the financial performance of CGC. There were no cash payments
made during 1998 or 1997. The acquisition was accounted for under the purchase
method of accounting effective April 1, 1997. The total purchase price exceeded
the estimated fair value of net assets acquired by approximately $21 million,
which was recorded as goodwill and which is being amortized on a straight-line
basis over 15 years. During 1998, CGC was renamed Bay View Commercial Finance
Group. All references to this subsidiary from this point forward herein will
reflect its new name.
76
<PAGE>
Ultra Funding, Inc.
Effective October 1, 1997, the Company, through its newly formed
subsidiary, Ultra Funding, Inc., acquired the origination capabilities and
certain assets of Ultra Funding, Ltd. of Austin, Texas. The total purchase price
exceeded the estimated fair value of net assets acquired by approximately
$400,000, which was recorded as goodwill and which is being amortized on a
straight-line basis over seven years.
America First Eureka Holdings, Inc.
The Company completed its acquisition of America First Eureka Holdings,
Inc. ("AFEH") and its wholly owned subsidiary, EurekaBank, a federal savings
bank, on January 2, 1998. Pursuant to the Merger Agreement, the Company paid $90
million in cash and $210 million in stock (8,076,923 shares of the Company's
common stock, a portion of which were issued from the Company's shares in
treasury) to America First Financial Fund 1987-A Limited Partnership, the sole
shareholder of AFEH, for a total purchase price of $300 million. The number of
common shares issued was based on the average value of the Company's common
stock for the 20 full trading days ending on the fifth business day prior to the
merger closing date. Based on the average value of the Company's common stock
during this period and pursuant to the Merger Agreement, the number of common
shares issued was determined by dividing $210 million by $26.00 per share.
The acquisition of AFEH was accounted for under the purchase method of
accounting effective January 2, 1998. The amount of goodwill recorded as of the
merger date was $104 million, which is being amortized on a straight-line basis
over 20 years and which excludes core deposit intangibles ("CDI") of
approximately $12 million, which are being amortized on a straight-line basis
over 10 years. This goodwill amount represents the excess of the total purchase
price over the estimated fair value of net assets acquired.
The following table illustrates the allocation of the purchase price:
<TABLE>
<CAPTION>
---------------------------
(Dollars in thousands)
---------------------------
<S> <C>
Cash paid $ 90,000
Common stock issued 210,000
Acquisition costs 4,456
---------------------------
Total purchase price 304,456
Fair value of assets acquired, including CDI 2,304,231
Fair value of liabilities assumed 2,103,352
---------------------------
Net assets acquired 200,879
---------------------------
Purchase price in excess of net assets acquired $ 103,577
===========================
</TABLE>
77
<PAGE>
The pro forma financial information in the following table illustrates the
combined results of operations of the Company and AFEH for the year ended
December 31, 1997 as if the acquisition of AFEH had occurred as of January 2,
1997. The pro forma financial information is presented for informational
purposes and is not necessarily indicative of the results of operations which
would have occurred had the Company and AFEH constituted a single entity as of
January 2, 1997. The pro forma financial information is also not necessarily
indicative of the future results of operations of the combined company. In
particular, the Company's opportunity to achieve certain cost savings as a
result of the acquisition has not been included in the pro forma financial
information.
<TABLE>
<CAPTION>
------------------------------
Year Ended
December 31, 1997
------------------------------
(Dollars in thousands,
except per share amounts)
<S> <C>
Net interest income $ 142,521
Provision for loan and lease losses (6,708)
Noninterest income 24,324
Noninterest expense (126,633)
Income tax expense (15,694)
------------------------------
Net income $ 17,810
==============================
Basic earnings per share $ 0.85
------------------------------
Diluted earnings per share $ 0.84
==============================
</TABLE>
The pro forma combined net income for the year ended December 31, 1997 of
$17.8 million consists of net income for the Company of $14.0 million and net
income for AFEH of $20.0 million, less pro forma adjustments of $16.2 million.
Significant pro forma adjustments include interest expense relating to $100
million in Subordinated Notes issued in August 1997 in anticipation of the
Company's acquisition of AFEH, amortization expense relating to goodwill and
core deposit intangibles created as a result of the acquisition and additional
income tax expense relating to income taxes that would have been recognized
utilizing the Company's effective income tax rates for the year ended December
31, 1997, net of the tax impact of the pro forma adjustments.
Note 3. Cash and Cash Equivalents
The following table illustrates the Company's cash and cash equivalents as
of the dates indicated:
<TABLE>
<CAPTION>
------------------------------------------
Year Ended December 31,
------------------------------------------
1998 1997
------------------- -------------------
(Dollars in thousands)
<S> <C> <C>
Cash and deposits due from depository institutions $ 37,296 $ 40,885
Short-term investments 167,890 190,937
------------------ -------------------
Total $ 205,186 $ 231,822
================== ===================
</TABLE>
Generally, the Company's banking depositories either pay interest on
deposits or apply an imputed interest credit to deposit balances which is used
as an offset to charges for banking services rendered. The Company has no
compensating balance arrangements or lines of credit with banks. BVB is required
to maintain reserves against customer deposits by keeping balances with the
Federal Reserve Bank of San Francisco in a noninterest-earning cash account.
Cash balances for BVB required to be held in reserve at the Federal Reserve Bank
of San Francisco totaled approximately $1.1 million and $5.3 million at December
31, 1998 and 1997, respectively. The average required reserve balance for BVB
totaled $6.1 million in 1998 and $7.4 million in 1997.
78
<PAGE>
Note 4. Investment Securities
All investment securities were classified as either available-for-sale or
held-to-maturity at December 31, 1998 and 1997. The Company did not maintain a
trading portfolio during 1998 or 1997. The following table illustrates the
Company's investment securities as of the dates indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
At December 31, 1998
----------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains (Losses) Value
--------------- ------------ -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
Federal National Mortgage Association stock $ 579 $ 99 $ - $ 678
Other securities 4,965 - (324) 4,641
--------------- ------------ -------------- -------------
$ 5,544 $ 99 $ (324) $ 5,319
=============== ============ ============== =============
<CAPTION>
---------------------------------------------------------------------
At December 31, 1997
---------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains (Losses) Value
--------------- ------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
Other securities $ 5,639 $ - $ - $ 5,639
=============== ============= ============== =============
Held-to-maturity:
Federal Farm Credit Bank callable note $ 5,000 $ 15 $ - $ 5,015
=============== ============= ============== =============
</TABLE>
The Company's investment in the Federal Farm Credit Bank callable note was
called in 1998. Sales of $2.2 million in investment securities during 1998,
classified as available-for-sale, resulted in a realized gain of $202,000. There
were no sales of investment securities during 1997 or 1996. No investment
securities were pledged as collateral during 1998 or 1997.
In conjunction with the securitization of BVC's auto loan portfolio in
January 1997, BVC entered into a short sale of Treasury securities during the
fourth quarter of 1996 to hedge the asset valuations against movements in
interest rates. A loss of $293,000 was recorded in the fourth quarter of 1996
associated with the close-out of this short sale of Treasury securities.
79
<PAGE>
Note 5. Mortgage-backed Securities
The Company holds mortgage-backed securities ("MBS") issued by government-
chartered agencies, including Freddie Mac ("FHLMC"), Fannie Mae ("FNMA") and the
Government National Mortgage Association ("GNMA"), and by non-public financial
institutions and financial intermediaries. The MBS portfolio also included
senior tranches of private issue collateralized mortgage obligations ("CMOs") at
December 31, 1998. All MBS were classified as either available-for-sale or held-
to-maturity at December 31, 1998 and 1997. The following table illustrates the
Company's MBS as of the dates indicated:
<TABLE>
<CAPTION> -------------------------------------------------------------------------
At December 31, 1998
-------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses) Value
------------------- ------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available- for-sale:
FNMA $ 748 $ 11 $ - $ 759
GNMA 12,509 - (125) 12,384
CMOs 473 - - 473
------------------- ------------- ---------------- ----------------
Total $ 13,730 $ 11 $ (125) $ 13,616
=================== ============= ================ ================
Held-to-maturity:
FHLMC $ 137,823 $ 74 $ (798) $ 137,099
FNMA 259,151 971 (984) 259,138
GNMA 6,538 24 (59) 6,503
Other financial intermediaries 41,759 614 (24) 42,349
CMOs 176,502 127 (346) 176,283
------------------- ------------- ---------------- -----------------
Total 621,773 $ 1,810 $ (2,211) $ 621,372
=================== ============= ================ =================
<CAPTION>
-------------------------------------------------------------------------
At December 31, 1997
-------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains (Losses) Value
------------------- ------------- ---------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
FNMA $ 54,526 $ - $ (124) $ 54,402
=================== ============= ================ =================
Held-to-maturity:
FHLMC $ 165,383 $ 154 $ (1,114) $ 164,423
FNMA 244,908 328 (1,431) 243,805
GNMA 614 26 - 640
Other financial intermediaries 4,954 158 - 5,112
------------------- ------------- ---------------- ----------------
Total $ 415,859 $ 666 $ (2,545) $ 413,980
=================== ============= ================ =================
</TABLE>
The weighted-average yields on MBS available-for-sale and held-to-maturity
at December 31, 1998 were 6.12% and 6.21%, respectively. The weighted-average
yields on MBS available-for-sale and held-to-maturity at December 31, 1997 were
6.84% and 6.44%, respectively.
At December 31, 1998, the amount of adjustable rate MBS was $115.7 million.
There were no adjustable rate MBS as of December 31, 1997. The Company uses MBS
as full or partial collateral for advances from the Federal Home Loan Bank of
San Francisco ("FHLBSF"), repurchase agreements and interest rate exchange
agreements. The total par value of pledged MBS at December 31, 1998 and 1997 was
$619.3 million and $455.7 million, respectively.
Proceeds from sales of MBS classified as available-for-sale during 1998
were $239.7 million. Gross gains of $2.0 million and gross losses of $206,000
were realized on those sales. Proceeds from sales of MBS classified as
available-for-sale during 1997 were $20.5 million. Gross gains of $13,000 and
gross losses of $13,000 were realized on these sales. There were no sales of MBS
classified as held-to-maturity during 1998 or 1997. Proceeds from sales of MBS
classified as available-for-sale during 1996 were $54.5 million. Gross gains of
$411,000 and gross losses of $918,000 were realized on these sales. Proceeds
from the sale of MBS classified as held-to-maturity (scheduled to mature within
three months from sale date) during 1996 were $2.6 million. There was no gain or
loss realized on this sale.
