UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C.
20549
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal
year ended December 31, 1999
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
transition period from _____________
to _____________
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Commission file
number 0-14879
BAY VIEW CAPITAL
CORPORATION
(Exact name of
registrant as specified in its charter)
| Delaware |
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94-3078031 |
| (State or other
jurisdiction of incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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| 1840 Gateway
Drive |
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| San Mateo,
California |
|
94404 |
| (Address of
principal executive offices) |
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(Zip
Code) |
Registrant’s
telephone number, including area code: (650) 312-7200
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, par
value $0.01 per share
Stock Purchase
Rights
9 1
/8 Subordinated
Notes due 2007
(Title of
class)
Securities
registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such requirements for the past 90 days.
YES x
NO ¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s
knowledge, in a definitive proxy or information statement incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
As of January 31, 2000, there were
outstanding 32,562,942 shares of the registrant’s Common Stock. The
aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price of such stock as of
January 31, 2000, was $287,060,915. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an
admission by the registrant that such person is an affiliate of the
registrant).
DOCUMENTS
INCORPORATED BY REFERENCE
Part III of Form
10K—Portions of Definitive Proxy Statement for 2000 Annual Meeting of
Stockholders
FORM
10-K
FORWARD-LOOKING
STATEMENTS
This Form 10-K contains forward-looking
statements which describe our future plans, strategies and expectations. All
forward-looking statements are based on assumptions and involve risks and
uncertainties, many of which are beyond our control and which may cause our
actual results, performance or achievements to differ materially from the
results, performance or achievements that we anticipate. Factors that might
affect forward-looking statements include, among other things:
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the demand for our
products;
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actions taken by
our competitors;
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tax rate changes,
new tax laws and revised tax law interpretations;
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adverse changes
occurring in securities markets;
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inflation and
changes in prevailing interest rates that reduce our margins or the fair
value of the financial instruments we hold;
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economic or
business conditions, either nationally or in our market areas, that are
worse than we expect;
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legislative or
regulatory changes that adversely affect our business;
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our inability to
identify suitable future acquisition candidates;
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the timing, impact
and other uncertainties of our acquisitions and our success or failure in
the integration of their operations;
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our ability to
enter new geographic and product markets successfully and capitalize on
growth opportunities;
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technological
changes that are more difficult or expensive than we expect;
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increases in
delinquencies and defaults by our borrowers and other loan
delinquencies;
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increases in our
provision for losses on loans and leases;
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our inability to
sustain or improve the performance of our subsidiaries;
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our inability to
achieve the financial goals in our strategic plans, including any
financial goals related to both contemplated and consummated
acquisitions;
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the outcome of
lawsuits or regulatory disputes;
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credit and other
risks of lending, leasing and investment activities; and
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our inability to
use the net operating loss carryforwards we currently have.
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As a result of the above, we cannot assure you
that our future results of operations or financial condition or any other
matters will be consistent with those presented in any forward-looking
statements. Accordingly, we caution you not to rely on these forward-looking
statements. We do not undertake, and specifically disclaim any obligation,
to update these forward-looking statements, which speak only as of the date
made.
PART
I
Bay View Capital Corporation, incorporated
under the laws of the state of Delaware in 1989, is a $6.5 billion bank
holding company headquartered in San Mateo, California. Our primary
subsidiary is Bay View Bank, N.A., a commercial bank that operates 57 full
service branches throughout the greater San Francisco Bay Area. Our other
wholly owned subsidiaries include Bay View Securitization Corporation, Bay
View Capital I and FMAC Insurance Services, Inc.
Bay View Bank was organized in 1911 and became
a wholly owned subsidiary of Bay View Capital Corporation in 1989 upon our
formation as a bank holding company. Prior to 1996, Bay View Bank generated
a majority of its earnings from relatively low-yielding mortgage-based
assets funded primarily by certificates of deposit. In late 1995, we
installed a senior management team with extensive commercial bank
experience. We then embarked upon a business plan to enhance earnings by
systematically changing-out our balance sheet, replacing lower-yielding
mortgage-based loans with consumer and commercial loans and leases with
higher risk-adjusted returns and enhancing and expanding our deposit base by
attracting and retaining lower cost transaction accounts, and ultimately
converting Bay View Bank from a thrift to a commercial bank. This conversion
was officially consummated in 1999 when Bay View Bank obtained a national
bank charter. (See Item 7. “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” for further details
regarding our conversion strategy).
In executing our business plan to transform
Bay View Bank into a commercial bank, we made several strategic acquisitions
since 1996 to form key business divisions. In June 1996, we formed our auto
lending division to provide financing options through auto dealers
nationwide. In April 1997, we formed our commercial lending division to
provide customized financing to emerging, small and middle-market businesses
throughout the country. In January 1998, we acquired an additional 36
banking branches, creating the largest deposit franchise operating
exclusively in the San Francisco Bay Area. And, most recently, in November
1999, we acquired Franchise Mortgage Acceptance Company, a national leader
in franchise lending, and its wholly owned multi-family lending division,
Bankers Mutual, collectively referred to as FMAC. (See Item 7.
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for further details of our FMAC
acquisition).
Our principal business activity as a
traditional commercial bank is to earn interest on loans, leases and
investment securities that are funded by customer deposits and other
borrowings. Our difference between the interest received and the interest
paid has historically comprised the majority of our earnings. Our primary
lending activities consist of multi-family and commercial real estate loans,
consumer auto and home equity lending, and commercial business and franchise
financing. With the acquisition of FMAC in November 1999, our future
earnings will be significantly affected by our ability to securitize and/or
sell franchise loans and leases. Our 57 branch deposit franchise provides
personalized banking services to individuals and businesses and is the
significant source of funding for our lending operations. The operating
results of our major business segments are accounted for and presented by
platform. (See Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for further details and
financial information related to the Banking Platform, the Home Equity
Platform, the Auto Platform, and the Commercial Platform).
Real Estate Lending
At December 31, 1999, real estate loans
totaled $1.9 billion, representing 43.2% of our gross loan and lease
portfolio. The real estate loan portfolio is comprised of single-family
residential mortgage loans, multi-family residential mortgage loans and
nonresidential commercial real estate loans.
Single-Family Residential Mortgage Loans (one
to four units)—At December 31, 1999, loans secured by single-family
residential real estate totaled $940.2 million, representing 21.6% of our
gross loan and lease portfolio. These loans are primarily adjustable-rate
mortgages, sometimes referred to as ARMs, and generally have original terms
of 30 years. We discontinued originating single-family loans in 1996 and, as
a result, the portfolio of single-family loans decreased as these loans pay
off. We anticipate that this portfolio will continue to decline as a
percentage of our assets as we continue to generate and purchase other
assets which provide higher risk-adjusted yields. During 1999, we sold $105
million in northern California single-family mortgage loans that were
indexed to the Eleventh District Cost of Funds Index, sometimes referred to
as COFI. COFI is considered a lagging index because its interest rate
movements generally lag behind changes in market interest rates. This sale
reduced our interest rate risk exposure to COFI-based assets, our
concentration of lower-yielding mortgage loans and our geographic
concentration risk.
Multi-Family Residential Mortgage Loans
(five or more units)—At December 31, 1999, loans secured by
multi-family residential real estate totaled $622.8 million, representing
14.3% of our gross loan and lease portfolio. The loans that we hold in our
portfolio are primarily fully-amortizing ARMs with original terms of 30
years or 15-year ARMs with monthly payments calculated on a 30-year
amortization period with a balloon payment due at maturity. Prior to 1996,
we originated ARMs that were indexed to COFI. Since that time, our
originations have been based on indexes other than COFI, such as the London
Interbank Offered Rate, or LIBOR, to avoid the associated interest rate risk
that the COFI index creates. During July 1999, we sold approximately $450
million of our northern California COFI-based multi-family loans, reducing
our interest rate exposure to COFI-based assets and our geographic
concentration risk. At December 31, 1999, only 16.5% of multi-family loans
were COFI-indexed loans.
We generally do not lend more than 75% of the
appraised value of multi-family residences on a first mortgage loan. The
property’s cash flow available for loan payments is also a limiting
factor on the approved loan amount. Properties securing multi-family loans
are required to generate cash flow sufficient to cover loan payments and
other expected property expenditures.
In addition to the multi-family loans we hold
in our portfolio, we also originate fixed-rate multi-family loans to be
sold. These operations were acquired in 1999 through our acquisition of
FMAC. (See Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for further details of
our FMAC acquisition). The loans are originated expressly for sale under the
Fannie Mae Delegated Underwriting and Servicing and Freddie Mac Program Plus
plans. Most of these loans have an original term of 30 years. Once sold, we
continue to service the loans on a fee basis. At December 31, 1999, the
servicing portfolio of multi-family loans sold totaled $3.2
billion.
Nonresidential Commercial Real Estate
Lending—At December 31, 1999, loans secured by nonresidential
commercial real estate totaled $317.1 million, representing 7.3% of our
gross loan and lease portfolio. Substantially all of our commercial real
estate loans are ARMs. ARMs secured by commercial real estate are generally
made upon the same terms and conditions as ARMs secured by multi-family
residences.
Most of our commercial real estate loans
consist of loans secured by improved property such as office buildings,
warehouses and retail sales facilities. A majority of these loans are in
amounts ranging from $250,000 to $1 million. We generally do not originate
commercial real estate loans that have a loan-to-value ratio exceeding 70%.
The property’s cash flow available for loan payments is also a limiting
factor on the approved loan amount. Properties securing commercial real
estate loans are required to generate cash flow sufficient to cover loan
payments and other expected property expenditures.
Underwriting Policies and Procedures for
Real Estate Loans—Multi-family and commercial real estate lending
entails significant additional risks compared to single-family residential
mortgage lending. Income producing property loans may involve large loan
balances to single borrowers or groups of related borrowers. In addition,
repayment of loans secured by multi-family and commercial real estate
properties is typically dependent upon the successful operation of the
properties, as well as favorable conditions in the real estate market and/or
the economy in general.
We originate multi-family and commercial real
estate loans through internal loan production personnel. As part of the loan
underwriting process, staff appraisers or qualified independent appraisers
inspect and appraise the property that will secure the loan. A loan
underwriter analyzes the merits of the loan based upon information obtained
relative to the borrower and property (e.g., income, credit history, assets,
liabilities, cash flows, and the value of the real property as stated on the
appraisal report). Loans are then approved at various levels of authority
depending upon the amount and type of loan.
The majority of real estate loans held in our
portfolio are secured by properties located in northern California. We
require the American Land Title Association form of title insurance on all
loans secured by real property and require that fire and extended coverage
casualty insurance in amounts sufficient to rebuild or replace the
improvements at current replacement costs be maintained on all properties
securing the loans. In addition, we require flood insurance for properties
in flood hazard zones to protect the property securing our interest.
Consistent with regional industry practices, we do not necessarily require
earthquake insurance as part of our general underwriting practices. In
certain circumstances, however, we may require mudslide, earthquake and/or
other hazard insurance depending upon the location of the
property.
Business Loans and Lines of Credit
At December 31, 1999, our business loans
totaled $33.3 million, representing 0.8% of our gross loan and lease
portfolio. The business loans are comprised of business lending products
(e.g., business term loans and lines of credit) which are offered in
conjunction with other services in order to expand Bay View Bank’s
customer base and make us more competitive in the commercial business
banking environment.
Consumer Lending
At December 31, 1999, consumer loans totaled
$1.1 billion, representing 26.3% of our gross loan and lease portfolio. The
consumer loans are comprised primarily of auto loans and home equity loans
and lines of credit.
Automobile Financing—At December
31, 1999, auto loans totaled $496.9 million, representing 11.4% of our gross
loan and lease portfolio. Additionally, auto leases totaled $463.1 million
at December 31, 1999, representing 7.1% of our consolidated assets. We
underwrite and purchase new and used fixed-rate prime auto loans and leases
on an indirect basis. The auto leases are accounted for as operating leases
and, accordingly, the leased asset is capitalized and depreciated down to
its estimated residual value over the term of the lease.
We underwrite all loans and leases that we
purchase, utilizing custom credit scoring systems. Our underwriting
standards focus on the borrower’s ability to repay, as demonstrated by
debt-to-income ratios, as well as the borrower’s willingness to repay,
as demonstrated by Fair, Isaac & Company Credit Bureau scores, sometimes
referred to as FICO scores.
We periodically securitize and sell our auto
loans. During the fourth quarter of 1999, $247 million of auto loans were
securitized and sold.
Home Equity Lending—At December
31, 1999, home equity loans and lines of credit totaled $648.7 million,
representing 14.9% of our gross loan and lease portfolio. Bay View Bank
originates conventional home equity loans and lines of credit through its
branch network. We also purchase home equity loans on an indirect basis.
Through the first quarter of 1999, we purchased uninsured high loan-to-value
home equity loans. We define high
loan-to-value home equity loans as loans with a combined loan-to-value ratio
of 100% or more. Later in 1999, we ceased purchasing these uninsured high
loan-to-value home equity loans and focused our production efforts towards
originating higher-quality conventional home equity loans and lines of
credit (where combined loan-to-value ratios are less than 100%, typically
80% to 90%) or insured high loan-to-value home equity loans where 100% of
the loan is insured against credit losses. At December 31, 1999, our
portfolio included $434.4 million in high loan-to-value home equity loans,
$34.4 million in 100% insured high loan-to-value home equity loans and
$179.9 million in conventional home equity loans.
We underwrite all home equity loans that we
originate and purchase. Our underwriting standards for home equity loans
focus on debt-to-income ratios and FICO scores.
Commercial Lending
Asset-Based Lending, Factoring and
Equipment Leasing—At December 31, 1999, our commercial loans and
leases, excluding franchise loans, totaled $254.7 million, representing 5.8%
of our gross loan and lease portfolio. Approximately $158.2 million of the
loans and leases outstanding at December 31, 1999 were asset-based loans,
including asset-based participation loans, another $25.2 million of the
balance was related to receivable factoring and $71.3 million were equipment
leases. Asset-based and factoring loans are adjustable rate loans primarily
based on the prime rate index. Our equipment leases are fixed-rate direct
financing leases. We employ underwriting procedures which include, among
other things, continuous reviews of the borrower’s financial condition
and periodic audits of the receivables, equipment or other assets securing
the loans and leases.
Franchise Lending—At December 31,
1999, our commercial franchise loans totaled $1.0 billion, representing
23.9% of our gross loan and lease portfolio. We offer commercial loans for
franchise businesses. Our long-term loans are called permanent loans. We
refer to our short-term loans as Development and Construction, or DEVCO
loans, and Seasoning loans.
Our permanent franchise loans are
fully-amortizing long-term fixed- or adjustable-rate loans provided for
purposes other than development and construction of business units. These
loans generally have a maximum term and amortization period of up to 20
years. Fixed-rate loans are based upon U.S. Treasury rates plus a spread
while adjustable-rate loans are tied to LIBOR plus a spread and generally
reprice on a monthly basis. Flexible loan programs are employed, based on
cash flows and pledged collateral, to help tailor products to the needs of
specific borrowers.
We employ underwriting and monitoring
procedures which include, among other things, continuous reviews of the
borrower’s financial condition and periodic audits of the borrower
’s business results. We focus on the cash flow of the business, the
continuing ability of the borrower to operate the business unit in a cash
positive manner and the borrower’s ability to repay the loan since
neither the real property mortgage nor the franchise or license agreement is
generally assignable to secure the loan. In determining enterprise value, in
addition to a borrower’s credit profile, we focus on the following
factors:
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Business
Profitability. We lend to borrowers whose
business operations provide adequate cash flow to support loan
payments.
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Strength of
Business Concept. We emphasize loans to
borrowers whose business has significant national or regional market
penetration.
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Operating
Experience. We emphasize loans to borrowers
having ownership of multiple business units with strong industry
backgrounds.
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Site
Considerations. We focus on the location,
physical condition and environmental characteristics. We look for
borrowers with business units located in high traffic areas that we
believe exhibit strong retail property fundamentals. We look for borrowers
investing in well-maintained existing properties or in newly constructed
properties and we use third-party appraisal professionals who conduct
physical site inspections of each property. We employ environmental
professionals and a process that, although
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not requiring
either Phase I or Phase II environmental inspections, includes a pragmatic
detailed questionnaire covering both federal and state documentation and
certification requirements.
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Collateral.
Loans are partially secured by taking a first lien
on all available furniture, fixtures and equipment. Where the available
collateral includes a building on a ground lease, we require an assignment
of the lease in addition to a security interest on the building and on the
furniture, fixtures and equipment. If the collateral includes owned real
estate, we also obtain a first mortgage on the property. Borrowers with
additional collateral are generally afforded better credit terms.
Depending upon the collateral provided, loan-to-value ratios, up-front
fees and interest rates are adjusted to properly reflect credit
risk.
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DEVCO loans are offered to fund the
development and construction of new business units. DEVCO loans generally
provide an interest-only period of up to 18 months that gives the borrower
the opportunity to construct the unit, stabilize business unit performance
and achieve a higher cash flow in the short-term. Fixed-rate DEVCO loans are
tied to U.S. Treasury rates, while adjustable-rate DEVCO loans are tied to
LIBOR. Adjustable-rate DEVCO loans generally have an 18-month maturity and
fixed-rate DEVCO loans generally have a 15-year maturity. Both adjustable-
and fixed-rate DEVCO loans generally provide an initial 18 month period
necessary for the unit to be constructed and sales to stabilize. Within the
initial 18 month period, the unit is appraised and a final loan amount is
then determined, using actual unit level performance. After 18 months, the
borrower can apply for a permanent loan which will be re-underwritten,
converting the adjustable-rate DEVCO loan to a permanent loan. As a result
of fee incentives built into the adjustable-rate DEVCO loans, borrowers
generally look to convert into permanent loans on the maturity date. DEVCO
loans are secured by the real property mortgage or leasehold interest as
well as all available furniture, fixtures and equipment.
Seasoning loans are offered to fund the
acquisition of new business units or the conversion of existing business
units into a different franchise concept. Seasoning loans generally provide
an interest-only period of up to 18 months that gives the borrower the
opportunity to stabilize business unit performance and achieve a higher cash
flow in the short-term. Generally, other terms and conditions are similar to
those of DEVCO loans.
Our investing activities primarily involve the
purchase and sale of mortgage-backed securities by Bay View Bank. We
purchase securities to supplement our high-quality loan and lease
production. Our portfolio includes mortgage-backed securities issued by
Fannie Mae, Freddie Mac, and the Government National Mortgage Association.
Our portfolio also includes senior tranches of private issue collateralized
mortgage obligations which carry less prepayment and credit risk as compared
to other collateralized mortgage obligation tranches.
Securities are classified as held-to-maturity
or available-for-sale. We do not maintain a trading portfolio. Securities in
the held-to-maturity category consist of securities purchased for long-term
investment in order to enhance our ongoing stream of net interest income.
Securities deemed held-to-maturity are classified as such because we have
both the intent and ability to hold these securities to maturity. Securities
purchased to meet investment-related objectives such as interest rate risk
and liquidity management, but which may be sold as necessary to implement
management strategies, are designated as available-for-sale at the time of
purchase. We also hold retained interests in our franchise and auto loan and
lease securitizations which are designated as securities available-for-sale.
At December 31, 1999 we had $49.1 million in securities available for sale
(including $43.1 million in retained interests) and $10.0 million in
securities classified as held-to-maturity.
Retail Deposit Activities
Bay View Bank attracts both short-term and
long-term deposits from the general public by offering a wide range of
deposit products and services. Bay View Bank, through its branch network,
provides its banking customers with money market accounts, savings and
checking accounts, certificates of deposit, individual retirement accounts,
investment services, business checking accounts, cash management services,
24-hour automated teller machines, and, in 2000, internet banking and
bill-pay services.
Enhancing the value of Bay View Bank’s
retail branch franchise remains one of our primary objectives. We plan to
continue to expand our retail banking presence in northern California
through internal growth, new product development and the acquisition or
purchase of deposits. Our retail deposit franchise is now the largest of any
financial institution operating exclusively in the San Francisco Bay
Area.
Our borrowing activities are primarily
conducted by Bay View Bank. The Federal Home Loan Bank System functions in a
reserve credit capacity for qualifying financial institutions. As a member,
Bay View Bank is required to own capital stock in the Federal Home Loan Bank
of San Francisco and may apply for advances from the Federal Home Loan Bank
of San Francisco utilizing Federal Home Loan Bank stock, qualifying mortgage
loans and mortgage-backed securities as collateral.
The Federal Home Loan Bank of San Francisco
offers a full range of borrowing programs on its advances with terms of up
to ten years at competitive market rates. A prepayment penalty is usually
imposed for early repayment of these advances. As a Federal Reserve Bank
member, Bay View Bank may also borrow from the Federal Reserve Bank of San
Francisco.
We also utilize other short-term borrowing
including warehouse lines and reverse repurchase agreements. Reverse
repurchase agreements are sales of securities we own to securities dealers
or the Federal Home Loan Bank of San Francisco with our commitment to
repurchase such securities for a predetermined price at a future date. At
December 31, 1999 our Federal Home Loan Bank advances totaled $1.4 billion
and our short-term borrowings totaled $415.4 million.
At December 31, 1999, we had approximately
$239.5 million of debt outstanding. This debt is comprised of (i) $99.5
million of 9.125% Subordinated Notes due August 15, 2007 issued in August
1997 by Bay View Capital Corporation, (ii) $50 million of 10.00%
Subordinated Notes due August 31, 2009 issued in August 1999 by Bay View
Bank and (iii) $90 million of 9.76% Capital Securities due December 31, 2028
issued in December 1998 by Bay View Capital I, a Delaware business trust
sponsored by Bay View Capital Corporation.
The banking and financial services industry in
general, and specifically in California and the San Francisco Bay Area, is
highly competitive. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product
delivery systems, and the accelerating pace of consolidation among financial
services providers. We compete for loans and leases, deposits, and customers
with other commercial banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies, finance
companies, money market funds, credit unions, and other nonbank financial
services providers. Many of these competitors are much larger in total
assets and capitalization, have greater access to existing and newly
emerging capital markets and offer a broader range of financial services
than Bay View Bank. In addition, recent federal legislation may have the
effect of further increasing the pace of consolidation within the financial
services industry. (See “Supervision and Regulation—Financial
Services Modernization Legislation”).
In order to compete with other financial
services providers, we principally rely upon local promotional activities,
personal relationships with our customers, and specialized services tailored
to meet the needs of the communities served. In those instances where we are
unable to accommodate a customer’s needs, we may arrange for those
services to be provided by our correspondents. Bay View Bank has branch
offices located in the following San Francisco Bay Area counties: San
Francisco, San Mateo, Santa Clara, Marin, Contra Costa, Alameda, Sonoma,
Solano, and Santa Cruz. In addition, we maintain commercial lending offices
in Los Angeles, California and operate various lending facilities through a
nationwide network of loan production offices.
Economic Conditions, Government Policies, Legislation, and
Regulation
Our profitability, like most financial
institutions, is dependent on interest rate differentials. In general, the
difference between the interest rates we pay on our interest-bearing
liabilities, such as deposits and other borrowings, and the interest rates
we receive on our interest-earning assets, such as loans, leases and
securities, comprises a significant portion of our earnings. These rates are
highly sensitive to many factors that are beyond our control, such as
inflation, recession and unemployment and the impact of future changes in
domestic and foreign economic conditions that we cannot predict.
Our business is also influenced by the
monetary and fiscal policies of the federal government and the policies of
regulatory agencies, particularly the Board of Governors of the Federal
Reserve System, sometimes referred to as the Federal Reserve Board. The
Federal Reserve Board implements national monetary policies, with objectives
such as curbing inflation and combating recession, through its open-market
operations in U.S. Government securities by adjusting the required level of
reserves for depository institutions subject to its reserve requirements,
and by varying the target federal funds and discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve
Board in these areas influence the growth of bank loans, leases,
investments, and deposits, and also affect interest rates earned on
interest-earning assets and paid on interest-bearing liabilities. We cannot
predict the nature or impact on us of any future changes in monetary and
fiscal policies.
From time to time, legislation is enacted, and
regulations are adopted which have the effect of increasing the cost of
doing business, limiting or expanding permissible activities, or affecting
the competitive balance between financial services providers. Proposals to
change the laws and regulations governing the operations and taxation of
national banks, bank holding companies and other financial institutions are
frequently made in the U.S. Congress, in the state legislatures and by
various regulatory agencies. We cannot predict the likelihood of any
legislative or regulatory changes or the impact that these changes might
have on us.
Supervision and Regulation
General
Bay View Capital Corporation and Bay View
Bank are extensively regulated under federal law. This regulation is
intended primarily for the protection of depositors and the deposit
insurance fund and not for the benefit of our stockholders. Set forth below
is a summary description of the material laws and regulations which relate
to our operations. The description is qualified in its entirety by reference
to the applicable laws and regulations.
Bay View Capital Corporation
As a registered bank holding company, we are
subject to regulation under the Bank Holding Company Act of 1956, as
amended, sometimes referred to as the BHCA. We are required to file with the
Federal Reserve Board quarterly, semi-annual and annual reports, and such
additional information as the Federal Reserve Board may require pursuant to
the BHCA. The Federal Reserve Board may conduct examinations of Bay View
Capital Corporation and our subsidiaries.
The Federal Reserve Board may require that we
terminate an activity or terminate control of, or liquidate or divest
certain subsidiaries or affiliates when the Federal Reserve Board believes
the activity, or the control of the subsidiary or affiliate constitutes a
significant risk to the financial safety, soundness or stability of any of
our banking subsidiaries. The Federal Reserve Board also has the authority
to regulate provisions of certain bank holding company debt, including
authority to impose interest ceilings and reserve requirements on such debt.
Under certain circumstances, we must file written notice and obtain approval
from the Federal Reserve Board prior to purchasing or redeeming our equity
securities.
Under the BHCA and regulations adopted by the
Federal Reserve Board, we and our nonbanking subsidiaries are prohibited
from requiring certain tie-in arrangements in connection with any extension
of credit,
lease or sale of property or furnishing of services by Bay View Bank, N.A.
Further, we are required by the Federal Reserve Board to maintain certain
levels of regulatory capital.
We are required to obtain the prior approval
of the Federal Reserve Board for the acquisition of more than 5% of the
outstanding shares of any class of voting securities or substantially all of
the assets of any bank or bank holding company. Prior approval of the
Federal Reserve Board is also required for the merger or consolidation of
Bay View Capital Corporation with another bank holding company.
We are prohibited by the BHCA, except in
certain statutorily prescribed instances, from acquiring direct or indirect
ownership or control of more than 5% of the outstanding voting shares of any
company that is not a bank or bank holding company and from engaging
directly or indirectly in activities other than those of banking, managing
or controlling banks or furnishing services to our subsidiaries. However, we
may, subject to the prior approval of the Federal Reserve Board, engage in
any, or acquire shares of companies engaged in, activities that are deemed
by the Federal Reserve Board to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a
bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its
operations in an unsafe or unsound manner. In addition, it is the Federal
Reserve Board’s policy that in serving as a source of strength to its
subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company’s failure to
meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve Board to be an
unsafe and unsound banking practice or a violation of the Federal Reserve
Board’s regulations or both.
Our securities are registered with the
Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. As such, we are subject to the information, proxy
solicitation, insider trading, and other requirements and restrictions of
the Securities Exchange Act.
Effective April 1, 1999, we changed the
listing of our common stock and Capital Securities from Nasdaq to the New
York Stock Exchange and commenced trading of our Subordinated Notes on the
New York Stock Exchange. Our common stock trades under the ticker symbol
“BVC”, our capital securities trade under the ticker symbol
“BVS”, and our Subordinated Notes trade under the ticker symbol
“BVC 07”.
Bay View Bank, N.A.
Bay View Bank, N.A., as a national banking
association, is subject to primary supervision, examination and regulation
by the Office of the Comptroller of the Currency, sometimes referred to as
the OCC. To a lesser extent, Bay View Bank is also subject to regulations of
the Federal Deposit Insurance Corporation, sometimes referred to as the
FDIC, which insures our deposit accounts, and the Federal Reserve Board. If,
as a result of an examination, the OCC determines that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of Bay View Bank’s operations are
unsatisfactory, or that Bay View Bank or its management is violating or has
violated any law or regulation, various remedies are available to the OCC.
Such remedies include the power to enjoin “unsafe or unsound practices
”, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the
growth of Bay View Bank, to assess civil monetary penalties, and to remove
officers and directors. The FDIC has similar enforcement authority, in
addition to its authority to terminate Bay View Bank’s deposit
insurance in the absence of action by the OCC and upon a finding that we are
in an unsafe or unsound condition, are engaging in unsafe or unsound
activities, or that our conduct poses a risk to the deposit insurance fund
or may prejudice the interest of our depositors.
Various requirements and restrictions under
the laws of the United States affect the operations of Bay View Bank.
Federal statutes and regulations relate to many aspects of Bay View Bank
’s operations, including reserves
against deposits, ownership of deposit accounts, interest rates payable on
deposits, loans and investments, mergers and acquisitions, borrowings,
dividends, locations of branch offices, capital requirements, and disclosure
obligations to depositors and borrowers.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act, also referred to as the Financial
Services Modernization Act. The Financial Services Modernization Act repeals
the two affiliation provisions of the Glass-Steagall Act: Section 20, which
restricted the affiliation of Federal Reserve Member Banks with firms
“engaged principally” in specified securities activities; and
Section 32, which restricts officer, director or employee interlocks between
a member bank and any company or person “primarily engaged” in
specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state
law restricting the establishment of financial affiliations, primarily
related to insurance. The general effect of the law is to establish a
comprehensive framework to permit affiliations among commercial banks,
insurance companies, securities firms, and other financial services
providers by revising and expanding the BHCA framework to permit a holding
company to engage in a full range of financial activities through a new
entity known as a Financial Holding Company. “Financial activities
” is broadly defined to include not only banking, insurance and
securities activities, but also merchant banking and additional activities
that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities or complementary activities that do not pose a substantial risk
to the safety and soundness of depository institutions or the financial
system generally.
Generally, the Financial Services
Modernization Act:
|
·
|
Repeals historical
restrictions on, and eliminates many federal and state law barriers to,
affiliations among banks, securities firms, insurance companies, and other
financial services providers;
|
|
·
|
Provides a uniform
framework for the functional regulation of the activities of banks,
savings institutions and their holding companies;
|
|
·
|
Broadens the
activities that may be conducted by bank holding companies and
subsidiaries of national banks;
|
|
·
|
Provides an
enhanced framework for protecting the privacy of consumer
information;
|
|
·
|
Adopts a number of
provisions related to the capitalization, membership, corporate
governance, and other measures designed to modernize the Federal Home Loan
Bank system;
|
|
·
|
Modifies the laws
governing the implementation of the Community Reinvestment Act, sometimes
referred to as CRA; and
|
|
·
|
Addresses a variety
of other legal and regulatory issues affecting both day-to-day operations
and long-term activities of financial institutions.
|
In order for us to take advantage of the
ability to affiliate with other financial services providers, we must become
a “Financial Holding Company” as permitted under an amendment to
the BHCA. To become a Financial Holding Company, we would file a declaration
with the Federal Reserve Board, electing to engage in activities permissible
for Financial Holding Companies and certifying that we are eligible to do so
because all of our insured depository institution subsidiaries are
well-capitalized and well-managed (see “Capital Standards”). In
addition, the Federal Reserve Board must also determine that each of our
insured depository institution subsidiaries has at least a “satisfactory
” CRA rating (see “Community Reinvestment Act and Fair Lending
Developments”). We meet the requirements to make an election to
become a Financial Holding Company. Our management has not determined at
this time whether we will seek an election to become a Financial Holding
Company. We are examining our strategic business plan to determine whether,
based upon market conditions, our relative financial condition, regulatory
capital requirements, general economic conditions, and other factors, we
desire to utilize any of our expanded powers provided in the Financial
Services Modernization Act.
The Financial Services Modernization Act also
permits national banks to engage in expanded activities through the
formation of financial subsidiaries. A national bank may have a subsidiary
engaged in any activity authorized for national banks directly or any
financial activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant banking.
These activities, except real estate investment or development, may only be
conducted through a subsidiary of a Financial Holding Company. Financial
activities include all activities permitted under new sections of the BHCA
or by OCC regulation or interpretation.
A national bank seeking to have a financial
subsidiary, and each of its depository institution affiliates, must be
“well-capitalized” and “well-managed”. The total assets
of all financial subsidiaries may not exceed the lesser of 45% of a bank
’s total assets, or $50 billion. A national bank must exclude from its
assets and equity all equity investments, including retained earnings, in a
financial subsidiary. The assets of the subsidiary may not be consolidated
with the bank’s assets. The bank must also have policies and procedures
to assess financial subsidiary risk and to protect the bank from such risks
and potential liabilities.
We do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in
the near-term. However, to the extent that it permits banks, securities
firms and insurance companies to affiliate, the financial services industry
may experience further consolidation. The Financial Services Modernization
Act is intended to grant to community banks certain powers as a matter of
right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, this Act may have the result of increasing the amount of
competition that we face from larger institutions and other types of
companies offering financial products, many of which may have substantially
more financial resources than we do.
Dividends and Other Transfers of Funds
Our principal source of income is dividends
from Bay View Bank. Bay View Bank is a legal entity separate and distinct
from Bay View Capital Corporation. Bay View Bank is subject to various
statutory and regulatory restrictions on its ability to pay dividends to us.
In addition, the OCC has the authority to prohibit Bay View Bank from paying
dividends, depending upon its financial condition, if such payment is deemed
to constitute an unsafe or unsound practice. As a national bank, Bay View
Bank may pay dividends in any one calendar year equal to its net earnings in
that calendar year plus net earnings for the previous two calendar years,
less any dividends paid during this three-year period.
The OCC also has the authority to
prohibit Bay View Bank from engaging in activities that, in the OCC
’s opinion, constitute unsafe or unsound practices in conducting
its business. It is possible, depending upon the financial condition of the
bank in question and other factors, that the OCC could assert that
the payment of dividends or other payments might, under some circumstances,
be such an unsafe or unsound practice. Further, the OCC and the
Federal Reserve Board have established guidelines with respect to the
maintenance of appropriate levels of capital by national banks and bank
holding companies under their jurisdiction. Compliance with the standards
set forth in such guidelines and the restrictions that are or may be imposed
under the prompt corrective action provisions of federal law could limit the
amount of dividends that Bay View Bank or Bay View Capital Corporation may
pay. An insured depository institution is prohibited from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions, if after such transaction the institution would be
undercapitalized. See “Capital Standards” and “Prompt
Corrective Regulatory Action and Other Enforcement Mechanisms” and for
a discussion of these additional restrictions on capital
distributions.
Bay View Bank is subject to certain
restrictions imposed by federal law on any extensions of credit to, or the
issuance of a guarantee or letter of credit on behalf of, Bay View Capital
Corporation or other affiliates, the purchase of, or investments in, stock
or other securities thereof, the taking of such securities as collateral for
loans, and the purchase of our assets. Such restrictions prevent us from
borrowing from Bay View Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and
investments are limited, individually, to 10% of Bay View Bank’s
capital and surplus (as defined by federal regulations), and such secured
loans and investments are limited, in the aggregate, to 20% of Bay View Bank
’s
capital and surplus (as defined by federal regulations). California law also
imposes certain restrictions with respect to transactions involving Bay View
Capital Corporation and other controlling persons of Bay View Bank.
Additional restrictions on transactions with affiliates may be imposed on
Bay View Bank under the prompt corrective action provisions of federal law.
See “Prompt Corrective Action and Other Enforcement Mechanisms.
”
Capital Standards
The Federal Reserve Board and the OCC
have adopted risk-based minimum capital guidelines intended to provide a
measure of capital that reflects the degree of risk associated with a
banking organization’s operations for both transactions reported on the
balance sheet as assets and transactions, such as letters of credit and
recourse arrangements, which are recorded as off-balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off-balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. Treasury securities, to 100% for assets with a higher
degree of credit risk, such as commercial loans.
The federal banking agencies require a minimum
ratio of qualifying total risk-based capital to risk-adjusted assets of 8%
and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In
addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to
total average assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total average assets is 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the
minimum guidelines and ratios.
