<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---- ----
Commission file number 001-14879
BAY VIEW CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3078031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Gateway Drive, San Mateo, California 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 312-7200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, Par Value $.01 Outstanding at April 30, 1999
(Title of Class) 18,653,637 shares
1
<PAGE>
FORM 10-Q
INDEX
BAY VIEW CAPITAL CORPORATION
----------------------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page(s)
- ------- --------------------- -------
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition............ 4
Consolidated Statements of Income and Comprehensive Income 5
Consolidated Statements of Stockholders' Equity........... 6
Consolidated Statements of Cash Flows..................... 7-8
Notes to Consolidated Financial Statements................ 9-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 12-43
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 44-47
PART II. OTHER INFORMATION
- -------- -----------------
Other Information......................................... 48
Signatures................................................ 49
</TABLE>
2
<PAGE>
Forward-Looking Statements
Certain statements included in this Form 10-Q 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.
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
------------- -------------
March 31, December 31,
1999 1998
------------- -------------
ASSETS (Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash and due from depository institutions $ 44,848 $ 37,296
Short-term investments 103,070 167,890
------------- -------------
147,918 205,186
Securities available-for-sale:
Investment securities 4,932 5,319
Mortgage-backed securities 12,783 13,616
Securities held-to-maturity:
Investment securities - -
Mortgage-backed securities 570,464 621,773
Loans and leases, net of allowance for losses 4,392,979 4,191,269
Investment in operating leased assets, net 261,237 183,453
Investment in stock of the FHLB of San Francisco 87,245 90,878
Investment in stock of the Federal Reserve Bank 12,154 -
Real estate owned, net 2,070 2,666
Premises and equipment, net 23,797 24,727
Intangible assets 131,517 134,088
Other assets 116,455 123,257
------------- -------------
Total assets $5,763,551 $5,596,232
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts $1,750,875 $1,627,275
Retail certificates of deposit 1,542,688 1,642,362
Brokered certificates of deposit 49,723 -
------------- -------------
3,343,286 3,269,637
Advances from the FHLB of San Francisco 1,744,900 1,653,300
Securities sold under agreements to repurchase 23,047 25,302
Subordinated Notes, net 99,453 99,437
Senior Debentures 50,000 50,000
Other borrowings 4,387 5,077
Other liabilities 30,395 25,668
------------- -------------
Total liabilities 5,295,468 5,128,421
------------- -------------
Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures ("Capital Securities") 90,000 90,000
Stockholders' equity:
Serial preferred stock: Authorized, 7,000,000 shares; Outstanding, none - -
Common stock ($.01 par value): Authorized, 60,000,000 shares;
issued, 3/31/99-20,376,251 shares; 12/31/98-20,376,251 shares;
outstanding, 3/31/99-18,808,637 shares; 12/31/98-19,113,637 shares 204 204
Additional paid-in capital 251,010 251,010
Retained earnings (substantially restricted) 160,930 155,715
Treasury stock, at cost, 3/31/99-1,567,614 shares; 12/31/98-1,262,614 shares (30,669) (25,157)
Accumulated other comprehensive income:
Unrealized loss on securities available-for-sale, net of tax (133) (202)
Debt of Employee Stock Ownership Plan (3,259) (3,759)
------------- -------------
Total stockholders' equity 378,083 377,811
------------- -------------
Total liabilities and stockholders' equity $5,763,551 $5,596,232
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------
Three Months Ended
March 31,
--------------------------------------------
1999 1998
-------------------- --------------------
(Amounts in thousands, except
per share amounts)
<S> <C> <C>
Interest income:
Interest on loans and leases $ 87,118 $81,257
Interest on mortgage-backed securities 9,398 15,255
Interest and dividends on investment securities 3,505 2,551
-------------------- --------------------
100,021 99,063
Interest expense:
Interest on deposits 33,602 40,996
Interest on Senior Debentures and Notes 3,527 3,527
Interest on borrowings 22,109 17,606
-------------------- --------------------
59,238 62,129
Net interest income 40,783 36,934
Provision for losses on loans and leases 5,311 660
-------------------- --------------------
Net interest income after provision for losses on loans and leases 35,472 36,274
Noninterest income:
Leasing income 9,658 -
Loan fees and charges 2,001 1,730
Account fees 1,654 1,458
Sales commissions 1,181 633
Gain on sale of loans and securities - 112
Other, net 1,473 270
-------------------- --------------------
15,967 4,203
Noninterest expense:
General and administrative 26,156 27,742
Dividend expense on Capital Securities 2,235 -
Leasing expenses 6,681 -
Real estate owned operations, net 17 37
Net losses (recoveries) on real estate 17 (24)
Amortization of intangible assets 2,904 2,746
-------------------- --------------------
38,010 30,501
Income before income tax expense 13,429 9,976
Income tax expense 6,296 4,916
-------------------- --------------------
Net income $ 7,133 $ 5,060
==================== ====================
Basic earnings per share $0.37 $0.25
==================== ====================
Diluted earnings per share $0.37 $0.24
==================== ====================
Average basic shares outstanding 19,162 20,251
==================== ====================
Average diluted shares outstanding 19,335 20,673
==================== ====================
Net income $ 7,133 $ 5,060
Other comprehensive income, net of tax:
Unrealized gain on securities available-for-sale, net of tax expense of
$49 for the three months ended March 31, 1999 and $344 for the three
months ended March 31, 1998 69 488
-------------------- --------------------
Comprehensive income $ 7,202 $ 5,548
==================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional
Number of Common Paid-in Retained Treasury
Shares Stock Capital Earnings* Stock
--------------- ------------ --------------- ----------- --------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 15,126 $151 $103,052 $141,065 $(66,352)
Issuance of common stock (AFEH acquisition):
From shares held in treasury - - - - 65,258
From authorized but unissued shares 5,087 51 144,691 - -
Repurchase of common stock - - - - (24,063)
Exercise of stock options, including tax benefits 163 2 3,267 - -
Cash dividends declared ($0.40 per share) - - - (8,069) -
Unrealized loss, net of tax - - - - -
Repayment of debt - - - - -
Net income - - - 22,719 -
--------------- ------------ --------------- ----------- --------------
Balance at December 31, 1998 20,376 $204 $251,010 $155,715 $(25,157)
=============== ============ =============== =========== ==============
Repurchase of common stock - - - - (5,512)
Cash dividends declared ($0.10 per share) - - - (1,918) -
Unrealized gain, net of tax - - - - -
Repayment of debt - - - - -
Net income - - - 7,133 -
--------------- ------------ --------------- ----------- --------------
Balance at March 31, 1999 20,376 $204 $251,010 $160,930 $(30,669)
=============== ============ =============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
On Securities Debt of Total
Available-for-Sale, Employee Stock Stockholders'
Net of Tax Ownership Plan Equity
----------------- ---------------- -----------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C>
Balance at December 31, 1997 $ (72) $(4,217) $173,627
Issuance of common stock (AFEH acquisition):
From shares held in treasury - - 65,258
From authorized but unissued shares - - 144,742
Repurchase of common stock - - (24,063)
Exercise of stock options, including tax benefits - - 3,269
Cash dividends declared ($0.40 per share) - - (8,069)
Unrealized loss, net of tax (130) - (130)
Repayment of debt - 458 458
Net income - - 22,719
----------------- ---------------- -----------------
Balance at December 31, 1998 $(202) (3,759) $377,811
================= ================ =================
Repurchase of common stock - - (5,512)
Cash dividends declared ($0.10 per share) - - (1,918)
Unrealized gain, net of tax 69 - 69
Repayment of debt - 500 500
Net income - - 7,133
----------------- ---------------- -----------------
Balance at March 31, 1999 $(133) $(3,259) $378,083
================= ================ =================
</TABLE>
* Substantially restricted
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1999 1998
--------------- ----------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,133 $ 5,060
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of intangible assets 2,904 2,746
Provision for losses on loans and leases and real estate owned 5,328 636
Depreciation and amortization of premises and equipment 1,806 1,239
Depreciation and amortization of investment in operating leased assets 5,810 -
Amortization of premiums, net of discounts 2,975 3,452
Gain on sale of loans and securities - (112)
(Increase) decrease in other assets 5,623 (31,512)
Increase (decrease) in other liabilities 5,625 (21,410)
Other, net 1,248 1,066
--------------- ----------------
Net cash provided by (used in) operating activities 38,452 (38,835)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash and cash equivalents received - 82,129
Net decrease in loans and leases resulting from principal payments, net
of originations 74,953 119,409
Purchase of loans and leases (368,286) (155,389)
Purchase of investment securities - (2,252)
Principal payments on mortgage-backed securities 51,227 71,332
Proceeds from sale of mortgage-backed securities available-for-sale - 9,436
Proceeds from sale of investment securities available-for-sale - 595
Proceeds from sale of real estate owned 918 924
Additions to premises and equipment (876) (4,683)
(Increase) decrease in investment in stock of the FHLB of San Francisco 3,633 (1,205)
Increase in investment in stock of the Federal Reserve Bank (12,154) -
--------------- ----------------
Net cash provided by (used in) investing activities (250,585) 120,296
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
1999 1998
---------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 73,649 $ (197,821)
Proceeds from advances from the FHLB of San Francisco 489,300 833,300
Repayment of advances from the FHLB of San Francisco (397,700) (906,170)
Proceeds from reverse repurchase agreements 23,047 153,428
Repayment of reverse repurchase agreements (25,302) (75,134)
Net change in other borrowings (690) (10,609)
Repurchase of common stock (5,512) -
Proceeds from issuance of common stock - 1,104
Dividends paid to stockholders (1,927) (2,032)
---------------- -----------------
Net cash provided by (used in) financing activities 154,865 (203,934)
---------------- -----------------
Net decrease in cash and cash equivalents (57,268) (122,473)
Cash and cash equivalents at beginning of period 205,186 231,822
---------------- -----------------
Cash and cash equivalents at end of period $ 147,918 $ 109,349
================ =================
Cash paid for:
Interest $ 61,494 $ 66,657
Income taxes $ - $ -
Supplemental non-cash investing and financing activities:
Loans transferred to real estate owned $ 544 $ 1,593
The acquisition of subsidiaries involved the following:
Common stock issued $ - $ 210,000
Liabilities assumed - 2,103,482
Fair value of assets acquired, other than cash and cash equivalents - (2,130,177)
Goodwill - (101,176)
---------------- -----------------
Net cash and cash equivalents received $ - $ 82,129
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Bay View Capital Corporation (sometimes referred to as "the
Company"), a diversified financial services holding company incorporated in 1989
in the state of Delaware, and our wholly owned subsidiaries: Bay View Bank,
N.A., a California corporation operating as a national bank (sometimes referred
to as "Bay View Bank"); Bay View Securitization Corporation, a Delaware
corporation; and Bay View Capital I, a Delaware business trust. Bay View Bank
includes its wholly owned subsidiaries: Bay View Acceptance Corporation, a
Nevada corporation; Bay View Commercial Finance Group, a California corporation;
MoneyCare, Inc., a California corporation; and Bay View Auxiliary Corporation, a
California corporation. Bay View Acceptance Corporation includes its wholly
owned subsidiaries: Bay View Credit, a California corporation; Ultra Funding,
Inc., a California corporation; and LFS-BV, Inc., a Nevada corporation. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Effective March 1, 1999, the Company contributed the capital stock of Bay
View Commercial Finance Group to Bay View Bank in conjunction with the March 1,
1999 conversion of Bay View Bank from a federally chartered capital stock
savings bank to a national bank. Bay View Commercial Finance Group was
previously a wholly owned subsidiary of the Company.