80
<PAGE>
The amortized cost and fair value of MBS classified as available-for-sale and
held-to-maturity at December 31, 1998, categorized by remaining contractual
maturity, are illustrated in the following table. Expected remaining maturities
of MBS will generally differ from contractual maturities because borrowers may
have the right to prepay obligations with or without penalties.
<TABLE>
<CAPTION>
------------------------------
At December 31, 1998
------------------------------
Amortized Fair
Cost Value
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $ 1,915 $ 1,911
Due after one year through five years 2,227 2,261
Due after five years through ten years 143,267 143,221
Due after ten years 488,094 487,595
----------- -----------
Total 635,503 634,988
=========== ===========
</TABLE>
Note 6. Loans and Leases
The following table illustrates the Company's loans and leases as of the dates
indicated:
<TABLE>
<CAPTION>
------------------------------
At December 31,
------------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Mortgage loans:
Residential
Single-family (one to four units) $ 1,600,690 $ 550,506
Multi-family (five or more units) 1,015,980 1,026,148
Nonresidential 338,220 348,754
----------- -----------
2,954,890 1,925,408
Motor vehicle loans 546,806 298,627
High loan-to-value home equity loans 483,793 67,092
Other consumer loans 92,766 61,478
Commercial loans and leases 113,210 54,120
----------- -----------
Gross loans and leases 4,191,465 2,406,725
Net deferred origination fees and costs and
advances (4,331) (1,054)
Premiums and discounts 49,540 5,900
Allowance for loan and lease losses (45,405) (38,458)
----------- -----------
(196) (33,612)
----------- -----------
Total $ 4,191,269 $ 2,373,113
=========== ===========
</TABLE>
The Company's loan classifications for financial reporting purposes differ
from those for regulatory purposes. Loans are classified for financial reporting
purposes based upon the purpose and primary source of repayment of the loans.
Loans are classified for regulatory reporting purposes based upon the type of
collateral securing the loans.
During the first quarter of 1997, $253 million of BVC's motor vehicle loans
were securitized and sold. The BVC motor vehicle loan portfolio was recorded at
its fair value upon acquisition of BVC in 1996 assuming that such loans would be
securitized and sold. As a result, the $925,000 gain recorded on the sale was
related to the change in market interest rates between the acquisition date of
BVC and the date of subsequent securitization and sale of the loans. At December
31, 1998 and 1997, BVC serviced $75.9 and $145.0 million of these motor vehicle
loans, respectively. The Company discontinued the securitization of BVC's motor
vehicle loans in conjunction with the announcement of the AFEH acquisition in
May 1997.
At December 31, 1998, 1997 and 1996, BVB serviced participating interests in
loans sold of $475.1 million, $372.0 million and $412.4 million, respectively.
At December 31, 1998 and 1997, the Company had outstanding recourse and
subordination contingencies relating to principal balances of $54.1 million and
$50.9 million, respectively, on sold mortgage loans.
81
<PAGE>
The Company has agreed to modifications of certain multi-family and
nonresidential mortgage loans. The modifications have taken the form of interest
rate concessions and/or payment concessions. Such loan modifications are
considered troubled debt restructurings (see Note 1) and are entered into with
the objective of maximizing the Company's long-term recovery of the investment
in the loan when a borrower is experiencing financial difficulties. The Company
has no commitments to lend additional funds to borrowers whose loans were so
modified. In the aggregate, the Company's investment in troubled debt
restructurings (excluding troubled debt restructurings classified as nonaccrual
loans) was $777,000, $731,000 and $509,000 at December 31, 1998, 1997 and 1996,
respectively. Interest income with respect to these loans, under their original
terms, as well as actual interest recognized, was not significant in 1998, 1997
or 1996.
At December 31, 1998, 1997 and 1996, nonaccrual loans and leases totaled $14.7
million, $11.0 million and $16.1 million, respectively. Interest on nonaccrual
loans and leases that was not recorded in income was $492,000, $209,000 and
$735,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Actual interest recognized by the Company on these nonaccrual loans and leases
was not significant in 1998, 1997 or 1996. At December 31, 1998, the Company had
no commitments to lend additional funds to these borrowers.
The average investment in loans and leases during 1998, 1997 and 1996 for
which impairment was determined in accordance with SFAS 114 was $15.2 million,
$13.9 million and $15.1 million, respectively. Impaired loans and leases consist
of nonperforming loans and leases (see Note 1) and troubled debt restructurings,
as illustrated in the following table as of the dates indicated:
<TABLE>
<CAPTION>
--------------------------------
At December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Nonperforming loans and leases $ 14,700 $ 10,991 $ 16,125
Troubled debt restructurings 777 731 509
-------- -------- --------
Total $ 15,477 $ 11,722 $ 16,634
======== ========= ========
</TABLE>
82
<PAGE>
The following table illustrates the changes in the Company's allowance for
loan and lease losses as of and for the periods indicated:
<TABLE>
<CAPTION>
At And For The Year Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 38,458 $ 29,013 $ 30,014
Reserves related to entity and asset acquisitions 11,374 14,162 2,860
Charge-offs:
Real estate and other (2,851) (2,699) (6,401)
Consumer (15,387) (4,057) -
Commercial (828) (1,685) -
---------- ---------- ----------
(19,066) (8,441) (6,401)
Recoveries:
Real estate and other 2,264 706 522
Consumer 3,085 955 120
Commercial 176 111 -
---------- ---------- ----------
5,525 1,772 642
---------- ---------- ----------
Net charge-offs (13,541) (6,669) (5,759)
Provision for loan and lease losses 9,114 1,952 1,898
---------- ---------- ----------
Balance at end of year $ 45,405 $ 38,458 $ 29,013
========== ========== ==========
Allowance for loan and lease losses:
Real estate and other $ 30,225 $ 29,026 $ 27,969
Consumer 9,136 3,240 1,044
Commercial 6,044 6,192 -
---------- ---------- ----------
Total $ 45,405 $ 38,458 $ 29,013
========== ========== ==========
</TABLE>
An allowance for loan and lease losses was provided for all impaired loans and
leases at December 31, 1998, 1997 and 1996. The portion of the total allowance
for loan and lease losses that was attributable to impaired loans was $4.7
million, $1.7 million and $1.9 million at December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998 and 1997, mortgage loans aggregating $1.92 billion and
$1.24 billion, respectively, were pledged as collateral for advances from the
FHLBSF.
83
<PAGE>
Note 7. Premises and Equipment
The following table illustrates the Company's premises and equipment as of the
dates indicated:
<TABLE>
<CAPTION>
-----------------------
At December 31,
-----------------------
1998 1997
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Land $ 1,658 $ 214
Buildings 2,515 338
Capitalized leases 3,979 3,979
Leasehold improvements 14,562 7,505
Furniture and equipment 29,040 20,992
Other 1,055 3,896
--------- ---------
52,809 36,924
Less:
Accumulated depreciation
and amortization (28,082) (20,760)
--------- ---------
Total $ 24,727 $ 16,164
========= =========
</TABLE>
In 1996, the Company recorded $500,000 in write-downs due to the sale of the
Company's San Mateo, California corporate office complex. Also during 1996, the
Company wrote off $1.2 million of computer hardware equipment as a result of new
specifications relating to the Company's long-term information services
technology agreement with an outside data processing vendor. Depreciation and
amortization expense for the years ended December 31, 1998, 1997 and 1996 was
$6.8 million, $3.0 million and $2.2 million, respectively.
Note 8. Intangible Assets
The following table illustrates the Company's intangible assets as of the
dates indicated:
<TABLE>
<CAPTION>
-----------------------
At December 31,
-----------------------
1998 1997
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Core deposit premiums $ 10,244 $ 1,758
Goodwill 123,844 27,749
--------- ---------
Total $ 134,088 $ 29,507
========= =========
</TABLE>
Amortization expense for core deposit premiums was $3.7 million, $2.1 million
and $2.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Amortization expense for goodwill was $7.7 million, $2.0 million and $581,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
84
<PAGE>
Note 9. Deposits
The following table illustrates the Company's deposits as of the dates
indicated:
<TABLE>
<CAPTION>
---------------------------------------------------
At December 31, 1998
---------------------------------------------------
% of Weighted
Amount Total Average Rate
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Savings accounts $ 150,808 4.6% 2.02%
Checking accounts 373,619 11.4 0.94
Money market accounts 1,102,848 33.8 3.91
------------ ------------ ------------
Transaction accounts 1,627,275 49.8 3.15
Certificates of deposit 1,642,362 50.2 5.20
------------ ------------ ------------
Total $ 3,269,637 100.0% 4.20%
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------
At December 31, 1998
---------------------------------------------------
% of Weighted
Amount Total Average Rate
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Savings accounts $ 130,856 7.8% 2.28%
Checking accounts 116,114 6.9 0.68
Money market accounts 306,850 18.3 4.44
------------ ------------ ------------
Transaction accounts 553,820 33.0 2.97
Certificates of deposit 1,045,152 62.3 5.51
Brokered certificates of deposit 78,163 4.7 5.82
------------ ------------ ------------
Total $ 1,677,135 100.0% 4.71%
============ ============ ============
</TABLE>
Noninterest-bearing deposits were $66.4 million and $27.2 million as of
December 31, 1998 and 1997, respectively. The aggregate amount of certificates
of deposit individually exceeding $100,000 totaled $391.3 million and $376.8
million at December 31, 1998 and 1997, respectively. Certificates of deposit
outstanding at December 31, 1998 were scheduled to mature as follows:
<TABLE>
<CAPTION>
------------
(Dollars in
thousands)
------------
<S> <C>
1999 $ 1,401,265
2000 157,654
2001 49,627
2002 28,204
2003 4,098
Thereafter 1,514
------------
Total $ 1,642,362
============
</TABLE>
85
<PAGE>
The following table illustrates interest expense on deposits, by deposit type,
for the periods indicated:
<TABLE>
<CAPTION>
-------------------------------------
Year Ended December 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Savings accounts $ 2,411 $ 3,667 $ 5,335
Checking and money market accounts 67,397 9,050 6,095
Certificates of deposit 79,848 60,470 73,429
Thrift certificates - 3,297 15,366
-------- -------- --------
Total $149,656 $ 76,484 $100,225
======== ======== ========
</TABLE>
Note 10. Advances from the Federal Home Loan Bank of San Francisco
The following table illustrates outstanding advances from the FHLBSF, by
maturity and rate, as of the dates indicated:
<TABLE>
<CAPTION>
------------------------------------------------------
Weighted-Average
Principal Amounts Interest Rates
------------------------ -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1998 - $ 985,270 - 5.88%
1999 $ 729,100 65,000 5.07% 6.14
2000 279,400 20,000 4.93 5.89
2001 190,400 40,000 5.75 7.27
2002 24,400 - 4.83 -
2003 300,000 - 5.02 -
Thereafter 130,000 - 5.40 -
---------- ---------- ---------- ----------
Total $1,653,300 $1,110,270 5.16% 5.94%
========== ========== ========= ==========
</TABLE>
FHLBSF advances at December 31, 1998 included $20 million of variable-rate
advances. These advances mature in the year 2001 and reset semi-annually based
on the 6-month London Interbank Offered Rate ("LIBOR"). FHLBSF advances were
collateralized by loans and MBS totaling $2.5 billion and $1.7 billion at
December 31, 1998 and 1997, respectively.