The following table presents the amounts of
regulatory capital and capital ratios for Bay View Bank, compared to its
minimum regulatory capital requirements at December 31, 1999.
| |
|
At December 31,
1999
|
| |
|
Actual
|
|
Minimum Capital
Requirement
|
|
Excess
|
| |
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
| |
|
(Dollars in
thousands) |
| Tier 1
leverage |
|
$406,001 |
|
6.87 |
% |
|
$236,337 |
|
4.00 |
% |
|
$169,664 |
|
2.87 |
% |
| Tier 1
risk-based |
|
$406,001 |
|
8.41 |
% |
|
$193,024 |
|
4.00 |
% |
|
$212,977 |
|
4.41 |
% |
| Total
risk-based |
|
$507,516 |
|
10.52 |
% |
|
$386,048 |
|
8.00 |
% |
|
$121,468 |
|
2.52 |
% |
The following table presents the amounts of
regulatory capital and capital ratios for Bay View Capital Corporation,
compared to its minimum regulatory capital requirements at December 31,
1999.
| |
|
At December 31,
1999
|
| |
|
Actual
|
|
Minimum Capital
Requirement
|
|
Excess
|
| |
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
| |
|
(Dollars in
thousands) |
| Tier 1
leverage |
|
$386,110 |
|
6.51 |
% |
|
$237,247 |
|
4.00 |
% |
|
$148,863 |
|
2.51 |
% |
| Tier 1
risk-based |
|
$386,110 |
|
7.17 |
% |
|
$215,475 |
|
4.00 |
% |
|
$170,635 |
|
3.17 |
% |
| Total
risk-based |
|
$587,773 |
|
10.91 |
% |
|
$430,950 |
|
8.00 |
% |
|
$156,823 |
|
2.91 |
% |
Prompt Corrective Action and Other Enforcement
Mechanisms
Federal banking agencies possess broad powers
to take corrective and other supervisory action to resolve the problems of
insured depository institutions, including but not limited to those
institutions that fall below one or more prescribed minimum capital ratios.
Each federal banking agency has promulgated regulations defining
the following five categories in which an insured depository institution will
be placed, based upon its capital ratios: well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. At December 31, 1999, Bay View Bank and Bay
View Capital Corporation both exceeded the required ratios for
classification as “well-capitalized.”
An institution that, based upon its capital
levels, is classified as well-capitalized, adequately capitalized or
undercapitalized may be treated as though it were in the next lower capital
category if the appropriate federal banking agency, after notice and
opportunity for hearing, determines that an unsafe or unsound condition or
an unsafe or unsound practice warrants such treatment. At each successive
lower capital category, an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not treat a
significantly undercapitalized institution as critically undercapitalized
unless its capital ratio actually warrants such treatment.
In addition to measures taken under the prompt
corrective action provisions, commercial banking organizations may be
subject to potential enforcement actions by federal regulators for unsafe or
unsound practices in conducting their businesses or for violations of any
law, rule, regulation, or any condition imposed in writing by the agency or
any written agreement with the agency.
Safety and Soundness Standards
The federal banking agencies have adopted
guidelines designed to assist them in identifying and addressing potential
safety and soundness concerns before capital becomes impaired. The
guidelines set forth operational and managerial standards relating to: (i)
internal controls, information systems and internal audit systems, (ii) loan
documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings,
and (vi) compensation, fees and benefits. In addition, the federal banking
agencies have also adopted safety and soundness guidelines with respect to
asset quality and earnings standards. These guidelines provide six standards
for establishing and maintaining a system to identify problem assets and
preventing those assets from deteriorating. Under these standards, an
insured depository institution should: (i) conduct periodic asset quality
reviews to identify problem assets, (ii) estimate the inherent losses in
problem assets and establish reserves that are sufficient to absorb
estimated losses, (iii) compare problem asset totals to capital, (iv) take
appropriate corrective action to resolve problem assets, (v) consider the
size and potential risks of material asset concentrations, and (vi) provide
periodic asset quality reports with adequate information for management and
the Board of Directors to assess the level of asset risk. These new
guidelines also set forth standards for evaluating and monitoring earnings
and for ensuring that earnings are sufficient to maintain adequate capital
and reserves.
Premiums for Deposit Insurance
Bay View Bank’s deposit accounts are
insured by the Savings Association Insurance Fund, or SAIF, as administered
by the FDIC, up to the maximum amounts permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that our institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC or the institution
’s primary regulator.
The FDIC charges an annual assessment for the
insurance of deposits based on the risk that a particular institution poses
to its deposit insurance fund. The risk classification is based on an
institution’s capital group and supervisory subgroup assignment.
Pursuant to federal law, on January 1, 1997, Bay View Bank began paying, in
addition to its normal deposit insurance premium as a member of the SAIF, an
amount equal to approximately 6.4 basis points per $100 of insured deposits
toward the retirement of the Financing Corporation bonds issued in the 1980s
to assist in the recovery of the savings and loan industry. Members of the
Bank Insurance Fund, or BIF, by contrast, pay, in addition to their normal
deposit insurance premium, approximately 1.3 basis points. Under federal;
law, the FDIC is not permitted to establish SAIF assessment rates that are
lower than comparable BIF assessment rates. Effective January 1, 2000, the
rate paid to retire the Financing Corporation bonds is equal
for members of the BIF and the SAIF at 2.12 basis points. Federal law also
provided for the merging of the BIF and the SAIF by January 1, 1999,
provided there were no financial institutions still chartered as savings
associations at that time. However, as of January 1, 1999, there were still
financial institutions chartered as savings associations.
Interstate Banking and Branching
The BHCA permits bank holding companies from
any state to acquire banks and bank holding companies located in any other
state, subject to certain conditions, including certain nationwide- and
state-imposed concentration limits. Bay View Bank has the ability, subject
to certain restrictions, to acquire by acquisition or merger branches
outside its home state. The establishment of new interstate branches is also
possible in those states with laws that expressly permit it. Interstate
branches are subject to certain laws of the states in which they are
located. Competition may increase further as banks branch across state lines
and enter new markets.
Community Reinvestment Act and Fair Lending
Developments
Bay View Bank is subject to certain fair
lending requirements and reporting obligations involving home mortgage
lending operations and CRA activities. The CRA generally requires the
federal banking agencies to evaluate the record of a financial institution
in meeting the credit needs of its local communities, including low-and
moderate-income neighborhoods. A bank may be subject to substantial
penalties and corrective measures for a violation of certain fair lending
laws. The federal banking agencies may take compliance with such laws and
CRA obligations into account when regulating and supervising other
activities.
A bank’s compliance with its CRA
obligations is based upon a performance-based evaluation system which bases
CRA ratings on an institution’s lending service and investment
performance. When a bank holding company applies for approval to acquire a
bank or other bank holding company, the Federal Reserve Board will review
the assessment of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application.
Based on an examination conducted October 13, 1998, Bay View Bank was rated
“satisfactory” in complying with its CRA obligations.
At December 31, 1999, we had a total of 1,299
employees on a full-time equivalent basis, consisting of both full-time and
permanent part-time employees, as follows:
| Bay View Bank, N.A.
and Subsidiaries |
|
1,149 |
| Bay View Capital
Corporation |
|
150 |
| |
|
|
|
Total |
|
1,299 |
| |
|
|
Our employees are not represented by any
unions or covered by any collective bargaining agreements. We consider our
relations with our employees to be satisfactory.
Executive Officers of the Registrant
The following table sets forth certain
information regarding the executive officers of the Registrant.
Name
|
|
Age
|
|
Position
|
|
Year
Appointed
|
| Edward H.
Sondker |
|
52 |
|
Director, President
and Chief Executive Officer |
|
1995 |
| Richard E.
Arnold |
|
59 |
|
Executive Vice
President and Director of Sales and
Banking Administration, Bay View Bank |
|
1997 |
| John N.
Buckley |
|
42 |
|
Executive Vice
President and Chief Credit Officer |
|
1995 |
| Matthew L.
Carpenter |
|
40 |
|
President and Chief
Executive Officer, Bay View
Commercial Finance Group |
|
1999 |
| David A.
Heaberlin |
|
50 |
|
President and Chief
Operating Officer, Bay View
Bank |
|
1999 |
| Wayne L.
Knyal |
|
53 |
|
President and Chief
Executive Officer,, Bay View
Franchise Mortgage Acceptance Company |
|
1999 |
| Scott H.
Ray |
|
35 |
|
Executive Vice
President and Chief Financial
Officer |
|
2000 |
| Ronald L.
Reed |
|
53 |
|
Executive Vice
President and Director of
Management Information Systems and Loan
Servicing |
|
1997 |
| Douglas J.
Wallis |
|
49 |
|
Executive Vice
President, General Counsel and
Corporate Secretary |
|
2000 |
| Carolyn
Williams-Goldman |
|
38 |
|
Executive Vice
President and Director of
Administration |
|
1998 |
| Jeffrey O.
Butcher |
|
35 |
|
First Vice
President and Controller |
|
2000 |
The business experience of each of our
executive officers is as follows:
Mr. Sondker has served as a Director,
President and Chief Executive Officer of Bay View Capital Corporation since
1995. Previously, he served as President and Chief Executive Officer of
Independence One Bank of California, FSB, a subsidiary of Michigan National
Corporation. From 1985 to 1990, he was the President and Chief Executive
Officer of La Jolla Bank & Trust Company. Prior to 1985, Mr. Sondker
held executive and management positions with a community bank holding
company in Kansas City, Missouri.
Mr. Arnold, Executive Vice President, has
served as Director of Sales and Banking Administration since 1997.
Previously, he served as Executive Vice President of First Interstate Bank
and was responsible for all branch banking activities in northern
California. Prior to joining First Interstate Bank in 1990, he held
executive and management positions at Security Pacific Bank in a career that
spanned over 30 years.
Mr. Buckley, Executive Vice President, has
served as Chief Credit Officer since 1995 and Manager of Credit
Administration and Asset Management since 1994. He joined Bay View Capital
Corporation in September 1993. Previously, he served at Bank of America in
various capacities from 1985 to 1993. His last position was Vice President
and Regional Credit Administrator for the Real Estate Industries Division at
Bank of America.
Mr. Carpenter has served as President and
Chief Executive Officer of our subsidiary Bay View Commercial Finance Group
since 1999. Prior to becoming President and Chief Executive Officer, Mr.
Carpenter served as Chief Operating Officer of Bay View Commercial Finance
Group from the time of its acquisition by Bay View Capital Corporation in
1997. Prior to the acquisition, Mr. Carpenter served as Chief Financial
Officer of Concord Growth Corporation, the predecessor of Bay View
Commercial Finance Group, from 1991 to 1997, and as President of EXXE Data
Corporation, the holding company of Concord Growth Corporation, from 1993 to
1997.
Mr. Heaberlin has served as President of Bay
View Bank since 1999 and Chief Operating Officer of Bay View Bank since
1997. He served as Executive Vice President and Chief Financial Officer of
Bay View Capital
Corporation from 1995 to January 2000. Previously, Mr. Heaberlin served as
Senior Vice President and Chief Financial Officer for First
California/Mortgage Service America. During 1993 and 1994, he was Executive
Vice President and Treasurer of ITT Residential Capital Corporation. Prior
to his service with ITT, he was a financial executive for various entities
including Bowery Bank, Exchange National Bank of Chicago, Financial
Corporation of Santa Barbara, and Numerica Financial. Mr. Heaberlin is a
Certified Public Accountant and has over 20 years experience in commercial
banking, savings banks and the financial services industry.
Mr. Knyal has served as a Director of Bay View
Capital Corporation and President of Bay View Franchise Mortgage Acceptance
Company since Bay View Capital Corporation’s acquisition of FMAC in
November 1999. Mr. Knyal was previously President and Chief Executive
Officer of FMAC from the founding of its predecessor in 1991 until the
acquisition of FMAC by Bay View Capital Corporation. Prior to his service
with FMAC, he founded and owned CBI Insurance Services, Inc. and
concurrently served as President of CBI Mortgage Company, a residential
mortgage banker. From 1968 to 1980, Mr. Knyal was an Executive Vice
President of Krupp/Taylor Advertising and served clients in the fast food
industry. He is also a Director of New Riders, Inc., a restaurant
company.
Mr. Ray, Executive Vice President, was
appointed Chief Financial Officer in January 2000. Since joining Bay View
Capital Corporation in 1998, Mr. Ray has served as Chief Financial Officer
of Bay View Bank and Controller of Bay View Capital Corporation. Previously,
he served as Executive Vice President and Chief Financial Officer for
Silicon Valley Bancshares. Mr. Ray is a Certified Public Accountant and has
15 years of professional experience in both public accounting and private
industry, mostly within the financial services industry.
Mr. Reed, Executive Vice President, has served
as Director of Management Information Systems and Loan Servicing since 1997.
Previously, he served as Chief Information Officer for Weyerhaeuser and WMC
Mortgage Corporation. He has over 30 years of corporate management,
information technology and servicing experience and has also held senior
management positions with Technology Management Corporation, American
Savings Bank and Home Savings of America / HF Ahmanson.
Mr. Wallis, Executive Vice President, was
appointed General Counsel of Bay View Capital Corporation in January 2000.
Mr. Wallis joined Bay View Capital Corporation in 1999 as General Counsel
for Bay View Bank. Previously, he served as Executive Vice President and
General Counsel for California Federal Bank. Mr. Wallis is a member of the
State Bars of California and Missouri. He has over 25 years of experience
within the banking industry.
Ms. Williams-Goldman, Executive Vice
President, has served as Director of Administration since 1998 and Director
of Human Resources since 1995. She joined Bay View Capital Corporation as
Associate Counsel in 1994. Previously, she served as Vice President and
Counsel at First Nationwide Bank in San Francisco. Prior to her service with
First Nationwide Bank, she was an Associate in the Business Law and Banking
Practice Groups of Winthrop, Stimson, Putnam & Roberts. She is a member
of the State Bars of California and New York.
Mr. Butcher was appointed Controller in
January 2000. Previously, he served as Vice President and Manager of
Financial Reporting and Investor Relations. Prior to joining Bay View in
1997, he was a Senior Manager with KPMG LLP serving clients in the financial
services industry. Mr. Butcher is a Certified Public Accountant.
There is no family relationship among the
above officers. All executive officers serve at the discretion of the Board
of Directors.
At December 31, 1999, we occupied a total of
113 offices plus our administrative corporate office under operating lease
agreements expiring at various dates through the year 2016. In most
instances, these lease arrangements include options to renew or extend the
lease at market rates. Bay View Bank owns the property on
which four of its branches are located. We also own leasehold improvements,
furniture and equipment at our offices and branches, all of which are used
in our business activities.
Item 3. Legal Proceedings
There were no legal proceedings requiring
disclosure pursuant to this item at December 31, 1999, or at the date of
this report.
Item 4. Submission of Matters to a Vote of Security
Holders
At a special meeting of our stockholders held
on October 14, 1999, our stockholders considered the following
proposals:
I. Approval and
adoption of the Agreement and Plan of Merger and Reorganization, dated March
11, 1999, as amended, by and between Bay View Capital Corporation and
Franchise Mortgage Acceptance Company and the transactions contemplated
thereby and approval of the issuance of Bay View common stock in connection
therewith. The vote on the proposal was as follows:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Vote
|
| 14,597,725 |
|
677,999 |
|
40,964 |
|
2,561,052 |
II. Approval and
adoption of an amendment to our 1995 Stock Option and Incentive Plan to
increase the number of shares reserved thereunder from 2,000,000 to
2,500,000. The vote on the proposal was as follows:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Vote
|
| 14,613,689 |
|
2,933,722 |
|
330,329 |
|
0 |
PART
II
Item 5. Market for Registrant’s Common Equity and
Related Stockholder Matters
At December 31, 1999, our common stock was
traded on the New York Stock Exchange under the stock symbol “BVC.
” At December 31, 1999, 32,562,942 shares of our common stock were
outstanding, which were owned by 1,497 stockholders of record.
The following table illustrates quarterly
stock price activity and dividends declared for 1999 and 1998.
| |
|
1999
|
| |
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
| Stock price
—high |
|
$21.06 |
|
$20.50 |
|
$20.56 |
|
$16.81 |
| Stock price
—low |
|
$17.44 |
|
$16.25 |
|
$12.50 |
|
$11.69 |
| Dividends |
|
$
0.10 |
|
$
0.10 |
|
$
0.10 |
|
$ —
|
|
|
| |
|
1998
|
| |
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
| Stock price
—high |
|
$37.25 |
|
$38.00 |
|
$31.75 |
|
$21.69 |
| Stock price
—low |
|
$29.38 |
|
$29.50 |
|
$17.00 |
|
$12.50 |
| Dividends |
|
$
0.10 |
|
$
0.10 |
|
$
0.10 |
|
$
0.10 |
Our ability to pay dividends is subject to
certain restrictions and limitations pursuant to applicable laws and
regulations. See “Supervision and Regulation” at Item 1.
“Business” and Note 14 to the Consolidated Financial Statements,
“Stockholders’ Equity and Regulatory Capital Requirements,”
at Item 8. “Financial Statements and Supplementary Data.
”
Item 6. Selected Financial Data—Five-Year
Financial Information
| |
|
At December
31,
|
| |
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
1995
|
| |
|
(Dollars in
thousands) |
| Selected
Balance Sheet Information(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
assets |
|
$6,498,700 |
|
|
$5,596,232 |
|
|
$3,246,476 |
|
|
$3,300,262 |
|
|
$3,004,496 |
|
| Mortgage-backed
securities |
|
654,713 |
|
|
635,389 |
|
|
470,261 |
|
|
577,613 |
|
|
731,378 |
|
| Loans and leases,
net |
|
4,361,493 |
|
|
4,191,269 |
|
|
2,373,113 |
|
|
2,474,717 |
|
|
2,062,268 |
|
| Investment in
operating leased assets, net |
|
463,088 |
|
|
183,453 |
|
|
—
|
|
|
—
|
|
|
—
|
|
| Deposits |
|
3,729,780 |
|
|
3,269,637 |
|
|
1,677,135 |
|
|
1,763,967 |
|
|
1,819,840 |
|
| Borrowings |
|
1,935,517 |
|
|
1,833,116 |
|
|
1,355,976 |
|
|
1,245,537 |
|
|
941,465 |
|
| Capital
Securities |
|
90,000 |
|
|
90,000 |
|
|
—
|
|
|
—
|
|
|
—
|
|
| Stockholders’
equity |
|
631,194 |
|
|
377,811 |
|
|
173,627 |
|
|
200,062 |
|
|
207,977 |
|
|
| |
|
For the Year
Ended December 31,
|
| |
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
1995
|
| |
|
(Dollars in
thousands, except per share amounts) |
| Selected
Results of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Information(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest
income |
|
$
421,656 |
|
|
$
406,363 |
|
|
$
242,244 |
|
|
$
241,755 |
|
|
$
216,463 |
|
| Interest
expense |
|
(251,172 |
) |
|
(251,762 |
) |
|
(154,908 |
) |
|
(160,773 |
) |
|
(160,547 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest
income |
|
170,484 |
|
|
154,601 |
|
|
87,336 |
|
|
80,982 |
|
|
55,916 |
|
| Provision for
losses on loans and leases |
|
(28,311 |
) |
|
(9,114 |
) |
|
(1,952 |
) |
|
(1,898 |
) |
|
(4,284 |
) |
| Leasing
income |
|
58,558 |
|
|
11,341 |
|
|
—
|
|
|
—
|
|
|
—
|
|
Gain (loss) on
sale of loans and leases and
securities, net |
|
10,058 |
|
|
1,060 |
|
|
925 |
|
|
(1,453 |
) |
|
(2,510 |
) |
| Other income,
net |
|
22,916 |
|
|
18,671 |
|
|
11,830 |
|
|
10,017 |
|
|
8,652 |
|
| General and
administrative expenses |
|
(117,116 |
) |
|
(113,567 |
) |
|
(71,913 |
) |
|
(58,955 |
) |
|
(57,016 |
) |
| Leasing
expense |
|
(40,188 |
) |
|
(7,682 |
) |
|
—
|
|
|
—
|
|
|
—
|
|
| Dividend expense
on Capital Securities |
|
(8,935 |
) |
|
(244 |
) |
|
—
|
|
|
—
|
|
|
—
|
|
| SAIF
recapitalization assessment |
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,750 |
) |
|
—
|
|
| Net recoveries on
real estate operations |
|
274 |
|
|
181 |
|
|
543 |
|
|
4,806 |
|
|
1,081 |
|
(Provision for)
recovery of losses on real
estate |
|
(36 |
) |
|
59 |
|
|
585 |
|
|
103 |
|
|
(749 |
) |
| Amortization of
intangible assets |
|
(13,687 |
) |
|
(11,372 |
) |
|
(4,088 |
) |
|
(2,606 |
) |
|
(3,944 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income tax (expense)
benefit |
|
54,017 |
|
|
43,934 |
|
|
23,266 |
|
|
19,246 |
|
|
(2,854 |
) |
| Income tax
(expense) benefit |
|
(25,053 |
) |
|
(21,215 |
) |
|
(9,245 |
) |
|
(8,277 |
) |
|
708 |
|
| Extraordinary
items, net of tax |
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,544 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income
(loss) |
|
$
28,964 |
|
|
$
22,719 |
|
|
$
14,021 |
|
|
$
10,969 |
|
|
$
(4,690 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss)
per diluted share: |
Income (loss) before
extraordinary
items |
|
$
1.36 |
|
|
$
1.12 |
|
|
$
1.06 |
|
|
$
0.79 |
|
|
$
(0.15 |
) |
|
Net income (loss) |
|
$
1.36 |
|
|
$
1.12 |
|
|
$
1.06 |
|
|
$
0.79 |
|
|
$
(0.32 |
) |
| Dividends declared
per share |
|
$
0.30 |
|
|
$
0.40 |
|
|
$
0.34 |
|
|
$
0.305 |
|
|
$
0.30 |
|
| |
|
At and For the
Year Ended December 31,
|
| |
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
1995
|
| |
|
(Dollars in
thousands, except per share amounts) |
| Selected Other
Information(1) |
|
|
|
| Net interest
margin |
|
3.23 |
% |
|
3.03 |
% |
|
2.86 |
% |
|
2.57 |
% |
|
1.86 |
% |
| Efficiency
ratio |
|
54.44 |
% |
|
63.88 |
% |
|
71.85 |
% |
|
64.79 |
% |
|
88.30 |
% |
| Return on average
assets |
|
0.49 |
% |
|
0.41 |
% |
|
0.45 |
% |
|
0.34 |
% |
|
(0.15 |
)% |
| Return on average
equity |
|
7.00 |
% |
|
5.87 |
% |
|
7.32 |
% |
|
5.39 |
% |
|
(2.11 |
)% |
| Ratio of total
equity to total assets |
|
9.71 |
% |
|
6.75 |
% |
|
5.35 |
% |
|
6.06 |
% |
|
6.92 |
% |
| Book value per
share |
|
$
19.38 |
|
|
$
19.77 |
|
|
$
14.38 |
|
|
$
14.98 |
|
|
$
14.65 |
|
| Dividend payout
ratio |
|
19.26 |
% |
|
35.57 |
% |
|
30.53 |
% |
|
38.61 |
% |
|
(93.75 |
)% |
| Nonperforming
assets |
|
$25,939 |
|
|
$18,020 |
|
|
$15,766 |
|
|
$24,310 |
|
|
$38,811 |
|
Ratio to total assets,
excluding loans and leases
held-for-sale |
|
0.40 |
% |
|
0.32 |
% |
|
0.49 |
% |
|
0.74 |
% |
|
1.29 |
% |
| Troubled debt
restructurings |
|
$
1,009 |
|
|
$
777 |
|
|
$
731 |
|
|
$
509 |
|
|
$15,641 |
|
Ratio to total assets,
excluding loans and leases
held-for-sale |
|
0.02 |
% |
|
0.01 |
% |
|
0.02 |
% |
|
0.02 |
% |
|
0.52 |
% |
(1)
|
Includes the
acquisitions of Bay View Credit effective June 1, 1996, Bay View
Commercial Finance Group effective April 1, 1997, Ultra Funding effective
October 1, 1997, America First Eureka Holdings effective January 2, 1998,
and Franchise Mortgage Acceptance Company effective November 1,
1999.
|
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
INDEX
| Strategic
Overview |
|
24 |
|
Our Mission and
Strategy |
|
24 |
|
Banking Platform
Strategy |
|
24 |
|
Home Equity Platform
Strategy |
|
25 |
|
Auto Platform
Strategy |
|
25 |
|
Commercial Platform
Strategy |
|
25 |
|
Acquisition of FMAC |
|
26 |
| Results of
Operations |
|
26 |
|
Contribution by
Platform |
|
26 |
|
Net Interest Income and Net
Interest Margin |
|
28 |
|
Interest Income |
|
33 |
|
Interest Expense |
|
35 |
|
Provision for Losses on Loans
and Leases |
|
37 |
|
Noninterest Income |
|
37 |
|
Noninterest Expense |
|
37 |
|
Income Taxes |
|
41 |
| Non-GAAP
Performance Measures |
|
41 |
|
Earnings Excluding Amortization
of Intangible Assets |
|
42 |
|
Normalized Net Interest
Margin |
|
43 |
| Balance Sheet
Analysis |
|
45 |
|
Securities |
|
45 |
|
Loans and Leases |
|
47 |
|
Deposits |
|
54 |
|
Borrowings |
|
55 |
| Liquidity |
|
57 |
| Capital
Resources |
|
57 |
| Year
2000 |
|
59 |
| Impact of
Inflation and Changing Prices |
|
60 |
Strategic
Overview
Bay View Capital Corporation is a diversified
financial services company that operates distinct business platforms. Each
platform is comprised of interest-earning assets with similar
characteristics including, among other things, marketing and distribution
channels, pricing, credit risk, and interest rate sensitivity.
Throughout 1998, we reported on three
business platforms: a Banking Platform, a Consumer Platform and a
Commercial Platform. The Banking Platform included single-family,
multi-family and commercial mortgage loans, mortgage-backed securities, and
retail and business banking deposit products and services. The Consumer
Platform included auto loans and leases and home equity loans. The
Commercial Platform included asset-based lending, factoring and commercial
leasing activities.
Effective January 1, 1999, we expanded our
business platforms in order to facilitate a more effective presentation and
analysis of our different business activities. These platforms are as
follows:
|
·
|
A Banking Platform
comprised of single-family, multi-family and commercial real estate
loans, franchise loans and asset-based commercial participation loans,
mortgage-backed securities and other investments, and retail and business
banking deposit products and services. The franchise lending operations
and related assets were added to the Banking Platform through our
acquisition of FMAC, along with the assets and operations of FMAC’s
wholly owned division, Bankers Mutual, a multi-family loan originator and
seller-servicer.
|
|
·
|
A Home Equity
Platform comprised of home equity loans and lines of credit.
|
|
·
|
An Auto Platform
comprised of auto loans and leases.
|
|
·
|
A Commercial
Platform comprised of asset-based lending, factoring and commercial
leasing activities.
|
Our Mission and Strategy
Our mission is to build a diversified
financial services company by investing in niche businesses with
risk-adjusted returns that enhance shareholder value. Our strategy centers
around our continued transition to commercial banking activities and
changing-out our balance sheet to expand our net interest margin. In order
to realize this objective, our actions include the following:
|
·
|
Replacing
lower-yielding mortgage loans and mortgage-backed securities on our
balance sheet with consumer and commercial loans and leases with higher
risk-adjusted returns, shorter maturities and less sensitivity to
interest rate changes.
|
|
·
|
Enhancing and
expanding Bay View Bank’s deposit base by attracting and retaining
lower-cost transaction accounts, including commercial and business
checking accounts, offering competitively priced certificates of deposit
and capitalizing on strategic branch or deposit acquisition
opportunities.
|
|
·
|
Maintaining the
capital levels of both Bay View Bank and Bay View Capital Corporation at
or above the well-capitalized level, as defined for regulatory
purposes.
|
Banking Platform Strategy
One of the principal businesses of the
Banking Platform is Bay View Bank’s 57 full service retail and
business banking branch network. A primary objective of the Banking
Platform is to enhance the value of our deposit franchise by focusing on
deposit growth, expanding and enhancing products and services and
capitalizing on strategic branch and deposit acquisition opportunities. A
primary component of the Banking Platform’s deposit growth strategy is
to focus on lower-cost transaction accounts (e.g., checking, savings and
money market accounts) as a source of financing. Transaction accounts at
Bay View Bank as a percentage of total retail deposits increased to 51.0%
at December 31, 1999 as compared with 49.8% at December 31, 1998 and 34.6%
at December 31, 1997.
On September 25, 1999, in keeping with the
platform’s strategy, we acquired two Luther Burbank Savings branches.
These two branches represented approximately $117 million in deposits. In
accordance with the agreement, we paid a 5.25% deposit premium. The amount
of goodwill recorded as of the acquisition date was $6 million.
The Banking Platform also includes our
multi-family and commercial real estate lending and the franchise lending
operations acquired from FMAC in November 1999. The strategy is not only to
concentrate on enhancing the profitability, efficiency and production
capabilities of these operations, but also to develop a whole loan market
for future franchise loan sales.
Effective March 1, 1999, Bay View Bank
converted from a savings institution regulated by the Office of Thrift
Supervision to a national bank regulated by the Office of the Comptroller
of the Currency and Bay View Capital Corporation converted from a savings
and loan holding company regulated by the Office of Thrift Supervision to a
bank holding company regulated by the Federal Reserve Board. These
conversions represented a critical step in our transformation to a
commercial bank. Our new national bank charter provides us with the ability
to continue, as well as expand, our focus on traditional commercial banking
activities.
Home Equity Platform Strategy
The Home Equity Platform originates and
purchases home equity loans and lines of credit. The Home Equity Platform
’s portfolio included $434 million in high loan-to-value home equity
loans at December 31, 1999 as compared with $485 million at December 31,
1998 and $67 million at December 31, 1997. We do not anticipate increasing
our exposure to uninsured high loan-to-value home equity loans beyond their
current levels. Our future home equity loan originations will generally be
limited to conventional home equity loans and lines of credit originated
through our branch banking network.
Auto Platform Strategy
The Auto Platform underwrites and purchases
high-quality, fixed-rate loans and leases secured by new and used autos.
The platform commenced its leasing activities effective April 1,
1998.
In executing its strategy, the Auto Platform
identifies product niches which are not the primary focus of traditional
competitors in the auto lending area, such as banks and captive finance
companies. One such niche includes auto loans where a highly qualified
borrower desires a higher relative loan amount and/or a longer term than is
offered by many other more traditional auto financing sources. In return
for the flexibility of the product it offers, the Auto Platform charges
higher interest rates while still applying its traditional underwriting
criteria to mitigate any potential loan losses.
In December 1999, the Auto Platform completed
a $247 million auto loan securitization, which resulted in a $5.2 million
gain recorded as noninterest income. This securitization helped us achieve
our asset and liability management strategy of reducing shorter duration
loans while retaining longer duration loan originations for our portfolio.
The securitization also benefited our regulatory risk-based capital ratios
and reduced our auto concentration risk.
Our strategic alliance with Lendco Financial
Services for the purchase of auto loans and leases, which began in the
second quarter of 1998, provided us with an option to acquire Lendco
Financial Services. While we did not exercise this option, we intend to
continue purchasing auto loans and leases from Lendco Financial Services
through June 30, 2000, when our contractual agreement expires.
Commercial Platform Strategy
The Commercial Platform’s strategy
focuses on being a nationwide provider of customized financing solutions to
small and middle-market businesses. The Commercial Platform offers
asset-based lending, factoring
and equipment leasing. During 1998, the Commercial Platform also began
originating asset-based commercial participation loans for the Banking
Platform. These loans totaled approximately $72 million at December 31,
1999 and $18 million at December 31, 1998.
Acquisition of FMAC
Our strategy to change-out our balance sheet
from lower-yielding mortgage loans and mortgage-backed securities to
consumer and commercial loans and leases with higher risk-adjusted returns
led to our acquisition of Franchise Mortgage Acceptance Company and its
wholly owned division, Bankers Mutual, collectively referred to as FMAC, on
November 1, 1999.
FMAC is one of the nation’s leading
small business lenders specializing in franchise lending. Bankers Mutual, a
division of FMAC which was acquired by FMAC in April 1998, is one of the
nation’s leading multi-family lenders. Since the merger, FMAC and
Bankers Mutual have operated as separate subsidiaries of Bay View Bank. FMAC
’s insurance agency service operates as a separate subsidiary of our
holding company, Bay View Capital Corporation. The acquisition provides us
with significant asset generation capabilities focused on franchised
quick-service restaurants, such as Burger King, Wendy’s, Pizza Hut,
and KFC, casual dining restaurants, such as TGI Friday’s, Applebees
and Denny’s, retail energy businesses (service stations, convenience
stores, truck stops, car washes, and quick lube businesses) and funeral
home and cemetery owners. We intend to portfolio a portion of the
commercial franchise loans originated, accelerating the transformation of
our balance sheet to consumer and commercial assets with higher
risk-adjusted yields, and securitize and/or sell the remainder. Bankers
Mutual has historically sold its multi-family loan production through
seller-servicer programs administered by Fannie Mae and Freddie Mac, which
we intend to continue and expand prospectively.
See Note 2 to the Consolidated Financial
Statements, “Merger and Acquisition-Related Activity,” at Item 8.
“Financial Statements and Supplementary Data” for further
discussion of the acquisition including pro forma financial statement
disclosures.
Results of
Operations
Consolidated net income was $29.0 million, or
$1.36 per diluted share, for the year ended December 31, 1999 as compared
with $22.7 million, or $1.12 per diluted share, for 1998 and $14.0 million,
or $1.06 per diluted share, for 1997. The increases in net income and
earnings per diluted share, as compared with the respective prior periods,
were primarily driven by the continued expansion of our net interest margin
and higher noninterest income, largely as a result of our acquisitions. Our
results reflect the acquisitions of Franchise Mortgage Acceptance Company
and its wholly owned division Bankers Mutual effective November 1, 1999,
America First Eureka Holdings, Inc. effective January 2, 1998, Ultra
Funding, Inc. effective October 1, 1997, and Bay View Commercial Finance
Group effective April 1, 1997.
Contribution by Platform
Each of our business platforms contributes to
our overall profitability. Contribution by platform is defined as each
platform’s net interest income and noninterest income less each
platform’s allocated provision for losses on loans and leases, direct
general and administrative expenses, including certain direct expense
allocations, and other noninterest expense, including the amortization of
intangible assets.
In computing net interest income by platform,
funding costs are allocated to each platform based on the duration of its
interest-earning assets and auto-related operating leased assets and,
specifically, by matching these assets with interest-bearing liabilities
with similar durations. Accordingly, the Auto Platform’s and the
Commercial Platform’s funding costs were determined based upon our
average cost of transaction accounts for the appropriate period. The
Banking Platform’s and the Home Equity Platform’s funding costs
were determined based upon the average cost of our remaining funding
sources, including the noninterest expense associated with our Capital
Securities issued on December 21, 1998.
All indirect general and administrative
expenses not specifically identifiable with, or allocable to, our business
platforms are included in indirect corporate overhead. Indirect corporate
overhead includes both recurring items, such as our administrative and
support functions, and certain special mention items, as discussed
elsewhere herein.
Our prior period platform results were
revised to reflect the expanded number of business platforms and to reflect
the methodology discussed above. We continue to enhance our cost allocation
methodology and anticipate further enhancements during future periods.
Intercompany revenues and expenses are eliminated in the measurement of
platform contribution.