The information provided in these interim financial statements reflects
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the Company's financial condition as of March 31, 1999 and
December 31, 1998, the results of its operations for the three-month periods
ended March 31, 1999 and 1998, and its cash flows for the three-month periods
ended March 31, 1999 and 1998. Such adjustments are of a normal, recurring
nature unless otherwise disclosed in this Form 10-Q. As necessary,
reclassifications have been made to prior period amounts to conform to the
current period presentation. These reclassifications had no effect on the
Company's financial condition, results of operations or stockholders' equity.
These interim financial statements have been prepared in accordance with the
instructions to Form 10-Q, and therefore do not include all of the necessary
information and footnotes for a presentation in conformity with generally
accepted accounting principles.
The information included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" was written assuming that you
have read or have access to our 1998 Annual Report on Form 10-K, which contains
the latest audited consolidated financial statements and notes, along with
Management's Discussion and Analysis of Financial Condition as of December 31,
1998 and 1997 and Results of Operations for the years ended December 31, 1998,
1997 and 1996. Accordingly, only certain changes in financial condition and
results of operations are discussed in this Form 10-Q. Furthermore, the interim
financial results for the three-month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other interim period.
Note 2 - Earnings per Share
Statement of Financial Accounting Standards No. 128, "Measurement of
Earnings Per Share," establishes standards for computing and reporting basic
earnings per share and diluted earnings per
9
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BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
share. Basic earnings per share is calculated by dividing net earnings for
the period by the weighted-average common shares outstanding for that period.
There is no adjustment to the number of outstanding shares for potential
dilutive instruments, such as stock options. Diluted earnings per share takes
into account the potential dilutive impact of such instruments and uses the
average share price for the period in determining the number of incremental
shares to add to the weighted-average number of shares outstanding.
The following table illustrates the calculation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31, March 31,
1999 1998
------------------- -------------------
(Amounts in thousands, except per
share amounts)
<S> <C> <C>
Net earnings available to common stockholders $ 7,133 $ 5,060
Weighted-average common shares outstanding 19,162 20,251
Add: Dilutive potential common shares 173 422
------------------- -------------------
Diluted weighted-average common shares outstanding 19,335 20,673
------------------- -------------------
Basic earnings per share $ 0.37 $ 0.25
=================== ===================
Diluted earnings per share $ 0.37 $ 0.24
=================== ===================
</TABLE>
Note 3 - Stock Options
At March 31, 1999, 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."
The following table illustrates the stock options available for grant as
of March 31, 1999:
<TABLE>
<CAPTION>
----------------- ----------------- ----------------- ----------------- -----------------
1989 Non- 1998
1995 Stock Employee Non-Employee
1986 Stock Option and Director Stock 1998-2000 Director Stock
Option and Incentive Option and Performance Option and
Incentive Plan Plan Incentive Plan Stock Plan Incentive Plan
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Shares reserved for issuance 1,759,430 2,000,000 550,000 400,000 200,000
Granted (2,048,816) (1,902,000) (570,000) - (42,000)
Forfeited 290,574 202,899 20,000 - -
Expired (1,188) - - - -
----------------- ----------------- ----------------- ----------------- -----------------
Total available for grant - 300,899 - 400,000 158,000
================= ================= ================= ================= =================
</TABLE>
10
<PAGE>
BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
At March 31, 1999, the Company had outstanding options under the plans
with expiration dates ranging from the years 2000 through 2009, as illustrated
in the following table:
<TABLE>
<CAPTION>
--------------------- ---------------------- ----------------------
Number of Exercise Price Weighted-Average
Option Shares Range Price
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Outstanding at December 31, 1998 2,145,700 $ 7.88 - 35.20 $21.55
Granted 46,000 18.38 - 18.50 18.49
Forfeited (43,300) 17.94 - 34.41 26.82
--------------------- ---------------------- ----------------------
Outstanding at March 31, 1999 2,148,400 $ 7.88 - 35.20 $21.37
===================== ====================== ======================
</TABLE>
Note 4 - Dividend Declaration
The Company declared a quarterly common stock cash dividend of $0.10 per
common share on March 25, 1999, payable on April 23, 1999 to common stockholders
of record as of April 9, 1999. The dividend payable, totaling approximately
$2.0 million, was accrued as of March 31, 1999 and is reflected in the
accompanying interim consolidated financial statements.
Note 5 - Acquisition of Franchise Mortgage Acceptance Company
On March 11, 1999, the Company signed a definitive merger agreement with
southern California-based Franchise Mortgage Acceptance Company (sometimes
referred to as "FMAC"). Under the terms of the definitive merger agreement, 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 exchanged
for, at the election of its holder, either $10.25 in cash or 0.5125 shares of
the Company's common stock.
After all FMAC shareholder elections have been made, the elections will be
adjusted to ensure that 60% of FMAC shares are paid in the Company's common
stock and 40% of FMAC shares are paid in cash, and to ensure that no FMAC
shareholder owns more than 9.99% of the Company's common stock after the merger.
These adjustments will be made on a pro rata basis.
The definitive merger 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, a multi-family lending division of FMAC. We expect
the transaction, which is subject to shareholder and regulatory approvals, to
close during the third quarter of 1999.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Strategic Overview
The Company is a diversified financial services company that operates
distinct business platforms. Each platform is comprised of interest-earning
assets with similar characteristics including, among other things, marketing and
distribution channels, pricing, credit risk, and interest rate sensitivity.
Throughout 1998, the Company reported on three business platforms: a Banking
Platform, a Consumer Platform and a Commercial Platform. The Banking Platform
included single-family, multi-family and commercial mortgage loans, mortgage-
backed securities, and retail and business deposit products and services. The
Consumer Platform included motor vehicle loans and leases and home equity loans.
The Commercial Platform included asset-based lending, factoring and commercial
leasing activities.
Effective January 1, 1999, the Company expanded its business platforms to four
in order to facilitate a more effective presentation and analysis of the
Company's different business activities. These platforms are as follows:
. A Banking Platform comprised of single-family, multi-family and commercial
mortgage loans, mortgage-backed securities, retail and business deposit
products and services, and asset-based commercial participation loans. The
Banking Platform also includes franchise loans purchased during the first
quarter of 1999 in connection with the Company's pending acquisition of FMAC.
The Company anticipates presenting the FMAC franchise lending activities as a
separate business platform subsequent to the consummation of the acquisition;
. A Home Equity Platform comprised of home equity loans and lines of credit;
. An Auto Platform comprised of motor vehicle loans and leases; and
. A Commercial Platform comprised of asset-based lending (excluding asset-based
commercial participation loans), factoring and commercial leasing activities.
The Company's Mission Statement
The Company's mission statement is "to build a diversified financial services
company by investing in niche businesses with risk-adjusted returns that enhance
shareholder value."
The Company's Strategy
The Company's strategy centers around the continued transition to traditional
commercial banking activities and the resulting expansion of our net interest
margin. In order to realize this objective, the Company's actions include the
following:
. Replacing lower-yielding mortgage loans and mortgage-backed securities with
consumer and commercial loans and leases with higher risk-adjusted returns,
shorter maturities and less sensitivity to interest rate fluctuations.
. Enhancing Bay View Bank's deposit base by increasing lower-cost transaction
accounts and de-emphasizing higher-cost certificates of deposit by
implementing its pricing strategies, emphasizing relationship banking and
capitalizing on cross-selling opportunities with customers.
12
<PAGE>
. De-emphasizing the less profitable elements of the Company's business
activities, including ceasing residential mortgage loan originations and
reducing Bay View Bank's wholesale activities.
. Maintaining the capital level of both Bay View Bank and the Company at or
above the well-capitalized level, as defined for regulatory purposes, and
returning excess capital at Bay View Bank to the holding company, as
necessary, for redeployment.
. Redeploying the Company's excess capital in businesses intended to generate
assets with higher risk-adjusted returns than those typically provided by
mortgage loans and mortgage-backed securities.
Banking Platform Strategy
The Banking Platform's primary objective is enhancing the value of Bay View
Bank's retail branch franchise through internal growth, new and enhanced
products and services, acquisitions, and purchases of deposits. At March 31,
1999, the Banking Platform had approximately $3.9 billion in interest-earning
assets as compared with approximately $3.8 billion at December 31, 1998.
A primary component of the Banking Platform's strategy is increasing lower-
cost transaction accounts (e.g., checking, savings and money market accounts) as
a source of financing for the Company. Transaction accounts at Bay View Bank as
a percentage of total retail deposits increased to 53.2% at March 31, 1999 as
compared with 49.8% at December 31, 1998 and 34.6% at December 31, 1997. At
both March 31, 1999 and December 31, 1998, the Banking Platform had
approximately $3.3 billion in deposits.
Effective March 1, 1999, Bay View Bank converted from a savings institution
regulated by the Office of Thrift Supervision to a national bank regulated by
the Office of the Comptroller of the Currency and the Company converted from a
savings and loan holding company regulated by the Office of Thrift Supervision
to a bank holding company regulated by the Federal Reserve Board. These
conversions culminate the Company's formal transformation to a commercial
banking entity. The new national bank charter provides the Company with the
ability to continue, as well as expand, its focus on traditional commercial
banking activities.
Home Equity Platform Strategy
The Home Equity Platform originates and purchases home equity loans and lines
of credit with higher risk-adjusted returns than traditional mortgage loans. At
March 31, 1999, the Home Equity Platform had approximately $640 million in
interest-earning assets as compared with approximately $660 million at December
31, 1998. The Home Equity Platform's portfolio included $471 million in high
loan-to-value home equity loans at March 31, 1999. The Company does not
anticipate significantly increasing its exposure to high loan-to-value home
equity loans.
Auto Platform Strategy
The Auto Platform underwrites and purchases high-quality, fixed-rate loans
and leases secured by new and used motor vehicles. The platform commenced its
leasing activities effective April 1, 1998. At March 31, 1999, the Auto
Platform had approximately $860 million in interest-earning assets and operating
leased assets as compared with approximately $750 million at December 31, 1998.
In executing its strategy, the Auto Platform identifies 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
13
<PAGE>
vehicle financing sources. In return for the flexibility of the product it
offers, the Auto Platform charges interest rates in this niche which are higher
than those typically offered by traditional sources of motor vehicle financing,
such as banks and captive finance companies, while applying its traditional
underwriting criteria, on a case-by-case basis, to mitigate any potential loan
losses. The Auto Platform also pursues geographic and product niches in its more
conventional loan and lease financing businesses.
Commercial Platform Strategy
The Commercial Platform's strategy focuses on being a nationwide provider of
commercial lending and leasing products and services. In December 1997, the
Company expanded its Commercial Platform by forming an asset-based lending group
known as Bay View Financial Corporation. Specifically, the Company added
personnel with significant industry experience, relocated the asset-based
lending business to Southern California, one of the top asset-based lending
markets in the country, and added new and enhanced products to the asset-based
lending segment's product array. At March 31, 1999, the Commercial Platform had
approximately $110 million in interest-earning assets as compared with
approximately $90 million at December 31, 1998.
Acquisition of FMAC
FMAC is one of the nation's leading small business lenders specializing in
franchise concept loans. Bankers Mutual, a division of FMAC, is one of the
nation's leading multi-family lenders. Following the merger, FMAC will operate
as a subsidiary of Bay View Bank. The acquisition provides the Company with
significant asset generation capabilities consistent with our strategic
direction. The acquisition also provides the Company with a significant small
business platform focused on the quick service restaurant, casual dining, retail
energy, and death care industries, in addition to providing the Company with
additional multi-family lending opportunities. The Company intends to portfolio
a significant portion of the commercial franchise loans originated, accelerating
the transformation of the Company's balance sheet to higher-yielding consumer
and commercial assets. Bankers Mutual has historically sold its multi-family
loan production through seller-servicer programs administered by Fannie Mae and
Freddie Mac which the Company intends to continue prospectively.