BVB is a member of the Federal Home Loan Bank System. As a member, BVB is
required to purchase stock in the FHLBSF at an amount equal to the greater of 1%
of BVB's residential mortgage loans or 5% of outstanding FHLBSF advances. The
stock is purchased at par value ($100 per share) and shares of stock held in
excess of the minimum requirement may be sold back to the FHLBSF at par value.
BVB records its investment in FHLBSF stock at cost (par value). At December 31,
1998, BVB's investment in FHLBSF stock was $90.9 million and its minimum
required investment was $82.7 million. The stock is pledged as collateral for
advances from the FHLBSF. The FHLBSF generally declares quarterly stock
dividends. The amount of FHLBSF dividends recorded in income during the years
ended December 31, 1998, 1997 and 1996 was $4.9 million, $3.4 million and $2.5
million, respectively.
Note 11. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase ("reverse repurchase
agreements") are effectively borrowings secured by the Company's portfolio of
MBS. The securities sold under the terms of these agreements are safekept for
the Company by the registered primary securities dealers who arrange the
transactions. Borrowings under reverse repurchase agreements outstanding at
December 31, 1998 and 1997 were $25.3 million and $90.1 million, respectively.
The weighted average interest rate on reverse repurchase agreements outstanding
at December 31, 1998 and 1997 was 5.37% and 5.76%, respectively.
86
<PAGE>
All of the Company's borrowings under reverse repurchase agreements have
maturities of one year or less and were collateralized by MBS with a par value
of $26.7 million and $93.6 million at December 31, 1998 and 1997, respectively.
The contractually required market values of the collateral pledged against these
borrowings may range up to 106% of the borrowings. The market value of the MBS
collateralizing such borrowings at December 31, 1998 and 1997 was $27.3 million
and $95.5 million, respectively.
Note 12. Notes and Debentures
On August 28, 1997, the Company issued $100 million in Subordinated Notes (the
"Notes") registered under the Securities Act of 1933, as amended (the
"Securities Act"). The Notes are unsecured obligations of the Company and are
subordinated in right of payment to all existing and future senior indebtedness,
as defined, of the Company. The Notes mature on August 15, 2007, with a call
provision upon a change of control or upon the occurrence of certain other
events, at the option of the Company. The issuance has a stated coupon of 9.125%
and yields 9.225%. The all-in cost of the Notes was 9.62%. A portion of the
proceeds was used to partially finance the acquisition of AFEH. Interest expense
on the Notes was $9.6 million and $3.2 million for the years ended December 31,
1998 and 1997, respectively.
On May 28, 1996, the Company issued $50 million in Senior Debentures with a
stated coupon of 8.42%, which were not registered under the Securities Act, in a
private placement under Section 4(2) of the Securities Act. A portion of the
proceeds was used to partially finance the acquisition of BVC. The Senior
Debentures, which had an all-in cost of 8.91%, matured on June 1, 1999. In
conjunction with the acquisition of AFEH, the Company negotiated covenant
modifications with the Senior Debenture holders during 1997 to allow the
repurchase of additional shares of common stock in exchange for a payment to the
Senior Debenture holders of approximately $1.1 million. Interest expense on the
Senior Debentures was $4.5 million for each of the years ended December 31, 1998
and 1997.
Note 13. Capital Securities
On December 21, 1998, the Company issued $90 million in 9.76% Capital
Securities (the "Securities") through Bay View Capital I (the "Trust"). The
Securities, which were sold in a public underwritten offering, pay quarterly
cumulative cash distributions at an annual rate of 9.76% of the liquidation
value of $25 per share. The Securities represent undivided beneficial interests
in the Trust, which was established by the Company for the purpose of issuing
the Securities. The Company owns all of the issued and outstanding common
securities of the Trust. Proceeds from the offering and from the issuance of
common securities were invested by the Trust in 9.76% Junior Subordinated
Deferrable Interest Debentures due December 31, 2028 issued by the Company (the
"Junior Debentures") with an aggregate principal amount of $92.8 million. The
primary asset of the Trust is the Junior Debentures. The obligations of the
Trust with respect to the Securities are fully and unconditionally guaranteed by
the Company, to the extent provided in the Guarantee Agreement with respect to
the Securities. A portion of the proceeds from the Capital Securities were used
to redeem the Company's $50 million of 8.42% Senior Debentures which matured on
June 1, 1999 and the remainder for general corporate purposes. The all-in cost
of the Securities was 9.95%. The Securities have the added benefit of qualifying
as Tier 1 capital for regulatory reporting purposes. Dividend expense on the
Securities was $244,000 for the year ended December 31, 1998.
87
<PAGE>
Note 14. Income Taxes
The following table illustrates the Company's consolidated income tax expense
for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended December 31, 1998
--------------------------------------------------
Federal State Total
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Current provision $ 1,393 $ 812 $ 2,205
Deferred provision 15,064 3,946 19,010
----------- ----------- -----------
Total income tax expense $ 16,457 $ 4,758 $ 21,215
=========== =========== ===========
--------------------------------------------------
Year Ended December 31, 1997
--------------------------------------------------
Current provision $ 4,940 $ 1,294 $ 6,234
Deferred provision 2,277 734 3,011
----------- ----------- -----------
Total income tax expense $ 7,217 $ 2,028 $ 9,245
=========== =========== ===========
--------------------------------------------------
Year Ended December 31, 1996
--------------------------------------------------
Current provision $ 3,007 $ 352 $ 3,359
Deferred provision 3,046 1,872 4,918
----------- ----------- -----------
Total income tax expense $ 6,053 $ 2,224 $ 8,277
=========== =========== ===========
</TABLE>
The following table illustrates the reconciliation between the federal
statutory income tax rate and the effective income tax rate for the periods
indicated:
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
Amortization of goodwill 6.1 3.0 1.0
State income tax rate, net of federal tax benefit 7.0 5.7 12.7
Other, net 0.2 (4.0) (5.7)
----------- ----------- -----------
Effective income tax rate 48.3% 39.7% 43.0%
=========== =========== ===========
</TABLE>
The Company's stockholders' equity included a tax benefit of $1.2 million and
$1.4 million for the years ended December 31, 1998 and 1997, respectively,
associated with the exercise of stock options.
88
<PAGE>
The following table illustrates the components of net deferred tax assets as
of the dates indicated:
<TABLE>
<CAPTION>
-----------------------
At December 31,
-----------------------
1998 1997
-------- --------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 72,586 $ 1,128
Provision for loan and lease losses 20,328 13,196
Other accrued expenses not deducted for tax purposes 2,703 -
Alternative minimum tax credit carryforwards 2,234 -
State income taxes 981 1,709
Capitalized leases 883 880
Mark-to-market adjustment on loans 672 -
Intangible assets 538 4,584
Unrealized loss on securities available-for-sale 136 57
Real estate joint ventures 135 255
Book depreciation in excess of tax depreciation - 617
Other 117 1,482
-------- --------
Gross deferred tax assets 101,313 23,908
Valuation allowance (3,985) (1,128)
-------- --------
Net deferred tax assets 97,328 22,780
Deferred tax liabilities:
FHLBSF stock dividends (11,067) (8,316)
Tax depreciation in excess of book depreciation (7,941) -
Excess over base year reserves (7,828) (794)
Loan fees (5,581) (6,029)
Loan premiums (1,813) (177)
Unrealized gain on loans held-for-sale - (2,099)
Other (38) (1,029)
-------- --------
Gross deferred tax liabilities (34,268) (18,444)
-------- --------
Net deferred tax asset $ 63,060 $ 4,336
======== ========
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," a deferred tax liability has not been recognized
for the bad debt reserves of the Company which arose in the tax years which
began prior to January 1, 1988. At December 31, 1998 and 1997, the amount of
these reserves was approximately $19.0 million. The amount of unrecognized
deferred tax liability for these reserves at December 31, 1998 and 1997 was
approximately $9.9 million. The deferred tax liability could potentially be
recognized by the Company in the future if there is a change in federal tax law,
certain distributions are made with respect to the stock of BVB, the bad debt
reserves are used for any purpose other than absorbing bad debt losses, or BVB
ceases to be a bank as defined in the Internal Revenue Code.
During 1996, the Company and the Internal Revenue Service reached a final
agreement to resolve certain disputed issues related to the taxable years 1987
through 1989. The principal disputed issues related to various savings and loan
industry tax issues for which the Company had previously provided deferred
taxes. During 1997, the Company realized the benefit resulting from the
finalization of these tax audits as well the benefit of enterprise zone interest
exclusions for previous years.
The acquisition of BVCFG during 1997 increased net deferred tax assets by $4.8
million. The acquisition of AFEH during 1998 increased net deferred tax assets
by $77.6 million.