The following tables illustrate each platform
’s contribution for the periods indicated. The tables also illustrate
the reconciliation of total contribution by platform to our net income for
the periods indicated. Reconciling items generally include indirect
corporate overhead and income tax expense.
| |
|
For the Year
Ended December 31, 1999
|
| |
|
Banking
|
|
Home
Equity
|
|
Auto
|
|
Commercial
|
|
Total
|
| |
|
(Dollars in
thousands) |
| Net interest
income(1) |
|
$
97,579 |
|
|
$
33,008 |
|
|
$
24,944 |
|
|
$14,953 |
|
|
$170,484 |
|
Provision for
losses on loans and
leases |
|
—
|
|
|
(19,433 |
) |
|
(6,125 |
) |
|
(2,753 |
) |
|
(28,311 |
) |
| Noninterest
income(1)(2) |
|
24,775 |
|
|
142 |
|
|
65,218 |
|
|
1,397 |
|
|
91,532 |
|
Direct general and
administrative
expenses(1) |
|
(68,063 |
) |
|
(4,111 |
) |
|
(14,953 |
) |
|
(8,623 |
) |
|
(95,750 |
) |
| Leasing
expenses(2) |
|
—
|
|
|
—
|
|
|
(40,188 |
) |
|
—
|
|
|
(40,188 |
) |
Dividend expense
on Capital
Securities |
|
(7,518 |
) |
|
(1,417 |
) |
|
—
|
|
|
—
|
|
|
(8,935 |
) |
| Net income on real
estate owned |
|
238 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
238 |
|
| Amortization of
intangible assets |
|
(10,947 |
) |
|
—
|
|
|
(1,314 |
) |
|
(1,426 |
) |
|
(13,687 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contribution by
platform |
|
$
36,064 |
|
|
$
8,189 |
|
|
$
27,582 |
|
|
$
3,548 |
|
|
75,383 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indirect corporate
overhead(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,366 |
) |
| Income tax
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,053 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$
28,964 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year
Ended December 31, 1998
|
| |
|
Banking
|
|
Home
Equity
|
|
Auto
|
|
Commercial
|
|
Total
|
| |
|
(Dollars in
thousands) |
|
| Net interest
income |
|
$
93,796 |
|
|
$22,003 |
|
|
$
27,833 |
|
|
$10,969 |
|
|
$154,601 |
|
Provision for
losses on loans and
leases |
|
—
|
|
|
(3,545 |
) |
|
(5,569 |
) |
|
—
|
|
|
(9,114 |
) |
| Noninterest
income(2) |
|
16,621 |
|
|
217 |
|
|
13,300 |
|
|
934 |
|
|
31,072 |
|
Direct general and
administrative
expenses(1) |
|
(61,055 |
) |
|
(2,664 |
) |
|
(16,982 |
) |
|
(8,667 |
) |
|
(89,368 |
) |
| Leasing
expenses(2) |
|
—
|
|
|
—
|
|
|
(7,682 |
) |
|
—
|
|
|
(7,682 |
) |
Dividend expense
on Capital
Securities |
|
(210 |
) |
|
(34 |
) |
|
—
|
|
|
—
|
|
|
(244 |
) |
| Net income on real
estate owned |
|
131 |
|
|
—
|
|
|
4 |
|
|
105 |
|
|
240 |
|
| Amortization of
intangible assets |
|
(8,754 |
) |
|
—
|
|
|
(1,166 |
) |
|
(1,452 |
) |
|
(11,372 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contribution by
platform |
|
$
40,529 |
|
|
$15,977 |
|
|
$
9,738 |
|
|
$
1,889 |
|
|
68,133 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indirect corporate
overhead(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,199 |
) |
| Income tax
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,215 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$
22,719 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year
Ended December 31, 1997
|
| |
|
Banking
|
|
Home
Equity
|
|
Auto
|
|
Commercial
|
|
Total
|
| |
|
(Dollars in
thousands) |
| Net interest
income |
|
$
60,369 |
|
|
$3,183 |
|
|
$15,285 |
|
|
$8,499 |
|
|
$
87,336 |
|
| Provision for
losses on loans and leases |
|
(229 |
) |
|
—
|
|
|
(1,458 |
) |
|
(265 |
) |
|
(1,952 |
) |
| Noninterest
income(1) |
|
7,906 |
|
|
6 |
|
|
4,280 |
|
|
563 |
|
|
12,755 |
|
Direct general and
administrative
expenses(1) |
|
(47,346 |
) |
|
(424 |
) |
|
(8,706 |
) |
|
(6,411 |
) |
|
(62,887 |
) |
| Net income on real
estate owned |
|
1,128 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,128 |
|
| Amortization of
intangible assets |
|
(2,073 |
) |
|
—
|
|
|
(1,038 |
) |
|
(977 |
) |
|
(4,088 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contribution by
platform |
|
$
19,755 |
|
|
$2,765 |
|
|
$
8,363 |
|
|
$1,409 |
|
|
32,292 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indirect corporate
overhead(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,026 |
) |
| Income tax
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,245 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$
14,021 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts include
certain special mention items which are discussed at “Net Interest
Income and Net Interest Margin”, “Noninterest Income” and
“General and Administrative Expenses.” Special mention items
generally include income and expense items recognized during the period
that we believe are significant and/or unusual in nature and therefore
useful to you in evaluating our performance and trends. These items may
or may not be nonrecurring in nature.
|
(2)
|
The Auto Platform
commenced its leasing activities effective April 1, 1998.
|
A discussion of each of the significant
components of contribution by platform follows:
Net Interest Income and Net Interest Margin
Net interest income represents the difference
between interest earned on loans, leases and investments and interest paid
on funding sources, including deposits and borrowings, and has historically
been our principal source of revenue. Net interest margin is the amount of
net interest income expressed as a percentage of average interest-earning
assets.
Net interest income was $170.5 million for
the year ended December 31, 1999 as compared with $154.6 million for 1998
and $87.3 million for 1997. Net interest margin was 3.23% for the year
ended December 31, 1999 as compared with 3.03% for 1998 and 2.86% for 1997.
The increases in net interest income and net interest margin were
attributable to our strategic development into a commercial bank and the
related continuing shift from traditional mortgage-based assets to consumer
and commercial assets with higher risk-adjusted yields combined with a
decline in our funding costs.
The following table illustrates net interest
income and net interest margin, by platform, for the years
indicated:
| |
|
For the Year
Ended December 31,
|
| |
|
1999
|
|
1998
|
|
1997
|
| |
|
Net
Interest
Income
|
|
Net
Interest
Margin
|
|
Net
Interest
Income
|
|
Net
Interest
Margin
|
|
Net
Interest
Income
|
|
Net
Interest
Margin
|
| |
|
(Dollars in
thousands) |
| Banking
Platform |
|
$
97,579 |
|
2.56 |
% |
|
$
93,796 |
|
2.28 |
% |
|
$60,369 |
|
2.19 |
% |
| Home Equity
Platform |
|
33,008 |
|
4.88 |
|
|
22,003 |
|
5.15 |
|
|
3,183 |
|
4.83 |
|
| Auto
Platform(1) |
|
24,944 |
|
3.84 |
|
|
27,833 |
|
6.01 |
|
|
15,285 |
|
8.00 |
|
| Commercial
Platform(2) |
|
14,953 |
|
11.49 |
|
|
10,969 |
|
15.66 |
|
|
8,499 |
|
21.39 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$170,484 |
|
3.23 |
% |
|
$154,601 |
|
3.03 |
% |
|
$87,336 |
|
2.86 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Auto Platform
commenced its leasing activities effective April 1, 1998. The Auto
Platform’s net interest margin compression is largely attributable
to funding costs associated with the platform’s leasing activities.
The platform’s net interest margin presented above does not include
the revenue impact of its auto leasing activities, which was included in
noninterest income, but does include the associated funding
costs.
|
(2)
|
Excludes
asset-based participation loans included in the Banking
Platform.
|
The following table illustrates
interest-earning assets, excluding our auto-related operating leased
assets, by platform, as of the dates indicated:
| |
|
At December
31,
|
| |
|
1999
|
|
1998
|
| |
|
(Dollars in
thousands) |
| Banking
Platform |
|
$4,026,891 |
|
$3,816,993 |
| Home Equity
Platform |
|
678,735 |
|
657,148 |
| Auto
Platform(1) |
|
527,317 |
|
570,128 |
| Commercial
Platform(2) |
|
182,240 |
|
94,888 |
| |
|
|
|
|
|
Total |
|
$5,415,183 |
|
$5,139,157 |
| |
|
|
|
|
(1)
|
Amounts exclude
auto-related operating leased assets totaling $463.1 million at December
31, 1999 and $183.5 million at December 31, 1998.
|
(2)
|
Amounts exclude
asset-based commercial participation loans originated by the Commercial
Platform for the Banking Platform totaling $72.0 million at December 31,
1999 and $18.3 million at December 31, 1998.
|
The following table illustrates average
interest-earning assets, excluding our auto-related operating leased
assets, by platform, for the years indicated:
| |
|
Average
Balances for the Year Ended
December 31,
|
| |
|
1999
|
|
1998
|
|
1997
|
| |
|
(Dollars in
thousands) |
| Banking
Platform |
|
$3,805,153 |
|
$4,155,328 |
|
$2,758,019 |
| Home Equity
Platform |
|
676,149 |
|
412,530 |
|
65,896 |
| Auto
Platform(1) |
|
659,312 |
|
460,453 |
|
191,066 |
| Commercial
Platform(2) |
|
130,897 |
|
69,702 |
|
39,739 |
| |
|
|
|
|
|
|
|
Total |
|
$5,271,511 |
|
$5,098,013 |
|
$3,054,720 |
| |
|
|
|
|
|
|
(1)
|
Amounts exclude
auto-related operating leased assets beginning in April 1998. The average
balance of these assets was $332.0 million for the year ended December
31, 1999 and $65.8 million for the year ended December 31,
1998.
|
(2)
|
Amounts exclude
asset-based commercial participation loans originated by the Commercial
Platform for the Banking Platform beginning in June 1998. The average
balance of these loans was $49.0 million for the year ended December 31,
1999 and $5.9 million for the year ended December 31, 1998.
|
Banking Platform
The Banking Platform’s net interest
income was $97.6 million for the year ended December 31, 1999 as compared
with $93.8 million for 1998 and $60.4 million for 1997. The Banking Platform
’s net interest margin was 2.56% for the year ended December 31, 1999
as compared with 2.28% for 1998 and 2.19% for 1997.
The increase in net interest income for 1999,
as compared with 1998, was attributable to an increase in net interest
margin partially offset by a decline in average interest-earning assets.
The increase in net interest margin
was primarily due to lower funding costs. Our funding costs declined due to
an increase in lower cost transaction accounts, deposit pricing strategies,
a decline in the interest rate environment during the first half of 1999
and the managed run-off of higher cost certificates of deposit. The decline
in average interest-earning assets was due to real estate loan sales and
asset repayments exceeding asset originations and purchases. The Banking
Platform’s asset yields remained relatively constant as the impact of
the continued change-out of our balance sheet from relatively
lower-yielding mortgage-based assets to commercial assets with higher
risk-adjusted yields, including franchise loans, was offset by the
declining interest rate environment during the first six months of
1999.
The increase in net interest income for 1998,
as compared with 1997, was attributable to both an increase in average
interest-earning assets and an increase in net interest margin. The
increase in average interest-earning assets was largely a result of our
acquisition of America First Eureka Holdings, Inc. and its wholly owned
subsidiary EurekaBank, sometimes referred to as AFEH. The increase in net
interest margin was due to a decline in our funding costs partially offset
by lower asset yields. The decline in funding costs was due to an increase
in lower cost transaction accounts, our deposit pricing strategies, the
interest rate environment, and the run-off of jumbo and brokered
certificates of deposit. The decline in asset yields was a result of
various factors, including the impact of EurekaBank’s lower-yielding
portfolio of mortgage loans we acquired effective January 2, 1998, $200
million of lower-yielding mortgage loans we acquired in June 1998,
primarily to assist Bay View Bank in meeting its CRA requirements, and
repayments of higher-yielding mortgage loans and mortgage-backed
securities.
Home Equity Platform
The Home Equity Platform’s net interest
income was $33.0 million for the year ended December 31, 1999 as compared
with $22.0 million for 1998 and $3.2 million for 1997. The Home Equity
Platform’s net interest margin was 4.88% for the year ended December
31, 1999 as compared with 5.15% for 1998 and 4.83% for 1997.
The increase in net interest income for 1999,
as compared with 1998, was due to higher average interest-earning assets,
largely resulting from home equity loan purchases, partially offset by a
decrease in net interest margin. The decrease in net interest margin was
primarily due to lower asset yields, partially offset by lower funding
costs. The decrease in asset yields was associated with replacing high
loan-to-value home equity loans, which we began purchasing in August 1997,
with purchases of higher-quality, yet lower-yielding loans, including 100%
insured high loan-to-value home equity loans and conventional home equity
loans, that is loans with a combined loan-to-value ratio of less than
100%.
The increase in net interest income for 1998,
as compared with 1997, was due to higher average interest-earning assets
and an increase in net interest margin, due to both higher asset yields and
lower funding costs. The increases in average interest-earning assets and
asset yields were due to continued purchases of high loan-to- value home
equity loans with higher risk-adjusted yields.
Auto Platform
The Auto Platform’s net interest income
was $24.9 million for the year ended December 31, 1999 as compared with
$27.8 million for 1998 and $15.3 million for 1997. The Auto Platform’s
net interest margin was 3.84% for the year ended December 31, 1999 as
compared with 6.01% for 1998 and 8.00% for 1997.
The decrease in net interest income for 1999,
as compared with 1998, was due to a decrease in the net interest margin
partially offset by higher average interest-earning assets. The decrease in
net interest margin was primarily attributable to higher funding costs,
including the costs associated with the platform’s auto leasing
activities, as discussed below, and increases in the cost of our
transaction accounts. The increase in interest-earning assets was due to
continued originations and purchases of auto loans. The increase in net
interest income for 1998, as compared with 1997, was due to higher average
interest-earning assets partially offset by decreases in net interest
margin, as discussed above. The net interest margin for 1999, as compared
with 1998, was also negatively impacted by lower asset yields resulting
from the platform’s migration to higher-quality, but lower-yielding
loans and the yield compression associated with competition.
The Auto Platform’s net interest margin
excludes the revenue generated from operating leases. Because the auto
leases are accounted for as operating leases, the rental income and related
expenses, including depreciation expense, are reflected in noninterest
income and noninterest expense, respectively, in accordance with generally
accepted accounting principles, sometimes referred to as GAAP. As a result,
the Auto Platform’s net interest income and margin do not include the
revenue impact of our auto leasing activities, but do include the
associated funding costs. As the platform’s auto leasing activities
have continued to increase, the corresponding funding costs have also
continued to increase, negatively impacting net interest income and margin.
Additionally, the Auto Platform’s net interest margin does not reflect
the tax benefit associated with its leasing activities related to the
losses generated for income tax purposes during the early lease periods.
The yields associated with the Auto Platform’s leasing activities will
increase over time as the related asset is depreciated down to its residual
value. For a discussion of normalized net interest income and net interest
margin, which include the revenue impact of our auto leasing activities,
see “Non-GAAP Performance Measures—Normalized Net Interest Income
and Net Interest Margin.”
Commercial Platform
The Commercial Platform’s net interest
income was $15.0 million for the year ended December 31, 1999 as compared
with $11.0 million for 1998 and $8.5 million for 1997. The Commercial
Platform’s net interest margin was 11.49% for the year ended December
31, 1999 as compared with 15.66% for 1998 and 21.39% for 1997. This
platform was created as a result of our acquisition of Bay View Commercial
Finance Group effective April 1, 1997.
The increases in net interest income, as
compared with the respective prior periods, were due to increases in the
platform’s average interest-earning assets, attributable to continued
growth within the platform, partially offset by decreases in net interest
margin. The decreases in net interest margin were largely attributable to
most of the platform’s growth being comprised of asset-based loans and
equipment leases, which generate lower yields relative to the platform
’s factoring activities, combined with the yield compression
associated with competition. The platform’s net interest margin was
also negatively impacted by increases in the cost of our transaction
accounts.
Average Balance Sheet
The following table illustrates certain
information relating to our consolidated statements of financial condition
and reflects the average yields on interest-earning assets and average
rates on interest-bearing liabilities for the years indicated. Such yields
and rates are derived by dividing interest income or interest expense by
the average balances of interest-earning assets or interest-bearing
liabilities, respectively, for the years indicated. Average balances of
interest-earning assets and interest-bearing liabilities were calculated by
averaging the relevant month-end amounts for the respective
years.
| |
|
For the Year
Ended December 31,
|
| |
|
1999
|
|
1998
|
|
1997
|
| |
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
| |
|
(Dollars in
thousands) |
|
|
| ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-earning
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$4,444,079 |
|
|
$369,841 |
|
8.32 |
% |
|
$4,174,976 |
|
$347,086 |
|
8.32 |
% |
|
$2,369,200 |
|
$197,898 |
|
8.35 |
% |
|
Mortgage-backed
securities(1) |
|
583,286 |
|
|
37,376 |
|
6.41 |
|
|
743,545 |
|
48,225 |
|
6.50 |
|
|
531,493 |
|
34,317 |
|
6.46 |
|
|
Investments(1) |
|
244,146 |
|
|
14,439 |
|
5.91 |
|
|
179,492 |
|
11,052 |
|
6.17 |
|
|
154,027 |
|
10,029 |
|
6.51 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
interest-earning assets |
|
5,271,511 |
|
|
421,656 |
|
8.00 |
|
|
5,098,013 |
|
406,363 |
|
7.98 |
|
|
3,054,720 |
|
242,244 |
|
7.93 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
assets |
|
611,301 |
|
|
|
|
|
|
|
394,623 |
|
|
|
|
|
|
76,674 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
assets |
|
$5,882,812 |
|
|
|
|
|
|
|
$5,492,636 |
|
|
|
|
|
|
$3,131,394 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$3,462,048 |
|
|
142,427 |
|
4.11 |
|
|
$3,375,777 |
|
149,656 |
|
4.44 |
|
|
$1,646,683 |
|
76,484 |
|
4.64 |
|
|
Borrowings(2) |
|
1,882,278 |
|
|
108,745 |
|
5.78 |
|
|
1,663,972 |
|
102,106 |
|
6.15 |
|
|
1,242,442 |
|
78,424 |
|
6.31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
interest-bearing liabilities |
|
5,344,326 |
|
|
251,172 |
|
4.70 |
|
|
5,039,749 |
|
251,762 |
|
5.00 |
|
|
2,889,125 |
|
154,908 |
|
5.36 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
liabilities |
|
124,640 |
|
|
|
|
|
|
|
66,062 |
|
|
|
|
|
|
50,834 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
liabilities |
|
5,468,966 |
|
|
|
|
|
|
|
5,105,811 |
|
|
|
|
|
|
2,939,959 |
|
|
|
|
|
| Stockholders
’ equity |
|
413,846 |
|
|
|
|
|
|
|
386,825 |
|
|
|
|
|
|
191,435 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’
equity |
|
$5,882,812 |
|
|
|
|
|
|
|
$5,492,636 |
|
|
|
|
|
|
$3,131,394 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income/net interest
spread |
|
|
|
|
$170,484 |
|
3.30 |
% |
|
|
|
$154,601 |
|
2.98 |
% |
|
|
|
$
87,336 |
|
2.57 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest-earning assets
(liabilities) |
|
$
(72,815 |
) |
|
|
|
|
|
|
$
58,264 |
|
|
|
|
|
|
$
165,595 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest
margin(3) |
|
|
|
|
|
|
3.23 |
% |
|
|
|
|
|
3.03 |
% |
|
|
|
|
|
2.86 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Average
balances and yields for securities and other investments classified
as available-for-sale are based on historical amortized
cost.
|
(2)
|
Interest
expense for borrowings includes interest expense on interest rate
swaps of $3.1 million, $2.4 million and $2.8 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Interest
expense for borrowings excludes dividend expense on our Capital
Securities.
|
(3)
|
Net interest
income divided by average interest-earning assets.
|
Interest Income
Our interest income on loans and
leases was $369.8 million for the year ended December 31, 1999 as
compared with $347.1 million for 1998 and $197.9 million for 1997. The
average yield on loans and leases was 8.32% for the years ended
December 31, 1999 and 1998 as compared with 8.35% for 1997.
The increase in interest income on
loans and leases for 1999, as compared with 1998, was due primarily to
higher average balances of loans and leases resulting from loan and
lease originations and purchases, primarily consumer and commercial
loans and leases, exceeding repayments and sales. The average yield on
loans and leases remained relatively unchanged as our ability to
replace lower-yielding mortgage-based assets with higher-yielding
consumer and commercial assets, including franchise loans, was offset
by a combination of factors. These factors included the impact of the
declining interest rate environment during the first six months of
1999, the yield compression associated with competition, higher premium
amortization attributable to higher prepayment speeds on our high
loan-to-value home equity loans, and our continued emphasis on
higher-quality loans and leases.
The increase in interest income on
loans and leases for 1998, as compared with 1997, was attributable to
higher average balances of loans and leases partially offset by a
slight decrease in yield on loans and leases. The increase in average
balances of loans and leases was largely a result of the acquisitions
of AFEH in 1998 and Ultra Funding, Inc. and Bay View Commercial Finance
Group in 1997, combined with internally generated platform loan growth.
The slight decrease in yield on loans and leases was due to a
combination of factors, including the impact of the declining interest
rate environment, the yield compression associated with competition,
and our continued emphasis on higher-quality loans and leases,
partially offset by our ability to replace relatively lower-yielding
mortgage-based assets with higher-yielding consumer and commercial
assets.
The following table illustrates
interest income on loans and leases, by platform, for the years
indicated:
|
|
|
Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
|
|
(Dollars in
thousands) |
| Banking
Platform |
|
$229,713 |
|
7.70 |
% |
|
$248,665 |
|
7.69 |
% |
|
$162,309 |
|
7.81 |
% |
| Home Equity
Platform |
|
65,600 |
|
9.70 |
|
|
42,351 |
|
10.27 |
|
|
6,646 |
|
10.09 |
|
| Auto
Platform |
|
55,429 |
|
8.47 |
|
|
42,993 |
|
9.44 |
|
|
19,328 |
|
10.46 |
|
| Commercial
Platform(1) |
|
19,099 |
|
14.59 |
|
|
13,077 |
|
18.76 |
|
|
9,615 |
|
24.20 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$369,841 |
|
8.32 |
% |
|
$347,086 |
|
8.32 |
% |
|
$197,898 |
|
8.35 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes
asset-based participation loans included in the Banking
Platform.
|
The Banking Platform’s average
loan yield was 7.70% for the year ended December 31, 1999 as compared
with 7.69% for 1998 and 7.81% for 1997. The platform’s average
yield remained relatively constant for 1999, as compared with 1998, as
the impact of the continued change-out of our balance sheet from
relatively lower-yielding mortgage-based loans to commercial loans and
leases with higher risk-adjusted yields, including franchise loans, was
offset by the declining interest rate environment during the first six
months of 1999. The decrease in the platform’s average loan yield
for 1998, as compared with 1997, was due to various factors, including
the impact of EurekaBank’s lower-yielding portfolio of mortgage
loans, acquired effective January 2, 1998, combined with the purchase
of $200 million of lower-yielding mortgage loans in June 1998,
primarily to assist Bay View Bank in meeting its CRA obligations, and
the continued repayments of higher-yielding mortgage loans.
The Home Equity Platform’s
average loan yield was 9.70% for the year ended December 31, 1999, as
compared with 10.27% for 1998 and 10.09% for 1997. The decrease in the
platform’s average loan yield for 1999, as compared with 1998, was
primarily due to our emphasis on higher-quality, yet lower-yielding,
home equity loans, including 100% insured high loan-to-value home
equity loans, combined with continued origination of lower-yielding
conventional home equity loans through our branches and higher premium
amortization attributable to higher prepayment speeds on our high
loan-to-value home equity loans. The increase in the platform’s
average loan yield for 1998, as compared with 1997, was due to
purchases of high loan-to-value home equity loans with higher
risk-adjusted yields.
The Auto Platform’s average
loan yield was 8.47% for the year ended December 31, 1999 as compared
with 9.44% for 1998 and 10.46% for 1997. The decreases in the platform
’s average loan yield, as compared with the respective prior
periods, were primarily due to lower asset yields on auto loan
originations and purchases. The lower yields were largely attributable
to the yield compression associated with increased competition within
the industry along with the platform’s continuing migration to
higher-quality, yet lower-yielding loans.
The Commercial Platform’s
average loan and lease yield was 14.59% for the year ended December 31,
1999 as compared with 18.76% for 1998 and 24.20% for 1997. The
decreases in the platform’s average loan and lease yield, as
compared with the respective prior periods, were a result of most of
the platform’s growth being comprised of asset-based loans and
equipment leases which generate lower yields relative to the platform
’s factoring activities combined with yield compression associated
with competition.
|
Mortgage-Backed Securities
|
Interest income on our
mortgage-backed securities was $37.4 million for the year ended
December 31, 1999 as compared with $48.2 million for 1998 and $34.3
million for 1997. The average yield on mortgage-backed securities was
6.41% for the year ended December 31, 1999 as compared with 6.50% for
1998 and 6.46% for 1997. The decreases in interest income and yield on
mortgage-backed securities for 1999, as compared with 1998, were due to
continued repayments of higher-yielding mortgage-backed securities
partially offset by purchases of investment grade collateralized
mortgage obligations, or CMOs during the latter half of 1998 and
Government National Mortgage Association mortgage-backed securities
during the second quarter of 1999. The increases in interest income and
yield on mortgage-backed securities for 1998, as compared with 1997,
were primarily attributable to the acquisition of EurekaBank’s
mortgage-backed securities portfolio, which reflected yields higher
than Bay View Bank’s pre-acquisition mortgage-backed securities
portfolio, combined with purchases of higher-yielding CMOs during 1998,
as discussed above, partially offset by prepayments of higher-yielding
mortgage-backed securities.
Interest and dividend income on our
investment securities was $14.4 million for the year ended December 31,
1999 as compared with $11.1 million for 1998 and $10.0 million for
1997. The average yield on investment securities was 5.91% for the year
ended December 31, 1999 as compared with 6.17% for 1998 and 6.51% for
1997. The increase in interest and dividend income on investment
securities for 1999, as compared with 1998, was largely due to higher
average balances resulting from our liquidity and investment management
activities partially offset by a decrease in average yield related to
the impact of changes in the interest rate environment. The increase in
interest and dividend income on investment securities for 1998, as
compared with 1997, was primarily due to higher average short-term
investment balances related to our acquisition of AFEH partially offset
by lower yields due to the declining interest rate
environment.
Interest Expense
Interest expense on our deposits
was $142.4 million for the year ended December 31, 1999 as compared
with $149.7 million for 1998 and $76.5 million for 1997. The average
cost of deposits was 4.11% for the year ended December 31, 1999 as
compared with 4.44% for 1998 and 4.64% for 1997.
The decrease in interest expense on
deposits for 1999, as compared with 1998, was due to a decrease in the
cost of deposits partially offset by higher average deposit balances.
The decrease in the cost of deposits resulted from a combination of
factors, including our continued emphasis on lower-cost transaction
accounts, our deposit pricing strategies and the declining interest
rate environment during the first six months of 1999, partially offset
by an increase in higher-cost brokered certificates of deposit. The
increase in average deposit balances was due to higher transaction
account balances and brokered certificates of deposit balances
partially offset by lower retail certificates of deposit.
The increase in interest expense on
deposits for 1998, as compared with 1997, was due to the acquisition of
EurekaBank’s deposit portfolio, partially offset by a decrease in
deposit costs due to an increase in lower-cost transaction accounts,
deposit pricing strategies, the declining interest rate environment
during the year, and the run-off of higher cost jumbo and brokered
certificates of deposits. The increase in transaction accounts and
run-off of higher cost jumbo and brokered certificates of deposits were
consistent with the Banking Platform’s strategic objective during
1998 to grow lower-cost transaction accounts, instead of higher-cost
certificates of deposit, as a source of our funding.
The following table summarizes our
deposit costs by type and our transaction accounts as a percentage of
retail deposits for the periods indicated:
|
|
|
For the
Months Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
| Transaction
accounts |
|
3.26 |
% |
|
3.15 |
% |
|
2.97 |
% |
| Retail
certificates of deposit |
|
4.92 |
|
|
5.20 |
|
|
5.51 |
|
| |
|
|
|
|
|
|
|
|
|
| Total retail
deposits |
|
4.07 |
|
|
4.20 |
|
|
4.65 |
|
| Brokered
certificates of deposit |
|
6.18 |
|
|
—
|
|
|
5.82 |
|
| |
|
|
|
|
|
|
|
|
|
| Total
deposits |
|
4.30 |
% |
|
4.20 |
% |
|
4.71 |
% |
| |
|
|
|
|
|
|
|
|
|
| Transaction
accounts as a percentage of retail deposits |
|
51.0 |
% |
|
49.8 |
% |
|
34.6 |
% |
| |
|
|
|
|
|
|
|
|
|
Interest expense on our borrowings,
excluding the Capital Securities issued in December 1998, was $108.7
million for the year ended December 31, 1999 as compared with $102.1
million for 1998 and $78.4 million for 1997. The average cost of
borrowings was 5.78% for the year ended December 31, 1999 as compared
with 6.15% for 1998 and 6.31% for 1997.
The increase in interest expense on
borrowings for 1999, as compared with 1998, was primarily due to higher
average borrowing balances. Higher balances were required to fund the
growth in our balance sheet. This volume-related increase in interest
expense was partially offset by a decline in the cost of borrowings,
attributable to our refinancing and extending of maturities on a
significant portion of our Federal Home Loan Bank advances in October
1998 and the maturity of $50 million of 8.42% Senior Debentures on June
1, 1999. The impact of these factors was partially offset by the
utilization of new funding sources during 1999, including a LIBOR-based
warehouse line with an all-in cost of approximately 7.92% and $50
million of 10% Subordinated Notes due 2009 issued by Bay View Bank on
August 18, 1999. A significant portion of our Federal Home Loan Bank
advances repriced in October 1999 and were therefore impacted by the
recent rising interest rate environment. As our level
of Federal Home Loan Bank advance borrowing capacity continues to decline
due to the decrease in eligible mortgage-based collateral, we will
continue to become more dependent on other funding sources, such as
deposits and warehouse lines, to fund our balance sheet.
The increase in interest expense on
borrowings for 1998, as compared with 1997, was primarily due to higher
average balances resulting from funding strategies we employed
subsequent to our acquisition of AFEH, combined with a full year of
interest expense on $100 million in Subordinated Notes issued in August
1997, partially offset by a decrease in borrowing costs primarily due
to lower market interest rates on Federal Home Loan Bank advances due
to the declining interest rate environment.
The following tables illustrate the
changes in net interest income due to changes in the rate and volume of
our interest-earning assets and interest-bearing liabilities. The
variances include the effects of our acquisitions. Changes in rate and
volume which cannot be segregated (i.e., changes in weighted-average
interest rate multiplied by average portfolio balance) have been
allocated proportionately to the change in rate and the change in
volume.
|
|
|
For the
Year Ended December 31,
1999 vs. 1998
|
|
|
|
Rate
Variance
|
|
Volume
Variance
|
|
Total
Variance
|
|
|
|
(Dollars in
thousands) |
| Interest
income: |
|
|
|
|
|
|
|
|
|
|
Loans and
leases |
|
$
— |
|
|
$
22,755 |
|
|
$
22,755 |
|
|
Mortgage-backed
securities |
|
(655 |
) |
|
(10,194 |
) |
|
(10,849 |
) |
|
Investments |
|
(449 |
) |
|
3,836 |
|
|
3,387 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(1,104 |
) |
|
16,397 |
|
|
15,293 |
|
| |
|
|
|
|
|
|
|
|
|
| Interest
expense: |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
(11,017 |
) |
|
3,788 |
|
|
(7,229 |
) |
|
Borrowings |
|
(5,623 |
) |
|
12,262 |
|
|
6,639 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(16,640 |
) |
|
16,050 |
|
|
(590 |
) |
| |
|
|
|
|
|
|
|
|
|
| Change in net
interest income |
|
$
15,536 |
|
|
$
347 |
|
|
$
15,883 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Year Ended December 31,
1998 vs. 1997
|
|
|
|
Rate
Variance
|
|
Volume
Variance
|
|
Total
Variance
|
|
|
|
(Dollars in
thousands) |
| Interest
income: |
|
|
|
|
|
|
|
|
|
|
Loans and
leases |
|
$
(707 |
) |
|
$149,895 |
|
|
$149,188 |
|
|
Mortgage-backed
securities |
|
213 |
|
|
13,695 |
|
|
13,908 |
|
|
Investments |
|
(472 |
) |
|
1,495 |
|
|
1,023 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(966 |
) |
|
165,085 |
|
|
164,119 |
|
| |
|
|
|
|
|
|
|
|
|
| Interest
expense: |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
(2,324 |
) |
|
75,496 |
|
|
73,172 |
|
|
Borrowings |
|
(1,913 |
) |
|
25,595 |
|
|
23,682 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(4,237 |
) |
|
101,091 |
|
|
96,854 |
|
| |
|
|
|
|
|
|
|
|
|
| Change in net
interest income |
|
$
3,271 |
|
|
$
63,994 |
|
|
$
67,265 |
|
| |
|
|
|
|
|
|
|
|
|
Provision For Losses on Loans and Leases
The provision for losses on loans
and leases was $28.3 million for the year ended December 31, 1999 as
compared with $9.1 million for 1998 and $2.0 million for 1997. The
increases in the provision for losses on loans and leases were
primarily a result of our acquisitions combined with our internal loan
and lease growth, principally in consumer and commercial loans and
leases. The provision levels reflect the continued change-out of the
balance sheet to consumer and commercial assets with higher gross
yields relative to traditional mortgage assets, but also higher
charge-offs and therefore higher provision expense. Higher net
charge-offs in the Home Equity Platform for 1999, as compared with
1998, related to uninsured high loan-to-value home equity loans. We do
not anticipate increasing our exposure to uninsured high loan-to-value
home equity loans beyond their current levels. Higher net charge-offs
in the Commercial Platform for 1999, as compared with 1998, related to
a seasoning of the commercial loan and lease portfolio. See
“Balance Sheet Analysis—Allowance for Loan and Lease Losses
” for further discussion.
Noninterest Income
Noninterest income was $91.5
million for the year ended December 31, 1999 as compared with $31.1
million for 1998 and $12.8 million for 1997. Noninterest income
included net gains on sales of loans and leases and securities of $10.1
million for the year ended December 31, 1999, $1.1 million for 1998 and
$925,000 for 1997.
The increase in noninterest income
for 1999, as compared with 1998, was largely attributable to higher
leasing income in the Auto Platform resulting from the continued growth
in our auto leasing activities which began in April 1998, combined with
higher net gains on the securitization and/or sale of loans and
increases in the Banking Platform’s account fees, loan fees and
charges and investment sales commissions. Net gains on the
securitization and/or sale of loans included a $5.2 million gain in the
Auto Platform from our $247 million auto loan securitization in
December 1999 and $4.9 million in net gains on loan sales in the
Banking Platform. The Banking Platform’s net gains were comprised
of $3.4 million from the sales of single-family, multi-family and home
equity loans and $1.5 million from Bankers Mutual’s sale of
multi-family loans into the secondary market. Noninterest income for
1999 also included a $1.1 million refund resulting from a favorable tax
ruling.
The increase in noninterest income
for 1998, as compared with 1997, was attributable to various factors,
including higher account fees and investment product sales commissions
related to the acquisition of AFEH, higher loan prepayment fees and
higher leasing income. Net gains on the sales of securities for the
year ended December 31, 1998 reflected approximately $2.0 million in
gains on sales of mortgage-backed securities and a $940,000 loss during
the third quarter of 1998 on the settlement of forward sale contracts
relating to mortgage-backed securities. In January 1997, Bay View
Credit securitized and sold $253 million of motor vehicle loans and
recognized a gain of $925,000 representing the improvement in the fair
value of the loans as a result of changes in market interest rates
between the acquisition date and the sale date.
Through our acquisition of FMAC, we
also acquired two large off-balance sheet servicing portfolios relating
to FMAC’s franchise loans and Bankers Mutual’s multi-family
loans. We expect each servicing portfolio to contribute a significant
amount of fees to our noninterest income. FMAC’s servicing income
for November and December of 1999 was $341,000 on a franchise loan
servicing portfolio totaling $2.2 billion at December 31, 1999. Bankers
Mutual’s servicing income for November and December of 1999 was
$169,000 on a mortgage loan servicing portfolio totaling $3.2 billion
at December 31, 1999.
Noninterest Expense
|
General and
Administrative
|
General and administrative expenses
for the year ended December 31, 1999 were $117.1 million as compared
with $113.6 million for 1998 and $71.9 million for 1997. Excluding
special mention items, which we discuss below, the increase in general
and administrative expenses for 1999, as compared with 1998, was
primarily related to the incremental general and administrative
expenses associated with our acquisition of
FMAC, increases associated with inflationary pressures, including annual
salary increases, and our continued business growth. During 1999, we
were able to significantly offset inflationary pressures by effectively
implementing various cost savings initiatives and other operating
efficiencies. Going forward, we will continue to focus on identifying
opportunities to realize additional operating efficiencies and cost
savings. The increases in general and administrative expenses for 1998,
as compared with 1997, were largely a result of our growth, including
our acquisitions of AFEH in 1998 and Ultra Funding, Inc. and Bay View
Commercial Finance Group in 1997, combined with inflationary pressures,
including annual salary increases.