Results of Operations
Net income for the first quarter of 1999 was $7.1 million, or $0.37 per
diluted share, as compared with $5.1 million, or $0.24 per diluted share, for
the first quarter of 1998. The increase in net income and earnings per share
for the first quarter of 1999, as compared with the first quarter of 1998, was
attributable to higher levels of net interest income and noninterest income
partially offset by higher levels of provision for losses on loans and leases
and noninterest expense.
Contribution by Platform
Each of the Company's four business platforms contributes to our overall
profitability. Contribution by platform is defined as each platform's net
interest income and noninterest income less each platform's allocated provision
for losses on loans and leases, direct general and administrative expenses,
including certain direct expense allocations, and other noninterest expense,
including the amortization of intangible assets.
In computing net interest income by platform, funding costs are allocated to
each platform based on the duration of its interest-earning assets and auto-
related operating leased assets and, specifically, by matching these assets with
interest-bearing liabilities with similar durations. Accordingly, the Auto
Platform's and the Commercial Platform's funding costs were determined based on
the Company's average cost of transaction accounts for the appropriate period.
The Banking Platform's and the Home Equity Platform's funding costs were
determined based on the Company's
14
<PAGE>
average cost of its remaining funding sources, including the noninterest expense
associated with the Company's 9.76% Capital Securities issued on December 21,
1998.
All indirect general and administrative expenses not specifically identifiable
with, or allocable to, the Company's business platforms are included in indirect
corporate overhead. Indirect corporate overhead includes both recurring items,
such as the Company's administrative and support functions, and certain special
mention items, such as expenses associated with corporate-wide process and
systems re-engineering projects and third-party Year 2000 compliance-related
costs.
The Company's prior period platform results were revised to reflect the
expanded number of business platforms and to reflect the methodology discussed
above. The Company continues to refine its cost allocation methodology and
anticipates further refinements during future periods.
The following tables illustrate each platform's contribution for the periods
indicated. The tables also illustrate the reconciliation of total contribution
by platform to the Company's net income for the periods indicated. Reconciling
items generally include indirect corporate overhead and income tax expense.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 (Unaudited)
-----------------------------------------------------------------------------------------
Banking Home Equity Auto Commercial Total
--------------- --------------- --------------- ----------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $ 23,460 $ 8,171 $ 6,092 $ 3,060 $ 40,783
Provision for losses on loans and - (3,501) (1,750) (60) (5,311)
leases
Noninterest income 5,482 24 10,185 276 15,967
Direct general and administrative
expenses /(1)/ (14,277) (1,026) (4,003) (1,920) (21,226)
Dividend expense on Capital Securities (1,900) (335) - - (2,235)
Leasing expenses /(2)/ - - (6,681) - (6,681)
Net expense on real estate owned (34) - - - (34)
Amortization of intangible assets (2,237) - (304) (363) (2,904)
--------------- --------------- --------------- ----------------- ------------
Contribution by platform $ 10,494 $ 3,333 $ 3,539 $ 993 18,359
=============== =============== =============== =================
Indirect corporate overhead /(1)/ (4,930)
Income tax expense (6,296)
------------
Net income $ 7,133
============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 (Unaudited)
---------------------------------------------------------------------------------------------
Banking Home Equity Auto Commercial Total
--------------- --------------- --------------- ----------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $ 25,577 $2,518 $ 6,353 $ 2,486 $ 36,934
Provision for losses on loans and - - (660) - (660)
leases
Noninterest income 3,148 74 831 150 4,203
Direct general and administrative
expenses /(1)/ (15,191) (342) (3,831) (2,003) (21,367)
Net expense on real estate owned (13) - - - (13)
Amortization of intangible assets (2,093) - (290) (363) (2,746)
--------------- --------------- --------------- ----------------- --------------
Contribution by platform $ 11,428 $2,250 $ 2,403 $ 270 16,351
=============== =============== =============== =================
Indirect corporate overhead /(1)/ (6,375)
Income tax expense (4,916)
--------------
Net income $ 5,060
==============
</TABLE>
15
<PAGE>
/(1)/ Amounts include certain special mention items which are discussed at
"General and Administrative Expenses." Special mention items generally
include income and expense items recognized during the period that we
believe are significant and/or unusual in nature and therefore, useful to
you in evaluating our performance and trends. These items may or may not
be nonrecurring in nature.
/(2)/ The Auto Platform commenced its leasing activities effective April 1,
1998.
Banking Platform
The decrease in the Banking Platform's contribution for the first quarter of
1999, as compared with the first quarter of 1998, resulted from lower interest
income primarily due to lower average balances of interest-earning assets
combined with the cost associated with the Company's Capital Securities issued
on December 21, 1998, partially offset by lower deposit and borrowing costs (as
discussed later under "Interest Expense"), higher noninterest income and lower
general and administrative expenses. The decrease in average balances of
interest-earnings assets for the first quarter of 1999, as compared with the
first quarter of 1998, was attributable to the decline in the platform's
mortgage-based assets consistent with the Company's strategic focus on
generating consumer and commercial assets with higher risk-adjusted yields.
The Banking Platform's contribution for the first quarter of 1999 included
$720,000 in pre-tax special mention items, including a $1.1 million state tax
refund resulting from a favorable ruling on a tax refund claim for taxable years
otherwise closed, which was partially offset by approximately $380,000 in
associated collection-based expenses during the same period. The Banking
Platform's contribution for the first quarter of 1998 included approximately
$2.1 million in pre-tax special mention items, primarily acquisition-related
expenses associated with the Company's January 2, 1998 acquisition of America
First Eureka Holdings, Inc. and its wholly owned subsidiary, EurekaBank.
Excluding these special mention items, the Banking Platform's general and
administrative expenses increased from $13.1 million for the first quarter of
1998 to $13.9 million for the first quarter of 1999, largely attributable to
inflationary pressures, including the Company's annual salary increases which
were effective March 1, 1998 and 1999.
Home Equity Platform
The increase in the Home Equity Platform's contribution for the first quarter
of 1999, as compared with the first quarter of 1998, was primarily due to higher
interest income resulting from higher average balances of interest-earning
assets combined with lower deposit and borrowing costs, partially offset by a
higher provision for losses on loans and leases, higher general and
administrative expenses and the cost associated with the Capital Securities.
The increases in interest income, provision for losses on loans and leases and
general and administrative expenses were largely due to the platform's growth,
particularly in high loan-to-value home equity loans. While these loans have
higher risk-adjusted yields relative to traditional mortgage-based assets, they
also have higher corresponding credit losses.
Auto Platform
The increase in the Auto Platform's contribution for the first quarter of
1999, as compared with the first quarter of 1998, was primarily due to higher
interest income and net rental income resulting from higher average balances of
interest-earning assets and the platform's operating leased assets, effective
April 1, 1998, combined with a decrease in the cost of the Company's
transaction accounts, partially offset by lower asset yields, a higher
provision for losses on loans and leases and higher general and administrative
expenses. The lower asset yields were attributable to the continued migration
to higher-quality, yet lower-yielding loans along with the yield compression
16
<PAGE>
associated with increased competition within the industry. The higher provision
level was a result of higher net charge-offs attributable to the continued
growth of the platform.
The Auto Platform's contribution for the first quarter of 1999 included
approximately $440,000 in special mention items, primarily expenses related to
the closure of a loan production office and severance costs. The Auto
Platform's contribution for the first quarter of 1998 included approximately
$66,000 in special mention items, primarily systems conversion-related expenses.
Excluding these special mention items, the Auto Platform's general and
administrative expenses decreased from $3.8 million for the first quarter of
1998 to $3.6 million for the first quarter of 1999, largely attributable to cost
savings initiatives partially offset by the inflationary pressures discussed
above.
Commercial Platform
The increase in the Commercial Platform's contribution for the first quarter
of 1999, as compared with the first quarter of 1998, was primarily due to higher
interest income resulting from higher average balances of interest-earning
assets combined with an increase in noninterest income, a decrease in the cost
of the Company's transaction accounts and lower general and administrative
expenses, partially offset by lower asset yields. The decrease in asset yields
was a result of most of the platform's growth being comprised of asset-based
loans and equipment leases which generate lower yields relative to the
platform's factoring activities. The decrease in the Commercial Platform's
general and administrative expenses were primarily due to cost savings
initiatives partially offset by the inflationary pressures discussed above.
Indirect Corporate Overhead
The decrease in indirect corporate overhead for the first quarter of 1999, as
compared with the first quarter of 1998, was primarily due to approximately $1.2
million in special mention items incurred in the first quarter of 1998, largely
attributable to corporate-wide process and systems re-engineering projects.
This compares with approximately $115,000 in special mention items incurred in
the first quarter of 1999, largely attributable to third-party Year 2000
compliance-related projects.
Net Interest Income and Net Interest Margin
Net interest income for the first quarter of 1999 was $40.8 million as
compared with $36.9 million for the first quarter of 1998. Net interest margin
for the first quarter of 1999 was 3.16% as compared with 2.90% for the first
quarter of 1998. The increases in net interest income and net interest margin
were due to a combination of factors, including growth in the Company's balance
sheet and the corresponding increase in average interest-earning assets, a
decrease in funding costs and the continuing shift to traditional commercial
banking assets with higher risk-adjusted yields. The decrease in funding costs
was primarily due to growth in lower-cost transaction accounts, the Company's
deposit pricing strategies which de-emphasize higher-cost certificates of
deposit and lower wholesale borrowing costs.
17
<PAGE>
The following table illustrates net interest income and net interest margin,
by platform, for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended (Unaudited)
---------------------------------------------------------------------
March 31, 1999 March 31, 1998
-------------------------------- --------------------------------
Net Net Net Net
Interest Interest Interest Interest
Income Margin Income Margin
-------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $23,460 2.41% $25,577 2.25%
Home Equity Platform 8,171 5.04 2,518 5.54
Auto Platform 6,092 4.28 6,353 7.32
Commercial Platform 3,060 12.59 2,486 19.01
-------------- -------------- -------------- --------------
Total $40,783 3.16% $36,934 2.90%
============== ============== ============== ==============
</TABLE>
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>
-----------------------------------------
(Unaudited)
-----------------------------------------
At At
March 31, December 31,
1999 1998
------------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform $3,880,901 $3,816,993
Home Equity Platform 644,589 657,148
Auto Platform 595,809 570,128
Commercial Platform 106,419 94,888
------------------- ------------------
Total $5,227,718 $5,139,157
=================== ==================
</TABLE>
The following table illustrates average interest-earning assets, excluding the
Company's auto-related operating leased assets, by platform, for the periods
indicated:
<TABLE>
<CAPTION>
-------------------------------------------
Three Months Ended (Unaudited)
-------------------------------------------
March 31, March 31,
1999 1998
------------------- --------------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform $3,788,276 $4,442,168
Home Equity Platform 649,865 180,827
Auto Platform 583,760 351,180
Commercial Platform 98,892 53,040
------------------- --------------------
Total $5,120,793 $5,027,215
=================== ====================
</TABLE>
Banking Platform
The Banking Platform's net interest margin for the first quarter of 1999 was
2.41% as compared with 2.25% for the first quarter of 1998. The increase in net
interest margin was primarily due to a decrease in the Company's funding costs,
partially offset by declining asset yields. The declining asset yields resulted
from continued prepayments of mortgage loans and mortgage-backed securities
combined with the purchase of $200 million of lower-yielding residential
mortgage loans in June 1998, primarily to assist Bay View Bank in meeting its
Community Reinvestment Act requirements.
18
<PAGE>
Home Equity Platform
The Home Equity Platform's net interest margin for the first quarter of 1999
was 5.04% as compared with 5.54% for the first quarter of 1998. The decrease in
net interest margin was primarily due to purchases of higher-quality high loan-
to-value home equity loans with lower yields during the second and third
quarters of 1998, partially offset by a decrease in the Company's funding costs.