The federal net operating loss ("NOL") carryforwards from the acquisition of
BVCFG are $1.8 million and will expire in the year 2011. The federal and state
NOL carryforwards from the acquisition of AFEH are $183.2 million and $34.3
million, respectively. The AFEH-related NOL's expire in various years from 2000
through 2006. During 1998, a federal NOL was created of approximately $12.8
million that will expire in the year 2018.
A valuation allowance on deferred tax assets is recorded if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized through recovery of taxes previously paid and/or future taxable income.
The allowance is subject to ongoing adjustments based on changes in
circumstances that affect the Company's assessment of
89
<PAGE>
the realizability of the deferred tax assets. The Company has reviewed its
deferred tax assets as of December 31, 1998 and 1997, respectively. Based on
this review, a valuation allowance of $4.0 million and $1.1 million at December
31, 1998 and 1997, respectively, was established to reduce the deferred tax
assets to that amount which is more likely than not to be realized.
Note 15. Stockholders' Equity and Regulatory Capital Requirements
Federal legislation to recapitalize and fully fund the Savings Association
Insurance Fund ("SAIF") was signed into law on September 30, 1996. Deposits for
BVB were SAIF-insured during 1996, and as a result of the legislation, BVB was
required to pay a one-time special assessment of $11.7 million pre-tax ($6.7
million after-tax or $0.485 per share). The legislation had no direct effect on
BVC, as its deposits were insured under the Bank Insurance Fund.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, BVB must meet specific capital guidelines that involve
quantitative measures of BVB's assets, liabilities and certain off-balance sheet
items as calculated in accordance with GAAP and regulatory capital guidelines.
BVB's capital amounts and classifications are also subject to qualitative
judgments by the regulators about interest rate risk components, asset and off-
balance sheet risk weightings and other factors. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a material
impact on the Company's financial condition and results of operations.
Office of Thrift Supervision ("OTS") regulations provide definitions of
regulatory capital (e.g., tangible capital, core capital and risk-based capital)
and the methods of calculating each type of capital. The Company's tangible
capital requirement is 1.5% of tangible assets. The core capital requirement is
4.0% of adjusted total assets, as defined. The risk-based capital requirement is
8.0% of risk-weighted assets, including off-balance sheet items. BVB's fully
phased-in regulatory capital exceeded the minimum requirements of each
regulatory capital standard in effect at December 31, 1998 and 1997 as
illustrated in the following tables:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
At December 31, 1998
-------------------------------------------------------------------------------------
Actual Minimum Required Excess
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible $ 344,509 6.36% $ 81,241 1.50% $ 263,268 4.86%
Core (Leverage) $ 345,211 6.37% $ 216,454 4.00% $ 128,757 2.37%
Risk-based $ 389,250 10.42% $ 298,798 8.00% $ 90,452 2.42%
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
At December 31, 1997
-------------------------------------------------------------------------------------
Actual Minimum Required Excess
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible $ 202,194 6.33% $ 47,932 1.50% $ 154,262 4.83%
Core (Leverage) $ 203,308 6.36% $ 127,863 4.00% $ 75,445 2.36%
Risk-based $ 228,532 10.87% $ 168,163 8.00% $ 60,369 2.87%
</TABLE>
90
<PAGE>
The following table illustrates the reconciliation of BVB's capital under
GAAP with its regulatory capital at December 31, 1998:
<TABLE>
<CAPTION>
------------------------------------------------------
At December 31, 1998
------------------------------------------------------
Tangible Core Risk-based
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
BVB stockholder's equity (GAAP) $ 468,760 $ 468,760 $ 468,760
Increase (decrease):
Unrealized loss on securities available-for-sale,
net of tax benefit 8 8 8
Core deposit premiums (10,244) (9,542) (9,542)
Goodwill (104,237) (104,237) (104,237)
Disallowed servicing and tax assets (9,778) (9,778) (9,778)
Nonqualifying equity investments - - (929)
Qualifying allowance for loan and lease losses - - 44,968
-------------- -------------- --------------
BVB regulatory capital $ 344,509 $ 345,211 $ 389,250
============== ============== ==============
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each federal banking agency to implement prompt corrective actions for
undercapitalized institutions that it regulates. In response to this
requirement, the OTS adopted final rules, effective December 19, 1992, based on
FDICIA's five capital tiers: well-capitalized, adequately-capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The regulations provide that a savings institution is well-capitalized if its
total risk-based capital ratio is 10% or greater, its tier 1 risk-based capital
ratio is 6% or greater, its tier 1 leverage ratio is 5% or greater, and the
institution is not subject to a capital directive. As used herein, total risk-
based capital ratio means the ratio of total risk-based capital to risk-weighted
assets, including off-balance sheet items, tier 1 capital ratio means the ratio
of core capital to risk-weighted assets, including off-balance sheet items, and
tier 1 leverage ratio means the ratio of core capital to adjusted total assets,
in each case as calculated in accordance with current OTS capital regulations.
As of December 31, 1998 and 1997, the most recent notification from the OTS
categorized BVB as well-capitalized. There are no conditions or events since
that notification that management believes have changed BVB's well-capitalized
categorization.
Under capital guidelines enacted by FDICIA, BVB met the criteria for the well-
capitalized standard as illustrated in the following tables as of the dates
indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
At December 31, 1998
---------------------------------------------------------------------------------------
Well-Capitalized
Actual Requirement Excess
--------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 leverage $ 345,211 6.37% $ 270,768 5.00% $ 74,443 1.37%
Tier 1 risk-based $ 345,211 9.24% $ 224,098 6.00% $ 121,113 3.24%
Total risk-based $ 389,250 10.42% $ 373,497 10.00% $ 15,753 0.42%
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
At December 31, 1997
---------------------------------------------------------------------------------------
Well-Capitalized
Actual Requirement Excess
--------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 leverage $ 203,308 6.36% $ 159,830 5.00% $ 43,478 1.36%
Tier 1 risk-based $ 203,308 9.67% $ 126,122 6.00% $ 77,186 3.67%
Total risk-based $ 228,532 10.87% $ 210,204 10.00% $ 18,328 0.87%
</TABLE>
91
<PAGE>
The OTS has adopted rules incorporating an interest rate risk component of the
capital adequacy guidelines for institutions with a greater than "normal" level
of interest rate risk exposure, as defined. As of December 31, 1998, BVB was not
subject to an interest rate risk component for capital measurement purposes.
The Company is a legal entity separate and distinct from BVB. The Company's
principal source of funds on an unconsolidated basis is expected dividends from
its wholly owned subsidiaries. Dividends declared by BVB to the Company were
$87.0 million in 1998, $13.0 million in 1997 and $0 in 1996. There are various
statutory and regulatory restrictions on the extent to which BVB may pay
dividends to, make investments in or loans to, or otherwise supply funds to the
Company. Based on the current financial status of BVB, the Company believes that
such restrictions will not impair BVB's ability to continue to pay dividends to
the Company.
Note 16. Stock Repurchase Program
During 1995, the Company's Board of Directors authorized the repurchase of up
to 1,200,000 shares of the Company's common stock. This authorization was
subsequently increased in 1996 to a total of 1,600,000 shares. As of December
31, 1996, the Company had completed its share repurchases by repurchasing
1,600,000 shares of its common stock at an average price of $15.99 per share.
In January 1997, the Company's Board of Directors authorized the repurchase of
$25 million in shares of the Company's common stock and in May 1997, an
additional $25 million was authorized. During 1997, the Company repurchased
$39.8 million in shares representing 1,399,000 shares of its common stock at an
average price of $28.48 per share. In December 1997, the Company's Board of
Directors rescinded the remaining share repurchase authorization. In January
1998, the Company's treasury shares were reissued in conjunction with the
acquisition of AFEH.
In August 1998, the Company's Board of Directors authorized the repurchase of
up to $50 million in shares of the Company's common stock. During 1998, the
Company repurchased $24.1 million in shares representing 1,196,500 shares of its
common stock at an average price of $20.11 per share. At December 31, 1998, the
Company had approximately $25.9 million in remaining authorization available for
future share repurchases.
Note 17. Stock Options
As of December 31, 1998, the Company had five stock option plans: the "Amended
and Restated 1986 Stock Option and Incentive Plan," the "Amended and Restated
1995 Stock Option and Incentive Plan," the "Amended and Restated 1989 Non-
Employee Director Stock Option and Incentive Plan," the "1998-2000 Performance
Stock Plan," and the "1998 Non-Employee Director Stock Option and Incentive
Plan," which authorize the issuance of up to 1,759,430, 2,000,000, 550,000,
400,000, and 200,000 shares of common stock, respectively. The plans provide for
the grant of a variety of long-term incentive awards to directors, officers and
employees as a means of enhancing and encouraging the recruitment and retention
of those individuals on whom the continued success of the Company most depends.
The exercise price for the purchase of shares subject to a stock option at the
date of grant generally may not be less than 100% of the market value of the
shares covered by the option on that date and the options generally vest over
periods ranging from 6 months to 3 years.