Our general and administrative
expenses for the year ended December 31, 1999 included $5.3 million in
special mention items, as compared with $10.4 million in special
mention items for 1998 and $8.8 million for 1997. Special mention items
generally include items recognized during the period that we believe
are significant and/or unusual in nature and therefore useful to you in
evaluating our performance and trends. These items may or may not be
nonrecurring in nature.
Special mention items for 1999
included approximately $1.1 million in severance payments, $1.0 million
in acquisition and integration costs (largely FMAC-related), $779,000
in Auto Platform restructuring charges, $705,000 in third-party Year
2000 compliance-related costs, and $598,000 in costs associated with
repurchasing out-of-the-money stock options for possible future
reissuance. Special mention items for 1999 also included approximately
$377,000 in collection-based fees associated with the previously
mentioned $1.1 million state tax refund, $278,000 in costs associated
with a debt offering which we did not consummate, $239,000 in costs
associated with branch relocations and closures, and $180,000 in
initial fees related to the listing of our securities on the New York
Stock Exchange.
Special mention items for 1998
included approximately $6.9 million in acquisition and integration
expenses related to our acquisition of AFEH, $1.35 million in expenses
related to the cancellation of our proposed acquisition of PSB Lending
Corporation, $814,000 in Auto Platform restructuring charges, $600,000
for a legal settlement related to the termination of a third-party data
processing service contract, $253,000 in third-party Year 2000
compliance related costs, $240,000 in branch closure expenses, and
$233,000 in other expenses.
Special mention items for 1997
included approximately $7.4 million in pre-merger charges related to
the acquisition of AFEH, which were comprised of approximately $5.8
million in related systems, operations and reengineering projects, a
$1.1 million payment to our Senior Debenture holders for debt covenant
modifications and a $450,000 write-off of deferred expenses related to
a shelf registration statement. Special mention items for 1997 also
included approximately $1.2 million in charges related to the expansion
and reorganization of the Auto and Commercial Platforms and an $800,000
expense accrual for long-term incentive plan awards due to an increase
in our stock price. The impact of these items was partially offset by a
$650,000 benefit associated with the decision to remain with the
current data processor for Bay View Bank and EurekaBank.
The following table illustrates
general and administrative expenses, by platform, for the periods
indicated:
|
|
|
For the
Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in
thousands) |
| Banking
Platform(1) |
|
$
68,063 |
|
$
61,055 |
|
$47,346 |
| Home Equity
Platform |
|
4,111 |
|
2,664 |
|
424 |
| Auto
Platform |
|
14,953 |
|
16,982 |
|
8,706 |
| Commercial
Platform |
|
8,623 |
|
8,667 |
|
6,411 |
| |
|
|
|
|
|
|
| Subtotal |
|
95,750 |
|
89,368 |
|
62,887 |
| Indirect
corporate overhead(2) |
|
21,366 |
|
24,199 |
|
9,026 |
| |
|
|
|
|
|
|
|
Total |
|
$117,116 |
|
$113,567 |
|
$71,913 |
| |
|
|
|
|
|
|
(1)
|
Amount
includes $9.5 million in incremental FMAC general and administrative
expenses for the year ended December 31, 1999.
|
(2)
|
Amount
represents indirect corporate expenses not specifically identifiable
with, or allocable to, our business platforms.
|
The following table illustrates
general and administrative expenses, excluding the special mention
items as previously discussed, by platform, for the periods
indicated:
|
|
|
Excluding
Special Mention Items
for the Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in
thousands) |
| Banking
Platform(1) |
|
$
66,275 |
|
$
56,232 |
|
$46,093 |
| Home Equity
Platform |
|
4,111 |
|
2,664 |
|
424 |
| Auto
Platform |
|
13,664 |
|
16,168 |
|
8,752 |
| Commercial
Platform |
|
8,483 |
|
8,667 |
|
5,523 |
| |
|
|
|
|
|
|
| Subtotal |
|
92,533 |
|
83,731 |
|
60,792 |
| Indirect
corporate overhead(2) |
|
19,280 |
|
19,470 |
|
2,326 |
| |
|
|
|
|
|
|
|
Total |
|
$111,813 |
|
$103,201 |
|
$63,118 |
| |
|
|
|
|
|
|
(1)
|
Amount
includes $8.9 million in FMAC general and administrative expenses,
excluding special mention items, for the year ended December 31,
1999.
|
(2)
|
Amount
represents indirect corporate expenses not specifically identifiable
with, or allocable to, our business platforms.
|
Banking Platform
The increase in the Banking Platform
’s general and administrative expenses, excluding special mention
items, for 1999, as compared with 1998, was primarily due to $8.9
million in incremental general and administrative expenses related to
FMAC, platform growth and inflationary pressures, including annual
salary increases, partially offset by cost savings initiatives and
efficiencies. The increase in the Banking Platform’s general and
administrative expenses, excluding special mention items, for 1998, as
compared with 1997, was largely attributable to the acquisition of
AFEH, continued growth in the platform and inflationary pressures,
including annual salary increases.
Home Equity
Platform
The increases in the Home Equity
Platform’s general and administrative expenses, excluding special
mention items, as compared with the respective prior periods, were
directly attributable to the increased costs associated with the
platform’s growth during these periods.
Auto Platform
The decrease in the Auto Platform
’s general and administrative expenses, excluding special mention
items, for 1999, as compared with 1998, was due to efficiencies
realized from restructuring and consolidating operations of the
platform, partially offset by the impact of platform growth and
inflationary pressures. The increase in the Auto Platform’s
general and administrative expenses, excluding special mention items,
for 1998, as compared with 1997, was attributable to continued growth
in the platform, including the acquisition of Ultra Funding, Inc. in
October 1997, our auto leasing activities which began in April 1998,
additional allocations of certain indirect general and administrative
expenses, and inflationary pressures.
Commercial Platform
The decrease in the Commercial
Platform’s general and administrative expenses, excluding special
mention items, for 1999, as compared with 1998, was due to cost savings
initiatives and efficiencies, partially offset by the impact of
platform growth and inflationary pressures. The increase in the
Commercial Platform’s general and administrative expenses,
excluding special mention items, for 1998, as compared with 1997, was
largely the
result of the platform being created with the acquisition of Bay View
Commercial Finance Group in April 1997 combined with continued growth
in the platform, including the expansion of the asset-based lending
segment of the platform, additional allocations of certain indirect
general and administrative expenses, and inflationary
pressures.
The following table illustrates the
ratio of general and administrative expenses to average
interest-earning assets, including our auto-related operating leased
assets and auto-related securitized assets, by platform, for the
periods indicated. The fluctuations in the general and administrative
expense ratios are largely driven by the fluctuations in general and
administrative expenses as previously discussed.
|
|
|
For the
Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in
thousands) |
| General and
administrative expenses |
|
$
117,116 |
|
|
$
113,567 |
|
|
$
71,913 |
|
Average total
assets, including auto-related securitized
assets |
|
$5,955,213 |
|
|
$5,607,221 |
|
|
$3,328,281 |
|
| |
|
|
|
|
|
|
|
|
|
General and
administrative expenses to average total
assets, including auto-related
securitized assets |
|
1.97 |
% |
|
2.03 |
% |
|
2.16 |
% |
| |
|
|
|
|
|
|
|
|
|
The following table illustrates the
ratio of general and administrative expenses to average
interest-earning assets, including our auto-related operating leased
assets and auto-related securitized assets, by platform, on an
annualized basis for the periods indicated:
|
|
|
For the
Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
| Banking
Platform |
|
1.79 |
% |
|
1.47 |
% |
|
1.72 |
% |
| Home Equity
Platform |
|
0.61 |
% |
|
0.65 |
% |
|
0.64 |
% |
| Auto
Platform |
|
1.41 |
% |
|
2.65 |
% |
|
2.24 |
% |
| Commercial
Platform |
|
6.59 |
% |
|
12.43 |
% |
|
16.13 |
% |
Efficiency Ratio
Another measure that management
uses to monitor our level of general and administrative expenses is the
efficiency ratio. The efficiency ratio is calculated by dividing the
amount of general and administrative expenses by operating revenues,
defined as net interest income, as adjusted to include expenses
associated with the Capital Securities, the excess of our
leasing-related rental income over leasing-related depreciation
expense, and other noninterest income, excluding securities gains and
losses. Effective November 1, 1999, in connection with our acquisition
of FMAC, gains and losses from loan sales and securitizations are
included in operating revenues as this will be a recurring operating
activity. 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:
|
|
|
For the
Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in
thousands) |
| General and
administrative expenses |
|
$117,116 |
|
|
$113,567 |
|
|
$
71,913 |
|
| Operating
revenues, as defined |
|
$215,112 |
|
|
$177,785 |
|
|
$100,091 |
|
| |
|
|
|
|
|
|
|
|
|
| Efficiency
ratio |
|
54.4 |
% |
|
63.9 |
% |
|
71.9 |
% |
| |
|
|
|
|
|
|
|
|
|
The improvement in the efficiency
ratio for 1999, as compared with 1998, was due to higher net interest
income, higher net leasing-related rental income, and higher other
noninterest income, including the $1.1 million state tax refund
recognized during the first quarter of 1999, partially offset by higher
general and administrative
expenses and the expenses associated with our Capital Securities. The
improvement in the efficiency ratio for 1998, as compared with 1997,
was largely due to efficiencies resulting from our acquisition of
AFEH.
Capital Securities
On December 21, 1998, we issued $90
million in Capital Securities through Bay View Capital I, a business
trust formed to issue the securities. The Capital Securities, which
were sold in an underwritten public offering, pay quarterly cumulative
cash distributions at an annual rate of 9.76% of the liquidation value
of $25 per share. Dividend expense on the Capital Securities was $8.9
million for the year ended December 31, 1999 as compared with $244,000
for the year ended December 31, 1998.
Leasing Expense
Leasing expense represents expenses
related to our auto leasing activities which began in April 1998.
Because the leases are accounted for as operating leases, the
corresponding assets are capitalized and depreciated to their estimated
residual values over their lease terms. This depreciation expense is
included in leasing expenses, along with the amortization of
capitalized initial direct lease costs. Leasing expenses for the year
ended December 31, 1999 were $40.2 million as compared with $7.7
million for the year ended December 31, 1998.
Real Estate Owned
Income from our real estate loan
operations and our net losses or recoveries on real estate owned were a
combined $238,000 for the year ended December 31, 1999 as compared with
$240,000 for 1998 and $1.1 million for 1997. The decrease for 1998, as
compared with 1997, was primarily due to higher real estate owned
balances in 1997, resulting in higher gains on sales and higher income
from operations.
Amortization of Intangible
Assets
Amortization expense related to
intangible assets was $13.7 million for the year ended December 31,
1999 as compared with $11.4 million for 1998 and $4.1 million for 1997.
The increases in amortization of intangible assets were due to the
additional amortization of goodwill and core deposit intangibles
generated in conjunction with our aforementioned acquisitions, all of
which were accounted for under the purchase method of
accounting.
Income Taxes
Income tax expense was $25.1
million for the year ended December 31, 1999 as compared with $21.2
million for 1998 and $9.2 million for 1997. Our effective tax rate was
46.4% for 1999 as compared with 48.3% for 1998 and 39.7% for 1997. The
decrease in the effective tax rate for 1999, as compared with 1998, was
primarily due to a decrease in the impact of nondeductible goodwill
amortization resulting from a higher level of pre-tax income. The
increase in the effective income tax rate for 1998, as compared with
1997, was primarily due to an increase in nondeductible goodwill
amortization.
Non-GAAP
Performance Measures
The following measures of earnings
excluding amortization of intangible assets, normalized net interest
income and normalized net interest margin, and their corresponding
ratios, are not measures of performance in accordance with GAAP. These
measures should not be considered alternatives to net income, net
interest income and net interest margin as indicators of our operating
performance. These measures are included because we believe they are
useful tools to assist you in assessing our performance and trends.
These measures may not be comparable to similarly titled measures
reported by other companies.
Earnings Excluding Amortization of Intangible
Assets
Earnings excluding amortization of
intangible assets represent net income excluding charges related to the
amortization of intangible assets, largely goodwill. This illustration
is intended to approximate what our earnings would have been excluding
the non-cash expense associated with amortization of goodwill and other
intangible assets generated from our acquisitions, all of which have
been accounted for under the purchase method of accounting.
Goodwill is generated from
acquisitions accounted for under the purchase method of accounting.
Under the purchase method of accounting, the assets acquired and
liabilities assumed are recorded at their fair values. The excess of
the consideration paid for the acquisition, including certain
acquisition-related costs, over the fair value of net assets acquired
is recorded as goodwill. This goodwill is then amortized as an expense
in the acquiring company’s income statement over a period not
exceeding 40 years, and generally not exceeding 25 years for financial
institutions.
The purchase method of accounting
differs significantly from the pooling-of-interests method of
accounting for acquisitions. Under the pooling-of-interests method of
accounting, the assets and liabilities of the company being acquired
are combined with the assets and liabilities of the acquiring company
at their recorded cost and as a result, no goodwill is generated. As no
goodwill is generated, a company that has accounted for its
acquisitions under the pooling-of-interests method of accounting incurs
no goodwill amortization expense.
The purchase and the
pooling-of-interests methods of accounting are not alternatives for
accounting for acquisitions. Instead, generally accepted accounting
principles prescribe which method must be applied depending upon the
characteristics of the underlying acquisition. Our acquisitions of
FMAC, AFEH, Ultra Funding, Inc., Bay View Commercial Finance Group, and
Bay View Credit were all accounted for under the purchase method of
accounting.
As a result of the two distinct
methods of accounting for acquisitions discussed above, it may be
difficult for investors and other interested parties to compare the
operating results of companies that have accounted for acquisitions
under the purchase method of accounting with companies that have
accounted for acquisitions under the pooling-of-interests method of
accounting.
In response to this situation, we
have illustrated what our earnings would have been excluding the
non-cash expense associated with amortization of the intangible assets
generated from our acquisitions. While this disclosure is not intended
to represent what our operating results would have been had our
acquisitions been accounted for under the pooling-of-interests method
of accounting, due to other differences between the two methods, we do
believe it represents a reasonable approximation of what our results
would have been.
The following table illustrates the
reconciliation of net income to earnings excluding amortization of
intangible assets, and the corresponding annualized performance return
measures, for the periods indicated:
|
|
|
Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in
thousands, except
per share amounts) |
| Net
income(1) |
|
$28,964 |
|
|
$22,719 |
|
|
$14,021 |
|
| Amortization
of intangible assets, net of tax |
|
11,982 |
|
|
9,855 |
|
|
2,936 |
|
| |
|
|
|
|
|
|
|
|
|
| Earnings
excluding amortization |
|
$40,946 |
|
|
$32,574 |
|
|
$16,957 |
|
| |
|
|
|
|
|
|
|
|
|
| Earnings per
diluted share |
|
$
1.36 |
|
|
$
1.12 |
|
|
$
1.06 |
|
| |
|
|
|
|
|
|
|
|
|
| Earnings
excluding amortization per diluted share |
|
$
1.92 |
|
|
$
1.60 |
|
|
$
1.28 |
|
| |
|
|
|
|
|
|
|
|
|
| Return on
average assets(2) |
|
0.49 |
% |
|
0.41 |
% |
|
0.45 |
% |
| |
|
|
|
|
|
|
|
|
|
| Return on
average equity(2) |
|
7.00 |
% |
|
5.87 |
% |
|
7.32 |
% |
| |
|
|
|
|
|
|
|
|
|
| Earnings
excluding amortization—return on average assets(3) |
|
0.70 |
% |
|
0.59 |
% |
|
0.54 |
% |
| |
|
|
|
|
|
|
|
|
|
| Earnings
excluding amortization—return on average equity(3) |
|
9.89 |
% |
|
8.42 |
% |
|
8.86 |
% |
| |
|
|
|
|
|
|
|
|
|
| Earnings
excluding amortization—return on average tangible
assets(4) |
|
0.71 |
% |
|
0.61 |
% |
|
0.55 |
% |
| |
|
|
|
|
|
|
|
|
|
| Earnings
excluding amortization—return on average tangible
equity(4) |
|
15.80 |
% |
|
13.07 |
% |
|
10.04 |
% |
| |
|
|
|
|
|
|
|
|
|
(1)
|
Net income for
the periods indicated includes certain special mention items, as
discussed above.
|
(2)
|
Return on
average assets is defined as net income divided by average assets.
Return on average equity is defined as net income divided by average
equity.
|
(3)
|
Earnings
excluding amortization—return on average assets is defined as
earnings excluding amortization of intangible assets divided by
average assets. Earnings excluding amortization—return on
average equity is defined as earnings excluding amortization of
intangible assets divided by average equity.
|
(4)
|
Earnings
excluding amortization—return on average tangible assets is
defined as earnings excluding amortization of intangible assets
divided by average tangible assets. Earnings excluding amortization
—return on average tangible equity is defined as earnings
excluding amortization of intangible assets divided by average
tangible equity. Average tangible assets are defined as average
assets less average intangible assets. Average tangible equity is
defined as average equity less average intangible assets.
|
Normalized Net Interest Margin
Normalized net interest income and
net interest margin include net rental income from our auto leasing
activities (that is, the excess of rental income over depreciation
expense on auto-related leased assets), which are principally funded by
our deposits, and also include expenses related to our Capital
Securities. Because our auto leases are accounted for as operating
leases, the rental income is reflected as noninterest income and the
related expenses, including depreciation expense, are reflected as
noninterest expenses, in accordance with GAAP. Normalized net interest
income also excludes certain nonrecurring interest income and interest
expense items.
Normalized net interest income for
the year ended December 31, 1999 was $184.7 million as compared with
$159.1 million for 1998 and $87.3 million for 1997. Normalized net
interest margin for the year ended December 31, 1999 was 3.30% as
compared with 3.08% for 1998 and 2.86% for 1997.
The following table illustrates
normalized net interest income and net interest margin, by platform,
for the periods indicated:
|
|
|
For the
Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
Net
Interest
Income
|
|
Net
Interest
Margin
|
|
Net
Interest
Income
|
|
Net
Interest
Margin
|
|
Net
Interest
Income
|
|
Net
Interest
Margin
|
|
|
|
(Dollars in
thousands) |
| Banking
Platform |
|
$
90,761 |
|
2.37 |
% |
|
$
94,611 |
|
2.28 |
% |
|
$60,369 |
|
2.19 |
% |
| Home Equity
Platform |
|
31,268 |
|
4.63 |
|
|
21,236 |
|
5.15 |
|
|
3,183 |
|
4.83 |
|
| Auto
Platform(1) |
|
47,728 |
|
4.85 |
|
|
32,309 |
|
6.14 |
|
|
15,285 |
|
8.00 |
|
| Commercial
Platform |
|
14,941 |
|
11.49 |
|
|
10,919 |
|
15.66 |
|
|
8,499 |
|
21.39 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$184,698 |
|
3.30 |
% |
|
$159,075 |
|
3.08 |
% |
|
$87,336 |
|
2.86 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Auto
Platform commenced its leasing activities effective April 1, 1998.
The Auto Platform’s margin does not reflect the tax benefits
associated with its leasing activities (that is, the losses generated
for income tax purposes during the early lease periods).
|
The increases in normalized net
interest income and net interest margin, as compared with the
respective prior periods, were largely attributable to similar factors
previously discussed at “Net Interest Income and Net Interest
Margin” combined with higher net rental income from our auto
leasing activities, partially offset by the impact of our Capital
Securities issued on December 21, 1998.
Our cost of borrowings, in
accordance with GAAP, does not include the impact of the cost
associated with the $90 million of Capital Securities issued on
December 21, 1998. Had this expense been included, our cost of
borrowings would have been 5.97% for the year ended December 31, 1999,
representing an increase of 19 basis points.
The following table illustrates
interest-earning assets, including our auto-related operating leased
assets, by platform, as of the dates indicated:
|
|
|
At
December 31,
1999
|
|
At
December 31,
1998
|
|
|
|
(Dollars in
thousands) |
| Banking
Platform |
|
$4,026,891 |
|
$3,816,993 |
| Home Equity
Platform |
|
678,735 |
|
657,148 |
| Auto
Platform |
|
990,405 |
|
753,581 |
| Commercial
Platform(1) |
|
182,240 |
|
94,888 |
| |
|
|
|
|
|
Total |
|
$5,878,271 |
|
$5,322,610 |
| |
|
|
|
|
(1)
|
Amounts
exclude asset-based commercial participation loans originated by the
Commercial Platform for the Banking Platform totaling $72.0 million
at December 31, 1999 and $18.3 million at December 31,
1998.
|
The following table illustrates
average interest-earning assets, including our auto-related operating
leased assets, by platform, for the years indicated:
|
|
|
Average
Balances for the Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in
thousands) |
| Banking
Platform |
|
$3,805,153 |
|
$4,155,328 |
|
$2,758,019 |
| Home Equity
Platform |
|
676,149 |
|
412,530 |
|
65,896 |
| Auto
Platform |
|
991,329 |
|
526,275 |
|
191,066 |
| Commercial
Platform |
|
130,897 |
|
69,702 |
|
39,739 |
| |
|
|
|
|
|
|
|
Total |
|
$5,603,528 |
|
$5,163,835 |
|
$3,054,720 |
| |
|
|
|
|
|
|
(1)
|
Amounts
exclude asset-based commercial participation loans originated by the
Commercial Platform for the Banking Platform beginning in June 1998.
The average balance of these loans was $49.0 million for the year
ended December 31, 1999 and $5.9 million for the year ended December
31, 1998.
|
Balance Sheet
Analysis
Bay View Capital Corporation’s
total assets were $6.5 billion at December 31, 1999 as compared with
$5.6 billion at December 31, 1998 and $3.2 billion at December 31,
1997. The increase in our assets from 1998 to 1999 was largely related
to the purchase of $814 million in franchise loans during 1999 and the
acquisition of FMAC. The increase in assets from 1997 to 1998 was
largely attributable to the $2.3 billion in total assets acquired
through our acquisition of AFEH.
Securities
Our securities activities are
primarily conducted by Bay View Bank. Bay View Bank has historically
purchased securities to supplement our loan production. The majority of
the securities purchased are high-quality mortgage-backed securities,
including securities issued by the Government National Mortgage
Association, sometimes referred to as GNMA, Fannie Mae and Freddie Mac
and senior tranches of private issue collateralized mortgage
obligations, or CMOs. Since mortgage-backed securities are
collateralized by mortgages, these assets qualified as mortgage-related
assets under the OTS regulations which, until Bay View Bank’s
conversion to a national bank effective March 1, 1999, required Bay
View Bank to hold certain levels of mortgage-related assets. In
addition to these securities we also hold retained interests in loan
and lease securitizations and hold investment securities such as U.S.
government agency notes and other short-term securities.
The following table illustrates our
securities portfolio as of the dates indicated:
|
|
|
At December
31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in
thousands) |
| Available-for-sale |
|
|
|
|
|
|
| Investment
securities |
|
$
49,063 |
|
$
5,319 |
|
$
5,639 |
Mortgage-backed securities:
GNMA,
Fannie Mae and Freddie Mac |
|
10,143 |
|
13,143 |
|
54,402 |
|
CMOs |
|
336 |
|
473 |
|
—
|
| |
|
|
|
|
|
|
|
Total |
|
$
59,542 |
|
$
18,935 |
|
$
60,041 |
| |
|
|
|
|
|
|
|
|
| Held-to-maturity |
|
|
|
|
|
|
| Investment
securities |
|
$
9,997 |
|
$
— |
|
$
5,000 |
Mortgage-backed securities:
GNMA,
Fannie Mae and Freddie Mac |
|
472,019 |
|
403,512 |
|
410,905 |
|
Other financial
intermediaries |
|
20,633 |
|
41,759 |
|
4,954 |
|
CMOs |
|
151,582 |
|
176,502 |
|
—
|
| |
|
|
|
|
|
|
|
Total |
|
$654,231 |
|
$621,773 |
|
$420,859 |
| |
|
|
|
|
|
|
During 1999, we purchased $10.0
million in Federal Home Loan Bank callable notes which we use as
collateral for borrowings. In connection with our acquisition of FMAC,
we acquired $35.0 million in retained interests in franchise loan and
lease securitizations and asset-backed securities. In December of
1999, we securitized and sold $247 million in auto loans and retained
an interest in this securitization of $10.0 million. During 1998, we
sold $2 million in investment securities available-for-sale and a $5.0
million Federal Farm Credit Bank callable bank note was
called.
We purchased $172.0 million in
mortgage-backed securities during 1999. There were no sales of
mortgage-backed securities from our available-for-sale portfolio in
1999. In 1998, we sold $237.7 million in mortgage-backed securities
from our available-for-sale portfolio, including securities acquired
in connection with our acquisition of AFEH. A portion of these
mortgage-backed securities was replaced by $201.7 million in CMOs
purchased during 1998, which were classified as held-to-maturity.
During 1997, we sold $20.5 million in mortgage-backed securities from
our available-for-sale portfolio. There were no purchases of
mortgage-backed securities in 1997. We do not maintain a trading
portfolio. The unrealized loss on securities classified as
available-for-sale included in stockholders’ equity (net of tax)
was $293,000 at December 31, 1999, $202,000 at December 31, 1998 and
$72,000 at December 31, 1997.
At December 31, 1999, 1998 and
1997 we did not hold any securities that were issued by a single
party, excluding securities issued by the U.S. government or U.S.
government agencies and corporations, which exceeded 10% of our
stockholders’ equity balance.
Mortgage-backed securities pose
risks not associated with fixed maturity bonds, primarily related to
the ability of the borrower to prepay the underlying loan with or
without penalty. This risk, known as prepayment risk, may cause the
mortgage-backed securities to remain outstanding for a period of time
different than that assumed at the time of purchase. When interest
rates decline, prepayments generally tend to increase, causing the
average expected remaining maturity of the mortgage-backed securities
to decline. Conversely, if interest rates rise, prepayments tend to
decrease, lengthening the average expected remaining maturity of the
mortgage-backed securities.
The following table illustrates
the remaining contractual principal maturities and weighted-average
yields on our mortgage-backed securities held at December 31, 1999.
The weighted-average yield is computed using the amortized cost of
available-for-sale securities, which are reported at fair value.
Expected remaining maturities of mortgage-backed securities will
generally differ from their contractual maturities because borrowers
may have the right to prepay obligations with or without
penalties.
|
|
|
Within One
Year
|
|
After One
Year
Through Five Years
|
|
After Five
Years
Through Ten Years
|
|
After Ten
Years
|
|
Total
|
|
|
|
Amount
|
|
Weighted-
Average
Yield
|
|
Amount
|
|
Weighted-
Average
Yield
|
|
Amount
|
|
Weighted-
Average
Yield
|
|
Amount
|
|
Weighted-
Average
Yield
|
|
Amount
|
|
Weighted-
Average
Yield
|
|
|
|
(Dollars
in thousands) |
|
| Available-for-sale: |
|
|
GNMA, Fannie Mae |
|
$ —
|
|
—
|
|
|
$ —
|
|
—
|
|
|
$
517 |
|
6.67 |
% |
|
$
9,795 |
|
5.88 |
% |
|
$
10,312 |
|
5.92 |
% |
|
CMOs |
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
336 |
|
4.56 |
|
|
336 |
|
4.56 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
amortized cost |
|
$
— |
|
—
|
|
|
$
— |
|
—
|
|
|
$
517 |
|
6.67 |
% |
|
$
10,131 |
|
5.84 |
% |
|
$
10,648 |
|
5.88 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair
value |
|
$
— |
|
|
|
|
$
— |
|
|
|
|
$
504 |
|
|
|
|
$
9,975 |
|
|
|
|
$
10,479 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Held-to-maturity: |
GNMA, Fannie Mae and
Freddie Mac |
|
$325 |
|
7.98 |
% |
|
$673 |
|
9.24 |
% |
|
$103,419 |
|
6.30 |
% |
|
$367,602 |
|
6.52 |
% |
|
$472,019 |
|
6.47 |
% |
Other financial
Intermediaries |
|
39 |
|
8.88 |
|
|
—
|
|
—
|
|
|
2,291 |
|
9.80 |
|
|
18,303 |
|
6.01 |
|
|
20,633 |
|
6.44 |
|
|
CMOs |
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
151,582 |
|
6.60 |
|
|
151,582 |
|
6.60 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
amortized cost |
|
$364 |
|
8.08 |
% |
|
$673 |
|
9.24 |
% |
|
$105,710 |
|
6.38 |
% |
|
$537,487 |
|
6.53 |
% |
|
$644,234 |
|
6.50 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair
value |
|
$363 |
|
|
|
|
$686 |
|
|
|
|
$102,830 |
|
|
|
|
$521,705 |
|
|
|
|
$625,584 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and Leases
Loan and Lease Portfolio
Composition
We account for the activity and
balances of our loan and lease portfolio by our four business
segments, or platforms. The Banking Platform consists of
single-family, multi-family and commercial real estate loans, small
business loans, asset-based commercial participation loans, and
franchise loans. We ceased our single-family loan origination
operations in 1996 in conjunction with our strategic plan to
change-out these assets for commercial bank-like assets with higher
risk-adjusted yields. The Auto Platform engages in high-quality
indirect auto lending and leasing. The Home Equity Platform originates
and purchases conventional home equity loans and lines and maintains a
portfolio of purchased high loan-to-value home equity loans. The
Commercial Platform engages in asset-based lending, factoring and
equipment leasing.
The following table shows the
composition of our gross loan and lease portfolio and illustrates our
successful efforts to change-out our mortgage-based loans, especially
single-family loans, with commercial and consumer assets, as of the
dates indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
1995
|
|
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
|
|
(Dollars
in thousands) |
| Banking
Platform(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Single-
family (one to four
units) |
|
$
940,235 |
|
21.6 |
% |
|
$1,515,413 |
|
36.2 |
% |
|
$
550,506 |
|
22.9 |
% |
|
$
692,086 |
|
27.6 |
% |
|
$
731,310 |
|
34.9 |
% |
Multi-family (five or
more units) |
|
622,835 |
|
14.3 |
|
|
1,015,980 |
|
24.2 |
|
|
1,026,148 |
|
42.6 |
|
|
1,048,291 |
|
41.9 |
|
|
995,038 |
|
47.5 |
|
Commercial real
estate |
|
317,068 |
|
7.3 |
|
|
338,220 |
|
8.1 |
|
|
348,754 |
|
14.5 |
|
|
381,822 |
|
15.2 |
|
|
333,236 |
|
15.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
1,880,138 |
|
43.2 |
|
|
2,869,613 |
|
68.5 |
|
|
1,925,408 |
|
80.0 |
|
|
2,122,199 |
|
84.7 |
|
|
2,059,584 |
|
98.3 |
|
|
Franchise loans |
|
1,040,608 |
|
23.9 |
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Asset-based commercial
participation
loans |
|
72,014 |
|
1.6 |
|
|
18,322 |
|
0.4 |
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Business loans |
|
33,345 |
|
0.8 |
|
|
39,039 |
|
0.9 |
|
|
24,855 |
|
1.0 |
|
|
10,203 |
|
0.4 |
|
|
—
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Banking
Platform |
|
3,026,105 |
|
69.5 |
|
|
2,926,974 |
|
69.8 |
|
|
1,950,263 |
|
81.0 |
|
|
2,132,402 |
|
85.1 |
|
|
2,059,584 |
|
98.3 |
|
| Home Equity
Platform |
|
648,676 |
|
14.9 |
|
|
622,797 |
|
14.9 |
|
|
103,715 |
|
4.3 |
|
|
57,815 |
|
2.3 |
|
|
34,453 |
|
1.7 |
|
| Auto
Platform(1)(2) |
|
496,901 |
|
11.4 |
|
|
546,806 |
|
13.0 |
|
|
298,627 |
|
12.4 |
|
|
315,439 |
|
12.6 |
|
|
396 |
|
0.0 |
|
| Commercial
Platform(1) |
|
182,657 |
|
4.2 |
|
|
94,888 |
|
2.3 |
|
|
54,120 |
|
2.3 |
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross
loans and
leases(3) |
|
$4,354,339 |
|
100.0 |
% |
|
$4,191,465 |
|
100.0 |
% |
|
$2,406,725 |
|
100.0 |
% |
|
$2,505,656 |
|
100.0 |
% |
|
$2,094,433 |
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Our Auto
Platform was formed in June 1996. Our Commercial Platform was formed
in April 1997. We acquired AFEH in January 1998 and Franchise
Mortgage Acceptance Company in November 1999, which were included in
our Banking Platform.
|
(2)
|
Operating
leased assets are excluded from the Auto Platform.
|
(3)
|
Gross loans
and leases exclude premiums and discounts, deferred fees and costs,
and the allowance for losses on loans and leases.
|
We ceased originating
single-family loans in 1996. Accordingly, single-family mortgage loans
decreased in 1999, as compared with 1998, due primarily to loan
repayments and scheduled amortization. We also sold $105 million in
single-family COFI-based loans in 1999 to reduce our exposure to this
lagging index. The decrease in multi-family loans from 1999, as
compared with 1998, was primarily related to our sale of $450 million
in multi-family COFI-based loans, again, to reduce our exposure to
COFI, reduce our geographic concentration risk, and also to realize
our strategy of changing-out our assets from real estate-based loans
to commercial and consumer assets. The increase in the Banking Platform
’s single-family mortgage loans in 1998, as compared with 1997,
was due to the acquisition of EurekaBank’s mortgage loan
portfolio in conjunction with the purchase of AFEH, partially offset
by mortgage loan repayments. We began purchasing franchise loans in
February 1999 in anticipation of our acquisition of FMAC, and we began
originating franchise loans when our acquisition of FMAC was
consummated in November 1999. The increases in the Home Equity, Auto
and Commercial Platforms were consistent with our strategy to
change-out our balance sheet, as previously discussed. Within the Auto
Platform, we securitized and sold $247 million in auto loans in 1999
and $253 million in auto loans in 1997.