At March 31, 1999, the Home Equity Platform included $471 million in high
loan-to-value home equity loans as compared with $189 million at March 31, 1998.
At March 31, 1999, the combined loan-to-value ratio for the Company's high loan-
to-value home equity loan portfolio was approximately 114%. The Company's
underwriting standards for high loan-to-value home equity loans focus on the
borrower's ability to repay, as demonstrated by debt-to-income ratios, as well
as the borrower's willingness to repay, as demonstrated by Fair, Isaac Credit
Bureau (sometimes referred to as "FICO") scores. At March 31, 1999, the
Company's high loan-to-value home equity loan portfolio had an average debt-to-
income ratio of approximately 39% and an average FICO score of approximately
670.
Auto Platform
The Auto Platform's net interest margin for the first quarter of 1999 was
4.28% as compared with 7.32% for the first quarter of 1998. The decrease in net
interest margin was largely due to lower asset yields combined with the funding
costs associated with the platform's leasing activities, partially offset by
lower funding costs. The lower asset yields were largely attributable to the
platform's continuing migration to higher-quality, yet lower-yielding loans
along with the yield compression associated with increased competition within
the industry. The Auto Platform's net interest margin, calculated in accordance
with generally accepted accounting principles (sometimes referred to as "GAAP"),
excludes the income impact associated with the platform's auto leasing
activities, which commenced operations effective April 1, 1998, but includes the
interest expense associated with the deposits and borrowings utilized to fund
these assets. As the auto leases are accounted for as operating leases, the
rental income is reflected in noninterest income and the related expenses,
including depreciation expense, are reflected as noninterest expense, in
accordance with GAAP. For a discussion of normalized net interest income and net
interest margin, which includes the income impact associated with the platform's
auto leasing activities, see "Non-GAAP Performance Measures - Normalized Net
Interest Income and Net Interest Margin."
During the first quarter of 1999, the Auto Platform generated $175 million in
motor vehicle loans and leases as compared with $118 million during the first
quarter of 1998. The totals for the first quarter of 1999 included $87 million
in auto loans, with an average FICO score of 715, and $88 million in auto
leases, with an average FICO score of 734.
Commercial Platform
The Commercial Platform's net interest margin for the first quarter of 1999
was 12.59% as compared with 19.01% for the first quarter of 1998. The decrease
in net interest margin was a result of most of the platform's growth being
comprised of asset-based loans and equipment leases which generate lower yields
relative to the platform's factoring activities, partially offset by lower
funding costs.
Prepayments
Prepayments, including normal amortization, for the first quarter of 1999 were
approximately $410 million, representing an annualized rate of 33.0%, as
compared with approximately $360 million during the first quarter of 1998,
representing an annualized rate of 29.0%. The high level of prepayments during
the first quarter of 1999, most of which related to lower-yielding mortgage-
based assets, was more than
19
<PAGE>
offset by loan and lease originations and purchases of nearly $650 million in
higher-yielding consumer and commercial assets during this same period.
Average Balance Sheet
The following table illustrates average yields on the Company's interest-
earning assets and average rates on the Company's interest-bearing liabilities
for the periods indicated. These average yields and rates were calculated by
dividing interest income by the average balance of interest-earning assets and
by dividing interest expense by the average balances of interest-bearing
liabilities, for the periods indicated. Average balances of interest-earning
assets and interest-bearing liabilities were calculated by averaging the
relevant month-end amounts for the respective periods.
20
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Yields and Rates (Unaudited)
----------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
---------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------------------------------------- ------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
- ------
Interest-earning assets:
Loans and leases receivable $4,264,502 $ 87,118 8.22% $3,953,437 $81,257 8.24%
Mortgage-backed securities /(1)/ 598,630 9,398 6.28 908,955 15,255 6.71
Investments /(1)/ 257,661 3,505 5.13 164,823 2,551 6.26
------------- ---------- ---------- ---------- --------- -----------
Total interest-earning assets 5,120,793 $100,021 7.84% 5,027,215 $99,063 7.90%
========== ========== ========= ===========
Other assets 481,239 362,316
------------- ----------
Total assets $5,602,032 $5,389,531
============= ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Deposits $3,296,261 $ 33,602 4.13% $3,601,041 $40,996 4.62%
Borrowings /(2)/ 1,813,731 25,636 5.70 1,317,764 21,133 6.46
------------- ---------- ---------- ---------- --------- -----------
Total interest-bearing liabilities 5,109,992 $ 59,238 4.69% 4,918,805 $62,129 5.11%
========== ========== ========= ===========
Other liabilities 111,889 84,342
------------- ----------
Total liabilities 5,221,881 5,003,147
Stockholders' equity 380,151 386,384
------------- ----------
Total liabilities and stockholders' equity $5,602,032 $5,389,531
============= ==========
Net interest income/net interest spread $ 40,783 3.15% $36,934 2.79%
========== ========== ========= ===========
Net interest earning assets $ 10,801 $ 108,410
============= ==========
Net interest margin /(3)/ 3.16% 2.90%
========== ===========
</TABLE>
/(1)/ Average balances and yields for mortgage-backed securities and investment
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 $1.0 million for the three months ended March 31, 1999 and
$611,000 for the three months ended March 31, 1998.
/(3)/ Annualized net interest income divided by average interest-earning assets.
21
<PAGE>
Interest Income
Loans and Leases
Interest income on loans and leases was $87.1 million for the first quarter of
1999 as compared with $81.3 million for the first quarter of 1998. The average
yield on loans and leases was 8.22% for the first quarter of 1999 as compared
with 8.24% for the first quarter of 1998. The increase in interest income on
loans and leases for the first quarter of 1999, as compared with the first
quarter of 1998, was primarily due to higher average balances of loans and
leases resulting from internally generated loan and lease growth supplemented by
loan purchases.
The following table illustrates interest income on loans and leases, by
platform, for the periods indicated:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Three Months Ended (Unaudited)
-------------------------------------------------------------------------------------
March 31, 1999 March 31, 1998
---------------------------------------- ---------------------------------------
Average Average
Amount Yield Amount Yield
------------------ ----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $54,992 7.53% $64,985 7.71%
Home Equity Platform 15,884 9.79 4,835 10.74
Auto Platform 12,390 8.67 8,573 10.04
Commercial Platform 3,852 15.80 2,864 21.90
------------------ ----------------- ----------------- -----------------
Total $87,118 8.22% $81,257 8.24%
================== ================= ================= =================
</TABLE>
While each platform's average loan and lease yield decreased for the first
quarter of 1999, as compared with the first quarter of 1998, the Company's total
average loan and lease yield remained relatively constant. This was a result of
the change in the Company's mix of loans and leases. Specifically, the average
balance of interest-earning assets within the Banking Platform decreased for the
first quarter of 1999, as compared with the first quarter of 1998, while the
average balances of interest-earning assets in the higher-yielding Home Equity,
Auto and Commercial Platforms increased during this same period.
Banking Platform
- ----------------
The Banking Platform's average loan yield for the first quarter of 1999 was
7.53% as compared with 7.71% for the first quarter of 1998. The decrease in the
platform's average loan yield for the first quarter of 1999, as compared with
the first quarter of 1998, was primarily due to the impact of continued
prepayments of mortgage loans combined with the purchase of $200 million of
lower-yielding residential mortgage loans in June 1998, primarily to assist Bay
View Bank in meeting its Community Reinvestment Act requirements.
Home Equity Platform
- --------------------
The Home Equity Platform's average loan yield for the first quarter of 1999
was 9.79% as compared with 10.74% for the first quarter of 1998. The decrease
in the platform's average loan yield for the first quarter of 1999, as compared
with the first quarter of 1998, was primarily due to purchases of higher-quality
high loan-to-value home equity loans with lower yields during the second and
third quarters of 1998.
22
<PAGE>
Auto Platform
- -------------
The Auto Platform's average loan yield for the first quarter of 1999 was 8.67%
as compared with 10.04% for the first quarter of 1998. The decrease in the
platform's average loan yield for the first quarter of 1999, as compared with
the first quarter of 1998, was primarily due to lower asset yields on auto loan
originations and purchases. The lower yields were largely attributable to the
platform's continuing migration to higher-quality, yet lower-yielding loans
along with the yield compression associated with increased competition within
the industry.
Commercial Platform
- -------------------
The Commercial Platform's average loan and lease yield for the first quarter
of 1999 was 15.80% as compared with 21.90% for the first quarter of 1998. The
decrease in the platform's average loan yield for the first quarter of 1999,
as compared with the first quarter of 1998, was a result of most of the
platform's growth being comprised of asset-based loans and equipment leases
which generate lower yields relative to the platform's factoring activities.
Mortgage-Backed Securities
Interest income on mortgage-backed securities for the first quarter of 1999
was $9.4 million as compared with $15.3 million for the first quarter of 1998.
The average yield on mortgage-backed securities was 6.28% for the first quarter
of 1999 as compared with 6.71% for the first quarter of 1998. The decreases in
interest income and average yield on mortgage-backed securities for the first
quarter of 1999, as compared with the first quarter of 1998, were primarily due
to continued prepayments of mortgage-backed securities, partially offset by
purchases of higher-yielding collateralized mortgage obligations during the
latter half of 1998.
Investment Securities
Interest and dividend income on investment securities for the first quarter of
1999 was $3.5 million as compared with $2.6 million for the first quarter of
1998. The average yield on investment securities for the first quarter of 1999
was 5.13% as compared with 6.26% for the first quarter of 1998. The increase in
interest and dividend income on investment securities for the first quarter of
1999, as compared with the first quarter of 1998, was primarily due to higher
average balances resulting from the Company's funding and investment management
activities. The decrease in the average yield on investment securities was
primarily due to the impact of the recent interest rate environment.
Interest Expense
Deposits
Interest expense on deposits was $33.6 million for the first quarter of 1999
as compared with $41.0 million for the first quarter of 1998. The cost of
deposits was 4.13% for the first quarter of 1999 as compared with 4.62% for the
first quarter of 1998. The decrease in interest expense was due to decreases in
both average deposit balances and the cost of deposits. The decrease in the
average deposit balances for the first quarter of 1999, as compared with the
first quarter of 1998, was primarily a result of the Company's deposit pricing
strategies and, specifically, de-emphasizing higher-cost certificates of
deposit. The decrease in the cost of deposits for the first quarter of 1999, as
compared with the first quarter of 1998, resulted from a combination of factors,
including an increase in lower-cost transaction accounts and the Company's
deposit pricing strategies.
23
<PAGE>
The Company's cost of deposits for the month of March 1999 was 4.09%. This
cost was 43 basis points below the Eleventh District Cost of Funds Index
(sometimes referred to as "COFI") of 4.52% for March 1999. Transaction account
balances as a percentage of retail deposits were 53.2% at March 31, 1999 as
compared with 49.8% at December 31, 1998 and 34.6% at December 31, 1997.
The following table summarizes the cost of deposits versus COFI and
transaction accounts as a percentage of retail deposits for the periods
indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Three Months Ended (Unaudited)
-----------------------------------------------------------------
March 31, December 31, December 31,
1999 1998 1997
------------------ ------------------- ------------------
<S> <C> <C> <C>
Cost of deposits 4.09% 4.20% 4.71%
COFI 4.52% 4.66% 4.95%
------------------ ------------------- ------------------
Spread below COFI (0.43) (0.46) (0.24)
================== =================== ==================
Transaction accounts as a
percentage of retail deposits 53.2% 49.8% 34.6%
================== =================== ==================
</TABLE>
While the spread below COFI for the Company's deposits was 43 basis points for
the month of March 1999, the spread for the original Bay View Bank branches, on
a standalone basis, was 57 basis points below COFI for the month of March 1999.