92
<PAGE>
The following table illustrates the stock options available for grant as of
December 31, 1998:
<TABLE>
<CAPTION>
-------------- -------------- -------------- -------------- -------------- --------------
1989 Non- 1998
1995 Stock Employee Non-Employee
1986 Stock Option and Director Stock 1998-2000 Director Stock
Option and Incentive Option and Performance Option and
Incentive Plan Plan Incentive Plan Stock Plan Incentive Plan Total
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares reserved for issuance 1,759,430 2,000,000 550,000 400,000 200,000 4,909,430
Granted (2,048,816) (1,898,000) (570,000) - - (4,516,816)
Forfeited 290,574 159,599 20,000 - - 470,173
Expired (1,188) - - - - (1,188)
-------------- -------------- -------------- -------------- -------------- --------------
Total available for grant 0 261,599 0 400,000 200,000 861,599
============== ============== ============== ============== ============== ==============
</TABLE>
At December 31, 1998, the Company had outstanding options under the plans with
expiration dates ranging from the year 2000 through 2008, as illustrated in
following table:
<TABLE>
<CAPTION>
------------------------------------------------------
Number of Exercise Price Weighted Average
Option Shares Range Price
--------------- -------------- ----------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 977,094 $ 6.97-13.31 $ 10.51
Granted 424,000 13.47-18.87 16.01
Exercised (202,204) 6.97-12.50 9.20
Forfeited (44,000) 12.50-12.81 12.78
--------------- -------------- ----------------
Outstanding at December 31, 1996 1,154,890 7.28-18.87 12.67
Granted 901,000 6.97-34.41 28.71
Exercised (118,990) 6.97-17.50 10.15
Forfeited (178,500) 6.97-28.44 26.13
--------------- -------------- ----------------
Outstanding at December 31, 1997 1,758,400 7.88-34.41 19.70
Granted 629,000 17.94-35.20 25.17
Exercised (160,101) 7.88-28.44 12.17
Forfeited (81,599) 8.69-35.20 28.11
--------------- -------------- ----------------
Outstanding at December 31, 1998 2,145,700 $ 7.88-35.20 $ 21.55
=============== ============== ================
Exercisable at December 31, 1998 1,047,507 $ 7.88-35.20 $ 17.31
=============== ============== ================
</TABLE>
The following table illustrates information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
--------------------------------------------------------------- -----------------------------------------
Outstanding Exercisable
--------------------------------------------------------------- -----------------------------------------
Weighted Average
Range of Number Remaining Life Weighted Average Number Weighted Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
- ------------------- ------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 7.88 - 15.63 719,000 5.92 $ 12.51 643,000 $ 12.14
$ 16.56 - 27.56 742,700 8.69 $ 20.73 245,653 $ 21.45
$ 27.63 - 35.20 684,000 9.02 $ 31.93 158,854 $ 31.85
------------------- ------------------- ------------------- ------------------- -------------------
$ 7.88 - 35.20 2,145,700 7.87 $ 21.55 1,047,507 $ 17.31
=================== =================== =================== =================== ===================
</TABLE>
93
<PAGE>
Statement of Financial Accounting Standards No. 123 Pro Forma Disclosure
The Company adopted SFAS 123 effective January 1, 1996, but continues to
account for employee and director stock-based compensation plans under the
intrinsic value method prescribed by APB 25. SFAS 123 requires that stock-based
compensation to parties other than employees and directors be accounted for
under the fair value method. Accordingly, no compensation cost has been
recognized for the Company's stock option awards to employees and directors in
1998, 1997 and 1996. The weighted-average fair values of options granted to
employees and directors were $25.17, $28.71 and $16.01 per share in 1998, 1997
and 1996, respectively. Had compensation cost related to the Company's stock
option awards to employees and directors been determined under the fair value
method prescribed under SFAS 123, the Company's net income and earnings per
share would have been the pro forma amounts illustrated in the table below for
the periods indicated:
<TABLE>
<CAPTION>
------------------------------------------------
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Net income:
Actual $ 22,719 $ 14,021 $ 10,969
Pro forma $ 20,557 $ 12,866 $ 10,255
Net income per share:
Actual basic earnings per share $ 1.13 $ 1.09 $ 0.80
Pro forma basic earnings per share $ 1.03 $ 1.00 $ 0.75
Actual diluted earnings per share $ 1.12 $ 1.06 $ 0.79
Pro forma diluted earnings per share $ 1.01 $ 0.98 $ 0.74
</TABLE>
The fair value of options granted was estimated as of the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
------------------------------------------------
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Dividend yield 1.48% 1.25% 2.00%
Expected volatility of the Company's common stock /(1)/ 32% 31% 30%
Expected risk-free interest rate /(1)/ 4.54% 5.67% 5.21%
Expected life of options in years 5.37 5.10 4.84
</TABLE>
(1) The expected volatility of the Company's common stock and the expected
risk-free interest rate were calculated using a term commensurate with the
expected life of the options.
Note 18. Employee Benefit Plans
The Company has a 401(k) thrift plan under which an employee with three or
more months of service may contribute from 2% to 15% of base salary to the plan.
The amount of base salary deferred is not subject to federal or state income
taxes at the time of deferral. After one year of service, the Company will match
an employee's contribution up to 100% of the first 6% of the employee's base
salary, depending on the employee's length of service. The Company's
contribution for the years ended December 31, 1998, 1997 and 1996 was $2.1
million, $1.4 million and $435,000, respectively.
Effective December 31, 1995, the Company modified its non-qualified defined
benefit retirement plan for non-employee members of its Board of Directors and
terminated its non-qualified supplemental retirement plan for executive officers
(collectively, the "Plans"). As of December 31, 1998, the Company had a $1.1
million liability to certain non-employee members of its Board of Directors
payable in 66,114 shares of the Company's common stock in satisfaction of the
non-qualified defined benefit retirement plan liability. Such shares were
repurchased in the market and are held in treasury and restricted as to re-
issuance until paid out. The liability is included in additional paid-in
capital. As of December 31, 1998, the Company had a $1.8 million liability to
certain current and retired executive officers (relating to the remaining
benefits owed pursuant to the terminated non-qualified supplemental retirement
plan for executive officers) recorded as other liabilities.
94
<PAGE>
The Company has an Employee Stock Ownership Plan ("ESOP") covering all regular
full-time and part-time employees who have completed one year of service. ESOP
plan participants become 100% vested in their allocated balances upon the
completion of three years of service. In 1989, the Company borrowed $6.0 million
from a financial institution which it in turn lent to the ESOP to purchase
shares of the Company's common stock in the open market. At December 31, 1998
and 1997, the ESOP held 439,077 and 449,853 shares, respectively, of the
Company's common stock. All shares of common stock held by the ESOP are treated
as outstanding shares in both the Company's basic and diluted EPS computations.
The interest rate paid by the Company on the ESOP debt is based on 90% of the
prime rate. Total interest expense incurred by the ESOP plan on its debt was
$290,000, $316,000 and $362,000 for the years ended December 31, 1998, 1997 and
1996, respectively. The interest expense recorded by the Company was $176,000,
$224,000 and $289,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. ESOP-related compensation expense recorded by the Company was
$908,000, $421,000 and $386,000 for the years ended December 31, 1998, 1997 and
1996, respectively. The Company makes periodic contributions to the ESOP
primarily to enable the ESOP to pay principal, interest expense and
administrative costs not covered by cash dividends received by the ESOP on its
unallocated shares of the Company's common stock. Contributions from the Company
to the ESOP on a cash basis totaled $639,000 for 1998, $649,000 for 1997 and
$674,000 for 1996.
The Company assumed the liability associated with a qualified, noncontributory
defined benefit retirement plan in conjunction with its acquisition of AFEH
covering substantially all of AFEH's former employees. AFEH had previously
frozen the benefits provided under the plan effective January 1, 1994. Prior to
that date, the benefits were based on the average of each eligible employee's
highest five consecutive annual salaries in the ten years preceding age 65, or
the employee's termination date, if earlier.
Due to the plan's frozen status, no additional benefits were accrued in the
plan after January 1, 1994. All plan participants became fully vested in their
accrued benefits on this date. The Company may elect to terminate the frozen
plan at some point in the future according to its rights under the plan. The
plan assets consist primarily of a well-diversified portfolio of equities and
fixed income securities. It is the policy of the Company to fund the minimum
amount required.
The following table illustrates the change in the plan's projected benefit
obligation for the year ended December 31, 1998:
<TABLE>
<CAPTION>
-------------
(Dollars in
thousands)
-------------
<S> <C>
Projected benefit obligation at beginning of year $ 7,643
Interest cost 459
Actuarial gain (297)
Changes in assumptions 36
Benefits paid (1,683)
-------------
Projected benefit obligation at end of year $ 6,158
=============
</TABLE>
The following table illustrates the change in the plan assets for the year
ended December 31, 1998:
<TABLE>
<CAPTION>
-------------
(Dollars in
thousands)
-------------
<S> <C>
Plan assets at beginning of year $ 6,949
Actual return on plan assets 717
Benefits paid (1,683)
-------------
Plan assets at end of year $ 5,983
=============
</TABLE>
95
<PAGE>
The following table illustrates the plan's funded status and amounts
recognized in the Company's consolidated statement of financial condition at
December 31, 1998:
<TABLE>
<CAPTION>
-----------
(Dollars in
thousands)
-----------
<S> <C>
Projected benefit obligation $ 6,158
Fair value of plan assets 5,983
-----------
Projected benefit obligation in excess of plan assets (175)
Unrecognized gain from past experience different than originally
assumed and from effects of changes in assumptions (485)
Recognition of a portion of unrecognized gain 92
-----------
Total accrued benefit liability $ (568)
===========
Weighted average discount rate 6.75%
===========
Expected long-term rate of return on assets 6.00%
===========
</TABLE>
Throughout the 1998 plan year, $1.5 million in benefit payments were
distributed to plan participants. As the benefit payments were in excess of 15%
of the plan's accumulated benefit obligation, the payments were considered a
settlement of plan liabilities under Statement of Financial Accounting Standards
No. 88 "Employer's Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits." The result was an immediate
recognition of a corresponding portion of the associated unrecognized gain.
The following table illustrates components of net periodic pension benefit for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
-----------
(Dollars in
thousands)
===========
<S> <C>
Interest cost on projected benefit obligation $ 458
Assumed return on plan assets (492)
Net amortization of unrecognized gain (92)
-----------
Net periodic pension benefit $ (126)
===========
</TABLE>
Note 19. Derivative Financial Instruments
In the normal course of business, the Company uses derivative financial
instruments with off-balance sheet risk to reduce its exposure to changes in
interest rates. During 1998 and 1997, derivative financial instruments used by
the Company included interest rate exchange agreements, forward sales of
securities and Treasury rate lock agreements. These derivative financial
instruments also involve, to varying degrees, elements of credit risk. 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.
Interest Rate Exchange Agreements
At December 31, 1998 and 1997, the Company was a party to interest rate
exchange agreements with a notional principal amount of $365.5 million and
$449.3 million, respectively. The following tables illustrate the maturities and
weighted-average interest rates for swaps outstanding as of December 31, 1998
and 1997. The information is based on interest rates at December 31, 1998 and
1997. To the extent that rates change, variable interest rate information will
change.