The following table illustrates
the composition of our fixed- and adjustable-rate gross loan and lease
portfolio (before premiums and discounts, deferred fees and costs and
the allowance for losses on loans and leases) as of the dates
indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars
in thousands) |
| Fixed-rate
loans and leases: |
|
Mortgage |
|
$
308,381 |
|
$
620,603 |
|
$
295,068 |
|
Home
Equity |
|
564,333 |
|
506,338 |
|
77,211 |
|
Auto |
|
496,901 |
|
545,431 |
|
297,252 |
|
Commercial |
|
96,499 |
|
19,192 |
|
15,029 |
|
Franchise |
|
832,486 |
|
—
|
|
—
|
|
Business |
|
33,345 |
|
39,039 |
|
24,855 |
| |
|
|
|
|
|
|
|
|
|
2,331,945 |
|
1,730,603 |
|
709,415 |
| Adjustable-rate loans and leases: |
|
Mortgage |
|
1,571,757 |
|
2,249,010 |
|
1,630,340 |
|
Home
Equity |
|
84,343 |
|
116,459 |
|
26,504 |
|
Auto |
|
—
|
|
1,375 |
|
1,375 |
|
Commercial |
|
158,172 |
|
94,018 |
|
39,091 |
|
Franchise |
|
208,122 |
|
—
|
|
—
|
| |
|
|
|
|
|
|
|
|
|
2,022,394 |
|
2,460,862 |
|
1,697,310 |
| |
|
|
|
|
|
|
|
Total |
|
$4,354,339 |
|
$4,191,465 |
|
$2,406,725 |
| |
|
|
|
|
|
|
The following table illustrates
the remaining contractual maturity distribution of our fixed- and
adjustable-rate gross loan and lease portfolio (before premiums and
discounts, deferred fees and costs and the allowance for losses on
loans and leases) at December 31, 1999:
|
|
|
At
December 31, 1999
|
|
|
|
One Year
or Less
|
|
After One
Year
Through
Five Years
|
|
After Five
Years
|
|
Total
|
|
|
|
(Dollars
in thousands) |
| Fixed-rate
loans and leases: |
|
Mortgage |
|
$
373 |
|
$
11,312 |
|
$
296,696 |
|
$
308,381 |
|
Home
Equity |
|
3 |
|
2,435 |
|
561,895 |
|
564,333 |
|
Auto |
|
2,207 |
|
245,725 |
|
248,969 |
|
496,901 |
|
Commercial |
|
96,499 |
|
—
|
|
—
|
|
96,499 |
|
Franchise |
|
3,876 |
|
16,499 |
|
812,111 |
|
832,486 |
|
Business |
|
8,197 |
|
6,402 |
|
18,746 |
|
33,345 |
| |
|
|
|
|
|
|
|
|
|
|
|
111,155 |
|
282,373 |
|
1,938,417 |
|
2,331,945 |
| Adjustable-rate loans and leases: |
|
Mortgage |
|
13,124 |
|
21,291 |
|
1,537,342 |
|
1,571,757 |
|
Home
Equity |
|
205 |
|
6,544 |
|
77,594 |
|
84,343 |
|
Commercial |
|
98,558 |
|
59,614 |
|
—
|
|
158,172 |
|
Franchise |
|
3,728 |
|
3,032 |
|
201,362 |
|
208,122 |
| |
|
|
|
|
|
|
|
|
|
|
|
115,615 |
|
90,481 |
|
1,816,298 |
|
2,022,394 |
| |
|
|
|
|
|
|
|
|
|
Total |
|
$226,770 |
|
$372,854 |
|
$3,754,715 |
|
$4,354,339 |
| |
|
|
|
|
|
|
|
|
Loan and Lease Originations and
Purchases
Our strategy has been to
supplement our loan and lease production with purchases of
high-quality loans and leases. The following table illustrates gross
loans and leases, including operating leased assets, originated and
purchased for the years indicated:
|
|
|
For the
Year Ended December 31,
|
| |
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars
in thousands) |
| Loan and
lease originations: |
|
Mortgage(1) |
|
$
250,562 |
|
$
150,677 |
|
$148,808 |
|
Home
Equity |
|
64,624 |
|
39,301 |
|
9,031 |
|
Auto |
|
682,827 |
|
565,272 |
|
227,181 |
|
Commercial |
|
164,297 |
|
75,584 |
|
17,672 |
|
Franchise(2) |
|
142,241 |
|
—
|
|
—
|
|
Other |
|
68,690 |
|
29,790 |
|
8,686 |
| |
|
|
|
|
|
|
|
Total
originations |
|
1,373,241 |
|
860,624 |
|
411,378 |
| |
|
|
|
|
|
|
| Loan
purchases: |
|
Mortgage |
|
26,472 |
|
421,458 |
|
50,967 |
|
Home
Equity |
|
178,815 |
|
454,901 |
|
69,996 |
|
Auto |
|
135,504 |
|
71,773 |
|
85,682 |
|
Franchise |
|
813,988 |
|
—
|
|
—
|
| |
|
|
|
|
|
|
|
Total purchases |
|
1,154,779 |
|
948,132 |
|
206,645 |
| |
|
|
|
|
|
|
|
Total originations and
purchases |
|
$2,528,020 |
|
$1,808,756 |
|
$618,023 |
| |
|
|
|
|
|
|
(1)
|
Excludes
$78.5 million in multi-family loans originated and sold by Bankers
Mutual during November and December of 1999.
|
(2)
|
Represents
franchise loans originated subsequent to the acquisition of FMAC on
November 1, 1999.
|
Our loan and lease origination and
purchase activity is consistent with our strategy of focusing on
generating consumer and commercial assets which provide higher
risk-adjusted yields compared to the traditional mortgage-based
assets. Real estate loan originations and purchases consist primarily
of multi-family and commercial real estate loans. Single-family
mortgage loan originations ceased during 1996. The real estate loan
purchases in 1998 included $200 million of loans acquired primarily to
assist Bay View Bank in meeting its CRA regulatory
requirements.
Credit Quality
We define nonperforming assets as
nonaccrual loans and leases, real estate owned, defaulted
mortgage-backed securities, and other repossessed assets. We define
nonaccrual loans and leases as loans and leases 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 and leases less than 90 days delinquent designated as
nonperforming when we determine that the full collection of principal
and/or interest is doubtful. Troubled debt restructurings are defined
as loans that have been modified (due to borrower financial
difficulties) to allow a stated interest rate and/or a monthly payment
rate lower than those prevailing in the market. We do not record
interest on nonaccrual loans and leases.
Overall credit quality has
continued to remain strong as evidenced by the low nonperforming
assets and delinquencies presented below. The following table
illustrates our nonperforming assets and troubled debt restructurings
as of the dates indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
1995
|
|
|
|
(Dollars
in thousands) |
| Nonaccrual
loans(1) |
|
$22,918 |
|
$14,700 |
|
$10,991 |
|
$16,125 |
|
$10,755 |
| Real estate
owned(1) |
|
2,467 |
|
2,666 |
|
4,146 |
|
7,387 |
|
24,476 |
| Defaulted
mortgage-backed securities |
|
—
|
|
—
|
|
—
|
|
—
|
|
3,580 |
| Other
repossessed assets |
|
554 |
|
654 |
|
629 |
|
798 |
|
—
|
| |
|
|
|
|
|
|
|
|
|
|
| Nonperforming
assets |
|
25,939 |
|
18,020 |
|
15,766 |
|
24,310 |
|
38,811 |
| Troubled debt
restructurings |
|
1,009 |
|
777 |
|
731 |
|
509 |
|
15,641 |
| |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$26,948 |
|
$18,797 |
|
$16,497 |
|
$24,819 |
|
$54,452 |
| |
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes $8.7
million of nonaccrual franchise loans and leases and $1.4 million of
franchise real estate owned at December 31, 1999.
|
The following table illustrates,
by platform, nonperforming assets and nonperforming assets as a
percentage of consolidated assets, excluding loans and leases
held-for-sale:
|
|
|
Nonperforming Assets as a Percentage
of Consolidated Total Assets
|
|
|
|
At
December 31,
1999
|
|
At December 31,
1998
|
|
At December 31,
1997
|
|
|
|
(Dollars
in thousands) |
| Banking
Platform(1) |
|
$20,074 |
|
0.31 |
% |
|
$15,293 |
|
0.27 |
% |
|
$13,438 |
|
0.42 |
% |
| Home Equity
Platform |
|
2,919 |
|
0.04 |
|
|
1,287 |
|
0.02 |
|
|
907 |
|
0.03 |
|
| Auto
Platform |
|
1,307 |
|
0.02 |
|
|
1,090 |
|
0.02 |
|
|
748 |
|
0.02 |
|
| Commercial
Platform |
|
1,639 |
|
0.03 |
|
|
350 |
|
0.01 |
|
|
673 |
|
0.02 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$25,939 |
|
0.40 |
% |
|
$18,020 |
|
0.32 |
% |
|
$15,766 |
|
0.49 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
$10.1 million of nonperforming franchise assets at December 31,
1999.
|
The following table illustrates,
by platform, loans and leases delinquent 60 days or more as a
percentage of gross loans and leases, excluding loans and leases
held-for-sale:
|
|
|
Loans and
Leases Delinquent 60 Days or More as a
Percentage of Gross Loans and Leases
|
|
|
|
At
December 31,
1999
|
|
At
December 31,
1998
|
|
At
December 31,
1997
|
|
|
|
(Dollars
in thousands) |
|
Banking Platform (1) |
|
$16,967 |
|
0.39 |
% |
|
$15,928 |
|
0.38 |
% |
|
$19,711 |
|
0.82 |
% |
|
Home Equity Platform |
|
7,957 |
|
0.19 |
|
|
4,048 |
|
0.09 |
|
|
1,815 |
|
0.08 |
|
|
Auto Platform |
|
1,852 |
|
0.04 |
|
|
1,676 |
|
0.04 |
|
|
1,045 |
|
0.04 |
|
|
Commercial Platform |
|
1,639 |
|
0.04 |
|
|
350 |
|
0.01 |
|
|
673 |
|
0.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$28,415 |
|
0.66 |
% |
|
$22,002 |
|
0.52 |
% |
|
$23,244 |
|
0.97 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes $7.1
million of franchise loans and leases delinquent 60 days or more at
December 31, 1999.
|
Allowance for Losses on Loans and
Leases
Credit risk is defined as the
possibility of sustaining a loss because other parties to the
financial instrument fail to perform in accordance with the terms of
the contract. While we follow underwriting and credit monitoring
procedures which we believe are appropriate in both growing and
managing the loan and lease portfolio, in the event of nonperformance
by these other parties, our potential exposure to credit losses could
significantly affect our consolidated financial position and results
of operations.
Lending money involves an inherent
risk of nonpayment. Management seeks to reduce such credit risk by
administering lending policies and underwriting procedures combined
with its monitoring of the loan and lease portfolio. The allowance for
losses on loans and leases represents management’s estimate of
probable inherent losses which have occurred as of the date of the
financial statements. The process of determining the necessary levels
of allowances for loan and lease losses is subjective and requires
considerable judgement. In accordance with applicable guidelines, this
process results in an allowance for losses on loans and leases that
consists of three components as described below:
|
1.
Reserves for loans and leases that have been individually
evaluated and identified as loans or leases which have probable
losses. These loans and leases are
generally larger-balance commercial or income producing real estate
loans or leases which are evaluated on an individual basis. Reserves
for these loans and leases are attributable to specific weaknesses
in these loans or leases evidenced by factors such as a
deterioration in the borrower’s ability to meet its
obligations, a deterioration in the quantity or quality of the
collateral securing the loan or lease, payment delinquency, or other
events of default under the terms of the loan or lease agreement or
promissory note.
|
|
2.
Reserves for groups of smaller-balance homogenous loans and
leases that are collectively evaluated for impairment and for groups
of performing larger-balance loans and leases which currently
exhibit no identifiable weaknesses. The
smaller-balance homogenous loans and leases generally consist of
single-family mortgage loans and consumer loans, including auto
loans, home equity loans and lines of credit and unsecured personal
loans. The larger-balance loans and leases generally consist of
commercial or income producing real estate loans and leases. These
loans and leases have specific characteristics which indicate that
it is probable that a loss has been incurred in a group of loans or
leases with those similar characteristics. Reserves for these groups
of loans and leases are determined based on a combination of factors
including historical loss experience, asset concentrations, levels
and trends of classified assets, and loan and lease delinquencies.
Reserves for these groups of loans and leases also include an
additional reserve for certain products we have introduced more
recently, such as high loan-to-value home equity loans, where we do
not have extensive historical data, other than industry experience,
upon which to base its reserve levels. This additional reserve is
intended to provide for those situations where our experience may be
different than industry experience.
|
|
3.
Unallocated Reserves. Management
determines the unallocated portion of the allowance for losses on
loans and leases based on factors that are not necessarily
associated with a specific credit, group of loans or leases or loan
or lease category. These factors include, but are not limited to,
management’s evaluation of economic conditions in regions where
we lend money, loan and lease concentrations, lending policies or
underwriting procedures, and trends in delinquencies and
nonperforming assets. The unallocated portion of the allowance for
losses on loans and leases reflects management’s efforts to
ensure that the overall allowance appropriately reflects the
probable losses inherent in the loan and lease
portfolio.
|
The allowance for losses on loans
and leases at December 31, 1999 was $52.2 million as compared with
$45.4 million at December 31, 1998 and $38.5 million at December 31,
1997. The increase in the allowance for losses on loans and leases at
December 31, 1999 compared with December 31, 1998, was largely due to
reserves acquired in connection with the acquisition of FMAC,
partially offset by reserve reductions related to transfers of loans
held-for-sale. The increase in the allowance for losses on loans and
leases at December 31, 1998, as compared with December 31, 1997, was
largely due to the reserves acquired in conjunction with our
acquisition of AFEH. The allowance for losses on loans and leases is
maintained at a level that we believe is appropriate
based on our estimate of probable losses in the portfolio of loans and
leases held-for-investment. This assessment is based on many factors
including prevailing economic conditions, identified losses within the
portfolio, historical loss experience, asset concentrations, levels
and trends in classified assets, loan and lease delinquencies, and
industry data.
The following table illustrates
the allowance for losses on loans and leases as a percentage of
nonperforming assets and gross loans and leases, excluding loans and
leases held-for-sale:
|
|
|
Allowance
for Losses on Loans and Leases as
a Percentage of Specified
Assets
|
|
|
|
At
December 31, 1999
|
|
At December 31, 1998
|
|
At December 31, 1997
|
|
|
|
(Dollars
in thousands) |
|
|
|
Assets
|
|
Percent
|
|
Assets
|
|
Percent
|
|
Assets
|
|
Percent
|
| Nonperforming
assets |
|
$
25,939 |
|
201 |
% |
|
$
18,020 |
|
252 |
% |
|
$
15,766 |
|
244 |
% |
| Gross loans
and leases |
|
$4,288,092 |
|
1.22 |
% |
|
$4,191,465 |
|
1.08 |
% |
|
$2,406,725 |
|
1.60 |
% |
The decrease in the allowance for
losses on loans and leases as a percentage of nonperforming assets at
December 31, 1999, as compared with December 31, 1998, was largely a
result of our acquisition of FMAC and their corresponding $10.1
million of additional franchise nonperforming assets at December 31,
1999. The increase in the allowance for losses on loans and leases as
a percentage of gross loans and leases at December 31, 1999, as
compared with December 31, 1998, was due to our continuing evaluation
of the allowance and the corresponding increase needed to bring the
allowance to the desired level in response to 1999 net charge-off
levels and the continued change-out of the balance sheet to more
commercial bank-like assets. The decrease in the allowance for losses
on loans and leases as a percentage of gross loans and leases at
December 31, 1998, as compared with December 31, 1997, was largely a
result of our acquisition of AFEH. EurekaBank’s $1.5 billion loan
portfolio consisted primarily of single-family and multi-family
residential mortgage loans which have lower credit risk as compared
with consumer and commercial assets, and thus had a corresponding
lower allowance for loan losses.
The following table illustrates
the allowance for losses on loans and leases for the years
indicated:
|
|
|
For the
Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
1995
|
|
|
|
(Dollars
in thousands) |
| Beginning
balance |
|
$
45,405 |
|
|
$
38,458 |
|
|
$29,013 |
|
|
$30,014 |
|
|
$29,115 |
|
| Reserves
related to acquisitions(1) |
|
8,256 |
|
|
11,374 |
|
|
14,162 |
|
|
2,860 |
|
|
—
|
|
| Transfers of
loans to held-for-sale |
|
(2,656 |
) |
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| Charge-offs: |
|
Mortgage and
other(1) |
|
(827 |
) |
|
(2,480 |
) |
|
(2,699 |
) |
|
(6,401 |
) |
|
(4,879 |
) |
|
Home
Equity |
|
(19,568 |
) |
|
(7,152 |
) |
|
—
|
|
|
—
|
|
|
—
|
|
|
Auto(1) |
|
(7,674 |
) |
|
(8,604 |
)) |
|
(4,057 |
) |
|
—
|
|
|
—
|
|
|
Commercial(1) |
|
(3,176 |
) |
|
(828 |
) |
|
(1,685 |
) |
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,245 |
) |
|
(19,064 |
) |
|
(8,441 |
) |
|
(6,401 |
) |
|
(4,879 |
) |
| Recoveries: |
|
Mortgage and
other(1) |
|
607 |
|
|
2,290 |
|
|
706 |
|
|
642 |
|
|
1,494 |
|
|
Home
Equity |
|
1,530 |
|
|
456 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Auto(1) |
|
1,722 |
|
|
2,599 |
|
|
955 |
|
|
—
|
|
|
—
|
|
|
Commercial(1) |
|
231 |
|
|
178 |
|
|
111 |
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,090 |
|
|
5,523 |
|
|
1,772 |
|
|
642 |
|
|
1,494 |
|
| Net
charge-offs |
|
(27,155 |
) |
|
(13,541 |
) |
|
(6,669 |
) |
|
(5,759 |
) |
|
(3,385 |
) |
| Provision for
loan and lease losses |
|
28,311 |
|
|
9,114 |
|
|
1,952 |
|
|
1,898 |
|
|
4,284 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending
balance |
|
$
52,161 |
|
|
$
45,405 |
|
|
$38,458 |
|
|
$29,013 |
|
|
$30,014 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs to average total loans and
leases |
|
0.61 |
% |
|
0.32 |
% |
|
0.28 |
% |
|
0.24 |
% |
|
0.16 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Our Auto
Platform was formed in June 1996. Our Commercial Platform was formed
in April 1997. We acquired America First Eureka Holdings in January
1998 and Franchise Mortgage Acceptance Company in November
1999.
|
Deposits
As a primary part of our business,
we generate deposits for the purpose of funding loans, leases and
securities. The following table illustrates deposits as of the dates
indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
Amount
|
|
Rates
|
|
Amount
|
|
Rates
|
|
Amount
|
|
Rates
|
|
|
|
(Dollars
in thousands) |
| Transaction
accounts |
|
$1,703,123 |
|
3.26 |
% |
|
$1,627,275 |
|
3.15 |
% |
|
$
553,820 |
|
2.97 |
% |
| Retail
certificates of deposit |
|
1,637,127 |
|
4.92 |
|
|
1,642,362 |
|
5.20 |
|
|
1,045,152 |
|
5.51 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total retail
deposits |
|
3,340,250 |
|
4.07 |
|
|
3,269,637 |
|
4.20 |
|
|
1,598,972 |
|
4.65 |
|
| Brokered
certificates of deposit |
|
389,530 |
|
6.18 |
|
|
—
|
|
0.0 |
|
|
78,163 |
|
5.82 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$3,729,780 |
|
4.30 |
|
|
$3,269,637 |
|
4.20 |
|
|
$1,677,135 |
|
4.71 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
accounts as a percentage
of retail deposits |
|
|
|
51.0 |
% |
|
|
|
49.8 |
% |
|
|
|
34.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in retail deposits at
December 31, 1999, as compared with December 31, 1998, was due
primarily to the growth of our transaction accounts. In 1999, we also
relied on brokered certificates of deposit to help fund our growth.
The increase in total deposits at December 31, 1998, as compared with
December 31, 1997, was primarily due to the acquisition of EurekaBank
’s deposit portfolio effective January 2, 1998.
Increasing the value of Bay View
Bank’s retail branch franchise is one of our primary objectives.
We believe that expanding Bay View Bank’s retail deposit base,
particularly transaction accounts, will enhance our results of
operations by lowering our consolidated cost of funds, increasing fee
income and expanding opportunities for selling products and services,
although there can be no assurance in this regard. Through Bay View
Bank, we increased our percentage of transaction accounts in relation
to total retail deposits to 51.0% at December 31, 1999 as compared
with 49.8% for 1998 and 34.6% for 1997. The increase in the percentage
of transaction accounts as a percentage of total retail deposits from
year to year was consistent with management’s strategy of
reducing higher-cost deposits and expanding lower-cost transaction
accounts as funding sources for our business activities.
Retail certificates of deposit of
$100,000 or more, by time remaining until maturity, were as
follows:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars
in thousands) |
| Three months
or less |
|
$
96,916 |
|
$148,798 |
| Over three
through six months |
|
151,179 |
|
77,782 |
| Over six
through twelve months |
|
130,930 |
|
111,090 |
| Over twelve
months |
|
44,961 |
|
53,587 |
| |
|
|
|
|
|
Total |
|
$423,986 |
|
$391,257 |
| |
|
|
|
|
Borrowings
In addition to deposits, we
utilize collateralized advances from the Federal Home Loan Bank of San
Francisco and other borrowings, such as senior and subordinated debt,
capital securities, warehouse lines, and securities sold under
agreements to repurchase (also known as reverse repurchase
agreements), on a collateralized and noncollateralized basis, for
various purposes including the funding of loans, leases and securities
as well as to support the execution of our business
strategies.
During 1999, two warehouse lines
with initial committed amounts totaling $600 million were secured.
Both lines have maturities of one year or less. One warehouse line was
established to provide financing for franchise loans, while the other
will be used to fund Bankers Mutual multi-family loan production. The
aggregate balance of the warehouse lines was $397.5 million at
December 31, 1999.
On August 18, 1999, Bay View Bank
issued $50 million of 10% Subordinated Notes, which mature in August
2009, a portion of which was used to partially finance the acquisition
of FMAC. In December 1998, we issued $90 million in Capital Securities
yielding 9.76%, which mature on December 31, 2028. A portion of the
proceeds from the Capital Securities were used to redeem our $50
million of 8.42% Senior Debentures which matured on June 1, 1999 and
the remainder for general corporate purposes. In August 1997 we issued
$100 million in Subordinated Notes with a stated coupon of 9.125% and
a yield of 9.225%. A portion of the proceeds from the Subordinated
Notes was used to partially finance the acquisition of AFEH effective
January 2, 1998.
The following table illustrates
outstanding borrowings as of the dates indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars
in thousands) |
Advances from
the Federal Home Loan Bank of
San Francisco |
|
$1,367,300 |
|
$1,653,300 |
|
$1,110,270 |
| Securities
sold under agreements to repurchase |
|
17,883 |
|
25,302 |
|
90,134 |
| Warehouse
lines |
|
397,538 |
|
—
|
|
—
|
| Subordinated
Notes, net |
|
149,502 |
|
99,437 |
|
99,372 |
| Senior
Debentures |
|
—
|
|
50,000 |
|
50,000 |
| Other
borrowings |
|
3,294 |
|
5,077 |
|
6,200 |
| Capital
Securities |
|
90,000 |
|
90,000 |
|
—
|
| |
|
|
|
|
|
|
|
Total |
|
$2,025,517 |
|
$1,923,116 |
|
$1,355,976 |
| |
|
|
|
|
|
|
The lower Federal Home Loan Bank
advances level at December 31, 1999, as compared with 1998, was
primarily related to the sale of $450 million in multi-family
COFI-based loans that were pledged as underlying collateral, higher
retail deposit balances, largely attributable to the acquisition of
the Luther Burbank Savings branches, internal deposit growth, and the
use of brokered certificates of deposit as an alternative funding
source. We anticipate that the balances of our Federal Home Loan Bank
advances will continue to decline due to the decrease in eligible
mortgage-based collateral resulting from the continued change-out of
our balance sheet. As a result, we expect that the balances of our
deposits, warehouse lines and other sources of funding will continue
to increase. The higher borrowing level at December 31, 1998, as
compared with 1997, was due to funding requirements associated with
our acquisitions and the issuance of the Capital Securities on
December 21, 1998.
Short-term borrowings are defined
as borrowings due within one year or less. The following table
illustrates our short-term borrowings as of the dates
indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars
in thousands) |
Advances from
the Federal Home Loan Bank of
San Francisco |
|
$
722,500 |
|
|
$729,100 |
|
|
$
985,270 |
|
| Securities
sold under agreements to repurchase |
|
17,883 |
|
|
25,302 |
|
|
90,134 |
|
| Warehouse
lines |
|
397,538 |
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total |
|
$1,137,921 |
|
|
$754,402 |
|
|
$1,075,404 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted-average interest rate of total short-term
borrowings outstanding at period
end |
|
6.47 |
% |
|
5.07 |
% |
|
5.88 |
% |
| |
|
|
|
|
|
|
|
|
|
The following table illustrates
the maximum outstanding balance for each type of short-term borrowing
at any month end during 1999, 1998 and 1997, and the average balances
and weighted-average interest rates on short-term borrowings for 1999,
1998 and 1997:
|
|
|
Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars
in thousands) |
Advances from
the Federal Home Loan Bank of
San Francisco |
|
$1,900,400 |
|
|
$1,575,460 |
|
|
$1,042,480 |
|
| Securities
sold under agreements to repurchase |
|
24,784 |
|
|
153,148 |
|
|
201,551 |
|
| Warehouse
lines |
|
397,538 |
|
|
—
|
|
|
—
|
|
Average
amount of total short-term borrowings
outstanding during the year |
|
$
858,226 |
|
|
$1,168,410 |
|
|
$1,056,836 |
|
Weighted-average interest rate of total short-term
borrowings outstanding during the
year |
|
5.10 |
% |
|
5.54 |
% |
|
5.75 |
% |
| |
|
|
|
|
|
|
|
|
|
Liquidity
The objective of our liquidity
management program is to ensure that funds are available in a timely
manner to meet loan demand and depositors’ needs, and to service
other liabilities as they come due, without causing an undue amount of
cost or risk, and without causing a disruption to normal operating
conditions.
We regularly assess the amount and
likelihood of projected funding requirements through a review of
factors such as historical deposit volatility and funding patterns,
present and forecasted market and economic conditions, and existing
and planned business activities. Our Asset and Liability Committee
provides oversight to the liquidity management process and recommends
policy guidelines, subject to Board of Directors approval, and courses
of action to address our actual and projected liquidity
needs.
The ability to attract a stable,
low-cost base of deposits is a significant source of liquidity. Other
sources of liquidity available to us include short-term borrowings,
which consist of advances from the Federal Home Loan Bank of San
Francisco, reverse repurchase agreements, warehouse lines and other
short-term borrowing arrangements. Our liquidity requirements can also
be met through the use of our portfolio of liquid assets. Liquid
assets, as defined by us, include cash and cash equivalents in excess
of the minimum levels necessary to carry out normal business
operations, federal funds sold, commercial paper, and other short-term
investments.
To assist you in analyzing our
liquidity, you should review our Consolidated Statements of Cash Flows
at Item 8. “Financial Statements and Supplementary Data.
”
At December 31, 1999, we had
federal and state net operating loss carryforwards of $172.4 million
and $13.1 million, respectively. To the extent we have future taxable
income, these net operating loss carryforwards may be utilized to
reduce our current federal and state income tax liability and thus
enhance future liquidity levels.
Capital
Resources
Management seeks to maintain
adequate capital to support anticipated asset growth and credit risks,
and to ensure that Bay View Capital Corporation and Bay View Bank are
in compliance with all regulatory capital guidelines. The primary
sources of new capital during 1999 were the retention of earnings,
common stock issued in conjunction with the our acquisition of FMAC
and $50 million in Subordinated Notes issued by Bay View Bank, our
wholly owned subsidiary, on August 18, 1999. The Subordinated Notes,
which mature in August 2009, qualify as Tier 2 capital for regulatory
purposes. The proceeds from the notes were used for, among other
things, the payment of dividends to us to partially fund our
acquisition of FMAC and for our general corporate
purposes.
On December 21, 1998, we issued
$90 million in Capital Securities through Bay View Capital I. The
Capital Securities pay quarterly cumulative cash distributions at an
annual rate of 9.76% of the liquidation value of $25 per share. We
used $50 million of the proceeds to repay our 8.42% Senior Debentures
upon their maturity in June 1999 and the remainder for general
corporate purposes. The Capital Securities have the added benefit of
qualifying as Tier 1 capital for regulatory purposes. The Capital
Securities are presented as a separate line item in our consolidated
balance sheet under the caption “Guaranteed Preferred Beneficial
Interest in the Company’s Junior Subordinated Debentures.”
For additional related discussion, see Note 12 to the Consolidated
Financial Statements, “Capital Securities” at Item 8.
“Financial Statements and Supplementary Data.”
Stockholders’ equity totaled
$631.2 million at December 31, 1999 as compared with $377.8 million at
December 31, 1998. This increase was largely due to common stock
issued in conjunction with the FMAC acquisition combined with our
earnings, partially offset by dividends declared and common stock
repurchased. Tangible stockholders’ equity, which excludes
intangible assets, was $302.2 million at December 31, 1999 as compared
with $243.7 million at December 31, 1998. This increase was due to
common stock issued in conjunction with the acquisition of FMAC, our
earnings and the amortization of intangible assets, partially offset
by dividends declared, common stock repurchased and additional
intangible assets generated in conjunction with the FMAC acquisition
and the acquisition of deposits from Luther Burbank Savings. We do not
have any material commitments for capital expenditures at December 31,
1999.
The following table illustrates
the reconciliation of our stockholders’ equity to tangible
stockholders’ equity as of the dates indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars
in thousands) |
| Stockholders
’ equity |
|
$
631,194 |
|
|
$
377,811 |
|
| Intangible
assets |
|
(329,005 |
) |
|
(134,088 |
) |
| |
|
|
|
|
|
|
| Tangible
stockholders’ equity |
|
$
302,189 |
|
|
$
243,723 |
|
| |
|
|
|
|
|
|
| Book value
per share |
|
$
19.38 |
|
|
$
19.77 |
|
| |
|
|
|
|
|
|
| Tangible book
value per share |
|
$
9.28 |
|
|
$
12.75 |
|
| |
|
|
|
|
|
|
The following table illustrates
the changes in our tangible stockholders’ equity for the periods
indicated:
|
|
|
For the
Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars
in thousands) |
| Beginning
tangible stockholders’ equity |
|
$
243,723 |
|
|
$
144,120 |
|
|
$189,865 |
|
| Net
income |
|
28,964 |
|
|
22,719 |
|
|
14,021 |
|
| Equity issued
in connection with acquisitions |
|
237,022 |
|
|
210,000 |
|
|
—
|
|
Intangible
assets generated from acquisitions accounted for under
the purchase method of
accounting |
|
(199,344 |
) |
|
(115,734 |
) |
|
(21,656 |
) |
| Intangible
assets generated from branch acquisitions |
|
(6,154 |
) |
|
—
|
|
|
—
|
|
| Amortization
of intangible assets |
|
13,687 |
|
|
11,372 |
|
|
4,088 |
|
| Repurchase of
common stock |
|
(8,381 |
) |
|
(24,063 |
) |
|
(39,855 |
) |
| Exercise of
stock options |
|
498 |
|
|
3,269 |
|
|
2,617 |
|
| Cash
dividends declared |
|
(5,579 |
) |
|
(8,069 |
) |
|
(4,280 |
) |
| Other |
|
(2,247 |
) |
|
109 |
|
|
(680 |
) |
| |
|
|
|
|
|
|
|
|
|
| Ending
tangible stockholders’ equity |
|
$
302,189 |
|
|
$
243,723 |
|
|
$144,120 |
|
| |
|
|
|
|
|
|
|
|
|
Intangible assets generated from
our acquisitions accounted for under the purchase method of accounting
are deducted from stockholders’ equity in the above calculation
to arrive at tangible stockholders’ equity. Conversely, the
amortization of intangible assets increases tangible stockholders
’ equity as well as Bay View Capital Corporation’s and Bay
View Bank’s Tier 1 regulatory capital.
Bay View Bank is subject to
various regulatory capital guidelines administered by the Office of
the Comptroller of the Currency. Under these capital guidelines, the
minimum total risk-based capital ratio and Tier 1 risk-based capital
ratio requirements are 8.00% and 4.00%, respectively, of risk-weighted
assets and certain off-balance sheet items. The minimum Tier 1
leverage ratio requirement is 4.00% of quarterly average assets, as
adjusted.
Additionally, the Federal Deposit
Insurance Corporation Improvement Act of 1991 defines five capital
tiers: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized,
depending upon the capital level of the institution. Each federal
banking agency, including the Office of the Comptroller of the
Currency, is required to implement prompt corrective actions for
“undercapitalized” institutions that it
regulates.
Bay View Bank’s regulatory
capital levels at December 31, 1999 exceeded both the minimum
requirements as well as the requirements necessary to be considered
well-capitalized as illustrated in the following table:
|
|
|
At
December 31, 1999
|
|
|
|
Actual
|
|
Minimum
Requirement
|
|
Well-Capitalized
Requirement
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars
in thousands) |
| Tier 1
leverage |
|
$406,001 |
|
6.87 |
% |
|
$236,337 |
|
4.00 |
% |
|
$295,421 |
|
5.00 |
% |
| Tier 1
risk-based |
|
$406,001 |
|
8.41 |
% |
|
$193,024 |
|
4.00 |
% |
|
$289,536 |
|
6.00 |
% |
| Total
risk-based |
|
$507,516 |
|
10.52 |
% |
|
$386,048 |
|
8.00 |
% |
|
$482,560 |
|
10.00 |
% |
Bay View Capital Corporation
’s regulatory capital levels at December 31, 1999 also exceeded
both the Federal Reserve Board’s minimum requirements as well as
the requirements necessary to be considered well-capitalized as
illustrated in the following table:
|
|
|
At
December 31, 1999
|
|
|
|
Actual
|
|
Minimum
Requirement
|
|
Well-Capitalized
Requirement
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars
in thousands) |
| Tier 1
leverage |
|
$386,110 |
|
6.51 |
% |
|
$237,247 |
|
4.00 |
% |
|
—
|
|
—
|
|
| Tier 1
risk-based |
|
$386,110 |
|
7.17 |
% |
|
$215,475 |
|
4.00 |
% |
|
$323,212 |
|
6.00 |
% |
| Total
risk-based |
|
$587,773 |
|
10.91 |
% |
|
$430,950 |
|
8.00 |
% |
|
$538,687 |
|
10.00 |
% |
Stock Repurchase
Program
Our outstanding shares of common
stock were 32,562,942 at December 31, 1999 and 19,113,637 at December
31, 1998. The year-over-year increase in the number of outstanding
shares of common stock was principally attributable to the issuance of
shares in conjunction with our acquisition of FMAC. The
weighted-average shares outstanding (including potential dilutive
common shares) used for computing earnings per diluted share increased
to 21.3 million shares for the year ended December 31, 1999 as
compared with 20.3 million shares for the year ended December 31,
1998.
In August 1998, our Board of
Directors authorized the repurchase of up to $50 million in shares of
our common stock. During 1998, we repurchased $24.1 million in shares,
representing 1,196,500 shares of our common stock at an average price
of $20.11 per share. During 1999 we repurchased $8.3 million in
shares, representing 460,000 shares of our common stock at an average
price of $18.22 per share. At December 31, 1999, we had approximately
$17.6 million in remaining authorization available for future share
repurchases. In November 1999, all of our treasury shares were
reissued in conjunction with the acquisition of FMAC. We intend to
continue share repurchases prospectively, subject to our projected and
actual capital needs, and to measure acquisition and other investment
opportunities relative to the risk-free returns associated with share
repurchases.
Year
2000
We did not experience problems
related to the commencement of the Year 2000. All systems functioned
normally through the date change with no breaks or delays in service.
Our comprehensive compliance and testing program met its objective and
resulted in this successful outcome. Our total pre-tax costs
associated with modifications to become Year 2000 compliant are
estimated at approximately $2.0 million, $1.9 million of which was
incurred through December 31, 1999. A portion of these costs
represents a reallocation of internal resources and, therefore, does
not represent incremental expense to us.
Impact of
Inflation and Changing Prices
Our consolidated financial
statements presented herein have been prepared in accordance with
generally accepted accounting principles, which generally require the
measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative
purchasing power of money over time. Due to the fact that most assets
and liabilities of a financial institution are monetary in nature,
interest rates have a more significant impact on a financial
institution’s performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or
magnitude as the prices of goods and services.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Asset/Liability Management
The objective of our asset and
liability management activities is to improve our earnings by
adjusting the type and mix of assets and liabilities to effectively
address changing conditions and risks. Through overall management of
our balance sheet and by controlling various risks, we seek to
optimize our financial returns within safe and sound parameters. Our
operating strategies for attaining this objective include managing net
interest margin through appropriate risk/return pricing of assets and
liabilities and emphasizing growth in retail deposits, as a percentage
of interest-bearing liabilities, to reduce our cost of funds. Our
strategy includes originating and purchasing quality assets with
higher risk-adjusted yields and selling assets with lower
risk-adjusted yields or repricing characteristics that do not meet our
objectives for interest rate risk. We also seek to improve earnings
through controlling noninterest expense, enhancing noninterest income
and utilizing improved information systems to facilitate our analysis
of the profitability of our business platforms. We also utilize
interest rate derivative financial instruments to hedge mismatches in
the rate and maturity of our assets and their funding sources and to
reduce interest rate risk on anticipated transactions. Finally, we
perform internal analyses to measure, evaluate and monitor
risk.
Interest Rate Risk
A key objective of asset and
liability management is to manage interest rate risk associated with
changing asset and liability cash flows and market interest rate
movements. Interest rate risk occurs when interest rate sensitive
assets and liabilities do not reprice simultaneously and in equal
volumes. Our Asset and Liability Committee provides oversight to our
interest rate risk management process and recommends policy guidelines
regarding exposure to interest rates for approval by our Board of
Directors. Adherence to these policies is monitored on an ongoing
basis, and decisions related to the management of interest rate
exposure are made when appropriate in accordance with our
policies.
Financial institutions are subject
to interest rate risk to the degree that interest-bearing liabilities
reprice or mature on a different basis and at different times than
interest-earning assets. Our strategy has been to reduce the
sensitivity of our earnings to interest rate fluctuations by more
closely matching the effective maturities or repricing characteristics
of our assets and liabilities. Certain assets and liabilities,
however, may react in different degrees to changes in market interest
rates. Further, interest rates on certain types of assets and
liabilities may fluctuate prior to changes in market interest rates,
while rates on other types may lag behind. Additionally, certain
assets, such as adjustable rate mortgages, have features, including
payment and rate caps, which restrict changes in their interest rates.