The cost of deposits for the original EurekaBank branches, on a standalone
basis, was 37 basis points below COFI for the month of March 1999, reflecting
EurekaBank's higher deposit pricing structure. Since the acquisition of
EurekaBank 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 deposit 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 summarizes the cost of deposits versus COFI for the
original Bay View Bank branches and EurekaBank branches for the periods
indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Three Months Ended (Unaudited)
----------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30,
1999 1998 1998 1998
----------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Cost of deposits -- BVB 3.95% 3.97% 4.12% 4.22%
Cost of deposits -- EurekaBank 4.15% 4.28% 4.46% 4.56%
COFI 4.52% 4.66% 4.88% 4.88%
----------------- ------------------ ------------------- -----------------
Spread below COFI -- BVB (0.57) (0.69) (0.76) (0.66)
================= ================== =================== =================
Spread below COFI -- EurekaBank (0.37) (0.38) (0.42) (0.32)
================= ================== =================== =================
Difference 0.20 0.31 0.34 0.34
================= ================== =================== =================
</TABLE>
Borrowings
Interest expense on the Company's borrowings was $25.6 million for the first
quarter of 1999 as compared with $21.1 million for the first quarter of 1998.
The average cost of borrowings was 5.70% for the first quarter of 1999 as
compared with 6.46% for the first quarter of 1998. The increase in interest
expense on borrowings for the first quarter of 1999, as compared with the first
quarter of 1998, was primarily due to a higher level of Federal Home Loan Bank
advances outstanding during the first quarter of 1999. Higher levels of Federal
Home Loan Bank advances were required due to the growth in the
24
<PAGE>
Company's balance sheet combined with the decrease in the Company's average
deposit balances as discussed above. This volume-related increase in interest
expense was partially offset by a decline in the cost of borrowings attributable
to lower market interest rates and the Company's refinancing and extending of
maturities on a significant portion of our Federal Home Loan Bank advances
portfolio in October 1998. The 5.70% cost of borrowings for the first quarter of
1999, in accordance with GAAP, does not include the impact of the cost
associated with the $90 million of Capital Securities issued on December 21,
1998. Had this expense been included, the Company's cost of borrowings for the
first quarter of 1999 would have been 5.90%, representing an increase of 20
basis points.
Changes in Rate and Volume
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 for the three-month period ended March 31, 1999 as
compared with the three-month period ended March 31, 1998. Changes in rate and
volume which cannot be segregated (e.g., changes in average interest rate
multiplied by average portfolio balance) have been allocated proportionately
between the change in rate and the change in volume.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Three Months Ended March 31, 1999 vs. 1998 (Unaudited)
----------------------------------------------------------------------------
Rate Volume Total
Variance Variance Variance
--------------------- ---------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Loans and leases $ (187) $ 6,048 $ 5,861
Mortgage-backed securities (926) (4,931) (5,857)
Investment securities (450) 1,404 954
--------------------- ---------------------- ---------------------
(1,563) 2,521 958
--------------------- ---------------------- ---------------------
Interest expense:
Deposits (4,112) (3,282) (7,394)
Borrowings (2,048) 6,551 4,503
--------------------- ---------------------- ---------------------
(6,160) 3,269 (2,891)
--------------------- ---------------------- ---------------------
Net interest income $ 4,597 $ (748) $ 3,849
===================== ====================== =====================
</TABLE>
Provision for Losses on Loans and Leases
The provision for losses on loans and leases was $5.3 million for the
first quarter of 1999 as compared with $660,000 for the first quarter of 1998.
The increase in the provision for losses on loans and leases for the first
quarter of 1999, as compared with the first quarter of 1998, was a result of
both the higher net charge-offs in the Company's Home Equity Platform and Auto
Platform combined with the continued transformation of the Company's balance
sheet to a more commercial bank-like balance sheet. While the Home Equity
Platform and Auto Platform loan and lease portfolios have higher net charge-
offs, they continue to provide net risk-adjusted yields superior to those
provided by the Company's mortgage-based assets. You should also read the
section "Balance Sheet Analysis Allowance for Loan and Lease Losses" for
further discussion of the provision for losses on loans and leases.
Noninterest Income
Noninterest income for the first quarter of 1999 was $16.0 million as compared
with $4.2 million for the first quarter of 1998. The increase in noninterest
income for the first quarter of 1999, as compared with the first quarter of
1998, was largely attributable to leasing income, resulting from the Company's
auto leasing activities which commenced operations effective April 1, 1998, an
increase in other
25
<PAGE>
noninterest income resulting from a $1.1 million state tax refund recognized,
due to a favorable ruling on a tax refund claim for taxable years otherwise
closed, and an increase in the Banking Platform's commission income related to
its sale of uninsured investment products.
Noninterest Expense
General and Administrative Expenses
General and administrative expenses for the first quarter of 1999 were $26.2
million as compared with $27.7 million for the first quarter of 1998. The lower
level of general and administrative expenses for the first quarter of 1999, as
compared with the first quarter of 1998, was largely attributable to the net
effect of $3.4 million in special mention items incurred during the first
quarter of 1998, representing primarily $2.1 million in EurekaBank acquisition-
related expenses incurred by the Banking Platform and $1.2 million in
corporate-wide process and systems re-engineering costs, partially offset by
the continued growth in the Company's business platforms, by inflationary
pressures, including the Company's annual salary increases which were
effective March 1, 1998 and 1999, and by the impact of approximately $900,000
in special mention items incurred during the first quarter of 1999. Special
mention items for the first quarter of 1999 included approximately $440,000 in
severance payments and costs associated with restructuring activities in the
Auto Platform, approximately $380,000 in collection-based fees associated with
the $1.1 million state tax refund recognized by the Banking Platform, as
discussed above, and approximately $115,000 in corporate-wide third-party Year
2000 compliance-related costs.
The following table illustrates general and administrative expenses, by
platform, for the periods indicated:
<TABLE>
<CAPTION>
-------------------------------------------
Three Months Ended (Unaudited)
-------------------------------------------
March 31, March 31,
1999 1998
-------------------- -------------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform $14,277 $15,191
Home Equity Platform 1,026 342
Auto Platform 4,003 3,831
Commercial Platform 1,920 2,003
-------------------- -------------------
Total 21,226 21,367
Indirect corporate overhead /(1)/ 4,930 6,375
-------------------- -------------------
Total $26,156 $27,742
==================== ===================
</TABLE>
/(1)/ Amount represents indirect corporate expenses not specifically
identifiable with, or allocable to, the Company's business platforms.
26
<PAGE>
The following table illustrates general and administrative expenses, excluding
the special mention items as previously discussed, by platform, for the periods
indicated:
<TABLE>
<CAPTION>
-------------------------------------------
Three Months Ended (Unaudited)
-------------------------------------------
March 31, March 31,
1999 1998
-------------------- -------------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform $13,900 $13,093
Home Equity Platform 1,026 342
Auto Platform 3,564 3,765
Commercial Platform 1,920 2,003
-------------------- -------------------
Total 20,410 19,203
Indirect corporate overhead /(1)/ 4,813 5,175
-------------------- -------------------
Total $25,223 $24,378
==================== ===================
</TABLE>
/(1)/ Amount represents indirect corporate expenses not specifically
identifiable with, or allocable to, the Company's business platforms.
The increase in general and administrative expenses, excluding special mention
items, for the Banking Platform for the first quarter of 1999, as compared with
the first quarter of 1998, was primarily due to inflationary pressures,
including the Company's annual salary increases which were effective March 1,
1998 and 1999. The increase in general and administrative expenses, excluding
special mention items, for the Home Equity Platform for the first quarter of
1999, as compared with the first quarter of 1998, was primarily due to increased
costs associated with the significant increase in the Home Equity Platform's
average loan balance. The decreases in general and administrative expenses,
excluding special mention items, for the Auto Platform and the Commercial
Platform for the first quarter of 1999, as compared with the first quarter of
1998, were primarily due to efficiencies realized in integrating the
operations of these platforms within the operations of the Company and other
cost savings initiatives.
The following table illustrates the ratio of general and administrative
expenses to average total assets, including securitized assets, on an annualized
basis for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------
Three Months Ended (Unaudited)
--------------------------------------
March 31, March 31,
1999 1998
---------------- ----------------
(Dollars in thousands)
<S> <C>
General and administrative expenses $ 26,156 $ 27,742
Average total assets, including securitized assets $5,671,972 $5,389,531
---------------- ----------------
Annualized general and administrative expenses to
average total assets, including securitized assets 1.84% 2.06%
================ ================
</TABLE>
The decrease in the ratio of annualized general and administrative expenses to
average total assets, including securitized assets, for the first quarter of
1999, as compared with the first quarter of 1998, was largely attributable to
lower general and administrative expenses (as discussed above) combined with an
increase in average total assets.
27
<PAGE>
The following table illustrates the ratio of general and administrative
expenses to average interest-earning assets, including the Company's auto-
related operating leased assets and securitized assets, by platform, on an
annualized basis for the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------------
Three Months Ended (Unaudited)
---------------------------------------------
March 31, March 31,
1999 1998
-------------------- -------------------
<S> <C> <C>
Banking Platform 1.51% 1.37%
Home Equity Platform 0.63% 0.76%
Auto Platform 1.83% 3.11%
Commercial Platform 7.77% 15.11%
</TABLE>
The increase in the ratio of annualized general and administrative expenses to
average interest-earning assets for the Banking Platform was a result of a
decrease in average interest-earning assets due to continued prepayments,
partially offset by lower general and administrative expenses. Conversely, the
decreases in the ratios for the Home Equity and Auto Platforms were due to
higher average interest-earning assets due to growth in these platforms,
partially offset by higher general and administrative expenses. The decrease in
the ratio for the Commercial Platform was due to a combination of higher average
interest-earnings assets due to platform growth and slightly lower general and
administrative expenses.
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 by
operating revenues, defined as net interest income, as adjusted to include the
costs 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 required to generate $1 of operating revenue.
The following table illustrates the efficiency ratio for the periods
indicated:
<TABLE>
<CAPTION>
---------------------------------------------
Three Months Ended (Unaudited)
---------------------------------------------
March 31, March 31,
1999 1998
-------------------- -------------------
(Dollars in thousands)
<S> <C> <C>
General and administrative expenses $26,156 $27,742
Operating revenues, as defined $48,707 $41,136
-------------------- -------------------
Efficiency ratio 53.7% 67.4%
==================== ===================
</TABLE>
The improvement in the efficiency ratio for the first quarter of 1999, as
compared with the first quarter of 1998, was primarily due to higher net
interest income, net leasing-related income related to the Company's auto
leasing activities which commenced operations effective April 1, 1998, higher
other noninterest income, and lower general and administrative expenses,
partially offset by costs associated with the Capital Securities issued in
December 1998.
Capital Securities
On December 21, 1998, the Company issued $90 million in Capital Securities
through Bay View Capital I, a business trust formed by the Company to issue the
securities. The Capital Securities, which
28
<PAGE>
were sold in an underwritten public offering, pay quarterly cumulative cash
distributions at an annual rate of 9.76% of the liquidation value of $25 per
share. Dividend expense on the Capital Securities was $2.2 million for the first
quarter of 1999.
Leasing Expenses
Leasing expenses represent expenses related to the Company's auto leasing
activities which began in April 1998. Because the leases are accounted for as
operating leases, the corresponding assets are capitalized and depreciated down
to their estimated residual values over their lease terms. This depreciation
expense is included in leasing expenses, along with the amortization of
capitalized initial direct lease costs. Leasing expenses were $6.7 million for
the first quarter of 1999.
Real Estate Owned Operations and Net Losses (Recoveries) on Real Estate
The net expense related to the Company's real estate owned operations,
including net losses (recoveries) on real estate, for the first quarter of 1999
was $34,000 as compared with $13,000 for the first quarter of 1998. The
increase in expense for the first quarter of 1999, as compared with the first
quarter of 1998, was primarily due to $24,000 in net recoveries realized during
the first quarter of 1998.