96
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Maturities of Derivatives Instruments
At December 31, 1998
----------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Pay fixed generic swaps:
Notional amount $ 34,000 $ 100,000 $ 79,000 $ - $ 50,000 $ 102,500 $ 365,500
Weighted-average receive rate -
(3-month LIBOR) 5.46% 5.40% 5.43% 5.41% 5.40% 5.41%
Weighted-average pay rate (fixed) 6.75% 6.10% 6.81% - 6.94% 6.06% 6.42%
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Maturities of Derivatives Instruments
At December 31, 1997
----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Pay fixed generic swaps:
Notional amount $ - $ 67,750 $ 100,000 $ 104,000 $ - $ 177,500 $ 449,250
Weighted-average receive rate - -
(3-month LIBOR) 6.19% 5.74% 5.78% 5.76% 5.83%
Weighted-average pay rate (fixed) - 6.31% 6.10% 6.72% - 6.41% 6.40%
</TABLE>
The Company's outstanding interest rate swaps at December 31, 1998 and 1997
were collateralized by MBS with total par value of $10.7 million and $9.1
million, respectively. The effect of interest rate swaps for the years ended
December 31, 1998, 1997 and 1996 was to increase interest expense by $2.4
million, $2.8 million and $2.6 million, respectively.
Forward Sale of MBS
In the past, the Company has selected forward sale contracts of MBS to hedge
portfolios of mortgage loans because of their historical effectiveness as a
hedge. In connection with the market and interest rate volatility experienced
during the third quarter of 1998, the correlation between the outstanding
forward sale contracts and the underlying portfolio of assets was disrupted,
triggering the settlement of the forward sale contracts and resulting in a
$940,000 recognized loss for the year ended December 31, 1998. There were no
forward sale contracts in effect at December 31, 1998.
Hedging Issuance of Subordinated Debt
During 1997, the Company entered into $105 million of Treasury rate lock
agreements to hedge the anticipated issuance of $100 million in Subordinated
Notes. These agreements guaranteed a stated rate of interest for a stated period
of time and the Company paid the difference between the lock rate and the
effective Treasury rate on the settlement date. In conjunction with the Treasury
rate lock agreements, approximately $307,000 was deferred and is being
recognized as an adjustment to net interest expense over the life of the Notes.
Note 20. Commitments and Contingencies
Banking Center Premises
In 1980, the Company sold a building which formerly housed its headquarters
for $3.45 million, and, concurrent with the sale, leased back the entire
building under a twenty-year lease which has been accounted for as a capital
lease. The Company occupies a minor portion of this building and receives
sublease rental income from the remaining portion, and is responsible for all
operating and maintenance expenses associated with the building. During the
years ended December 31, 1998, 1997 and 1996, depreciation on the capital lease
was $303,000 for each year. Accumulated depreciation on the capital lease at
December 31, 1998 and 1997 was $3.5 million and $3.2 million, respectively.
As of December 31, 1998, the Company and its subsidiaries occupied 64 offices
plus the Company's administrative corporate office under operating lease
arrangements expiring at various dates through the year 2012. In most instances,
these lease arrangements include options to renew or extend the lease at market
rates and terms. BVB owns the property in which four of its branches are
located. In 1996, the Company sold its corporate office complex and entered into
an operating lease arrangement for new facilities. Also in 1996, BVC's corporate
office complex was sold and BVC
97
<PAGE>
relocated its administrative offices. Rental expense for the years ended
December 31, 1998, 1997 and 1996 related to premises under operating leases
totaled $10.6 million, $5.6 million and $3.5 million, respectively. Sublease
rentals totaled $1.4 million, $670,000 and $389,000 during the years ended
December 31, 1998, 1997 and 1996, respectively.
Future minimum payments under noncancellable lease obligations, including
approximately $6.7 million to be recovered from sublease rental arrangements
through the year 2007, are summarized as follows:
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------
Capital Lease Operating Lease
Payments Payments
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
1999 $ 965 $ 8,248
2000 497 7,161
2001 - 5,535
2002 - 4,651
2003 - 3,946
Thereafter - 21,473
--------------- ---------------
1,462 $ 51,014
===============
Less amount representing interest (165)
---------------
Net capital lease obligation $ 1,297
===============
</TABLE>
Mortgage Loans
At December 31, 1998, the Company had outstanding commitments to originate
$7.8 million in mortgage loans and $15.9 million in construction loans. The
Company has outstanding recourse and subordination contingencies at December 31,
1998 relating to $54.1 million of sold loans (see Note 6).
Litigation
The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of business. In the opinion of management, after
consultation with counsel, the resolution of these legal actions will not have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
Year 2000
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 the
Company's 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 the
operations of the Company and its suppliers and customers.
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 the Company's
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,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity and financial condition. The Company's Year 2000
compliance program is intended to reduce levels of uncertainty about the Year
2000 issue including questions as to the compliance and readiness of its
material third-party providers. The Company believes that, with the
implementation of new and/or upgraded business systems and completion of the
Year 2000 compliance program as scheduled, the possibility of significant
interruptions of normal operations has been significantly reduced.
98
<PAGE>
Note 21. Estimated Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial
Instruments." Fair value estimates, methods and assumptions, set forth below for
the Company's financial instruments, are made solely to comply with the
requirements of SFAS 107 and should be read in conjunction with the Company's
consolidated financial statements and related notes.
The estimated fair value amounts have been determined by the Company using
market information and valuation methodologies considered appropriate. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
For all of these reasons, the aggregation of the fair values presented herein
does not represent, and should not be construed to represent, the underlying
value of the Company.
The following methods and assumptions have been used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate the value.
Cash and cash equivalents: This category includes cash and deposits due from
depository institutions, federal funds sold, and commercial paper. The cash
equivalents are readily convertible to known amounts of cash or are so near
their maturity that they present insignificant risk of changes in value. For
these short-term financial instruments, the carrying amount is a reasonable
estimate of fair value.
Securities: The fair values of investment securities and MBS are based on
published market prices or quotes obtained from independent registered
securities brokers.
Loans and leases: The fair value of fixed-rate and variable-rate loans and
leases classified as held-for-investment is estimated by discounting contractual
cash flows using discount rates that reflect the Company's current pricing for
loans and leases with similar credit ratings and for the same remaining
maturities. Prepayment estimates are based on historical experience and
published data for similar loans and leases.
Investment in stock of the FHLBSF: The carrying amount of the investment in
stock of the FHLBSF is used as a reasonable estimate of fair value.
Deposits: The fair value of transaction accounts with no stated maturity, such
as savings accounts, checking accounts and money market accounts is equal to the
amount payable on demand at the reporting date and is assumed to equal the
carrying amount. The fair value of fixed maturity deposits (e.g., certificates
of deposit) is estimated using the rates currently offered for certificates of
deposit with similar remaining maturities. The fair value of deposits does not
include the benefit that results from the low cost of funding provided by the
Company's deposits as compared with the cost of borrowing funds in the market.
Debt and other borrowings: Rates currently available to the Company for debt
and other borrowings with similar terms and remaining maturities are used to
estimate the fair value of existing debt, including advances from the FHLBSF,
securities sold under agreements to repurchase, Senior Debentures, Subordinated
Notes, other borrowings, and Capital Securities.
Off-balance sheet financial instruments: The Company has not estimated the
fair value of off-balance sheet commitments to extend credit. Because of the
uncertainty in attempting to assess the likelihood and timing of a commitment
being drawn upon, coupled with the lack of an established market for these
financial instruments, the Company does not believe it is meaningful or
practicable to provide an estimate of fair value.
Interest rate swaps: The unrealized gain (loss) on interest rate swaps is the
estimated amount that the Company would receive or pay to terminate the swap
agreements at the reporting date, taking into account current interest rates and
the current creditworthiness of the swap counterparties.
99
<PAGE>
Limitations: The fair value estimates presented herein are based on pertinent
information available to the Company as of December 31, 1998 and 1997. Although
the Company is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
The following table illustrates the estimated fair values of the Company's
financial instruments as of the dates indicated:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 205,186 $ 205,186 $ 231,822 $ 231,822
Investment securities 5,319 5,319 10,639 10,654
Mortgage-backed securities 635,389 634,988 470,261 468,382
Loans and leases, net 4,191,269 4,216,005 2,373,113 2,385,822
Investment in stock of the FHLBSF 90,878 90,878 61,012 61,012
Financial liabilities
Transaction accounts 1,627,275 1,627,275 553,820 553,820
Fixed maturity deposits 1,642,362 1,643,858 1,123,315 1,121,654
Advances from the FHLBSF 1,653,300 1,641,298 1,110,270 1,114,463
Securities sold under agreements to repurchase 25,302 25,342 90,134 90,355
Notes and Debentures 149,437 154,524 149,372 152,961
Other borrowings 5,077 5,113 6,200 6,245
Capital Securities 90,000 90,516 - -
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Off-Balance Sheet Financial Instruments
-------------------------------------------------------------------------
At December 31, 1998 At December 31, 1997
--------------------------------- ---------------------------------
Carrying Unrealized Carrying Unrealized
Amount Gain/(Loss) Amount Gain/(Loss)
------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest rate swaps $ (365) $ (10,377) $ (2,835) $ (891)
============= ============= ============= =============
</TABLE>
100
<PAGE>
Note 22. Parent Company Financial Information
The following table illustrates the parent company's condensed statements of
financial condition at December 31, 1998 and 1997 and the related condensed
statements of income and cash flows for the years ended December 31, 1998, 1997
and 1996:
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
-------------------------
At December 31,
-------------------------
1998 1997
---------- ----------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash on deposit (overdraft) with subsidiary bank $ (192) $ 539
Investment securities, at fair value - 199
Loans receivable 10,000 -
Investment in and advances to subsidiaries 596,190 316,972
Deferred income taxes 14,418 5,535
Other assets 14,653 11,501
---------- ----------
Total Assets $ 635,069 $ 334,746
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 15,037 $ 11,747
Subordinated Notes and Senior Debentures 149,437 149,372
Junior Subordinated Debentures 92,784 -
Stockholders' equity 377,811 173,627
---------- ----------
Total Liabilities and Stockholders' Equity $ 635,069 $ 334,746
========== ==========
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
----------------------------------------
Year ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 87,000 $ 13,000 $ 3,029
Interest income 2,693 2,658 1,548
---------- ---------- ----------
89,693 15,658 4,577
---------- ---------- ----------
Expense:
Interest on Notes and Debentures 14,650 7,746 2,623
General and administrative expense 14,262 9,456 1,234
Income tax benefit (10,713) (6,120) (997)
---------- ---------- ----------
18,199 11,082 2,860
---------- ---------- ----------
Income before undistributed net income of subsidiaries 71,494 4,576 1,717
Undistributed (distribution in excess of ) net income
of subsidiaries (48,775) 9,445 9,252
---------- ---------- ----------
Net income $ 22,719 $ 14,021 $ 10,969
========== ========== =========
</TABLE>
101
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
----------------------------------------
Year ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,719 $ 14,021 $ 10,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed (distributions in excess of) net income
of subsidiaries 48,775 (9,445) (9,252)
Dividends received - - 25,000
Gain on sale of securities (202) - -
Increase in other assets (11,380) (14,137) (2,076)
Increase (decrease) in other liabilities 8,929 10,485 (5,559)
Other (3,891) 3,758 (900)
---------- ---------- ----------
Net cash provided by operating activities 64,950 4,682 18,182
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash and cash equivalents
received 82,129 (9,975) (61,505)
Increase in loans receivable (10,000) - -
Investment in subsidiary (2,783) - -
Purchase of investment securities (1,956) (199) -
Proceeds from sale of investment securities 2,357 - -
Maturity of investment securities - 1,210 (200)
Return of investment in subsidiaries - - 11,971
Advances to subsidiaries (200,211) (53,667) (456)
---------- ---------- ----------
Net cash used in investing activities (130,464) (62,631) (50,190)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Junior Subordinated Debentures 92,784 - -
Issuance of Subordinated Notes, net of discount - 99,350 -
Issuance of Senior Debentures - - 50,000
Repurchase of common stock (24,063) (39,855) (16,971)
Proceeds from issuance of common stock 3,269 2,617 1,864
Dividends paid to stockholders (7,207) (4,419) (4,137)
---------- ---------- ----------
Net cash provided by financing activities 64,783 57,693 30,756
---------- ---------- ----------
Net decrease in cash (731) (256) (1,252)
Cash on deposit with subsidiary bank at beginning of year 539 795 2,047
---------- ---------- ----------
Cash on deposit (overdraft) with subsidiary bank at end of year $ (192) $ 539 $ 795
========== ========== ==========
</TABLE>
102
<PAGE>
Note 23. Segment and Related Information
The Company has three operating segments, referred to as business platforms.