We consider the anticipated effects of these factors when implementing
our interest rate risk management objectives.
We pursue both on- and off-balance
sheet strategies that should, in the long run, mitigate our exposure
to fluctuations in interest rates. Our interest rate risk should
continue to be reduced in the future as we continue to transition to
less interest rate sensitive consumer and commercial assets and as we
continue to grow transaction accounts.
Interest Rate Exchange
Agreements (Swaps)
We use interest rate exchange
agreements, or swaps, to hedge mismatches in the rate and maturity of
certain of our assets and their funding sources. Interest rate swaps
involve the exchange of fixed-rate and floating-rate interest payment
obligations without the exchange of the underlying notional amounts.
We were a party to interest rate swaps with notional principal amounts
of $256.5 million at December 31, 1999 and $365.5 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.
Treasury Futures
Contracts
We periodically securitize and
sell fixed- and variable-rate loans and leases. To mitigate the risk
of the effects of interest rate fluctuations on the value of our
fixed-rate loans held-for-sale, we will in certain cases hedge our
interest rate risk related to loans held-for-sale by entering into
United States Treasury futures contracts. At December 31, 1999, we had
open positions with a notional amount of $32.5 million related to the
United States Treasury futures contracts used to hedge fixed-rate
franchise loans held-for-sale.
Forward Sales of Mortgage-Backed
Securities
In the past, we have utilized
forward sales contracts of mortgage-backed securities to hedge
portfolios of mortgage loans because of their historical effectiveness
as a hedge. In connection with the market and interest rate volatility
experienced during the third quarter of 1998, the correlation between
our outstanding forward sale contracts and the underlying portfolio of
loans was disrupted, triggering the settlement of the forward sale
contracts and resulting in a $940,000 recognized loss for the year
ended December 31, 1998. There were no forward sale contracts in
effect at December 31, 1998 or December 31, 1999.
Treasury Rate Lock
Agreements
During 1997, we entered into $105
million in Treasury rate lock agreements to hedge the anticipated
issuance of $100 million in Subordinated Notes. These agreements
guaranteed a stated rate of interest for a stated period of time and
we paid the difference between the lock rate and the effective
Treasury rate on the settlement date. In conjunction with the Treasury
rate lock agreements, approximately $307,000 was deferred and is being
recognized as an adjustment to interest expense over the ten year life
of the Subordinated Notes.
Interest rate risk is the most
significant market risk impacting us; however, other types of market
risk also affect us in the normal course of our business activities.
The impact on us resulting from other market risks is deemed
immaterial and no separate quantitative information related to such
market risks is necessary. We do not maintain a portfolio of trading
securities and do not intend to engage in such activities in the
foreseeable future.
Interest Rate Sensitivity
Our monitoring activities related
to managing interest rate risk include both interest rate sensitivity
“gap” analysis and the use of a simulation model. While
traditional gap analysis provides a simple picture of the interest
rate risk embedded in the balance sheet, it provides only a static
view of interest rate sensitivity at a specific point in time and does
not measure the potential volatility in forecasted results relating to
changes in market interest rates over time. Accordingly, we combine
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.
The following table illustrates
our combined asset and liability repricing as of December 31,
1999:
|
|
|
Repricing
Period
|
|
|
|
Under One
Year
|
|
Over One to
Three Years
|
|
Over Three
to Five
Years
|
|
Over Five
Years
|
|
Total
|
|
|
|
(Dollars
in thousands) |
| Assets |
|
|
| Cash and
investments |
|
$
287,597 |
|
|
$
3,130 |
|
|
$
2,257 |
|
|
$
45,692 |
|
|
$
338,676 |
Mortgage-backed securities and loans and
leases(1) |
|
2,607,017 |
|
|
1,241,244 |
|
|
547,840 |
|
|
1,135,354 |
|
|
5,531,455 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
interest rate sensitive assets |
|
$2,894,614 |
|
|
$1,244,374 |
|
|
$
550,097 |
|
|
$1,181,046 |
|
|
$5,870,131 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
| Deposits: |
|
Transaction
accounts |
|
$1,030,686 |
|
|
$
465,242 |
|
|
$
138,130 |
|
|
$
69,065 |
|
|
$1,703,123 |
|
Certificates of
deposit |
|
1,427,493 |
|
|
202,903 |
|
|
5,772 |
|
|
959 |
|
|
1,637,127 |
|
Brokered
certificates of deposit |
|
389,530 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
389,530 |
|
Borrowings(2) |
|
1,157,590 |
|
|
195,168 |
|
|
300,416 |
|
|
372,343 |
|
|
2,025,517 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
interest rate sensitive liabilities |
|
$4,005,299 |
|
|
$
863,313 |
|
|
$
444,318 |
|
|
$
442,367 |
|
|
$5,755,297 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing
gap-positive (negative) before
impact of derivatives |
|
$(1,110,685 |
) |
|
$
381,061 |
|
|
$
105,779 |
|
|
$
738,679 |
|
|
$
114,834 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Impact of
derivatives |
|
124,000 |
|
|
(54,000 |
) |
|
(25,000 |
) |
|
(77,500 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(986,685 |
) |
|
327,061 |
|
|
80,779 |
|
|
661,179 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
repricing gap-positive
(negative) |
|
$
(986,685 |
) |
|
$
(659,624 |
) |
|
$(578,845 |
) |
|
$
82,334 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on
assumed annual prepayment and amortization rates which approximate
our historical experience.
|
(2)
|
Includes
Capital Securities.
|
The simulation model discussed
above also provides the Asset and Liability Committee with the ability
to simulate our net interest income. In order to measure, at December
31, 1999, the sensitivity of our forecasted net interest income to
changing interest rates, both a rising and falling interest rate
scenario were projected and compared to a base market interest rate
forecast derived from the current 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 December 31, 1999, our net
interest income exposure related to these hypothetical changes in
market interest rates was within our policy guidelines as illustrated
in the following table:
|
|
|
Increase/(Decrease) in Net Interest Income
|
|
|
|
|
|
-200
bp
|
|
-100
bp
|
|
+100
bp
|
|
+200
bp
|
| Projected
effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
NII without
derivatives |
|
$212,040 |
|
|
$201,950 |
|
|
$183,555 |
|
|
$172,657 |
|
|
NII with
derivatives |
|
$207,099 |
|
|
$199,066 |
|
|
$184,787 |
|
|
$175,946 |
|
|
Impact of
derivatives |
|
$
(4,941 |
) |
|
$
(2,884 |
) |
|
$
1,232 |
|
|
$
3,289 |
|
% Increase
(decrease) from base NII, with
derivatives |
|
7.75 |
% |
|
3.57 |
% |
|
(3.86 |
)% |
|
(8.46 |
)% |
|
Policy
guideline |
|
(15.00 |
)% |
|
(10.00 |
)% |
|
(10.00 |
)% |
|
(15.00 |
)% |
|
|
|
One application of our
simulation model measures the impact of market interest rate
changes on the net present value of estimated cash flows from our
assets, liabilities and off-balance sheet items, defined as
our |
market value
of equity. This analysis assesses the changes in market values of
interest rate sensitive financial instruments that would occur in
response to an instantaneous and sustained increase or decrease in
market interest rates of 100 and 200 basis points. At December 31,
1999, our market value of equity exposure related to these changes
in market interest rates was within our policy guidelines as
illustrated in the following table:
|
|
|
Changes
in Market Value of Equity
|
|
|
-200 bp
|
|
-100
bp
|
|
+100
bp
|
|
+200
bp
|
| Projected
effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
MVE without
derivatives |
|
$808,068 |
|
|
$734,916 |
|
|
$600,384 |
|
|
$535,128 |
|
|
MVE with
derivatives |
|
$795,216 |
|
|
$728,300 |
|
|
$605,394 |
|
|
$545,559 |
|
|
Impact of
derivatives |
|
$(12,852 |
) |
|
$
(6,616 |
) |
|
$
5,010 |
|
|
$
10,431 |
|
Change in MVE with
derivatives as a percentage of
base MVE |
|
19.81 |
% |
|
9.73 |
% |
|
(8.79 |
)% |
|
(17.80 |
)% |
|
Policy
guideline |
|
(15.00 |
)% |
|
(10.00 |
)% |
|
(10.00 |
)% |
|
(20.00 |
)% |
The computation of prospective
effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates,
asset prepayments and deposit decay, and should not be relied upon
as indicative of actual results. Further, the computations do not
contemplate any actions we may undertake in response to changes in
interest rates. Actual amounts may differ from those projections set
forth above should market conditions vary from the underlying
assumptions used.
Item 8. Financial Statements and Supplementary
Data
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars
in thousands) |
| ASSETS |
|
|
|
|
|
|
|
| Cash and
cash equivalents: |
|
Cash and due from
depository institutions |
|
$
155,600 |
|
|
$
37,296 |
|
|
Short-term
investments |
|
188,305 |
|
|
167,890 |
|
| |
|
|
|
|
|
|
|
|
|
343,905 |
|
|
205,186 |
|
| Securities
available-for-sale: |
|
Investment
securities |
|
49,063 |
|
|
5,319 |
|
|
Mortgage-backed
securities |
|
10,479 |
|
|
13,616 |
|
| Securities
held-to-maturity: |
|
Investment
securities |
|
9,997 |
|
|
—
|
|
|
Mortgage-backed
securities |
|
644,234 |
|
|
621,773 |
|
| Loans and
leases held-for-sale |
|
66,247 |
|
|
—
|
|
| Loans and
leases held-for-investment, net |
|
4,295,246 |
|
|
4,191,269 |
|
| Investment
in operating leased assets, net |
|
463,088 |
|
|
183,453 |
|
| Investment
in stock of the Federal Home Loan Bank of San Francisco |
|
77,835 |
|
|
90,878 |
|
| Investment
in stock of the Federal Reserve Bank |
|
13,476 |
|
|
—
|
|
| Real estate
owned, net |
|
2,467 |
|
|
2,666 |
|
| Premises
and equipment, net |
|
27,216 |
|
|
24,727 |
|
| Intangible
assets |
|
329,005 |
|
|
134,088 |
|
| Other
assets |
|
166,442 |
|
|
123,257 |
|
| |
|
|
|
|
|
|
|
Total assets |
|
$6,498,700 |
|
|
$5,596,232 |
|
| |
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| Deposits: |
|
Transaction
accounts |
|
$1,703,123 |
|
|
$1,627,275 |
|
|
Certificates of
deposit |
|
2,026,657 |
|
|
1,642,362 |
|
| |
|
|
|
|
|
|
|
|
|
3,729,780 |
|
|
3,269,637 |
|
| Advances
from the Federal Home Loan Bank of San Francisco |
|
1,367,300 |
|
|
1,653,300 |
|
| Short-term
borrowings |
|
415,421 |
|
|
25,302 |
|
| Subordinated Notes, net |
|
149,502 |
|
|
99,437 |
|
| Senior
Debentures |
|
—
|
|
|
50,000 |
|
| Other
borrowings |
|
3,294 |
|
|
5,077 |
|
| Other
liabilities |
|
112,209 |
|
|
25,668 |
|
| |
|
|
|
|
|
|
|
Total liabilities |
|
5,777,506 |
|
|
5,128,421 |
|
| |
|
|
|
|
|
|
|
Guaranteed Preferred
Beneficial Interest in our Junior Subordinated Debentures (
“Capital Securities”) |
|
90,000 |
|
|
90,000 |
|
|
|
| Stockholders’ equity: |
|
Serial preferred
stock; authorized, 7,000,000 shares; outstanding, none |
|
—
|
|
|
—
|
|
|
Common stock
($.01 par value); authorized, 60,000,000 shares; issued, 1999
—32,629,056 shares; 1998—20,376,251 shares;
outstanding, 1999—32,562,942 shares; 1998— 19,113,637
shares |
|
326 |
|
|
204 |
|
|
Additional
paid-in capital |
|
455,964 |
|
|
251,010 |
|
|
Retained earnings
(substantially restricted) |
|
179,100 |
|
|
155,715 |
|
|
Treasury stock,
at cost, 1999—66,114 shares; 1998—1,262,614
shares |
|
(1,094 |
) |
|
(25,157 |
) |
|
Accumulated other
comprehensive income: |
|
Unrealized loss on securities
available-for-sale, net of tax |
|
(293 |
) |
|
(202 |
) |
|
Debt of Employee
Stock Ownership Plan |
|
(2,809 |
) |
|
(3,759 |
) |
| |
|
|
|
|
|
|
|
Total stockholders’
equity |
|
631,194 |
|
|
377,811 |
|
| |
|
|
|
|
|
|
|
Total liabilities and
stockholders’ equity |
|
$6,498,700 |
|
|
$5,596,232 |
|
| |
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
|
|
|
For the
Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands, except
per share amounts) |
| Interest
income: |
|
|
|
|
|
|
|
|
|
|
Interest on loans and
leases |
|
$369,841 |
|
|
$347,086 |
|
|
$197,898 |
|
|
Interest on
mortgage-backed securities |
|
37,376 |
|
|
48,225 |
|
|
34,317 |
|
|
Interest and dividends
on investment securities |
|
14,439 |
|
|
11,052 |
|
|
10,029 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
421,656 |
|
|
406,363 |
|
|
242,244 |
|
| Interest
expense: |
|
Interest on
deposits |
|
142,427 |
|
|
149,656 |
|
|
76,484 |
|
|
Interest on
borrowings |
|
95,345 |
|
|
88,000 |
|
|
70,708 |
|
|
Interest on Senior
Debentures and Notes |
|
13,400 |
|
|
14,106 |
|
|
7,716 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
251,172 |
|
|
251,762 |
|
|
154,908 |
|
| Net
interest income |
|
170,484 |
|
|
154,601 |
|
|
87,336 |
|
| Provision
for losses on loans and leases |
|
28,311 |
|
|
9,114 |
|
|
1,952 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
interest income after provision for losses on loans and
leases |
|
142,173 |
|
|
145,487 |
|
|
85,384 |
|
| Noninterest income: |
|
|
|
|
|
|
|
|
|
|
Leasing
income |
|
58,558 |
|
|
11,341 |
|
|
—
|
|
|
Loan fees and
charges |
|
8,833 |
|
|
7,411 |
|
|
5,679 |
|
|
Account fees |
|
7,007 |
|
|
6,122 |
|
|
2,799 |
|
|
Sales
commissions |
|
4,801 |
|
|
3,994 |
|
|
2,502 |
|
|
Gain on sale of loans
and leases and securities, net |
|
10,058 |
|
|
1,060 |
|
|
925 |
|
|
Other, net |
|
2,275 |
|
|
1,144 |
|
|
850 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
91,532 |
|
|
31,072 |
|
|
12,755 |
|
| Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
General and
administrative: |
|
|
|
|
|
|
|
|
|
|
Compensation and employee
benefits |
|
64,064 |
|
|
56,105 |
|
|
35,646 |
|
|
Occupancy and equipment |
|
22,531 |
|
|
20,644 |
|
|
10,677 |
|
|
Professional services |
|
5,959 |
|
|
9,382 |
|
|
5,278 |
|
|
Marketing |
|
3,854 |
|
|
3,572 |
|
|
2,612 |
|
|
Data processing |
|
3,438 |
|
|
3,994 |
|
|
2,811 |
|
|
Deposit insurance premiums and regulatory
fees |
|
2,740 |
|
|
2,908 |
|
|
1,475 |
|
|
Other, net |
|
14,530 |
|
|
16,962 |
|
|
13,414 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
117,116 |
|
|
113,567 |
|
|
71,913 |
|
| Leasing
expense |
|
40,188 |
|
|
7,682 |
|
|
—
|
|
| Dividend
expense on Capital Securities |
|
8,935 |
|
|
244 |
|
|
—
|
|
| Income
from real estate owned operations, net |
|
(274 |
) |
|
(181 |
) |
|
(543 |
) |
| Net losses
(recoveries) on real estate |
|
36 |
|
|
(59 |
) |
|
(585 |
) |
| Amortization of intangible assets |
|
13,687 |
|
|
11,372 |
|
|
4,088 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
179,688 |
|
|
132,625 |
|
|
74,873 |
|
| Income
before income tax expense |
|
54,017 |
|
|
43,934 |
|
|
23,266 |
|
| Income tax
expense |
|
25,053 |
|
|
21,215 |
|
|
9,245 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
income |
|
$
28,964 |
|
|
$
22,719 |
|
|
$
14,021 |
|
| |
|
|
|
|
|
|
|
|
|
| Basic
earnings per share |
|
$
1.37 |
|
|
$
1.13 |
|
|
$
1.09 |
|
| |
|
|
|
|
|
|
|
|
|
| Diluted
earnings per share |
|
$
1.36 |
|
|
$
1.12 |
|
|
$
1.06 |
|
| |
|
|
|
|
|
|
|
|
|
| Weighted-average basic shares outstanding |
|
21,169 |
|
|
20,035 |
|
|
12,860 |
|
| |
|
|
|
|
|
|
|
|
|
| Weighted-average diluted shares outstanding |
|
21,315 |
|
|
20,335 |
|
|
13,203 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
income |
|
$
28,964 |
|
|
$
22,719 |
|
|
$
14,021 |
|
| Other
comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
Change in unrealized
(loss) gain on securities available-for-sale, net of tax
(benefit) expense of
($64), ($92) and $464 for 1999, 1998 and 1997,
respectively |
|
(91 |
) |
|
(130 |
) |
|
641 |
|
| |
|
|
|
|
|
|
|
|
|
| Comprehensive income |
|
$
28,873 |
|
|
$
22,589 |
|
|
$14,662 |
|
| |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
|
|
|
Number
of
Shares
Issued
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings(1)
|
|
Treasury
Stock
|
|
Unrealized Gain
(Loss) on Securities
Available-for-Sale,
Net of Tax
|
|
Debt of
Employee
Stock
Ownership
Plan
|
|
Total
Stockholders’
Equity
|
|
|
|
(Amounts in thousands, except per share
amounts) |
| Balance at
December 31, 1996 |
|
15,005 |
|
$150 |
|
$100,436 |
|
$131,324 |
|
|
$(26,497 |
) |
|
$(713 |
) |
|
$(4,638 |
) |
|
$200,062 |
|
| Repurchase
of common stock |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(39,855 |
) |
|
—
|
|
|
—
|
|
|
(39,855 |
) |
| Exercise
of stock options, including tax benefits |
|
121 |
|
1 |
|
2,616 |
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,617 |
|
| Cash
dividends declared ($0.34 per share) |
|
—
|
|
—
|
|
—
|
|
(4,280 |
) |
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,280 |
) |
| Unrealized
gain on securities available-for-sale, net of tax |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
641 |
|
|
—
|
|
|
641 |
|
| Repayment
of debt |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
421 |
|
|
421 |
|
| Net
income |
|
—
|
|
—
|
|
—
|
|
14,021 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,021 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1997 |
|
15,126 |
|
151 |
|
103,052 |
|
141,065 |
|
|
(66,352 |
) |
|
(72 |
) |
|
(4,217 |
) |
|
173,627 |
|
| Issuance
of common stock (AFEH acquisition): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From shares held
in treasury |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
65,258 |
|
|
—
|
|
|
—
|
|
|
65,258 |
|
|
From authorized
but unissued shares |
|
5,087 |
|
51 |
|
144,691 |
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
144,742 |
|
| Repurchase
of common stock |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(24,063 |
) |
|
—
|
|
|
—
|
|
|
(24,063 |
) |
| Exercise
of stock options, including tax benefits |
|
163 |
|
2 |
|
3,267 |
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,269 |
|
| Cash
dividends declared ($0.40 per share) |
|
—
|
|
—
|
|
—
|
|
(8,069 |
) |
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,069 |
) |
| Unrealized
loss on securities available-for-sale, net of tax |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
(130 |
) |
|
—
|
|
|
(130 |
) |
| Repayment
of debt |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
458 |
|
|
458 |
|
| Net
income |
|
—
|
|
—
|
|
—
|
|
22,719 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,719 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1998 |
|
20,376 |
|
204 |
|
251,010 |
|
155,715 |
|
|
(25,157 |
) |
|
(202 |
) |
|
(3,759 |
) |
|
377,811 |
|
| Issuance
of common stock (FMAC acquisition): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From shares held
in treasury |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
32,444 |
|
|
—
|
|
|
—
|
|
|
32,444 |
|
|
From authorized
but unissued shares |
|
12,212 |
|
122 |
|
204,456 |
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
204,578 |
|
| Repurchase
of common stock |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(8,381 |
) |
|
—
|
|
|
—
|
|
|
(8,381 |
) |
| Exercise
of stock options, including tax benefits |
|
41 |
|
—
|
|
498 |
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
498 |
|
| Cash
dividends declared ($0.30 per share) |
|
—
|
|
—
|
|
—
|
|
(5,579 |
) |
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,579 |
) |
| Unrealized
loss on securities available-for-sale, net of tax |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
(91 |
) |
|
—
|
|
|
(91 |
) |
| Repayment
of debt |
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
950 |
|
|
950 |
|
| Net
income |
|
—
|
|
—
|
|
—
|
|
28,964 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28,964 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at
December 31, 1999 |
|
32,629 |
|
$326 |
|
$455,964 |
|
$179,100 |
|
|
$
(1,094 |
) |
|
$(293 |
) |
|
$(2,809 |
) |
|
$631,194 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Substantially restricted.
The
accompanying notes are an integral part of these consolidated
financial statements.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
For the
Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands) |
|
| CASH FLOWS
FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| Net
income |
|
$
28,964 |
|
|
$
22,719 |
|
|
$
14,021 |
|
Adjustments to reconcile net income to net cash provided
by operating
activities: |
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
13,687 |
|
|
11,372 |
|
|
4,088 |
|
|
Proceeds
from securitizations and/or sales of loans and leases
held-for-sale |
|
937,457 |
|
|
—
|
|
|
265,203 |
|
|
Provision
for losses on loans and leases and real estate owned |
|
28,347 |
|
|
9,055 |
|
|
1,367 |
|
|
Depreciation and amortization of premises and
equipment |
|
7,860 |
|
|
6,780 |
|
|
2,974 |
|
Depreciation and amortization of investment in operating
leased
assets |
|
35,590 |
|
|
6,612 |
|
|
—
|
|
|
Amortization of premiums, net of discount
accretion |
|
24,072 |
|
|
15,735 |
|
|
4,139 |
|
|
Gain on
sale of loans and leases and securities, net |
|
(10,058 |
) |
|
(1,060 |
) |
|
(925 |
) |
|
Decrease
(increase) in other assets |
|
36,415 |
|
|
(6,863 |
) |
|
(7,421 |
) |
|
Increase
(decrease) in other liabilities |
|
9,074 |
|
|
(39,424 |
) |
|
(54,707 |
) |
|
Other,
net |
|
(2,526 |
) |
|
(2,628 |
) |
|
(1,678 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net cash
provided by operating activities |
|
1,108,882 |
|
|
22,298 |
|
|
227,061 |
|
| |
|
|
|
|
|
|
|
|
|
| CASH FLOWS
FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Acquisition of subsidiaries, net of cash and cash
equivalents (paid)
received |
|
(15,453 |
) |
|
82,129 |
|
|
(9,975 |
) |
| Acquisition of deposits, net of premium paid |
|
110,807 |
|
|
—
|
|
|
—
|
|
Net
(increase) decrease in loans and leases resulting from
originations,
net of repayments |
|
(152,297 |
) |
|
451,171 |
|
|
(57,327 |
) |
| Purchases
of loans and leases, net |
|
(1,136,658 |
) |
|
(948,132 |
) |
|
(120,963 |
) |
| Purchases
of mortgage-backed securities |
|
(172,304 |
) |
|
(201,714 |
) |
|
— |
|
| Purchases
of investment securities |
|
(20,035 |
) |
|
(1,956 |
) |
|
(5,639 |
) |
| Principal
payments on mortgage-backed securities |
|
149,494 |
|
|
284,627 |
|
|
83,643 |
|
| Proceeds
from sale of mortgage-backed securities
available-for-sale |
|
—
|
|
|
239,707 |
|
|
20,465 |
|
| Proceeds
from sale of investment securities available-for-sale |
|
—
|
|
|
2,357 |
|
|
—
|
|
Proceeds
from maturities/calls of investment securities available-for-
sale |
|
—
|
|
|
—
|
|
|
13,802 |
|
Proceeds
from maturities/calls of investment securities held-to-
maturity |
|
—
|
|
|
5,000 |
|
|
10,204 |
|
| Proceeds
from sale of real estate owned |
|
4,127 |
|
|
5,357 |
|
|
12,528 |
|
| Additions
to premises and equipment |
|
(3,922 |
) |
|
(11,110 |
) |
|
(11,694 |
) |
Decrease
(increase) in investment in stock of the Federal Home Loan
Bank of San Francisco |
|
13,043 |
|
|
(9,303 |
) |
|
(9,121 |
) |
| Increase
in investment in stock of the Federal Reserve Bank |
|
(13,476 |
) |
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
| Net cash
used in investing activities |
|
(1,236,674 |
) |
|
(101,867 |
) |
|
(74,077 |
) |
| |
|
|
|
|
|
|
|
|
|
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
—(Continued)
|
|
|
For the
Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands) |
| CASH FLOWS
FROM FINANCING ACTIVITIES |
| Net
increase (decrease) in deposits |
|
343,182 |
|
|
(420,141 |
) |
|
(86,832 |
) |
Proceeds
from advances from the Federal Home Loan Bank of
San Francisco |
|
3,725,100 |
|
|
5,320,200 |
|
|
5,509,532 |
|
Repayment
of advances from the Federal Home Loan Bank of
San Francisco |
|
(4,011,100 |
) |
|
(4,833,170 |
) |
|
(5,377,012 |
) |
| Proceeds
from reverse repurchase agreements |
|
268,461 |
|
|
377,813 |
|
|
519,338 |
|
| Repayment
of reverse repurchase agreements |
|
(275,880 |
) |
|
(442,645 |
) |
|
(639,844 |
) |
| Issuance
of Subordinated Notes, net of discount |
|
50,000 |
|
|
—
|
|
|
99,350 |
|
| Repayment
of Senior Debentures |
|
(50,000 |
) |
|
—
|
|
|
—
|
|
| Net
increase in warehouse lines outstanding |
|
234,129 |
|
|
—
|
|
|
—
|
|
| Net
decrease in other borrowings |
|
(1,783 |
) |
|
(11,123 |
) |
|
(10,865 |
) |
| Issuance
of Capital Securities |
|
—
|
|
|
90,000 |
|
|
—
|
|
| Repurchase
of common stock |
|
(8,381 |
) |
|
(24,063 |
) |
|
(39,855 |
) |
| Proceeds
from issuance of common stock |
|
498 |
|
|
3,269 |
|
|
2,617 |
|
| Dividends
paid to stockholders |
|
(7,715 |
) |
|
(7,207 |
) |
|
(4,419 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) financing activities |
|
266,511 |
|
|
52,933 |
|
|
(27,990 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net
increase (decrease) in cash and cash equivalents |
|
138,719 |
|
|
(26,636 |
) |
|
124,994 |
|
| Cash and
cash equivalents at beginning of year |
|
205,186 |
|
|
231,822 |
|
|
106,828 |
|
| |
|
|
|
|
|
|
|
|
|
| Cash and
cash equivalents at end of year |
|
$
343,905 |
|
|
$
205,186 |
|
|
$
231,822 |
|
| |
|
|
|
|
|
|
|
|
|
| Cash paid
during the year for: |
|
Interest |
|
$
255,814 |
|
|
$
253,528 |
|
|
$
148,615 |
|
|
Income
taxes |
|
$
—
|
|
|
$
118 |
|
|
$
14,674 |
|
| Supplemental non-cash investing and financing
activities: |
|
Loans
transferred to real estate owned |
|
$
3,319 |
|
|
$
4,956 |
|
|
$
8,252 |
|
|
Loans
transferred from held-for-investment to held-for-sale |
|
$
915,146 |
|
|
$
—
|
|
|
$
— |
|
|
Loans
originated to sell real estate owned |
|
$
—
|
|
|
$
—
|
|
|
$
1,904 |
|
| The
acquisitions of subsidiaries involved the following: |
|
|
|
|
Common
stock issued |
|
$
237,022 |
|
|
$
210,000 |
|
|
$
— |
|
|
Liabilities
assumed |
|
238,722 |
|
|
2,103,352 |
|
|
13,667 |
|
Fair value
of assets acquired, other than cash and cash
equivalents |
|
(291,853 |
) |
|
(2,127,646 |
) |
|
(1,986 |
) |
|
Goodwill |
|
(199,344 |
) |
|
(103,577 |
) |
|
(21,656 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash
and cash equivalents (paid) received |
|
$
(15,453 |
) |
|
$
82,129 |
|
|
$
(9,975 |
) |
| |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 1999
Note 1.
Summary of Significant Accounting
Policies
Nature of Operations
Bay View Capital Corporation is
a diversified bank holding company headquartered in San Mateo,
California. Our principal subsidiary is Bay View Bank, N.A. Bay
View Bank operates 57 full service branches throughout the San
Francisco Bay Area and loan production offices throughout the
United States. Bay View Bank offers personal and business banking
services and deposit accounts through its branch network and
provides multi-family and commercial real estate loans, consumer
loans and leases and commercial lending throughout the United
States. Bay View Securitization Corporation was formed for the
purpose of issuing asset-backed securities through a trust. Bay
View Capital I was formed for the purpose of issuing Capital
Securities through a trust. FMAC Insurance Services operates as an
insurance agency throughout the United States.
Principles of Consolidation
The accompanying consolidated
financial statements include the accounts of Bay View Capital
Corporation, a bank holding company incorporated under the laws of
the state of Delaware, and our wholly owned subsidiaries: Bay View
Bank, N.A., a national bank; Bay View Securitization Corporation, a
Delaware corporation; Bay View Capital I, a Delaware business
trust; and FMAC Insurance Services, a Delaware corporation. Bay
View Bank includes its wholly owned subsidiaries: Bay View
Acceptance Corporation, a Nevada corporation; Bay View Commercial
Finance Group, a California corporation; Bay View Franchise
Mortgage Acceptance Company, a California corporation; Bankers
Mutual, a California corporation; MoneyCare, Inc., a California
corporation; and Bay View Auxiliary Corporation, a California
corporation. Bay View Acceptance Corporation includes its wholly
owned subsidiary, LFS-BV, Inc., a Nevada corporation. Effective
March 1, 1999, Bay View Capital Corporation contributed the capital
stock of Bay View Commercial Finance Group to Bay View Bank in
conjunction with the March 1, 1999 conversion of Bay View Bank from
a federally chartered capital stock savings bank to a national
bank. Bay View Commercial Finance Group was previously a wholly
owned subsidiary of Bay View Capital Corporation. Effective June
14, 1999, Bay View Credit and Ultra Funding, Inc., previously
wholly owned subsidiaries of Bay View Acceptance Corporation, were
merged into Bay View Acceptance Corporation. All significant
intercompany accounts and transactions have been
eliminated.
Basis of Financial Presentation and Use of
Estimates
The preparation of financial
statements in conformity with generally accepted accounting
principles, sometimes referred to as GAAP, requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to possible
change in the near term relates to the determination of the
allowance for losses on loans and leases. An estimate of possible
changes or range of possible changes cannot be made.
Cash and Cash Equivalents
Cash and cash equivalents, as
reported in the consolidated statements of financial condition and
statements of cash flows, consist of highly liquid financial
instruments, with maturities of 90 days or less at the time of
purchase, that are readily convertible into cash and are so near
their maturity that they present insignificant risk of changes in
value.
Generally, our banking
depositories either pay interest on deposits or apply an imputed
interest credit to deposit balances which is used as an offset to
charges for banking services rendered. We have no compensating
balance arrangements or lines of credit with banks. Bay View Bank is
required to maintain reserves against customer deposits by keeping
balances with the Federal Reserve Bank of San Francisco in a
noninterest-earning cash account. Cash balances for Bay View Bank
required to be held in reserve at the Federal Reserve Bank of San
Francisco totaled approximately $850,000 at December 31, 1999 and
$1.1 million at December 31, 1998. The average required reserve
balance for Bay View Bank totaled $850,000 in 1999 and $6.1 million
in 1998.
Securities
Statement of Financial
Accounting Standards No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” establishes the
classification of investments into three categories:
held-to-maturity, available-for-sale and trading. Securities
classified as held-to-maturity are recorded at amortized cost,
adjusted for the amortization of premiums and accretion of
discounts, because we have the ability and intent to hold these
securities to maturity. Securities that are held to meet investment
objectives such as interest rate risk and liquidity management, but
which may be sold as necessary to implement management strategies,
are classified as available-for-sale and are reported at fair
value. Fair value for these securities is obtained principally from
published information or quotes by registered securities brokers.
Securities for which quotes are not readily available are valued
based on the present value of discounted estimated future cash
flows. Retained interests and assets-backed securities related to
our loan and lease securitizations are classified as securities
available-for sale. We are not aware of an active market for the
purchase and sale of these retained interests and asset-backed
securities at this time, and accordingly, we estimated the fair
value of the retained interests by calculating the present value of
the estimated expected future cash flows to be received, using a
discount rate commensurate with the risks involved. At December 31,
1999 and 1998, there was no impairment relating to retained
interests or asset-backed securities. We do not have a trading
portfolio.
Securities are identified as
either available-for-sale or held-to-maturity at purchase and are
accounted for accordingly. Unrealized losses on securities
held-to-maturity are realized and charged against earnings when it
is determined that a decline in value which is other than temporary
has occurred. Net unrealized gains and losses on securities
available-for-sale are excluded from earnings and reported, net of
applicable income taxes, as a separate component of stockholders
’ equity. Gains and losses on sales of securities are recorded
in earnings at the time of sale and are determined by the
difference between the net sale proceeds and the amortized cost of
the security, using the specific identification method.
Discounts and premiums on
securities are amortized into interest income using a method
approximating the effective interest method over the estimated life
of the security, adjusted for actual prepayments. Interest on
securities is accrued as income only to the extent considered
collectible.
Loans and Leases
Loans and leases that we
originate or purchase are identified as either held-for-sale or
held-for-investment and are recorded at cost including premiums or
discounts, deferred fees and costs and the allowance for losses, as
applicable. Loans and leases classified as held-for-sale primarily
consist of fixed-rate franchise loans, where the interest rate risk
has been hedged through the use of Treasury futures contracts, and
other loans specifically targeted for sale. Loans and leases
classified as held-for-sale are carried at the lower of cost or
market on an aggregate basis for each loan and lease type. Market
value for these loans and leases is based on prices for similar
loans and leases in the secondary whole loan or securitization
markets. Interest on loans and leases is accrued as income only to
the extent considered collectible. Loans and leases classified as
held-for-investment are carried at amortized cost and are not
adjusted to the lower of cost or market because we have the ability
and the intent to hold these loans and leases to maturity.
Generally, we discontinue interest accruals on loans and leases 90
days or more past due. Interest income on nonaccrual loans and
leases is recognized on a cash basis when received.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We charge fees for originating
loans and leases at the time the loan or lease is granted. We
recognize these origination fees, net of certain direct costs and
standard costs where applicable in accordance with Statement of
Financial Accounting Standards No. 91, “Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases,” as a
yield adjustment over the life of the related loan or lease using
the effective interest method or an approximate equivalent if not
materially different. Amortization of net deferred origination fees
is discontinued on nonperforming loans and leases. When a loan or
lease is sold or paid off, unamortized net deferred origination
fees are included in income at that time.
Statement of Financial
Accounting Standards No. 114, “Accounting by Creditors for
Impairment of a Loan,” as amended by Statement of Financial
Accounting Standards No. 118, “Accounting by Creditors for
Impairment of a Loan—Income Recognition and Disclosures,”
established standards for impaired loans. A loan is impaired when,
based on current information and events, it is probable that we are
unable to collect all amounts due according to the contractual
terms of the loan agreement. We consider nonperforming loans and
troubled debt restructurings as impaired loans. Nonperforming loans
are defined as loans 90 days or more delinquent as to principal and
interest payments unless the principal and interest are well
secured and in the process of collection. We also designate loans
less than 90 days delinquent as nonperforming when the full
collection of principal and/or interest is doubtful. Troubled debt
restructurings are loans which have been modified based upon
interest rate concessions and/or payment concessions. Statement No.