Amortization of Intangible Assets
Amortization expense related to intangible assets was $2.9 million for the
first quarter of 1999 as compared with $2.7 million for the first quarter of
1998. The increase in amortization expense for the first quarter of 1999, as
compared with the first quarter of 1998, was primarily due to the effect of
various purchase accounting adjustments, primarily related to tax items, made
throughout 1998 that impacted the level of goodwill generated from the Company's
January 2, 1998 acquisition of EurekaBank.
Income Tax Expense
Income tax expense was $6.3 million for the first quarter of 1999 as compared
with $4.9 million for the first quarter of 1998. The Company's effective tax
rate was 46.9% for the first quarter of 1999 as compared with 49.3% for the
first quarter of 1998. The decrease in the effective tax rate for the first
quarter of 1999, as compared with the first quarter of 1998, was primarily due
to a decrease in the impact of nondeductible goodwill amortization resulting
from the higher level of pre-tax income for the first quarter of 1999 as
compared with the first quarter of 1998.
29
<PAGE>
Non-GAAP Performance Measures
The following measures of tangible cash earnings, 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.
Tangible Cash Earnings
Tangible cash earnings represent net income excluding charges related to the
amortization of intangible assets, largely goodwill.
The following table illustrates the reconciliation of net income to tangible
cash earnings, and the corresponding performance return measures, for the
periods indicated:
<TABLE>
<CAPTION>
-------------------------------------------------------
Three Months Ended (Unaudited)
-------------------------------------------------------
March 31, March 31,
1999 1998
----------------------- ------------------------
(Dollars in thousands, except
per share amounts)
<S> <C> <C>
Net income /(1)/ $7,133 $5,060
Amortization of intangible assets, net of tax 2,511 2,403
----------------------- ------------------------
Tangible cash earnings $9,644 $7,463
======================= ========================
Earnings per diluted share $ 0.37 $ 0.24
======================= ========================
Tangible cash earnings per diluted share $ 0.50 $ 0.36
======================= ========================
Return on average assets/(2)/ 0.51% 0.38%
======================= ========================
Return on average equity/(2)/ 7.51% 5.24%
======================= ========================
Tangible cash return on average assets/(3)/ 0.69% 0.55%
======================= ========================
Tangible cash return on average equity/(3)/ 10.15% 7.73%
======================= ========================
Tangible cash return on average tangible assets/(4)/ 0.71% 0.57%
======================= ========================
Tangible cash return on average tangible equity/(4)/ 15.58% 12.13%
======================= ========================
</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)/ Tangible cash return on average assets is defined as tangible cash
earnings divided by average assets. Tangible cash return on average
equity is defined as tangible cash earnings divided by average equity.
/(4)/ Tangible cash return on average tangible assets is defined as tangible
cash earnings divided by average tangible assets. Tangible cash return on
average tangible equity is defined as tangible cash earnings divided by
average tangible equity. Average tangible assets is defined as average
assets less average intangible assets. Average tangible equity is defined
as average equity less average intangible assets.
30
<PAGE>
Normalized Net Interest Income and Net Interest Margin
Normalized net interest income and net interest margin include net rental
income from the Company's auto leasing activities (i.e., the excess of rental
income over depreciation expense on auto-related operating leased assets), which
are principally funded by the Company's deposits, and also include expenses
related to the Company's Capital Securities. As the Company's auto leases are
accounted for as operating leases, the rental income is reflected as
noninterest income and the related expenses, including depreciation expense,
are reflected as noninterest expenses, in accordance with GAAP. Normalized net
interest income for the first quarter of 1999 was $42.4 million as compared
with $36.9 million for the first quarter of 1998. Normalized net interest
margin for the first quarter of 1999 was 3.15% as compared with 2.90% for the
first quarter of 1998.
The following table illustrates normalized net interest income and net
interest margin, by platform, for the periods indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Three Months Ended (Unaudited)
-----------------------------------------------------------------------------
March 31, 1999 March 31, 1998
------------------------------------- -----------------------------------
Normalized Normalized Normalized Normalized
Net Net Net Net
Interest Interest Interest Interest
Income Margin Income Margin
----------------- ---------------- --------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $21,670 2.22% $25,577 2.25%
Home Equity Platform 7,800 4.81% 2,518 5.54%
Auto Platform 9,963 5.02% 6,353 7.32%
Commercial Platform 3,008 12.38% 2,486 19.01%
----------------- ---------------- --------------- ----------------
Total $42,441 3.15% $36,934 2.90%
================= ================ =============== ================
</TABLE>
The increase in normalized net interest income and net interest margin for the
first quarter of 1999, as compared with the first quarter of 1998, was largely
attributable to net rental income from the Company's auto leasing activities and
a decrease in the Company's funding costs. Normalized net interest margin for
the month of March 1999 was 3.19%.
Balance Sheet Analysis
The Company's total assets were $5.8 billion at March 31, 1999 as
compared with $5.6 billion at December 31, 1998. The increase in total assets
was largely due to loan and lease originations and purchases of approximately
$650 million during the first quarter of 1999 exceeding prepayments on loans and
mortgage-backed securities of approximately $410 million during this same
period. Loan purchases for the first quarter of 1999 included approximately
$330 million in franchise loans purchased from FMAC in connection with the
Company's pending acquisition of FMAC.
Securities
The Company maintains a portfolio of mortgage-backed securities,
including securities issued by Freddie Mac, Fannie Mae and the Government
National Mortgage Association and senior tranches of collateralized mortgage
obligations.
31
<PAGE>
The following table illustrates the Company's securities portfolio as of the
dates indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
(Unaudited)
--------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998
--------------------------------------- -----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------- ------------------ ------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale
- ------------------
Investment securities $ 5,200 $ 4,932 $ 5,544 $ 5,319
Mortgage-backed securities:
Issued by Freddie Mac, Fannie
Mae and the Government
National Mortgage Association 12,386 12,364 13,257 13,143
Collateralized mortgage
obligations 419 419 473 473
----------------- ------------------ ------------------- ------------------
12,805 12,783 13,730 13,616
----------------- ------------------ ------------------- ------------------
Held-to-maturity
- ----------------
Mortgage-backed securities:
Issued by Freddie Mac, Fannie
Mae and the Government
National Mortgage Association 368,548 369,020 403,512 402,740
Issued by other financial
intermediaries 34,580 35,086 41,759 42,349
Collateralized mortgage
obligations 167,336 167,451 176,502 176,283
----------------- ------------------ ------------------- ------------------
570,464 571,557 621,773 621,372
----------------- ------------------ ------------------- ------------------
$588,469 $589,272 $641,047 $640,307
================= ================== =================== ==================
</TABLE>
There were no sales or purchases of mortgage-backed securities during the
first quarter of 1999. The decrease in mortgage-backed securities at March 31,
1999, as compared with December 31, 1998, was primarily due to prepayments.
32
<PAGE>
Loans and Leases
The following table illustrates the Company's loan and financing lease
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
------------------------------------------------------
(Unaudited)
------------------------------------------------------
March 31, December 31,
1999 1998
------------------------ ------------------------
(Dollars in thousands)
<S> <C> <C>
Banking Platform:
Mortgage loans
Single-family $1,359,710 $1,515,413
Multi-family 997,227 1,015,980
Commercial real estate 341,076 338,220
------------------------ ------------------------
Total mortgage loans 2,698,013 2,869,613
Franchise loans 327,148 -
Other 60,567 57,361
------------------------ ------------------------
Total Banking Platform 3,085,728 2,926,974
Home Equity Platform 611,445 622,797
Auto Platform 578,402 546,806
Commercial Platform 106,419 94,888
------------------------ ------------------------
Total loans and leases, gross 4,381,994 4,191,465
Premiums and discounts and deferred fees and costs 55,132 45,209
Allowance for losses on loans and leases (44,147) (45,405)
------------------------ ------------------------
Total loans and leases, net $4,392,979 $4,191,269
======================== ========================
</TABLE>
Management's strategy is to supplement its loan and lease production with
purchases of high-quality loans. The following table illustrates loans and
leases originated and purchased, including auto-related operating leased assets,
for the periods indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------
Three Months Ended (Unaudited)
-----------------------------------------------------
March 31, March 31,
1999 1998
------------------------ ------------------------
(Dollars in thousands)
<S> <C> <C>
Loan and Lease Originations:
Real estate $ 48,646 $ 26,733
Home equity 14,624 5,143
Motor vehicle 162,671 99,878
Commercial 43,176 9,059
Other 7,542 1,613
------------------------ ------------------------
Total Originations 276,659 142,426
------------------------ ------------------------
Loan Purchases:
Real estate 8,712 4,495
Home equity 17,895 132,907
Motor vehicle 12,156 17,987
FMAC franchise loans 329,523 -
------------------------ ------------------------
Total Purchases 368,286 155,389
------------------------ ------------------------
Total $644,945 $297,815
======================== ========================
</TABLE>
The Company's loan and lease production for the first quarter of 1999 was
consistent with its strategy of focusing on generating high-quality consumer and
commercial assets which provide higher risk-adjusted yields relative to
mortgage-based assets combined with generating high-quality assets
33
<PAGE>
within the Banking Platform (e.g., multi-family mortgage, commercial real estate
mortgage and business loans). Loan purchases for the first quarter of 1999
included $330 million in FMAC franchise loans purchased in connection with the
Company's pending acquisition of FMAC. The real estate loans purchased were
primarily to assist Bay View Bank in meeting its Community Reinvestment Act
requirements.
Credit Quality
The Company defines nonperforming assets as nonaccrual loans, real estate
owned and other repossessed assets. The Company defines nonaccrual loans as
loans 90 days or more delinquent as to principal and interest payments (unless
the principal and interest are well secured and in the process of collection)
and loans less than 90 days delinquent designated as nonperforming when the
Company determines that the full collection of principal and/or interest is
doubtful. Troubled debt restructurings are defined as loans that have been
modified (due to borrower financial difficulties) to allow a stated interest
rate and/or a monthly payment lower than those prevailing in the market.
Overall credit quality has continued to remain strong as evidenced by the
improving trends in nonperforming assets and delinquencies. The following table
illustrates the Company's nonperforming assets and delinquencies:
<TABLE>
<CAPTION>
-----------------------------------------
(Unaudited)
-----------------------------------------
March 31, December 31,
1999 1998
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans and leases $13,086 $14,700
Real estate owned 2,070 2,666
Other repossessed assets 1,346 654
------------------ ------------------
Nonperforming assets 16,502 18,020
Troubled debt restructurings 772 777
------------------ ------------------
Total $17,274 $18,797
================== ==================
</TABLE>
The following table illustrates, by platform, nonperforming assets and
nonperforming assets as a percentage of total assets:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Nonperforming Assets
as a Percentage of Consolidated Assets (Unaudited)
-------------------------------------------------------------------
March 31, 1999 December 31, 1998
------------------------------- -------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $12,400 0.22% $15,293 0.27%
Home Equity Platform 2,409 0.04 1,287 0.02
Auto Platform 1,094 0.02 1,090 0.02
Commercial Platform 599 0.01 350 0.01
------------- -------------- -------------- -------------
Total $16,502 0.29% $18,020 0.32%
============= ============== ============== =============
</TABLE>
34
<PAGE>
The following table illustrates, by platform, loans and leases delinquent 60
days or more as a percentage of gross loans and leases:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Loans and Leases Delinquent 60 Days or More
as a Percentage of Gross Loans and Leases
(Unaudited)
-------------------------------------------------------------------
March 31, 1999 December 31, 1998
------------------------------- -------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Banking Platform $13,231 0.30% $15,928 0.38%
Home Equity Platform 7,239 0.16 4,048 0.09
Auto Platform 1,299 0.03 1,676 0.04
Commercial Platform 237 0.01 350 0.01
------------- -------------- -------------- -------------
Total $22,006 0.50% $22,002 0.52%
============= ============== ============== =============
</TABLE>
Allowance for Loan and Lease Losses
The Company conducts an ongoing review of its asset categories to assess the
adequacy of the allowance for loan and lease losses, which is maintained at a
level the Company believes is sufficient to cover estimated possible losses in
the portfolios. In determining the level of the allowance for loan and lease
losses, the Company considers a number of factors, including prevailing and
anticipated economic conditions, historical loss experience, the levels of
classified, nonperforming and delinquent assets, weighting by property type,
portfolio trends, and other factors. The allowance for loan and lease losses at
March 31, 1999 was $44.1 million as compared with $45.4 million at December 31,
1998. The decrease in the allowance for loan and lease losses at March 31,
1999, as compared with December 31, 1998, was a result of net charge-offs during
the first quarter of 1999 exceeding the provision for loan and lease losses.