The platforms were determined primarily based upon the characteristics of the
underlying interest-earning assets. Each platform is comprised of interest-
earning assets with similar characteristics including marketing and distribution
channels, pricing, credit risk, and interest rate sensitivity. The Company's
platforms are as follows:
A Banking Platform which is comprised primarily of single-family, multi-family
and commercial mortgage loans, MBS and retail and business deposit products and
services. The Banking Platform's revenues are substantially derived from
customers in Northern California.
A Consumer Platform which is comprised of motor vehicle loans and leases. The
Consumer Platform's revenues are substantially derived from customers in
California and the Western United States.
A Commercial Platform which is comprised of asset-based lending, factoring and
commercial leasing activities. The Commercial Platform's revenues are derived
from customers throughout the United States.
The accounting policies of the Company's platforms are the same as those
described in the Summary of Significant Accounting Policies (see Note 1). As the
Company's platforms are funded by the deposits and borrowings of BVB and the
debt of the Company, the cost of funds for each platform is deemed equal to the
Company's consolidated cost of funds. An additional amount of interest expense
is allocated to the Consumer Platform, representing the funding cost associated
with operating leased assets, in the measure of platform profitability. This
additional expense is not included in the computation of the Company's net
interest income and net interest margin as the underlying operating leased
assets are excluded from interest-earning assets in accordance with GAAP.
Certain indirect general and administrative costs are allocated from the Banking
Platform to the Consumer Platform and the Commercial Platform. All remaining
indirect general and administrative expenses are included in the Banking
Platform. Intercompany revenues and expenses are eliminated in the measurement
of platform profit or loss. The Company evaluates the performance of its
segments based on earnings contributed by platform, as illustrated in the
following table:
<TABLE>
<CAPTION>
----------------------------------------------------------
Year Ended December 31, 1998
----------------------------------------------------------
Banking Consumer Commercial Total
---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $ 317,039 $ 75,798 $ 13,526 $ 406,363
Interest expense (208,152) (39,936) (3,674) (251,762)
---------- ---------- ---------- -----------
Net interest income 108,887 35,862 9,852 154,601
Provision for losses on loans and leases (1,470) (7,644) - (9,114)
Noninterest income 17,122 13,018 932 31,072
General and administrative expenses (86,410) (18,305) (8,852) (113,567)
Dividend expense (244) - - (244)
Leasing expenses - (7,682) - (7,682)
Net recovery on real estate owned 240 - - 240
Amortization of intangible assets (8,753) (1,167) (1,452) (11,372)
---------- ---------- ---------- -----------
Income before income taxes 29,372 14,082 480 43,934
Income tax expense (14,110) (6,306) (799) (21,215)
---------- ---------- ---------- -----------
Net income (loss) contributed $ 15,262 $ 7,776 $ (319) $ 22,719
========== ========== ========== ===========
At December 31, 1998:
Interest-earning assets plus operating
leased assets $3,946,337 $1,263,065 $ 113,210 $ 5,322,612
========== ========== ==========
Noninterest-earning assets 273,620
-----------
Total assets $ 5,596,232
===========
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------
Year Ended December 31, 1997
----------------------------------------------------------
Banking Consumer Commercial Total
---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $ 209,168 $ 23,461 $ 9,615 $ 242,244
Interest expense (141,712) (11,151) (2,045) (154,908)
---------- ---------- ---------- -----------
Net interest income 67,456 12,310 7,570 87,336
Provision for losses on loans and leases (304) (1,383) (265) (1,952)
Noninterest income 7,912 4,280 563 12,755
General and administrative expenses (56,796) (8,706) (6,411) (71,913)
Net recovery on real estate owned 1,128 - - 1,128
Amortization of intangible assets (2,073) (1,038) (977) (4,088)
---------- ---------- ---------- -----------
Income before income taxes 17,323 5,463 480 23,266
Income tax expense (5,986) (2,665) (594) (9,245)
---------- ---------- ---------- -----------
Net income (loss) contributed $ 11,337 $ 2,798 $ (114) $ 14,021
========== ========== ========== ==========
At December 31, 1997:
Interest-earning assets $2,714,159 $ 371,158 $ 54,120 $3,139,437
========== ========== ==========
Noninterest-earning assets 107,039
----------
Total assets $3,246,476
==========
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
Year Ended December 31, 1996
----------------------------------------------------------
Banking Consumer Commercial Total
---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $ 221,682 $ 20,073 $ - $ 241,755
Interest expense (151,351) (9,422) - (160,773)
---------- ---------- ---------- -----------
Net interest income 70,331 10,651 - 80,982
Provision for losses on loans and leases (1,147) (751) - (1,898)
Noninterest income 7,501 1,063 - 8,564
General and administrative expenses (52,607) (6,348) - (58,955)
SAIF recapitalization expense (11,750) - - (11,750)
Net recovery on real estate owned 4,909 - - 4,909
Amortization of intangible assets (2,025) (581) - (2,606)
---------- ---------- ---------- -----------
Income before income taxes 15,212 4,034 - 19,246
Income tax expense (6,385) (1,892) - (8,277)
---------- ---------- ---------- -----------
Net income contributed $ 8,827 $ 2,142 $ - $ 10,969
========== ========== ========== ===========
At December 31, 1996:
Interest-earning assets $2,932,947 $ 315,439 $ - $3,248,386
========== ========== ==========
Noninterest-earning assets 51,876
----------
Total assets $3,300,262
==========
</TABLE>
104
<PAGE>
Note 24. Subsequent Events
During 1998, the Company initiated the process to convert BVB from a savings
institution regulated by the OTS to a national bank regulated by the Office of
the Comptroller of the Currency ("OCC") and to convert the holding company from
a savings and loan holding company regulated by the OTS to a bank holding
company regulated by the Federal Reserve Board. On February 2, 1999, the Company
received all necessary approvals to effect these conversions which were
consummated on March 1, 1999.
On March 11, 1999, the Company signed a Definitive Merger Agreement with
Southern California-based Franchise Mortgage Acceptance Company ("FMAC"). Under
the terms of the Definitive Agreement, the Company will acquire all of the
common stock of FMAC for consideration valued at approximately $309 million.
Each share of FMAC common stock will be entitled to receive, at the election of
the holder, either $10.25 in cash, or 0.5125 shares of the Company's common
stock. The FMAC shareholder elections are subject to the aggregate number of
shares of FMAC common stock to be exchanged for the Company's common stock being
equal to 60% of the number of shares of FMAC common stock outstanding
immediately prior to closing the transaction and no FMAC shareholder owning more
than 9.9% of the Company's common stock, on a pro forma basis. The Definitive
Agreement also provides for an additional payment of up to $30 million in
connection with the earn-out provision of FMAC's April 1998 purchase of Bankers
Mutual ("Bankers"), a multi-family lending division of FMAC. The transaction is
expected to close during the third quarter of 1999.
Note 25. Selected Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------
Year Ended December 31, 1998
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $ 99,064 $ 100,348 $ 104,568 $ 102,383
Net interest income 36,934 38,344 39,264 40,059
Provision for losses on loans and leases 660 1,700 2,754 4,000
Net income 5,061 5,234 5,025 7,399
Basic earnings per share 0.25 0.26 0.25 0.38
Diluted earnings per share 0.24 0.25 0.25 0.38
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------
Year Ended December 31, 1997
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income $ 58,243 $ 59,339 $ 61,737 $ 62,925
Net interest income 21,055 21,768 22,368 22,145
Provision for losses on loans and leases 565 612 651 124
Net income 5,262 4,504 3,064 1,191
Basic earnings per share 0.40 0.35 0.24 0.10
Diluted earnings per share 0.39 0.34 0.23 0.09
</TABLE>
105
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Bay View Capital Corporation:
We have audited the accompanying consolidated statement of financial condition
of Bay View Capital Corporation and subsidiaries ("the Company") as of December
31, 1998, and the related consolidated statements of income and comprehensive
income, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The accompanying consolidated financial statements of Bay View
Capital Corporation and subsidiaries as of December 31, 1997 and for the years
ended December 31, 1997 and 1996, were audited by other auditors whose report
thereon dated January 26, 1998, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bay View
Capital Corporation and subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
January 19, 1999, except as to footnote 24,
which is as of March 11, 1999
106
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
The information required by Item 304 of Regulation S-K was previously filed as
part of the Company's Current Reports on Form 8K filed on April 29, 1998 and May
12, 1998.