114 is not applicable to large groups of homogeneous loans that are
collectively evaluated for impairment. We consider our
single-family residential and consumer loans, including auto and
home equity loans, as homogeneous loans for purposes of the
application of Statement No. 114.
Charge-offs are recorded on
impaired loans for the difference between the valuation of the loan
and the recorded investment, net of any specific reserves. In
determining charge-offs for specific loans, management evaluates
the creditworthiness and financial status of the borrower and also
analyzes cash flows and current property appraisals. Statement No.
114 requires that impaired loans be measured based upon the present
value of expected future cash flows discounted at the loan’s
effective interest rate or, as a practical expedient, at the loan
’s observable market price or the fair value of the collateral
if the loan is collateral dependent. Our impaired real estate-based
loans are generally measured based on the fair value of the
collateral because they are collateral dependent.
Statement No. 118 allows a
creditor to use existing methods for recognizing interest income on
an impaired loan. We recognize interest income on impaired loans on
a cash basis when received.
Allowance for Losses on Loans and
Leases
The allowance for losses on
loans and leases is established through a provision charged to
expense and is maintained at a level that we believe is sufficient
to cover estimated probable losses in the portfolio. In determining
the level of the allowance for losses on loans and leases, we
adhere to an internal asset review system and an established loss
reserve methodology. This methodology provides for three reserve
components. The first component represents reserves for loans and
leases that have been individually evaluated and identified as
having probable losses. The second component represents reserves
for groups of loans and leases that are collectively evaluated for
impairment. We determine reserves for these groups of loans and
leases based on factors such as prevailing economic conditions,
historical loss experience, asset concentrations, levels and trends
of classified assets, and loan and lease delinquencies. The last
component is unallocated reserves, representing reserves based on
factors that are not necessarily associated with a specific credit,
group of loans or leases or loan or lease category. These factors
include an evaluation of economic conditions in areas where we lend
money, loan and lease concentrations, lending policies or
underwriting procedures, and trends in delinquencies and
nonperforming assets. The unallocated reserve reflects our efforts
to ensure that the overall allowance appropriately reflects the
probable losses inherent in the loan and lease
portfolio.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
While we use currently
available information to provide for losses on loans and leases,
additions to the allowance for losses on loans and leases may be
necessary based on new information and/or future economic
conditions.
Loan Sales and Servicing
Statement of Financial
Accounting Standards No. 125, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,
” establishes standards under which, after a transfer of
financial assets, an entity recognizes the financial and servicing
assets it still controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. Under Statement No.
125, we record a servicing asset for the present value of the
retained interest in a transferred asset representing servicing
fees net of related costs. Any retained interest in excess of such
servicing fees is recorded on a net present value basis and is
classified as an available-for-sale security and stated at fair
value. At December 31, 1999 and 1998, there was no impairment
relating to servicing assets. Amortization of servicing assets and
any related impairments are included in noninterest income and
noninterest expense as the associated servicing revenue is received
and expenses are incurred. Gains or losses on the securitizations
and/or sales of loans and leases are recorded in earnings at the
time of the transaction.
Investment in Operating Leased
Assets
We purchase autos subject to
leases which are characterized as operating leases in accordance
with Statement of Financial Accounting Standards No. 13,
“Accounting for Leases.” The corresponding asset is
recorded as a fixed asset and depreciated over the lease term to
its estimated residual value. This depreciation and other related
expenses, including the amortization of initial direct costs which
are deferred and amortized over the lease term, are classified as
noninterest expense. Lease payments received are recorded as
noninterest income. Gross leased asset balances were $500.0 million
at December 31, 1999 and $186.2 million at December 31, 1998.
Accumulated depreciation and amortization related to the leased
assets totaled $36.9 million at December 31, 1999 and $2.7 million
at December 31, 1998. At December 31, 1999, future minimum lease
payments to be received by us under operating leases were $83.7
million, $81.7 million, $68.5 million, $43.0 million, $15.4
million, and $1.3 million for the years ending December 31, 2000,
2001, 2002, 2003, 2004, and thereafter, respectively.
We continually review and
adjust, as necessary, the estimated residual value relating to our
leased assets through an evaluation of factors such as prevailing
economic conditions, historical loss experience and delinquencies.
The estimated residual value on our leased assets was $289.9
million at December 31, 1999 and $110.2 million at December 31,
1998.
Real Estate Owned
Real estate owned is comprised
of property acquired through foreclosure and is recorded at the
lower of cost (i.e., net loan value) or fair value less estimated
costs to sell, as of the date of foreclosure. The difference upon
foreclosure, if any, is charged-off against the allowance for
losses on loans and leases. Thereafter, a specific valuation
allowance is established and charged to noninterest expense for
adverse changes in the fair value of the property. Revenues and
other expenses associated with real estate owned are realized and
reported as a component of noninterest expense when
incurred.
Premises and Equipment
Premises and equipment are
stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed on the straight-line
basis over the estimated useful lives for each of the various asset
categories. These useful lives range from two to ten
years.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible Assets
Core deposit premiums arise
from the acquisition of deposits and are amortized on a declining
balance basis over the estimated life of the deposit base acquired,
generally eight to ten years. We continually evaluate the periods
of amortization to determine whether later events and circumstances
warrant revised estimates. In addition, the market value of core
deposit premiums is re-evaluated on an annual basis to assess if
any impairment exists and to determine the carrying value that may
be included as a component of regulatory capital.
Goodwill arises from
acquisitions and represents the excess of the total purchase price
over the fair value of net assets acquired. Goodwill is amortized
to expense on a straight-line basis over periods of up to 20 years.
On a periodic basis, we review our goodwill for events or changes
in circumstances that may indicate that the estimated undiscounted
future cash flows from these acquisitions will be less than the
carrying amount of the goodwill. If it becomes probable that
impairment exists, a reduction in the carrying amount is
recognized.
Impairment of Long-Lived Assets
Long-lived assets and certain
identifiable intangible assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset
and its eventual disposition. Measurement of an impairment loss for
long-lived assets and certain identifiable intangible assets that
management expects to hold and use are based on the fair value of
the asset. Long-lived assets and certain identifiable intangible
assets to be disposed of are reported at the lower of carrying
amount or fair value less costs to sell.
Securities Sold Under Agreements to
Repurchase
We enter into sales of
securities under agreements to repurchase (reverse repurchase
agreements) which are considered financing activities. The
obligations to repurchase the securities are reflected as
liabilities, and the related underlying securities for the
agreements, which are pledged as collateral and held by the
counterparties, are included in our securities portfolio as
recorded assets.
Income Taxes
We file consolidated federal
income tax returns in which our taxable income or loss is combined
with that of our subsidiaries. Consolidated, combined and separate
company state tax returns are filed in certain states, as
applicable, including California. Each subsidiary’s share of
income tax expense (benefit) is based on the amount which would be
payable (receivable) if separate returns were filed.
Our income tax provisions are
based upon income taxes payable for the current period as well as
current period changes in deferred income taxes. Deferred income
taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory income tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred income taxes for a change in
tax rates is recognized through the provision for income taxes
during the period of enactment.
Derivative Financial Instruments
We use interest rate derivative
financial instruments to hedge mismatches in the rate and maturity
of loans and leases and securities and their funding sources and to
reduce interest rate risk on anticipated transactions, including
loan and lease securitizations and/or sales. These instruments
serve to reduce rather than increase our
exposure to movements in interest rates. At the inception of the
hedge, we identify an individual asset, liability or anticipated
transaction or an identifiable group of essentially similar assets
or liabilities that expose us to interest rate risk at the
consolidated or subsidiary level. Interest rate derivatives are
accounted for by the deferral method only if they are designated as
a hedge and are expected to be and are effective in substantially
reducing interest rate risk arising from the assets, liabilities or
anticipated transactions identified as exposing us to risk. To
qualify as an effective hedge, derivative financial instruments
must meet specific correlation tests (i.e., the change in their
fair values must be within 80 to 120 percent of the opposite change
in the fair values of the hedged item or anticipated transaction).
For interest rate exchange agreements, sometimes referred to as
swaps, to qualify as an effective hedge, their notional amount,
interest rate index and term must closely match the related terms
of the hedged assets or liabilities. If a periodic assessment
indicates that the derivative no longer provides an effective
hedge, any previously unrecognized hedge gain or loss and any net
settlement amount upon the close-out or termination of the
derivative contract that offsets changes in the value of the hedged
asset or liability is deferred and amortized to earnings over the
life of the underlying hedged asset or liability. Further, any gain
or loss attributable to the excess of the notional amount over the
hedged amount is recognized in noninterest income.
Amounts payable or receivable
for interest rate swaps are accrued with the passage of time, the
effect of which is included in interest income or expense reported
on the hedged asset or liability. If a hedged asset or liability is
sold or paid off before maturity of the hedging interest rate
derivative, the derivative is closed out or settled, and any
previously unrecognized hedge gain or loss and any net settlement
amount upon the close-out or termination of the interest rate
derivative is recognized in earnings. If interest rate derivatives
used in an effective hedge are closed out or terminated before the
hedged item settles, any previously unrecognized hedge gain or loss
and any net settlement amount upon the close-out or termination of
the interest rate derivative is deferred and amortized to earnings
over the life of the underlying hedged asset or
liability.
When an anticipated transaction
is a securitization and/or sale of assets, the derivatives hedging
the anticipated transaction are closed out or settled, and any
previously unrecognized hedge gain or loss and any net settlement
amount upon the close-out or termination of the derivative is
accounted for as part of the gain or loss on the securitization
and/or sale of the underlying hedged assets. If the anticipated
transaction does not occur, the derivatives hedging the anticipated
transaction are closed out or settled, and are accounted for as a
gain or loss on the hedge.
In connection with our use of
interest rate derivatives, we are exposed to potential losses
(credit risk) in the event of nonperformance by the counterparties
to the agreements. We manage the credit risk associated with our
interest rate derivatives by adhering to a strict counterparty
selection process and by establishing maximum exposure limits with
each individual counterparty. We do not anticipate nonperformance
by our counterparties.
Stock-Based Compensation
Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based
Compensation,” establishes financial accounting and reporting
standards for stock-based compensation plans, including employee
stock purchase plans, stock options and restricted stock. Statement
No. 123 encourages all entities to adopt a fair value method of
accounting for stock-based compensation plans, whereby compensation
cost is measured at the grant date based upon the fair value of the
award and is realized as an expense over the service or vesting
period. However, Statement No. 123 also allows an entity to
continue to measure compensation cost for these plans using the
intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued
to Employees.”
We account for our stock-based
awards to employees and directors using the intrinsic value method
of accounting in accordance with Accounting Principles Board
Opinion No. 25. Under the intrinsic value method,
compensation cost is generally the excess, if any, of the quoted
market price of the stock at the grant or other measurement date
over the exercise price. See Note 16 for a pro forma presentation
of our net income and earnings per share had compensation cost
related to our stock option awards been determined under the fair
value method.
Earnings Per Share
Statement of Financial
Accounting Standards No. 128, “Measurement of Earnings Per
Share,” establishes standards for computing and reporting
basic earnings per share and diluted earnings per share. Basic
earnings per share are 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. All prior period
earnings per share amounts have been restated to reflect the
adoption of Statement No. 128.
The following table illustrates
the calculation of basic and diluted earnings per share for the
periods indicated:
|
|
|
For the
Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Amounts in thousands, except
per share amounts) |
|
Net
earnings available to common stockholders |
|
$28,964 |
|
$22,719 |
|
$14,021 |
|
Weighted-average basic shares outstanding |
|
21,169 |
|
20,035 |
|
12,860 |
|
Add:
Dilutive potential common shares |
|
146 |
|
300 |
|
343 |
| |
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding |
|
21,315 |
|
20,335 |
|
13,203 |
| |
|
|
|
|
|
|
|
Basic
earnings per share |
|
$
1.37 |
|
$
1.13 |
|
$
1.09 |
| |
|
|
|
|
|
|
|
Diluted
earnings per share |
|
$
1.36 |
|
$
1.12 |
|
$
1.06 |
| |
|
|
|
|
|
|
Recent Accounting Pronouncements
In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” which establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The
accounting for changes in the fair value of derivatives depends on
the intended use of the derivative. We currently utilize interest
rate derivatives to hedge mismatches in the rate and maturity of
loans, leases and securities and their funding sources and to
reduce interest rate risk on anticipated transactions, including
loan and lease securitizations and/or sales. To the extent these
interest rate derivatives qualify as a cash flow hedge under
Statement No. 133, the effective portion of the derivative’s
gain or loss would be initially reported as a component of other
comprehensive income (outside of earnings) and subsequently
reclassified into earnings when the forecasted transaction affected
earnings. Statement No. 133, as amended by Statement of Financial
Accounting Standards No. 137, will be effective for the fiscal
quarter beginning January 1, 2001. At this time, we are in the
process of evaluating the impact of the adoption of Statement 133,
and have not determined the effect the standard will have on our
consolidated financial condition, results of operations and cash
flows.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reclassifications
In addition to the
reclassifications discussed in Principles of Consolidation above,
certain other reclassifications have been made to prior year
balances in order to conform to the current year presentation. Such
reclassifications had no effect on the results of operations or
stockholders’ equity.
Note 2.
Merger and Acquisition-Related
Activity
Franchise Mortgage Acceptance
Company
We completed our acquisition of
Franchise Mortgage Acceptance Company and its wholly owned
division, Bankers Mutual, collectively referred to as FMAC, on
November 1, 1999. Under the terms of the definitive agreement, as
amended, we acquired all of the common stock of FMAC for
consideration valued at approximately $285 million. Each share of
FMAC common stock was exchanged for, at the election of the holder,
either $9.80 in cash or 0.5444 shares of our common stock. In
total, cash elections were limited to 15% of the shares of FMAC
common stock outstanding immediately prior to closing and the
elections for our common stock were limited to 85% of the shares of
FMAC common stock outstanding immediately prior to closing. We paid
approximately $48 million in cash, including payments for certain
acquisition costs, and issued 13,868,805 shares of our common
stock, a portion of which were issued from our shares in treasury.
Upon consummation of the merger, we contributed substantially all
of FMAC’s assets and liabilities to newly formed subsidiaries
of Bay View Bank.
The acquisition of FMAC was
accounted for under the purchase method of accounting effective
November 1, 1999. The amount of goodwill recorded as of the merger
date was approximately $199 million, which is being amortized on a
straight-line basis over 15 years. This goodwill amount represents
the excess of the total purchase price over the estimated fair
value of net assets acquired.
The following table illustrates
the allocation of the purchase price:
|
|
|
(Dollars in
thousands) |
| Cash
paid |
|
$
44,058 |
| Common
stock issued |
|
237,022 |
| Acquisition costs |
|
4,281 |
| |
|
|
| Total
purchase price |
|
285,361 |
| Fair value
of assets acquired |
|
324,739 |
| Fair value
of liabilities assumed |
|
238,722 |
| |
|
|
| Net assets
acquired |
|
86,017 |
| |
|
|
| Purchase
price in excess of net assets acquired |
|
$199,344 |
| |
|
|
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The pro forma financial
information in the following table illustrates the combined results
of our operations and the operations of FMAC for the years ended
December 31, 1999 and 1998 as if the acquisition of FMAC had
occurred as of January 1, 1998. The pro forma financial information
is presented for informational purposes and is not necessarily
indicative of the results of operations which would have occurred
if we had constituted a single entity as of January 1, 1998. The
pro forma financial information is also not necessarily indicative
of the future results of operations of the combined company. In
particular, our opportunity to achieve certain cost savings as a
result of the acquisition has not been included in the pro forma
financial information.
|
|
|
For the
Year Ended
December 31,
(Unaudited)
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands,
except per share
amounts) |
| Net
interest income |
|
170,667 |
|
|
$157,975 |
|
| Provision
for losses on loans and leases |
|
(50,406 |
) |
|
(11,758 |
) |
| Noninterest income |
|
125,748 |
|
|
81,530 |
|
| Noninterest expense |
|
(250,458 |
) |
|
(194,807 |
) |
| Income tax
expense |
|
(5,252 |
) |
|
(21,059 |
) |
| |
|
|
|
|
|
|
| Net (loss)
income |
|
$
(9,701 |
) |
|
$
11,881 |
|
| |
|
|
|
|
|
|
| Basic
(loss) earnings per share |
|
$
(0.28 |
) |
|
$
0.35 |
|
| |
|
|
|
|
|
|
| Diluted
(loss) earnings per share |
|
$
(0.28 |
) |
|
$
0.35 |
|
| |
|
|
|
|
|
|
The pro forma combined net loss
for the year ended December 31, 1999 of $9.7 million consists of
our net income of $29.0 million and a net loss for FMAC of $25.6
million, less pro forma adjustments of $12.9 million. The pro forma
combined net income for the year ended December 31, 1998 of $11.9
million consists of our net income of $22.7 million and net income
for FMAC of $8.3 million, less pro forma adjustments of $19.1
million. Significant pro forma adjustments include the reduction in
net interest income from a sale of a portion of Bay View Bank
’s loan portfolio in contemplation of the acquisition, the
interest and other costs associated with the issuance of $50
million in Subordinated Notes by Bay View Bank to partially finance
the acquisition, the amortization expense relating to goodwill
generated as a result of the acquisition, and the income tax
benefit associated with the pro forma adjustments.
Luther Burbank Savings Branches
On July 8, 1999, we announced a
definitive agreement with Luther Burbank Savings, a savings bank
headquartered in Santa Rosa, California, to acquire Luther Burbank
Savings’ Mill Valley and Novato, California branches. These
two branches represented approximately $117 million in deposits. In
accordance with the agreement, we paid a 5.25% deposit premium. The
transaction closed on September 25, 1999 and these two branches are
now operating as Bay View Bank branches. The amount of goodwill
recorded as of the acquisition date was approximately $6 million,
which is being amortized on a straight-line basis over 10
years.
America First Eureka Holdings,
Inc.
We completed our acquisition of
America First Eureka Holdings, Inc., sometimes referred to as AFEH,
and its wholly owned subsidiary, EurekaBank, a federal savings
bank, on January 2, 1998. Pursuant to the Merger Agreement, we paid
$90 million in cash and $210 million in common stock (8,076,923
shares of our common stock, a portion of which were issued from our
treasury shares) to America First Financial Fund 1987-A Limited
Partnership, the sole shareholder of AFEH, for a total purchase price
of $300 million. The number of common shares issued was based on
the average value of our common stock for the 20 full trading days
ending on the fifth business day prior to the merger closing date.
Based on the average value of our common stock during this period
and pursuant to the Merger Agreement, the number of common shares
issued was determined by dividing $210 million by $26.00 per
share.
The acquisition of AFEH was
accounted for under the purchase method of accounting effective
January 2, 1998. The amount of goodwill recorded as of the merger
date was $104 million, which is being amortized on a straight-line
basis over 20 years and which excludes core deposit intangibles of
approximately $12 million, which are being amortized on a declining
balance basis over 10 years. This goodwill amount represents the
excess of the total purchase price over the estimated fair value of
net assets acquired.
Concord Growth Corporation
We completed our acquisition of
EXXE Data Corporation and its wholly owned commercial finance
subsidiary, Concord Growth Corporation, on March 17, 1997. At the
close of the transaction, EXXE became a stand-alone subsidiary of
Bay View Capital Corporation. Subsequent to the close of the
transaction, EXXE was merged into Concord Growth Corporation and
liquidated and Concord Growth Corporation became a first-tier,
stand-alone subsidiary of Bay View Capital Corporation. The former
holders of EXXE capital stock, warrants and options received an
initial aggregate cash payment of $19.8 million and are entitled to
potential future cash payments of up to $34 million, expiring in
2000, depending upon the financial performance of Concord Growth
Corporation. There were no cash payments made during 1999, 1998 or
1997. The acquisition was accounted for under the purchase method
of accounting effective April 1, 1997. The total purchase price
exceeded the estimated fair value of net assets acquired by
approximately $22 million, which was recorded as goodwill and which
is being amortized on a straight-line basis over 15 years. During
1998, Concord Growth Corporation was renamed Bay View Commercial
Finance Group. All references to this subsidiary from this point
forward herein will reflect its new name. Effective March 1, 1999,
Bay View Capital Corporation contributed the capital stock of Bay
View Commercial Finance Group to Bay View Bank in conjunction with
the March 1, 1999 conversion of Bay View Bank from a federal stock
savings bank to a nationally chartered commercial bank.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 3.
Investment Securities
All investment securities were
classified as either available-for-sale or held-to-maturity at
December 31, 1999 and 1998. We did not maintain a trading portfolio
during 1999, 1998 or 1997. The following table illustrates our
investment securities as of the dates indicated:
|
|
|
At
December 31, 1999
|
|
|
|
Amortized
Cost
|
|
Unrealized Gross |
|
Fair
Value
|
|
|
|
|
Gains
|
|
(Losses)
|
|
|
|
(Dollars in thousands) |
| Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
Federal
National Mortgage Association stock |
|
$
579 |
|
$—
|
|
$
(7 |
) |
|
$
572 |
|
Asset-backed securities |
|
5,393 |
|
—
|
|
—
|
|
|
5,393 |
|
Retained
interests in securitizations |
|
43,098 |
|
—
|
|
—
|
|
|
43,098 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
$
49,070 |
|
$—
|
|
$
(7 |
) |
|
$49,063 |
| Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank callable notes |
|
$
9,997 |
|
$—
|
|
$(169 |
) |
|
$
9,828 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 1998
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized |
|
Fair
Value
|
|
|
|
|
Gains
|
|
(Losses)
|
|
|
|
(Dollars in thousands) |
| Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
Federal
National Mortgage Association stock |
|
$
579 |
|
$99 |
|
$—
|
|
$
678 |
|
Retained
interests in securitizations |
|
4,641 |
|
—
|
|
—
|
|
4,641 |
| |
|
|
|
|
|
|
|
|
|
|
|
$
5,220 |
|
$99 |
|
$—
|
|
$5,319 |
| |
|
|
|
|
|
|
|
|
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table illustrates
activity in our retained interests in loan and lease
securitizations for the periods indicated:
|
|
|
For the
Year Ended December 31, 1999
|
|
|
|
Beginning
Balance
|
|
FMAC
Balances
Acquired on
11/1/99
|
|
1999
Securitizations
|
|
Cash
Received
|
|
Accretion
|
|
Ending
Balance
|
|
|
|
(Dollars in thousands) |
| 1994-A |
|
$
— |
|
$
1,081 |
|
$
— |
|
$
(61 |
) |
|
$
32 |
|
$
1,052 |
| 1995-A |
|
—
|
|
474 |
|
—
|
|
(42 |
) |
|
14 |
|
446 |
| 1996-A |
|
—
|
|
5,098 |
|
—
|
|
(1 |
) |
|
154 |
|
5,251 |
| 1997-A |
|
—
|
|
661 |
|
—
|
|
—
|
|
|
20 |
|
681 |
| 1997-B |
|
—
|
|
608 |
|
—
|
|
—
|
|
|
18 |
|
626 |
| 1997-C |
|
—
|
|
210 |
|
—
|
|
—
|
|
|
6 |
|
216 |
| 1997-RA-1 |
|
4,641 |
|
—
|
|
—
|
|
(2,149 |
) |
|
415 |
|
2,907 |
| 1998-A |
|
—
|
|
518 |
|
—
|
|
—
|
|
|
16 |
|
534 |
| 1998-B |
|
—
|
|
5,547 |
|
—
|
|
(154 |
) |
|
167 |
|
5,560 |
| 1998-C |
|
—
|
|
6,652 |
|
—
|
|
(162 |
) |
|
210 |
|
6,700 |
| 1998-D |
|
—
|
|
6,992 |
|
—
|
|
—
|
|
|
211 |
|
7,203 |
| 1998-1 |
|
—
|
|
1,757 |
|
—
|
|
—
|
|
|
52 |
|
1,809 |
| 1999-LG-1 |
|
—
|
|
—
|
|
10,038 |
|
—
|
|
|
75 |
|
10,113 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$4,641 |
|
$29,598 |
|
$10,038 |
|
$(2,569 |
) |
|
$1,390 |
|
$43,098 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Year Ended December 31, 1998
|
|
|
|
Beginning
Balance
|
|
1998
Securitizations
|
|
Cash
Received
|
|
Accretion
|
|
Unrealized
Loss
|
|
Ending
Balance
|
|
|
|
(Dollars in thousands) |
| 1997-RA-1 |
|
$5,439 |
|
$
— |
|
$(911 |
) |
|
$437 |
|
$(324 |
) |
|
$4,641 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant assumptions
utilized in the December 31, 1999 valuation of retained interests
in auto loan securitizations (1997-RA-1 and 1999-LG-1) included a
weighted-average discount rate of 13.9%, an annualized loss factor
of 1.1% and a prepayment assumption of 1.6%. The weighted-average
discount rate for the remaining retained interests in franchise
loan and lease securitizations was 18.0% at December 31, 1999,
which included an inherent credit loss assumption and a prepayment
assumption consistent with industry averages.
We use certain qualified types
of investment securities as full or partial collateral for
borrowings, including advances from the Federal Home Loan Bank of
San Francisco. The total par value of pledged investment securities
at December 31, 1999 was $10.0 million. There were no pledged
investment securities at December 31, 1998.
The $10.0 million par value
Federal Home Loan Bank callable notes held at December 31, 1999
mature in 2014 and are callable in 2000. In 1998, our Federal Farm
Credit Bank callable note was called.
There were no sales of
investment securities in 1999. Proceeds from sales of investment
securities classified as available-for-sale during 1998 were $2.4
million. Gross gains of $202,000 were realized on these sales.
There were no sales of investment securities in 1997.
BAY VIEW
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 4.
Mortgage-backed Securities
We hold mortgage-backed
securities issued by government-chartered agencies, including
Fannie Mae, Freddie Mac and the Government National Mortgage
Association and by non-public financial intermediaries. The
mortgage-backed securities portfolio also includes senior tranches
of private-issue collateralized mortgage obligations. All
mortgage-backed securities were classified as either
available-for-sale or held-to-maturity at December 31, 1999 and
1998. The following table illustrates our mortgage-backed
securities as of the dates indicated:
|
|
|
At
December 31, 1999
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
|
|
Fair
Value
|
|
|
|
|
Gains
|
|
(Losses)
|
|
|
|
(Dollars in thousands) |
| Available-for-sale: |
|
Fannie
Mae |
|
$
517 |
|
$—
|
|
$
(13 |
) |
|
$
504 |
|
Government
National Mortgage Association |
|
9,795 |
|
—
|
|
(156 |
) |
|
9,639 |
|
Collateralized mortgage obligations |
|
336 |
|
—
|
|
—
|
|
|
336 |
| |
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale |
|
10,648 |
|
—
|
|
(169 |
) |
|
10,479 |
| |
|
|
|
|
|
|
|
|
|
|
|
| Held-to-maturity: |
|
Fannie
Mae |
|
195,550 |
|
15 |
|
(5,387 |
) |
|
190,178 |
|
Freddie
Mac |
|
102,090 |
|
10 |
|
(2,893 |
) |
|
99,207 |
|
Government
National Mortgage Association |
|
174,379 |
|
8 |
|
(2,435 |
) |
|
171,952 |
|
Issued by
other financial intermediaries |
|
20,633 |
|
156 |
|
(44 |
) |
|
20,745 |
|
Collateralized mortgage obligations |
|
151,582 |
|
—
|
|
(8,080 |
) |
|
143,502 |
| |
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity |
|
644,234 |
|
189 |
|
(18,839 |
) |
|
625,584 |
| |
|
|
|
|
|
|
|
|
|
|
Total |
|
$654,882 |
|
$189 |
|
$(19,008 |
) |
|
$636,063 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 1998
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
|
|
Fair
Value
|
|
|
|
|
Gains
|
|
(Losses)
|
|
|
|
(Dollars in thousands) |
| Available-for-sale: |
|
Fannie
Mae |
|
$
748 |
|
$
11 |
|
$
— |
|
|
$
759 |
|
Government
National Mortgage Association |
|
12,509 |
|
—
|
|
(125 |
) |
|
12,384 |
|
Collateralized mortgage obligations |
|
473 |
|
—
|
|
—
|
|
|
473 |
| |
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale |
|
13,730 |
|
11 |
|
(125 |
) |
|
13,616 |
| |
|
|
|
|
|
|
|
|
|
|
|
| Held-to-maturity: |
|
Fannie
Mae |
|
259,151 |
|
971 |
|
(984 |
) |
|
259,138 |
|
Freddie
Mac |
|
137,823 |
|
74 |
|
(798 |
) |
|
137,099 |
|
Government National Mortgage
Association |
|
6,538 |
|
24 |
|
(59 |
) |
|
6,503 |
|
Issued by
other financial intermediaries |
|
41,759 |
|
614 |
|
(24 |
) |
|
42,349 |
|
Collateralized mortgage obligations |
|
176,502 |
|
127 |
|
(346 |
) |
|
176,283 |
| |
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity |
|
621,773 |
|
1,810 |
|
(2,211 |
) |
|
621,372 |
| |
|
|
|
|
|
|
|
|
|
|
Total |
|
$635,503 |
|
$1,821 |
|
$(2,336 |
) |
|
$634,988 |
| |
|
|
|
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The weighted-average
yields on mortgage-backed securities classified as
available-for-sale and held-to-maturity at December 31, 1999 were
5.88% and 6.50%, respectively. The weighted-average yields on
mortgage-backed securities classified as available-for-sale and
held-to-maturity at December 31, 1998 were 6.12% and 6.21%,
respectively.
The amount of
adjustable-rate mortgage-backed securities was $78.9 million at
December 31, 1999 and $115.7 million at December 31, 1998. We use
mortgage-backed securities as full or partial collateral for
advances from the Federal Home Loan Bank of San Francisco,
repurchase agreements and interest rate exchange agreements. The
total par value of pledged mortgage-backed securities was $549.6
million at December 31, 1999 and $619.3 million at December 31,
1998.
There were no sales of
mortgage-backed securities classified as available-for-sale
during 1999. Proceeds from sales of mortgage-backed securities
classified as available-for-sale during 1998 were $239.7 million.
Gross gains of $2.0 million and gross losses of $206,000 were
realized on these sales. Proceeds from sales of mortgage-backed
securities classified as available-for-sale during 1997 were
$20.5 million. Gross gains of $13,000 and gross losses of $13,000
were realized on these sales. There were no sales of
mortgage-backed securities classified as held-to-maturity during
1999, 1998 or 1997.
The amortized cost and
fair value of mortgage-backed securities classified as
available-for-sale and held-to-maturity at December 31, 1999,
categorized by remaining contractual maturity, are illustrated in
the following table. Expected remaining maturities of
mortgage-backed securities will generally differ from contractual
maturities because borrowers may have the right to prepay
obligations with or without penalties.
|
|
|
At
December 31, 1999
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
(Dollars in thousands) |
| Due in
one year or less |
|
$
365 |
|
$
363 |
| Due
after one year through five years |
|
673 |
|
686 |
| Due
after five years through ten years |
|
106,456 |
|
103,568 |
| Due
after ten years |
|
547,388 |
|
531,446 |
| |
|
|
|
|
|
Total |
|
$654,882 |
|
$636,063 |
| |
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note 5.
Loans and Leases
The following table
illustrates our loans and leases as of the dates
indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands) |
| Mortgage
loans |
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
|
Single-family (one to four units) |
|
$
940,235 |
|
|
$1,515,413 |
|
|
Multi-family (five or more units) |
|
622,835 |
|
|
1,015,980 |
|
|
Nonresidential |
|
317,068 |
|
|
338,220 |
|
| |
|
|
|
|
|
|
|
|
|
1,880,138 |
|
|
2,869,613 |
|
| Franchise loans |
|
1,040,608 |
|
|
—
|
|
| Home
equity loans |
|
648,676 |
|
|
622,797 |
|
| Auto
loans |
|
496,901 |
|
|
546,806 |
|
| Commercial loans and leases(1) |
|
254,671 |
|
|
113,210 |
|
| Business
loans |
|
33,345 |
|
|
39,039 |
|
| |
|
|
|
|
|
|
| Total
gross loans and leases |
|
4,354,339 |
|
|
4,191,465 |
|
| Net
deferred origination fees and costs and advances |
|
(372 |
) |
|
(4,331 |
) |
| Premiums
and discounts |
|
59,687 |
|
|
49,540 |
|
| Allowance for losses on loans and leases |
|
(52,161 |
) |
|
(45,405 |
) |
| |
|
|
|
|
|
|
|
|
|
7,154 |
|
|
(196 |
) |
| |
|
|
|
|
|
|
|
Total |
|
$4,361,493 |
|
|
$4,191,269 |
|
| |
|
|
|
|
|
|
(1)
|
Includes
asset-based participation loans.
|
Our loan and lease
classifications for financial reporting purposes differ from
those for regulatory reporting purposes. Loans and leases are
classified for financial reporting purposes based upon the
purpose and primary source of repayment of the loans or leases.
Loans and leases are classified for regulatory reporting purposes
based upon the type of collateral securing the loans or
leases.
In 1999, we sold $450
million of multi-family COFI-based loans, $105 million of
single-family COFI-based loans, $80 million in Bankers Mutual
multi-family production, and $43 million of home equity loans. We
also securitized and sold $247 million of our auto loans during
the fourth quarter of 1999 and recorded a $5.2 million net gain
on the sale. There were no loan sales in 1998. During the first
quarter of 1997, we securitized and sold $253 million of our auto
loans and recorded a gain of $925,000 on the sale.
We serviced
participating interests in single-family, multi-family,
franchise, and auto loans and leases that we securitized and/or
sold of $6.0 billion at December 31, 1999 and $475.1 million at
December 31, 1998. At December 31, 1999, we had outstanding
recourse and subordination contingencies relating to $2.2 billion
of loans and leases securitized and/or sold, including $2.1
billion in multi-family loans sold by Bankers Mutual under Fannie
Mae’s Delegated Underwriting and Servicing program which we
have contractually limited our aggregate loan loss exposure to
$15.0 million. At December 31, 1998, we had outstanding recourse
and subordination contingencies relating to $54.1 million of
loans and leases securitized and/or sold.
The aggregate amount of
servicing assets arising from loans and leases securitized and/or
sold totaled $62.1 million at December 31, 1999 and $902,000 at
December 31, 1998. The fair value of servicing assets acquired in
connection with our November 1, 1999 acquisition of FMAC totaled
$61.4 million, representing
$34.4 million related to multi-family loans and $27.0 million
related to franchise loans. Significant assumptions utilized in
the December 31, 1999 valuation of servicing assets included a
weighted-average discount rate of 12.0% and annual prepayment
speeds ranging from 1.5% to 10.0% for multi-family loans and 0.5%
to 5.5% for franchise loans and leases, depending upon the
various related lockout and prepayment penalty
periods.
We have agreed to
modifications of certain multi-family and nonresidential mortgage
loans. The modifications have taken the form of interest rate
concessions and/or payment concessions. Such loan modifications
are considered troubled debt restructurings (see Note 1) and are
entered into with the objective of maximizing our long-term
recovery of the investment in the loan when a borrower is
experiencing financial difficulties. We have no commitments to
lend additional funds to borrowers whose loans were so modified.
In the aggregate, our investment in troubled debt restructurings
(excluding troubled debt restructurings classified as nonaccrual
loans of $60,000) was $1.0 million at December 31, 1999, $777,000
at December 31, 1998 and $731,000 at December 31, 1997. Interest
income with respect to these loans, under their original terms,
as well as actual interest recognized, was not significant in
1999, 1998 or 1997.
Nonaccrual loans and
leases totaled $22.9 million at December 31, 1999, $14.7 million
at December 31, 1998 and $11.0 million at December 31, 1997.
Interest on nonaccrual loans and leases that was not recorded in
income was $736,000 for the year ended December 31, 1999,
$492,000 for 1998 and $209,000 for 1997. Actual interest that we
recognized on these nonaccrual loans and leases was not
significant in 1999, 1998 or 1997. At December 31, 1999, we had
no commitments to lend additional funds to these
borrowers.