Net charge-offs for the first quarter of 1999 were $6.6 million, including
approximately $1.5 million related to the Company's portfolio of high loan-to-
value home equity loans acquired from Emergent Mortgage Corp. in August 1997 for
$67 million. This portfolio of higher-yielding loans, totaling $36 million at
March 31, 1999, also generates higher levels of charge-offs as a result of its
lower average credit quality (e.g., average FICO score of 620).
The following table illustrates the allowance for loan and lease losses as a
percentage of nonperforming assets, gross loans and leases and consolidated
assets, respectively:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Allowance for Loan and Lease Losses as a
Percentage of Specified Assets (Unaudited)
------------------------------------------------------------------
March 31, 1999 December 31, 1998
------------------------------ -------------------------------
Assets Percent Assets Percent
--------------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Nonperforming assets $ 16,502 268% $ 18,020 252%
Gross loans and leases $4,381,994 1.01% $4,191,465 1.08%
Consolidated assets $5,763,551 0.76% $5,596,232 0.81%
</TABLE>
The decrease in the allowance for loan and lease losses as a percentage of
gross loans and leases and consolidated assets as of March 31, 1999, as compared
with December 31, 1998, was due to net charge-offs for the first quarter of 1999
exceeding the provision for loan and lease losses, combined with the growth in
the balance sheet, including the FMAC franchise loans purchased during the
latter part of the first of quarter of 1999.
35
<PAGE>
The following table illustrates the changes in the allowance for loan and
lease losses for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
(Unaudited)
--------------------------------------------------------------------
Three Months Ended Year Ended
-------------------------------------------- -------------------
March 31, March 31, December 31,
1999 1998 1998
-------------------- ------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $45,405 $38,458 $ 38,458
Reserves related to acquisitions - 11,374 11,374
Charge-offs:
Real estate and other (394) (411) (2,053)
Home equity (4,634) (1,278) (7,955)
Auto (2,270) (2,002) (8,230)
Commercial (104) (185) (828)
-------------------- ------------------- -------------------
(7,402) (3,876) (19,066)
Recoveries:
Real estate and other 144 1,663 2,260
Home equity 187 - 457
Auto 502 285 2,632
Commercial - 71 176
-------------------- ------------------- -------------------
833 2,019 5,525
Net charge-offs (6,569) (1,857) (13,541)
Provision for loan and lease losses 5,311 660 9,114
-------------------- ------------------- -------------------
Ending balance $44,147 $48,635 $ 45,405
==================== =================== ===================
Net charge-offs to average loans and leases
(annualized) 0.62% 0.19% 0.32%
==================== =================== ===================
</TABLE>
The Company's provision for loan and lease losses was $5.3 million for the
first quarter of 1999, as compared with $660,000 for the first quarter of 1998.
The increase in the provision for loan and lease losses for the first quarter of
1999, as compared with the first quarter of 1998, was a result of both the
higher net charge-offs in the Company's Home Equity and Auto Platforms combined
with the continued transformation of the Company's balance sheet to a more
commercial bank-like balance sheet. While the Home Equity and Auto Platform
portfolios have higher net charge-offs, they continue to provide net risk-
adjusted yields superior to those provided by the Company's mortgage-based
assets.
36
<PAGE>
Deposits
As a primary part of the Company's business, deposits are generated for the
purpose of funding loans, leases and securities. The following table
illustrates deposits as of the dates indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(Unaudited)
---------------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998
------------------------------------------------ ----------------------------------------------
% of Weighted % of Weighted
Total Average Total Average
Amount Deposits Rate Amount Deposits Rate
---------------- -------------- ------------- --------------- -------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts $1,750,875 52.4% 3.33% $1,627,275 49.8% 3.15%
Retail certificates of deposit 1,542,688 46.1 5.03 1,642,362 50.2 5.20
Brokered certificates of
deposit 49,723 1.5 5.10 - - -
---------------- -------------- ------------- --------------- -------------- ------------
Total $3,343,286 100.0% 4.09% $3,269,637 100.0% 4.20%
================ ============== ============= =============== ============== =============
</TABLE>
Borrowings
The Company utilizes collateralized advances from the Federal Home Loan Bank
of San Francisco and other borrowings, such as senior and subordinated debt,
capital securities, and securities sold under agreements to repurchase (also
known as reverse repurchase agreements), on a collateralized and
noncollateralized basis, for various purposes including the funding of loans,
leases and securities as well as to support the Company in executing its
business strategies.
The following table illustrates outstanding borrowings as of the dates
indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------
(Unaudited)
------------------------------------------------------------
March 31, 1999 December 31, 1998
--------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C>
Advances from the Federal Home Loan Bank of San
Francisco $1,744,900 $1,653,300
Securities sold under agreements to repurchase 23,047 25,302
Subordinated Notes, net 99,453 99,437
Senior Debentures 50,000 50,000
Other borrowings 4,387 5,077
Capital Securities 90,000 90,000
--------------------------- ---------------------------
Total $2,011,787 $1,923,116
=========================== ===========================
</TABLE>
The higher borrowing level at March 31, 1999, as compared with December 31,
1998, was due to the growth in the Company's balance sheet during the first
quarter of 1999 in excess of the Company's growth in deposits.
37
<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 and
Liability Committee provides oversight to the liquidity management process and
recommends policy guidelines, subject to Board of Directors approval, and
courses of action to address 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 Federal Home Loan Bank
of San Francisco, reverse repurchase agreements and other short-term borrowing
arrangements. The Company's liquidity requirements can also be met through the
use of our 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.
Capital Resources
Management seeks to maintain adequate capital to support anticipated asset
growth and credit risks, and to ensure that the Company and Bay View Bank are in
compliance with all regulatory capital guidelines. The primary source of new
capital for the Company during the first quarter of 1999 was the retention of
earnings.
On December 21, 1998, the Company issued $90 million in Capital Securities
through Bay View Capital I. The Capital Securities, which were sold in an
underwritten public offering, pay quarterly cumulative cash distributions at an
annual rate of 9.76% of the liquidation value of $25 per share. The Company
plans to use $50 million of the proceeds to repay its 8.42% Senior Debentures
upon their maturity in June 1999 and anticipates using the balance for general
corporate purposes. The Capital Securities have the added benefit of qualifying
as Tier 1 capital for regulatory purposes. The Capital Securities are presented
as a separate line item in the consolidated balance sheet of the Company under
the caption "Guaranteed Preferred Beneficial Interest in the Company's Junior
Subordinated Debentures."
Stockholders' equity totaled $378.1 million at March 31, 1999 as compared with
$377.8 million at December 31, 1998. This increase was largely due to the
Company's earnings during the first quarter of 1999, partially offset by
dividends declared and common stock repurchased. Tangible stockholders' equity,
which excludes intangible assets, was $246.6 million at March 31, 1999 as
compared with $243.7 million at December 31, 1998. This increase was largely
due to the Company's earnings combined with the amortization of intangible
assets, partially offset by dividends declared and common stock repurchased.
38
<PAGE>
The following table illustrates the reconciliation of the Company's
stockholders' equity to tangible stockholders' equity as of the dates indicated:
<TABLE>
<CAPTION>
-------------------------------------------
(Unaudited)
-------------------------------------------
At At
March 31, December 31,
1999 1998
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Stockholders' equity $ 378,083 $ 377,811
Intangible assets (131,517) (134,088)
------------------ ------------------
Tangible stockholders' equity $ 246,566 $ 243,723
================== ==================
Book value per share $ 20.11 $ 19.77
================== ==================
Tangible book value per share $ 13.11 $ 12.75
================== ==================
</TABLE>
The following table illustrates the changes in the Company's tangible
stockholders' equity for the periods indicated:
<TABLE>
<CAPTION>
-------------------------------------------
(Unaudited)
-------------------------------------------
Three Months Year
Ended Ended
March 31, December 31,
1998 1998
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Beginning tangible stockholders' equity $243,723 $ 144,120
Net income 7,133 22,719
EurekaBank acquisition - 210,000
Intangible assets generated from acquisitions accounted
for under the purchase method of accounting - (115,734)
Amortization of intangible assets 2,904 11,372
Repurchase of common stock (5,512) (24,063)
Exercise of stock options - 3,269
Cash dividends declared (1,918) (8,069)
Other 236 109
------------------ ------------------
Ending tangible stockholders' equity $246,566 $ 243,723
================== ==================
</TABLE>
Intangible assets generated from the Company's acquisitions accounted for
under the purchase method of accounting are deducted from stockholders' equity
in the above calculation to arrive at tangible stockholders' equity.
Conversely, the amortization of intangible assets increases tangible
stockholders' equity as well as the Company's and Bay View Bank's Tier 1
regulatory capital.
Bay View Bank is subject to various regulatory capital guidelines administered
by the Office of the Comptroller of the Currency. Under these capital
guidelines, the minimum total risk-based capital ratio and Tier 1 risk-based
capital ratio requirements are 8.00% and 4.00%, respectively, of risk-weighted
assets and certain off-balance sheet items. The minimum Tier 1 leverage ratio
is 4% of average assets, as adjusted.
Additionally, the Federal Deposit Insurance Corporation Improvement
Act of 1991 defines five capital tiers: well-capitalized, adequately-
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, depending upon the capital level of the institution. Each
federal banking
39
<PAGE>
agency, including the Office of the Comptroller of the Currency, is required to
implement prompt corrective actions for "undercapitalized" institutions that it
regulates.
Bay View Bank's regulatory capital levels at March 31, 1999 exceeded both the
minimum requirements as well as the requirements necessary to be considered
well-capitalized as illustrated in the following table:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
(Unaudited)
----------------------------------------------------------------------------------------------------------
Minimum Well-Capitalized
Actual Requirement Requirement
------------------------------ -------------------------------- --------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------ --------------- ------------- --------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $379,199 6.96% $217,806 4.00% $272,258 5.00%
Tier 1 Risk-based 379,199 9.34% 162,332 4.00% 243,498 6.00%
Total Risk-based 423,346 10.43% 324,664 8.00% 405,830 10.00%
</TABLE>
The Company's regulatory capital at March 31, 1999 also exceeded both the
Federal Reserve Board's minimum capital requirements as well as the requirements
necessary to be considered well-capitalized by the Federal Reserve Board as
illustrated in the following table:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
(Unaudited)
----------------------------------------------------------------------------------------------------------
Minimum Well-Capitalized
Actual Requirement Requirement
------------------------------ -------------------------------- ---------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------ --------------- ------------- ---------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $308,884 5.62% $219,990 4.00% - -
Tier 1 Risk-based 308,884 7.48% 165,099 4.00% $247,648 6.00%
Total Risk-based 465,263 11.27% 330,197 8.00% 412,746 10.00%
</TABLE>
Universal Shelf Registration
The Company's Capital Securities were issued pursuant to a Universal Shelf
Registration Statement 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 these securities subject to market conditions and the
needs of the Company as it executes its business strategies. 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 Capital
Securities.