Part III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information concerning executive officers of the Company is contained under
the heading "Executive Officers of the Registrant" at Item 1. "Business."
Information concerning directors of the Company and compliance with the
reporting requirements of Section 16(a) of the Securities Exchange Act of 1934
by the Company's directors, executive officers and beneficial owners of greater
than ten percent of the Company's equity securities is incorporated herein by
reference from the Company's Definitive Proxy Statement for the Annual Meeting
of Stockholders held on May 27, 1999, a copy of which was filed not later than
120 days after the close of the Company's fiscal year. The compensation report
and performance graph included in the Definitive Proxy Statement pursuant to
Items 402(k) and 402(l) of Regulation S-K are specifically not incorporated by
reference herein.
Item 11. Executive Compensation
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's Definitive Proxy Statement for the Annual Meeting
of Stockholders held on May 27, 1999, a copy of which was filed not later than
120 days after the close of the Company's fiscal year. The compensation report
and performance graph included in the Definitive Proxy Statement pursuant to
Items 402(k) and 402(l) of Regulation S-K are specifically not incorporated by
reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's Definitive
Proxy Statement for the Annual Meeting of Stockholders held on May 27, 1999, a
copy of which was filed not later than 120 days after the close of the Company's
fiscal year.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders held on May 27, 1999, a copy of which was
filed not later than 120 days after the close of the Company's fiscal year.
107
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1) and (2):
- ----------------
The Company's Financial Statements and Supplementary Data contained in Item 8.
"Financial Statements and Supplementary Data" are filed as part of this report.
All financial statement schedules have been omitted as the required information
is not applicable or has been included in the Company's financial statements and
related notes.
(a) (3):
- ---------
Exhibits are listed in the table below.
<TABLE>
<CAPTION>
Reference to prior
filing or exhibit
Regulation S-K number attached
Exhibit Number Document hereto
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3 Articles of Incorporation 3a
Bylaws 3b
4 Instruments defining the rights of security holders, including indentures:
Articles of Incorporation 3a
Bylaws 3b
Specimen of common stock certificate 4a
Stockholder Protections Rights Agreement, dated July 31, 1990
(the "Rights Agreement") 4b
First Amendment to the Rights Agreement, dated February 26, 1993 4c
Second Amendment to the Rights Agreement, dated October 10, 1997 4d
Third Amendment to the Rights Agreement, dated September 29, 1998 4e
Form of Rights Certificate and of Election to Exercise pursuant to the
Rights Agreement 4f
9 Voting trust agreement None
10 Material contracts:
Employment Contract with Richard E. Arnold 10a
Employment Contract with John N. Buckley 10a
Employment Contract with Robert J. Flax 10a
Employment Contract with David A. Heaberlin 10a
Employment Contract with Scott H. Ray 10a
Employment Contract with Ronald L. Reed 10a
Employment Contract with Edward H. Sondker 10a
Employment Contract with Carolyn Williams-Goldman 10a
Supplemental Executive Retirement Plan 10b
Senior Management Incentive Plan 10c
Senior Management Long-Term Incentive Plan 10d
Amended and Restated 1986 Stock Option and Incentive Plan 10e
Amended and Restated 1989 Non-Employee Director Stock Option Plan 10f
Amended Outside Directors' Retirement Plan 10g
Stock in Lieu of Cash Compensation Plan for Non-Employee Directors 10g
Deferred Compensation Plan 10g
Amended and Restated 1995 Stock Option and Incentive Plan 10h
1998 - 2000 Performance Stock Plan 10i
1998 Non-Employee Director Stock Option and Incentive Plan 10i
Supplemental Phantom Stock Unit Plan 10.1
11 Statement re computation of per share earnings 11
12 Statements re computation of ratios of earnings to fixed charges 12
13 Annual Report to security holders Not required
</TABLE>
108
<PAGE>
<TABLE>
<S> <C> <C>
16 Letter re change in certifying accountant Not required
18 Letter re change in accounting principles None
21 Subsidiaries of the Registrant 21
22 Published report regarding matters submitted to vote of security holders None
23 Consent of KPMG LLP 23.1
Consent of Deloitte & Touche LLP 23.2
24 Power of attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits -- Report of predecessor independent accountants 99
</TABLE>
(References to Prior Filings)
3a Filed as exhibit 4(a) to the Registrant's Registration Statement on Form
S-3 filed June 20, 1997 (File No. 333-29757)
3b Filed as exhibit 1 to the Registrant's Current Report on Form 8-K filed
January 10, 1994 (File No. 0-17901)
4a Filed as exhibit 4.3 to the Registrant's Registration Statement on Form S-
8 filed July 26, 1991 (File No. 33-41924)
4b Filed as exhibit 1 to the Registrant's Registration Statement on Form 8
filed March 9, 1993 (the second amendment to a Form 8-A filed August 6,
1990) (File No. 0-17901)
4c Filed as exhibit 3 to the Registrant's Registration Statement on Form 8
filed March 9, 1993 (the second amendment to a Form 8-A filed August 6,
1990) (File No. 0-17901)
4d Filed as exhibit 4 to the Registrant's Registration Statement on Form 8-A,
as amended on Form 8-A/A-3, filed October 10, 1997 (File No. 0-17901)
4e Filed as exhibit 5 to the Registrant's Registration Statement on Form 8-A,
as amended on Form 8-A/A-4, filed September 29, 1998 (File No. 0-17901)
4f Filed as exhibit 2 to the Registrant's Registration Statement on Form 8
filed March 9, 1993 (the second amendment to a Form 8-A filed August 6,
1990) (File No. 0-17901)
10a Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1998 (File No. 0-17901)
10b-d Filed as exhibits 10.6 to 10.8, respectively, to the Registrant's Annual
Report on Form 10-K filed March 30, 1993 for the year ended December 31,
1992 (File No. 0-17901)
10e Filed as exhibit 4 to the Registrant's Registration Statement on Form S-8
filed August 11, 1995 (File No. 33-95724)
10f Filed as exhibit 4.4 to the Registrant's Registration Statement on Form S-
8 filed July 26, 1991 (File No. 33-41924)
10g Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, as amended on Form 10-K/A on June 27,
1997 (File No. 0-17901)
10h Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, as amended on Form 10-K/A on June 27,
1997 (File No. 0-17901)
10i Filed as an appendix to the Registrant's Definitive Proxy Statement on
Schedule 14-A filed April 20, 1998 (File No. 0-17901)
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
109
<PAGE>
(b) Reports on form 8-K:
- ------------------------
b(i) The Registrant filed the following report on Form 8-K dated December 16,
1998 during the three months ended December 31, 1998:
The Registrant filed the form of First Supplemental Indenture and the
consent and opinion of outside legal counsel in connection with the sale
by Bay View Capital I of 9.76% Cumulative Capital Securities, pursuant to
the Registration Statement on Form S-3 filed with the Securities and
Exchange Commission under the Securities Act of 1933.
b(ii) The Registrant filed the following report on Form 8-K dated December 22,
1998 during the three months ended December 31, 1998:
The Registrant filed the Underwriting Agreement, Amended and Restated
Declaration of Trust, Guarantee Agreement, Indenture, First Supplemental
Indenture, and a press release in connection with the sale by Bay View
Capital I of 9.76% Cumulative Capital Securities, completed on December
21, 1998.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: July 13, 1999 BAY VIEW CAPITAL CORPORATION
By:/s/ David A. Heaberlin
-----------------------
David A. Heaberlin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By:/s/ Scott H. Ray
-----------------
Scott H. Ray
Senior Vice President and
Controller
(Principal Accounting Officer)
110
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Bay View Capital Corporation:
We consent to the incorporation by reference in the registration statements
(Nos. 33-30602, 33-30603, 33-36161, 33-41924, 33-95724, 33-95726, 333-37027,
333-37029, 333-37031, 333-76553, 333-76555, and 333-76557) on Form S-8 and in
the registration statements (Nos. 333-29757 and 333-64877) on Form S-3 of Bay
View Capital Corporation of our report dated January 19, 1999, except as to
footnote 24, which is as of March 11, 1999, relating to the consolidated
statement of financial condition of Bay View Capital Corporation and
subsidiaries as of December 31, 1998, and the related consolidated statements of
income and comprehensive income, stockholders' equity and cash flows for the
year then ended, which report appears in the December 31, 1998 Annual Report on
Form 10-K/A of Bay View Capital Corporation.
/s/ KPMG LLP
San Francisco, California
July 13, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Bay View Capital Corporation listed below of our report dated January 26, 1998,
appearing in this Annual Report on Form 10-K/A of Bay View Capital Corporation
for the year ended December 31, 1998:
Registration Statement No. 33-30602 on Form S-8
Registration Statement No. 33-30603 on Form S-8
Registration Statement No. 33-36161 on Form S-8
Registration Statement No. 33-41924 on Form S-8
Registration Statement No. 33-95724 on Form S-8
Registration Statement No. 33-95726 on Form S-8
Registration Statement No. 333-37027 on Form S-8
Registration Statement No. 333-37029 on Form S-8
Registration Statement No. 333-37031 on Form S-8
Registration Statement No. 333-76553 on Form S-8
Registration Statement No. 333-76555 on Form S-8
Registration Statement No. 333-76557 on Form S-8
Amendment No. 1 to Registration Statement No. 333-29757 on Form S-3
Amendment No. 1 to Registration Statement No. 333-64877 on Form S-3
/s/ Deloitte & Touche LLP
San Francisco, California
July 13, 1999
<PAGE>
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Bay View Capital Corporation:
We have audited the accompanying consolidated statement of financial
condition of Bay View Capital Corporation and subsidiaries (the "Company") as
of December 31, 1997, and the related consolidated statements of income and
comprehensive income, stockholders' equity and cash flows for the years ended
December 31, 1997 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Bay View Capital
Corporation and subsidiaries at December 31, 1997, and the results of their
operations and their cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
January 26, 1998