Share Repurchases
In August 1998, the Company's Board of Directors authorized a total of $50
million in share repurchases. During the first quarter of 1999, the Company
repurchased approximately 305,000 shares at an average cost of $18.07 per share.
Since August, the Company has repurchased 1,501,500 shares at an average cost of
$19.70. At March 31, 1999, the Company had approximately $20.4 million in
remaining authorization available for future share repurchases. The Company
intends to continue share repurchases prospectively, and to measure acquisition
opportunities relative to the risk-free returns associated with share
repurchases.
40
<PAGE>
New York Stock Exchange
Effective April 1, 1999, the Company changed the listing of its common stock
and Capital Securities from Nasdaq to the New York Stock Exchange and commenced
trading of its Subordinated Notes on the New York Stock Exchange. The Company's
securities commenced trading on the New York Stock Exchange under the following
ticker symbols: BVC for its common stock, BVS for its Capital Securities, and
BVC 07 for its Subordinated Notes due August 2007. In addition to an expected
reduction in price volatility in the Company's securities, the move to the New
York Stock Exchange is expected to save investors money through better trade
execution resulting in lower transaction costs.
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 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 Bay View Bank. The federal banking agencies have asserted
that Year 2000 testing and certification is a key safety and soundness issue in
conjunction with regulatory examinations and thus, that an institution's failure
to appropriately address the Year 2000 issue could result in supervisory action,
including a reduction of the institution's supervisory ratings, the denial of
applications for approval of mergers or acquisitions or the imposition of civil
monetary penalties.
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
41
<PAGE>
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 the following
phases:
1. Inventorying Year 2000 items;
2. Assessing the Year 2000 compliance of items determined to be material to the
Company;
3. Upgrading or replacing material items that are determined not to be Year
2000 compliant and testing material items;
4. Designing and implementing contingency and business continuation plans; and
5. Assessing the status of third-party risks.
In the first phase, the Company conducted a thorough evaluation of current
information technology systems, software and embedded technologies, resulting in
the identification of 16 mission critical systems that could be affected by Year
2000 issues. Non-information technology systems such as climate control
systems, elevators and vault security equipment were also surveyed. This phase
of the Year 2000 compliance program is substantially complete.
In the second phase, results from the systems inventory were assessed to
determine the Year 2000 impact and what actions were required to obtain Year
2000 compliance. For 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. The software conversion of the Company's mission critical
systems is substantially complete. Each of the upgrades or replacements, to the
extent economically feasible, is tested to see how well it integrates with the
Company's overall data processing environment. Final "future-date" testing of
system upgrades and replacements was substantially complete by the end of the
first quarter of 1999. This phase of the Year 2000 process is ongoing for a few
non-mission critical systems and is expected to be completed during the second
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
successful, 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 modifications to 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.
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
42
<PAGE>
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 March 31, 1999 related to the Year 2000 issue
was approximately $900,000.
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, 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 issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of derivatives depends on the
intended use of the derivative. The Company currently utilizes interest rate
exchange agreements to hedge cash flows associated with current and anticipated
transactions. To the extent these interest rate exchange agreements qualify as
a cash flow hedge under Statement No. 133, the effective portion of the
derivative's gain or loss would be initially reported as a component of other
comprehensive income (outside of earnings) and subsequently reclassified into
earnings when the forecasted transaction affected earnings. Statement No. 133
will be effective for the Company for the fiscal quarter beginning January 1,
2000. The Company is in the process of evaluating the impact that the adoption
of Statement No. 133 will have on its consolidated financial condition, results
of operations or cash flows.
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which amends the disclosure requirements of
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities." Statement No. 134 conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. Statement No. 134 was effective for the Company January 1,
1999 and had no material impact on its consolidated financial condition, results
of operations or cash flows.
43
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Asset and Liability Management
The objective of the Company's asset and liability management activities is to
improve earnings by adjusting the type and mix of assets and liabilities to
effectively address changing conditions and risks. Through overall management of
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 and liability management is to manage interest rate
risk associated with changing asset and liability cash flows and market interest
rate movements. Interest rate risk occurs when interest rate sensitive assets
and liabilities do not reprice simultaneously and in equal volumes. The
Company's Asset and Liability Committee 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 its efforts to match
maturities on its Federal Home Loan Bank advances with the durations 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-rate and
44
<PAGE>
floating-rate interest payment obligations without the exchange of the
underlying notional amounts. The Company was a party to interest rate swaps with
notional principal amounts of $303 million at March 31, 1999 and $366 million at
December 31, 1998 which involve the receipt of floating interest rates (based on
three-month LIBOR) and payment of fixed interest rates on the underlying
notional amounts.
Interest rate risk is the most significant market risk impacting 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 immaterial and no separate quantitative information related to
such market risks is necessary. 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 the use of a simulation model which provides a dynamic
assessment of interest rate sensitivity.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated to reprice within a specific time
period and the amount of interest-bearing liabilities anticipated to reprice
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets repricing within a specific time period exceeds
the amount of interest-bearing liabilities repricing within that same time
period. Positive cumulative gaps suggest that earnings will increase when
interest rates rise. Negative cumulative gaps suggest that earnings will
increase when interest rates fall.
45
<PAGE>
The following table illustrates the combined asset and liability repricing of
the Company as of March 31, 1999:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Repricing Period (Unaudited)
------------------------------------------------------------------------------------
Under Between Between Over
One One and Three and Five
Year Three Years Five Years Years Total
-------------- -------------- -------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
- -------
Cash and investments $ 207,401 $ - $ - $ - $ 207,401
Mortgage-backed securities
and loans and leases/(1)/ 2,948,976 1,173,816 507,612 651,206 5,281,610
-------------- -------------- -------------- ------------ -------------
Total interest rate sensitive assets $3,156,377 $1,173,816 $ 507,612 $651,206 $5,489,011
============== ============== ============== ============ =============
Liabilities
- -----------
Deposits:
Transaction accounts $1,750,875 $ - $ - $ - $1,750,875
Certificates of deposit 1,268,349 299,002 23,482 1,578 1,592,411
Borrowings 919,803 443,844 324,902 323,238 2,011,787
-------------- -------------- -------------- ------------ -------------
Total interest rate sensitive liabilities $3,939,027 $ 742,846 $ 348,384 $324,816 $5,355,073
============== ============== ============== ============ =============
Repricing gap-positive (negative) before
impact of interest rate swaps $ (782,650) $ 430,970 $ 159,228 $326,390 $ 133,938
=============
Impact of interest rate swaps 269,000 (154,000) (25,000) (90,000)
-------------- -------------- -------------- ------------
$ (513,650) 276,970 134,228 236,390
============== ============== ============== ============
Cumulative repricing gap-positive (negative) $ (513,650) $ (236,680) $(102,452) $133,938
============== ============== ============== ============
</TABLE>
/(1)/ Based on assumed annual prepayment and amortization
rates which approximate the Company's historical experience.
46
<PAGE>
The simulation model discussed above provides the Asset and Liability
Committee with the ability to simulate the Company's net interest income. In
order to measure, as of March 31, 1999, the sensitivity of the Company's
forecasted net interest income to changing interest rates, both a rising and
falling interest rate scenario were projected and compared to a base market
interest rate forecast derived from the treasury yield curve. For the rising and
falling interest rate scenarios, the base market interest rate forecast was
increased or decreased, on an instantaneous and sustained basis, by 100 and 200
basis points. At March 31, 1999, the Company's net interest income exposure
related to these hypothetical changes in market interest rates was within
Company policy guidelines as illustrated in the following table:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Increase/(Decrease) in Net Interest Income (Unaudited)
------------------------------------------------------------------------------------------------
Projected effect: -200 bp -100 bp +100 bp +200 bp
------------------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Net interest income without swaps $183,469 $179,225 $168,392 $162,157
Net interest income with swaps $175,492 $173,426 $166,951 $162,894
Impact of swaps $ (7,977) $ (5,799) $ (1,441) $ 737
% Increase (decrease) from base
net interest income, with swaps 2.90% 1.69% (2.10%) (4.48%)
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.
47
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a(i). Computation of Ratios of Earnings to Fixed Charges (Exhibit 12)
a(ii). Financial Data Schedule (Exhibit 27)
b(i). The Registrant filed the following report on Form 8-K dated March
12, 1999 during the three months ended March 31, 1999:
The Board of Directors of the Registrant fixed May 27, 1999 as the
date of the Annual Meeting of Stockholders.
b(ii). The Registrant filed the following report on Form 8-K dated March
19, 1999 during the three months ended March 31, 1999:
The Registrant entered into a definitive merger agreement with
Franchise Mortgage Acceptance Company on March 11, 1999. In
accordance with the terms of the definitive merger 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 exchange for, at the election of the
holder, either $10.25 in cash, or .5125 shares of the Company's
common stock.
After all FMAC shareholder elections have been made, the elections
will be adjusted to ensure that 60% of FMAC shares are paid in the
Company's common stock and 40% of FMAC shares are paid in cash, and
to ensure that no FMAC shareholder owns more than 9.99% of the
Company's common stock after the merger. These adjustments will be
made on a pro rata basis.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAY VIEW CAPITAL CORPORATION
----------------------------
Registrant
DATE: May 17, 1999 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)
49
<PAGE>
EXHIBIT 12
BAY VIEW CAPITAL CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
3/31/99 3/31/98
<S> <C> <C>
Earnings:
Earnings before income tax expenses $ 13,429 $ 9,976
Add:
Interest on advances and other borrowings 27,871 21,136
Interest component of rental expense 469 556
-------- --------
Earnings before fixed charges excluding
interest on customer deposits 41,769 31,668
Interest on customer deposits 40,783 40,996
-------- --------
Earnings before fixed charges $ 82,552 $ 72,664
======== ========
Fixed charges:
Interest on advances and other borrowings $ 27,871 $ 21,136
Interest component of rental expense 469 556
-------- --------
Fixed charges excluding interest on
customer deposits 28,340 21,692
Interest on customer deposits 40,783 40,996
-------- --------
Total fixed charges $ 69,123 $ 62,688
======== ========
Ratio of earnings to fixed charges including interest
on customer deposits 1.19 1.16
Ratio of earnings to fixed charges excluding interest
on customer deposits 1.47 1.46
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 44,848
<INT-BEARING-DEPOSITS> 71,867
<FED-FUNDS-SOLD> 31,203
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,715
<INVESTMENTS-CARRYING> 570,464
<INVESTMENTS-MARKET> 571,557
<LOANS> 4,392,979
<ALLOWANCE> 44,147
<TOTAL-ASSETS> 5,763,551
<DEPOSITS> 3,343,286
<SHORT-TERM> 850,147
<LIABILITIES-OTHER> 30,395
<LONG-TERM> 1,161,640<F1>
0
0
<COMMON> 204
<OTHER-SE> 377,879
<TOTAL-LIABILITIES-AND-EQUITY> 5,763,551
<INTEREST-LOAN> 87,118
<INTEREST-INVEST> 12,903
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 100,021
<INTEREST-DEPOSIT> 33,602
<INTEREST-EXPENSE> 59,238
<INTEREST-INCOME-NET> 40,783
<LOAN-LOSSES> 5,311
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 38,010
<INCOME-PRETAX> 13,429
<INCOME-PRE-EXTRAORDINARY> 13,429
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,133
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 3.16
<LOANS-NON> 13,086
<LOANS-PAST> 0
<LOANS-TROUBLED> 772
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 45,405
<CHARGE-OFFS> (7,402)
<RECOVERIES> 833
<ALLOWANCE-CLOSE> (6,569)
<ALLOWANCE-DOMESTIC> 44,147
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>(Includes Capital Securities)
</FN>
</TABLE>