The average investment
in loans and leases for which impairment was determined in
accordance with Statement No. 114 was $15.5 million for the year
ended December 31, 1999, $15.2 million for 1998 and $13.9 million
for 1997. Impaired loans and leases consist of nonperforming
loans and leases (see Note 1) and troubled debt restructurings,
as illustrated in the following table as of the dates
indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands) |
| Nonperforming loans and leases |
|
$22,918 |
|
$14,700 |
|
$10,991 |
| Troubled
debt restructurings |
|
1,009 |
|
777 |
|
731 |
| |
|
|
|
|
|
|
|
Total |
|
$23,927 |
|
$15,477 |
|
$11,722 |
| |
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The following table
illustrates our allowance for losses on loans and leases, as well
as the changes thereto, as of and for the periods
indicated:
|
|
|
At
and For the Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands) |
| Balance
at beginning of year |
|
$
45,405 |
|
|
$
38,458 |
|
|
$29,013 |
|
| Reserves
related to entity and asset acquisitions |
|
8,256 |
|
|
11,374 |
|
|
14,162 |
|
| Transfers of loans to held-for-sale |
|
(2,656 |
) |
|
—
|
|
|
—
|
|
| Charge-offs: |
|
Mortgage
and other |
|
(827 |
) |
|
(2,480 |
) |
|
(2,699 |
) |
|
Home
equity |
|
(19,568 |
) |
|
(7,152 |
) |
|
—
|
|
|
Auto |
|
(7,674 |
) |
|
(8,604 |
) |
|
(4,057 |
) |
|
Commercial |
|
(3,176 |
) |
|
(828 |
) |
|
(1,685 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
(31,245 |
) |
|
(19,064 |
) |
|
(8,441 |
) |
| Recoveries: |
|
Mortgage
and other |
|
607 |
|
|
2,290 |
|
|
706 |
|
|
Home
equity |
|
1,530 |
|
|
456 |
|
|
—
|
|
|
Auto |
|
1,722 |
|
|
2,599 |
|
|
955 |
|
|
Commercial |
|
231 |
|
|
178 |
|
|
111 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
4,090 |
|
|
5,523 |
|
|
1,772 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
charge-offs |
|
(27,155 |
) |
|
(13,541 |
) |
|
(6,669 |
) |
| Provision for losses on loans and leases |
|
28,311 |
|
|
9,114 |
|
|
1,952 |
|
| |
|
|
|
|
|
|
|
|
|
| Balance
at end of year |
|
$
52,161 |
|
|
$
45,405 |
|
|
$38,458 |
|
| |
|
|
|
|
|
|
|
|
|
| Allowance for losses on loans and leases (including
unallocated): |
|
Mortgage
and other |
|
$
11,158 |
|
|
$
12,082 |
|
|
$
5,710 |
|
|
Home
equity |
|
21,559 |
|
|
20,165 |
|
|
23,316 |
|
|
Franchise |
|
7,563 |
|
|
—
|
|
|
—
|
|
|
Auto |
|
6,758 |
|
|
8,984 |
|
|
3,240 |
|
|
Commercial |
|
5,123 |
|
|
4,174 |
|
|
6,192 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total |
|
$
52,161 |
|
|
$
45,405 |
|
|
$38,458 |
|
| |
|
|
|
|
|
|
|
|
|
An allowance for losses
on loans and leases was provided for all impaired loans and
leases at December 31, 1999, 1998 and 1997. The portion of the
total allowance for loan and lease losses that was attributable
to impaired loans was $3.3 million at December 31, 1999, $4.7
million at December 31, 1998 and $1.7 million at December 31,
1997.
At December 31, 1999
and 1998, mortgage loans aggregating $852.4 million and $1.92
billion, respectively, were pledged as collateral for advances
from the Federal Home Loan Bank of San Francisco. Also, $436.3
million of franchise loans were pledged as collateral for our
warehouse line at December 31, 1999.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note 6.
Premises and Equipment
The following table
illustrates our premises and equipment as of the dates
indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands) |
| Land |
|
$
1,658 |
|
|
$
1,658 |
|
| Buildings |
|
2,756 |
|
|
2,515 |
|
| Capitalized leases |
|
3,979 |
|
|
3,979 |
|
| Leasehold improvements |
|
17,380 |
|
|
14,562 |
|
| Furniture and equipment |
|
36,559 |
|
|
29,040 |
|
| Other |
|
97 |
|
|
1,055 |
|
| |
|
|
|
|
|
|
|
|
|
62,429 |
|
|
52,809 |
|
| Less: |
|
|
|
|
|
|
|
Accumulated depreciation and amortization |
|
(35,213 |
) |
|
(28,082 |
) |
| |
|
|
|
|
|
|
| Total |
|
$
27,216 |
|
|
$
24,727 |
|
| |
|
|
|
|
|
|
Depreciation and
amortization expense related to premises and equipment totaled
$7.9 million for the year ended December 31, 1999, $6.8 million
for 1998 and $3.0 million for 1997.
Note 7.
Intangible Assets
The following table
illustrates our intangible assets as of the dates
indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands) |
|
| Core
deposit intangibles |
|
$
13,849 |
|
|
$
12,859 |
|
| Goodwill |
|
339,516 |
|
|
134,161 |
|
| |
|
|
|
|
|
|
|
|
|
353,365 |
|
|
147,020 |
|
| Less: |
|
|
Accumulated amortization |
|
(24,360 |
) |
|
(12,932 |
) |
| |
|
|
|
|
|
|
| Total |
|
$329,005 |
|
|
$134,088 |
|
| |
|
|
|
|
|
|
Amortization expense
for core deposit intangibles was $3.4 million for the year ended
December 31, 1999, $3.7 million for 1998 and $2.1 million for
1997.
Amortization expense
for goodwill was $10.3 million for the year ended December 31,
1999, $7.7 million for 1998 and $2.0 million for
1997.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note 8.
Deposits
The following table
illustrates our deposits as of the dates indicated:
|
|
|
At
December 31, 1999
|
|
|
|
Amount
|
|
% of
Total
|
|
Weighted-
Average
Rate
|
|
|
|
(Dollars in thousands) |
|
Savings
accounts |
|
$
145,565 |
|
3.9 |
% |
|
2.01 |
% |
|
Checking
accounts |
|
460,357 |
|
12.4 |
|
|
0.99 |
|
|
Money
market accounts |
|
1,097,201 |
|
29.4 |
|
|
4.17 |
|
| |
|
|
|
|
|
|
|
|
|
Total
transaction accounts |
|
1,703,123 |
|
45.7 |
|
|
3.26 |
|
|
Retail
certificates of deposit |
|
1,637,127 |
|
43.9 |
|
|
4.92 |
|
|
Brokered
certificates of deposit |
|
389,530 |
|
10.4 |
|
|
6.18 |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
$3,729,780 |
|
100.0 |
% |
|
4.30 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 1998
|
|
|
|
Amount
|
|
% of
Total
|
|
Weighted-
Average
Rate
|
|
|
|
(Dollars in thousands) |
|
Savings
accounts |
|
$
150,808 |
|
4.6 |
% |
|
2.02 |
% |
|
Checking
accounts |
|
373,619 |
|
11.4 |
|
|
0.94 |
|
|
Money
market accounts |
|
1,102,848 |
|
33.8 |
|
|
3.91 |
|
| |
|
|
|
|
|
|
|
|
|
Total
transaction accounts |
|
1,627,275 |
|
49.8 |
|
|
3.15 |
|
|
Retail
certificates of deposit |
|
1,642,362 |
|
50.2 |
|
|
5.20 |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
$3,269,637 |
|
100.0 |
% |
|
4.20 |
% |
| |
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits were $52.3 million at December 31, 1999 and $66.4
million at December 31, 1998. The aggregate amount of retail
certificates of deposit individually exceeding $100,000 totaled
$424.0 million at December 31, 1999 and $391.3 million at
December 31, 1998. Retail certificates of deposit outstanding at
December 31, 1999 were scheduled to mature as
follows:
|
|
|
At
December 31,
1999
|
|
|
|
(Dollars in
thousands) |
| 2000 |
|
$1,427,493 |
| 2001 |
|
160,074 |
| 2002 |
|
42,829 |
| 2003 |
|
4,179 |
| 2004 |
|
1,593 |
| Thereafter |
|
959 |
| |
|
|
| Total |
|
$1,637,127 |
| |
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The following table
illustrates interest expense on deposits, by deposit type, for
the periods indicated:
|
|
|
For
the Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands) |
| Savings
accounts |
|
$
2,444 |
|
$
2,411 |
|
$
3,667 |
| Checking
and money market accounts |
|
53,443 |
|
67,397 |
|
9,050 |
| Certificates of deposit |
|
86,540 |
|
79,848 |
|
60,470 |
| Thrift
certificates |
|
—
|
|
—
|
|
3,297 |
| |
|
|
|
|
|
|
| Total |
|
$142,427 |
|
$149,656 |
|
$76,484 |
| |
|
|
|
|
|
|
Note 9.
Advances From the Federal Home Loan Bank
of San Francisco
The following table
illustrates outstanding advances from the Federal Home Loan Bank
of San Francisco, sometimes referred to as the FHLB, by maturity
and rate, as of the dates indicated:
|
|
|
At
December 31,
|
|
|
|
Principal Amounts
|
|
Weighted-
Average Rate
|
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands) |
|
| 1999 |
|
$
—
|
|
$
729,100 |
|
—
|
% |
|
5.07 |
% |
| 2000 |
|
722,500 |
|
279,400 |
|
5.51 |
|
|
4.93 |
|
| 2001 |
|
190,400 |
|
190,400 |
|
5.75 |
|
|
5.75 |
|
| 2002 |
|
24,400 |
|
24,400 |
|
4.83 |
|
|
4.83 |
|
| 2003 |
|
300,000 |
|
300,000 |
|
5.02 |
|
|
5.02 |
|
| 2004 |
|
—
|
|
—
|
|
—
|
|
|
—
|
|
| Thereafter |
|
130,000 |
|
130,000 |
|
5.40 |
|
|
5.40 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$1,367,300 |
|
$1,653,300 |
|
5.41 |
% |
|
5.16 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Our advances from the
FHLB at December 31, 1999 included $20 million of variable-rate
advances. These advances mature in the year 2001 and reset
semi-annually based on the 6-month London Interbank Offered Rate,
sometimes referred to as LIBOR. These advances were
collateralized by mortgage loans and mortgage-backed securities
totaling $1.4 billion at December 31, 1999 and $2.5 billion at
December 31, 1998.
Bay View Bank is a
member of the Federal Home Loan Bank System. As a member, Bay
View Bank is required to purchase stock in the FHLB at an amount
equal to the greater of 1% of its residential mortgage loans or
5% of outstanding FHLB advances. The stock is purchased at par
value ($100 per share) and shares of stock held in excess of the
minimum requirement may be sold back to the FHLB at par value.
Bay View Bank records its investment in FHLB stock at cost (par
value). At December 31, 1999, Bay View Bank’s investment in
FHLB stock was $77.8 million and its minimum required investment
was $68.4 million. The stock is pledged as collateral for
advances from the FHLB. The FHLB generally declares quarterly
stock dividends. The amount of these dividends recorded in income
was $4.5 million for the year ended December 31, 1999, $4.9
million for 1998 and $3.4 million for 1997.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
10. Short-term Borrowings
The following table
illustrates our short-term borrowings as of the dates
indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands) |
| Securities sold under agreements to
repurchase |
|
$
17,883 |
|
$25,302 |
| Warehouse lines |
|
397,538 |
|
—
|
| |
|
|
|
|
|
Total |
|
$415,421 |
|
$25,302 |
| |
|
|
|
|
Securities sold under
agreements to repurchase, sometimes called reverse repurchase
agreements, are effectively borrowings secured by our portfolio
of mortgage-backed securities. The securities sold under the
terms of these agreements are in safekeeping with the registered
primary securities dealers who arrange the transactions. The
weighted-average interest rate on reverse repurchase agreements
outstanding was 6.29% at December 31, 1999 and 5.37% at December
31, 1998. All of our borrowings under reverse repurchase
agreements have maturities of one year or less and were
collateralized by mortgage-backed securities with a par value of
$20.4 million at December 31, 1999 and $26.7 million at December
31, 1998. The contractually required market values of the
collateral pledged against these borrowings may range up to 106%
of the borrowings at the time of sale. The market value of the
mortgage-backed securities collateralizing these borrowings was
$20.2 million at December 31, 1999 and $27.3 million at December
31, 1998.
Warehouse lines are
short-term lines of credit which we utilize to fund loan and
lease originations. All of our borrowings under warehouse lines
have maturities of one year or less and were collateralized by
franchise loans with a par value of $437.3 million at December
31, 1999. The contractually required value of the collateral
pledged against these borrowings may range up to 133% of the
borrowings. The advance rate ranges from 75% to 95% of the lower
of book value or market value of the underlying collateral. We
pay interest monthly on the average outstanding principal balance
at a spread over one-month LIBOR ranging from 85 to 160 basis
points depending upon the advance rate. The maximum amount of
time that a loan may remain on the warehouse line is six months.
We recorded $371,000 in commitment fee expense associated with
the warehouse lines for the year ended December 31,
1999.
There were no warehouse
lines committed or outstanding at December 31, 1998. The
following table illustrates our warehouse lines at December 31,
1999:
|
|
|
|
|
|
|
At
December 31, 1999
|
Lender
|
|
Expiration Date
|
|
Index
|
|
Interest
Rate(3)
|
|
Committed
Amount
|
|
Principal
Outstanding
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
Morgan
Stanley Asset
Funding, Inc.(1) |
|
July 15,
2000 |
|
One-month LIBOR plus
160 basis points(3) |
|
7.42 |
% |
|
$500,000 |
|
$397,538 |
Residential Funding
Corporation(2) |
|
March
31, 2000 |
|
One-month LIBOR plus
100 basis points |
|
6.82 |
% |
|
100,000 |
|
—
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
|
|
|
$600,000 |
|
$397,538 |
| |
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Morgan Stanley Asset Funding, Inc. line of credit is used to
fund franchise loans and leases.
|
(2)
|
The
Residential Funding Corporation line of credit is used to fund
multi-family loans originated by Bankers Mutual pending sale
into the secondary market.
|
(3)
|
The
spread over one-month LIBOR ranges from 85 basis points to 160
basis points.
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
11. Notes and Debentures
On August 18, 1999, Bay
View Bank issued $50 million in Subordinated Notes registered
under the Securities Act of 1933, as amended. The Subordinated
Notes are unsecured obligations of Bay View Bank and are
subordinated in right of payment to all existing and future
senior indebtedness, as defined, of Bay View Bank. The
Subordinated Notes mature on August 31, 2009, with a call
provision at our option any time after August 31, 2002 at par.
The issuance has a stated coupon of 10.00%. The all-in cost of
the Subordinated Notes was 10.57%. A portion of the proceeds was
dividended to Bay View Capital Corporation and used to partially
finance the acquisition of FMAC. Interest expense on the
Subordinated Notes was $1.9 million for the year ended December
31, 1999. These Subordinated Notes qualify as Tier 2 capital for
Bay View Bank regulatory capital purposes.
On August 28, 1997, Bay
View Capital Corporation issued $100 million in Subordinated
Notes registered under the Securities Act of 1933, as amended.
The Subordinated Notes are unsecured obligations of Bay View
Capital Corporation and are subordinated in right of payment to
all existing and future senior indebtedness, as defined, of Bay
View Capital Corporation. The Subordinated Notes mature on August
15, 2007, with a call provision effective on or after August 15,
2002 or, at any time upon a change of control or the occurrence
of certain other events, at our option, at various premiums
through August 15, 2005 and at par thereafter. The issuance has a
stated coupon of 9.125% and was issued at a discount to yield
9.225%. The all-in cost of the Subordinated Notes was 9.62%. A
portion of the proceeds was used to partially finance the
acquisition of AFEH. Interest expense on the Subordinated Notes
was $9.6 million for each of the years ended December 31, 1999
and 1998 and $3.2 million for 1997. These Subordinated Notes
qualify as Tier 2 capital for Bay View Capital Corporation
regulatory capital purposes.
On May 28, 1996, Bay
View Capital Corporation issued $50 million in Senior Debentures
with a stated coupon of 8.42% which were not registered under the
Securities Act of 1933, in a private placement under Section 4(2)
of the Securities Act. A portion of the proceeds was used to
partially finance the acquisition of Bay View Credit. The Senior
Debentures, which had an all-in cost of 8.91%, matured on June 1,
1999. In conjunction with the acquisition of AFEH, we negotiated
covenant modifications with the Senior Debenture holders during
1997 to allow the repurchase of additional shares of common stock
in exchange for a payment to the Senior Debenture holders of
approximately $1.1 million. Interest expense on the Senior
Debentures was $1.9 million for the year ended December 31, 1999
and $4.5 million for each of the years ended December 31, 1998
and 1997.
Note 12.
Capital Securities
On December 21, 1998,
we issued $90 million in Capital Securities through Bay View
Capital I, sometimes referred to as the Trust. The Capital
Securities pay quarterly cumulative cash distributions at an
annual rate of 9.76% of the liquidation value of $25 per share.
The Capital Securities represent undivided beneficial interests
in the Trust, which we established for the purpose of issuing the
Capital Securities. We own all of the issued and outstanding
common securities of the Trust. Proceeds from the offering and
from the issuance of common securities were invested by the Trust
in our 9.76% Junior Subordinated Deferrable Interest Debentures,
sometimes referred to as the Junior Debentures, due December 31,
2028 with an aggregate principal amount of $92.8 million. The
primary asset of the Trust is the Junior Debentures. The
obligations of the Trust with respect to the Capital Securities
are fully and unconditionally guaranteed by us to the extent
provided in the Guarantee Agreement with respect to the Capital
Securities. We used a portion of the proceeds to repay our $50
million Senior Debentures upon their maturity on June 1, 1999 and
the balance for general corporate purposes. The all-in cost of
the Capital Securities was 9.95%. The Capital Securities have the
added benefit of qualifying as Tier 1 capital for regulatory
capital purposes. Dividend expense on the Capital Securities was
$8.9 million for the year ended December 31, 1999 and $244,000
for the year ended December 31, 1998.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
13. Income Taxes
The following table
illustrates our consolidated income tax expense for the periods
indicated:
|
|
|
For
the Year
Ended December 31, 1999
|
|
|
|
Federal
|
|
State
|
|
Total
|
|
|
|
(Dollars in thousands) |
| Current
provision |
|
$
815 |
|
$2,315 |
|
$
3,130 |
| Deferred
provision |
|
19,669 |
|
2,254 |
|
21,923 |
| |
|
|
|
|
|
|
| Total
income tax expense |
|
$20,484 |
|
$4,569 |
|
$25,053 |
| |
|
|
|
|
|
|
|
|
|
|
|
For
the Year
Ended December 31, 1998
|
| Current
provision |
|
$
1,393 |
|
$
812 |
|
$
2,205 |
| Deferred provision |
|
15,064 |
|
3,946 |
|
19,010 |
| |
|
|
|
|
|
|
| Total
income tax expense |
|
$16,457 |
|
$4,758 |
|
$21,215 |
| |
|
|
|
|
|
|
|
|
|
|
|
For
the Year
Ended December 31, 1997
|
| Current
provision |
|
$
4,940 |
|
$1,294 |
|
$
6,234 |
| Deferred provision |
|
2,277 |
|
734 |
|
3,011 |
| |
|
|
|
|
|
|
| Total
income tax expense |
|
$
7,217 |
|
$2,028 |
|
$
9,245 |
| |
|
|
|
|
|
|
The following table
illustrates the reconciliation between the federal statutory
income tax rate and the effective income tax rate for the
periods indicated:
|
|
|
For
the Year
Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
| Federal
statutory income tax rate |
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
| Amortization of goodwill |
|
6.2 |
|
|
6.1 |
|
|
3.0 |
|
| State
income tax rate, net of federal tax benefit |
|
5.5 |
|
|
7.0 |
|
|
5.7 |
|
| Other,
net |
|
(0.3 |
) |
|
0.2 |
|
|
(4.0 |
) |
| |
|
|
|
|
|
|
|
|
|
| Effective income tax rate |
|
46.4 |
% |
|
48.3 |
% |
|
39.7 |
% |
| |
|
|
|
|
|
|
|
|
|
Our stockholders’
equity included a tax benefit associated with the exercise of
stock options of $92,000 for the year ended December 31, 1999,
$1.2 million for 1998 and $1.4 million for 1997.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The following table
illustrates the components of net deferred tax assets as of the
dates indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands) |
| Deferred tax assets: |
|
|
Net
operating loss carryforwards |
|
$
61,146 |
|
|
$
72,290 |
|
|
Provision for losses on loans and leases |
|
36,865 |
|
|
20,328 |
|
|
State
income taxes |
|
4,437 |
|
|
810 |
|
|
Alternative minimum tax credit carryforwards |
|
3,053 |
|
|
2,238 |
|
|
Other
accrued expenses not deducted for tax purposes |
|
1,940 |
|
|
3,788 |
|
|
Intangible assets |
|
1,231 |
|
|
538 |
|
|
Capitalized leases |
|
555 |
|
|
883 |
|
|
Unrealized loss on securities
available-for-sale |
|
206 |
|
|
136 |
|
|
Real
estate partnership investments |
|
—
|
|
|
96 |
|
|
Mark-to-market adjustment |
|
—
|
|
|
419 |
|
|
Other |
|
395 |
|
|
134 |
|
| |
|
|
|
|
|
|
| Gross
deferred tax assets |
|
109,828 |
|
|
101,660 |
|
| Valuation allowance |
|
—
|
|
|
(3,765 |
) |
| |
|
|
|
|
|
|
| Net
deferred tax assets |
|
109,828 |
|
|
97,895 |
|
| Deferred tax liabilities: |
|
Tax
depreciation in excess of book depreciation |
|
(26,094 |
) |
|
(8,758 |
) |
|
Securitizations |
|
(20,353 |
) |
|
—
|
|
|
Mark-to-market adjustment |
|
(11,851 |
) |
|
—
|
|
|
Federal
Home Loan Bank of San Francisco stock dividends |
|
(9,183 |
) |
|
(11,067 |
) |
|
Excess
over base year reserves |
|
(5,643 |
) |
|
(7,828 |
) |
|
Loan
fees |
|
(3,830 |
) |
|
(5,581 |
) |
|
Real
estate partnership investments |
|
(1,729 |
) |
|
—
|
|
|
Loan
premiums |
|
(696 |
) |
|
(1,790 |
) |
|
Other |
|
—
|
|
|
(36 |
) |
| |
|
|
|
|
|
|
| Gross
deferred tax liabilities |
|
(79,379 |
) |
|
(35,060 |
) |
| |
|
|
|
|
|
|
| Net
deferred tax asset |
|
$
30,449 |
|
|
$
62,835 |
|
| |
|
|
|
|
|
|
In accordance with
Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes,” a deferred tax
liability has not been recognized for our bad debt reserves that
arose in the tax years which began prior to January 1, 1988. At
December 31, 1999 and 1998, the amount of these reserves was
approximately $19.8 million. The amount of unrecognized deferred
tax liability for these reserves at December 31, 1999 and 1998
was approximately $10.3 million. The deferred tax liability
could potentially be recognized in the future if there is a
change in federal tax law, certain distributions are made with
respect to the stock of Bay View Bank, the bad debt reserves are
used for any purpose other than absorbing bad debt losses, or
Bay View Bank ceases to be a bank as defined in the Internal
Revenue Code.
During 1996, we
reached a final agreement with the Internal Revenue Service to
resolve certain disputed issues related to the taxable years
1987 through 1989. The principal disputed issues related to
various savings and loan industry tax issues for which we had
previously provided deferred taxes. During 1997, we realized the
benefit resulting from the finalization of these tax audits as
well the benefit of enterprise zone interest exclusions for
previous years.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The acquisition of
AFEH during 1998 increased net deferred tax assets by $77.6
million. The acquisition of FMAC during 1999 decreased net
deferred tax assets by $11.6 million.
At December 31, 1999,
the federal and state net operating loss carryforwards were
$172.4 million and $13.1 million, respectively. They will expire
in various years from 2001 through 2018.
A valuation allowance
on deferred tax assets is recorded if it is more likely than not
that some portion or all of the deferred tax assets will not be
realized through recovery of taxes previously paid and/or future
taxable income. The allowance is subject to ongoing adjustments
based on changes in circumstances that affect our assessment of
the realizability of the deferred tax assets. We have reviewed
our deferred tax assets as of December 31, 1999 and 1998. Based
upon this review, a valuation allowance was established to
reduce the deferred tax assets to that amount which is more
likely than not to be realized. This valuation allowance totaled
$0 at December 31, 1999 and $3.8 million at December 31,
1998.
Amounts for the
current year are based upon estimates and assumptions as of the
date of this report and could vary significantly from amounts
shown on our tax returns as filed. Accordingly, the variances
from the amounts previously reported for 1998 are primarily a
result of adjustments to conform to our tax returns as
filed.
Note
14. Stockholders’ Equity and
Regulatory Capital Requirements
Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, Bay View Capital Corporation and Bay View Bank must meet
specific capital guidelines that involve quantitative measures
of assets, liabilities and certain off-balance sheet items as
calculated in accordance with GAAP and regulatory capital
guidelines. Our capital amounts and classifications are also
subject to qualitative judgments by the regulators about
interest rate risk components, asset and off-balance sheet risk
weightings and other factors. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if
undertaken, could have a material impact on our financial
condition and results of operations.
Effective March 1,
1999, Bay View Bank converted from a savings institution
regulated by the Office of Thrift Supervision to a national bank
regulated by the Office of the Comptroller of the Currency and
Bay View Capital Corporation converted from a savings and loan
holding company regulated by the Office of Thrift Supervision to
a bank holding company regulated by the Federal Reserve
Board.
The Office of the
Comptroller of the Currency regulations provide definitions of
regulatory capital ratios (e.g., tier 1 leverage, tier 1
risk-based and total risk-based) and the methods of calculating
each type of capital. The minimum tier 1 leverage capital
requirement is 4.0% of adjusted quarterly average
assets, as defined. The minimum tier 1 risk-based capital
requirement is 4.0% of risk-weighted assets, including certain
off-balance sheet items. The minimum total risk-based capital
requirement (Tier 1 and Tier 2 capital) is 8.0% of risk-weighted
assets, including certain off-balance sheet items.
In addition, the
Federal Deposit Insurance Corporation Improvement Act of 1991,
sometimes referred to as FDICIA, requires each federal banking
agency to implement prompt corrective actions for
undercapitalized institutions that it regulates. In response to
this requirement, the Office of the Comptroller of the Currency
adopted final rules based on FDICIA’s five capital tiers:
well-capitalized, adequately-capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The regulations provide that a bank is well-capitalized if its
total risk-based capital ratio is 10% or greater, its tier 1
risk-based capital ratio is 6% or greater, its tier 1 leverage
ratio is 5% or greater, and the institution is not subject to a
capital directive. As used herein, total risk-based capital
ratio means the ratio of total risk-based capital to
risk-weighted assets, including off-balance sheet items, tier 1
risk-based capital ratio means the ratio of core capital to
risk-weighted
assets, including off-balance sheet items, and tier 1 ratio means
the ratio of core capital to adjusted total assets, in each case
as calculated in accordance with current agency capital
regulations.
Bay View Bank’s
regulatory capital levels at December 31, 1999 exceeded both the
minimum requirements as well as the requirements necessary to be
considered well-capitalized as illustrated in the following
table. As of December 31, 1999, the most recent notification
from the Office of the Comptroller of the Currency categorized
Bay View Bank as well-capitalized. There are no conditions or
events since that notification that management believes have
changed Bay View Bank’s well-capitalized
categorization.
|
|
|
At
December 31, 1999
|
|
|
|
Actual
|
|
Minimum
Requirement
|
|
Well-Capitalized
Requirement
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands) |
| Tier 1
leverage |
|
$406,001 |
|
6.87 |
% |
|
$236,337 |
|
4.00 |
% |
|
$295,421 |
|
5.00 |
% |
| Tier 1
risk-based |
|
$406,001 |
|
8.41 |
% |
|
$193,024 |
|
4.00 |
% |
|
$289,536 |
|
6.00 |
% |
| Total
risk-based |
|
$507,516 |
|
10.52 |
% |
|
$386,048 |
|
8.00 |
% |
|
$482,560 |
|
10.00 |
% |
Bay View Capital
Corporation’s regulatory capital levels at December 31,
1999 exceeded both the Federal Reserve Board’s minimum
requirements as well as the requirements necessary to be
considered well-capitalized as illustrated in the following
table:
|
|
|
At
December 31, 1999
|
|
|
|
Actual
|
|
Minimum
Requirement
|
|
Well-Capitalized
Requirement
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands) |
| Tier 1
leverage |
|
$386,110 |
|
6.51 |
% |
|
$237,247 |
|
4.00 |
% |
|
—
|
|
—
|
|
| Tier 1
risk-based |
|
$386,110 |
|
7.17 |
% |
|
$215,475 |
|
4.00 |
% |
|
$323,212 |
|
6.00 |
% |
| Total
risk-based |
|
$587,773 |
|
10.91 |
% |
|
$430,950 |
|
8.00 |
% |
|
$538,687 |
|
10.00 |
% |
The following table
reconciles stockholders’ equity under GAAP with regulatory
capital for Bay View Bank and Bay View Capital Corporation at
December 31, 1999:
|
|
|
At
December 31, 1999
|
|
|
|
Bay
View Bank
|
|
Bay
View Capital
Corporation
|
|
|
|
Tier
1
|
|
Total
Risk-based
|
|
Tier
1
|
|
Total
Risk-based
|
|
|
|
(Dollars in thousands) |
| Stockholders’ equity (GAAP) |
|
$
740,628 |
|
|
$
740,628 |
|
|
$
631,194 |
|
|
$
631,194 |
|
| Increase (decrease): |
|
Goodwill
and identifiable intangible assets |
|
(320,044 |
) |
|
(320,044 |
) |
|
(321,141 |
) |
|
(321,141 |
) |
|
Non-qualifying core deposit intangibles |
|
(7,731 |
) |
|
(7,731 |
) |
|
(7,731 |
) |
|
(7,731 |
) |
|
Disallowed servicing assets |
|
(6,852 |
) |
|
(6,852 |
) |
|
(6,212 |
) |
|
(6,212 |
) |
|
Capital
Securities |
|
—
|
|
|
—
|
|
|
90,000 |
|
|
90,000 |
|
|
Qualifying allowance for losses on loans and
leases |
|
—
|
|
|
51,515 |
|
|
—
|
|
|
52,161 |
|
|
Subordinated debt |
|
—
|
|
|
50,000 |
|
|
—
|
|
|
149,502 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Regulatory capital |
|
$
406,001 |
|
|
$
507,516 |
|
|
$
386,110 |
|
|
$
587,773 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
During 1998 and until
its conversion to a national bank charter on March 1, 1999, Bay
View Bank was subject to capital adequacy guidelines issued by
the Office of Thrift Supervision. These regulations provided
definitions of regulatory capital (e.g., tangible capital, core
capital and risk-based capital and the methods of calculating
each type of capital). The tangible capital requirement was
1.5% of tangible assets. The core capital requirement was
4.0% of adjusted total assets, as defined. The risk-based
capital requirement was 8.0% of risk-weighted assets, including
off-balance sheet items. Bay View Bank’s fully phased-in
regulatory capital ratios exceeded these minimum requirements at
December 31, 1998. The following table illustrates Bay View Bank
’s minimum regulatory capital ratios as they were
originally computed and reported to the Office of Thrift
Supervision at December 31, 1998:
|
|
|
At
December 31, 1998
|
|
|
|
Actual
|
|
Minimum Required
|
|
Excess
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands) |
|
| Tangible |
|
$344,509 |
|
6.36 |
% |
|
$
81,241 |
|
1.50 |
% |
|
$263,268 |
|
4.86 |
% |
| Core
(Leverage) |
|
$345,211 |
|
6.37 |
% |
|
$216,454 |
|
4.00 |
% |
|
$128,757 |
|
2.37 |
% |
| Risk-based |
|
$389,250 |
|
10.42 |
% |
|
$298,798 |
|
8.00 |
% |
|
$
90,452 |
|
2.42 |
% |
In addition, Bay View
Bank’s regulatory capital ratios were in excess of
regulatory guidelines for a well-capitalized savings institution
as of December 31, 1998. The following table illustrates Bay
View Bank’s “well-capitalized” regulatory capital
ratios as they were originally computed and reported to the
Office of Thrift Supervision at December 31, 1998:
|
|
|
At
December 31, 1998
|
|
|
|
Actual
|
|
Well-Capitalized
Requirement
|
|
Excess
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands) |
|
| Tier 1
leverage |
|
$345,211 |
|
6.37 |
% |
|
$270,768 |
|
5.00 |
% |
|
$
74,443 |
|
1.37 |
% |
| Tier 1
risk-based |
|
$345,211 |
|
9.24 |
% |
|
$224,098 |
|
6.00 |
% |
|
$121,113 |
|
3.24 |
% |
| Total
risk-based |
|
$389,250 |
|
10.42 |
% |
|
$373,497 |
|
10.00 |
% |
|
$
15,753 |
|
0.42 |
% |
The Office of the
Comptroller of the Currency has adopted rules incorporating an
interest rate risk component of the capital adequacy guidelines
for institutions with a greater than “normal” level of
interest rate risk exposure, as defined. As of December 31,
1999, Bay View Bank was not subject to an interest rate risk
component for capital measurement purposes.
Bay View Capital
Corporation is a legal entity separate and distinct from Bay
View Bank. Our principal source of funds on an unconsolidated
basis is dividends from our wholly owned subsidiaries, including
Bay View Bank. Dividends declared by Bay View Bank to Bay View
Capital Corporation were $89.6 million in 1999, $87.0 million in
1998 and $13.0 million in 1997. There are various statutory and
regulatory restrictions on the extent to which Bay View Bank may
pay dividends to, make investments in or loans to, or otherwise
supply funds to Bay View Capital Corporation. As a national
bank, Bay View Bank may pay dividends in any one calendar year
equal to its net earnings in that calendar year plus net
earnings for the previous two calendar years, less any dividends
paid during this three-year period.
As a national bank,
effective March 1, 1999, Bay View Bank is required to hold stock
in the Federal Reserve Bank totaling 3.0% of the sum of its
common stock and additional paid-in-capital. Bay View Bank
records its investment in Federal Reserve Bank stock at cost
(par value). Bay View Bank held $13.5 million in Federal Reserve
Bank stock at December 31, 1999.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
15. Stock Repurchase
Program
In August 1998, our
Board of Directors authorized the repurchase of up to $50
million in shares of our common stock. During 1998, we
repurchased $24.1 million in shares, representing 1,196,500
shares of our common stock at an average price of $20.11 per
share. During 1999 we repurchased an additional $8.3 million in
shares, representing 460,000 shares of our common stock at an
average price of $18.22 per share. In November 1999, our
treasury shares were reissued in conjunction with the
acquisition of FMAC. At December 31, 1999, we had approximately
$17.6 million in remaining authorization available for future
share repurchases.
In January 1997, our
Board of Directors authorized the repurchase of $25 million in
shares of our common stock and in May 1997, an additional $25
million was authorized. During 1997, we repurchased $39.8
million in shares, representing 1,399,000 shares of our common
stock at an average price of $28.48 per share. In December 1997,
our Board of Directors rescinded the remaining share repurchase
authorization. In January 1998, our treasury shares were
reissued in conjunction with the acquisition of
AFEH.
Note
16. Stock Options
As of December 31,
1999, we had six 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,” the “1998 Non-Employee
Director Stock Option and Incentive Plan,” and the
“1999 FMAC Stock Option, Deferred Stock and Restricted
Stock Plan” which authorize the issuance of up to
1,759,430, 2,500,000, 550,000, 400,000, 200,000, and 270,576
shares of common stock, respectively. The plans provide for the
grant of a variety of long-term incentive awards to directors,
officers and employees as a means of enhancing the recruitment
and retention of those individuals on whom our continued success
most depends. The exercise price for the purchase of shares
subject to a stock option at the date of grant generally may not
be less than 100% of the market value of the shares covered by
the option on that date and the options generally vest over
periods ranging from 6 months to 3 years.
The following table
illustrates the stock options available for grant as of December
31, 1999:
|
|
|
1986
Stock
Option and
Incentive
Plan
|
|
1995
Stock
Option and
Incentive
Plan
|
|
1989
Non-
Employee
Director
Stock
Option and
Incentive
Plan
|
|
1998-2000
Performance
Stock Plan
|
|
1998
Non-
Employee
Director
Stock
Option and
Incentive
Plan
|
|
1999 FMAC
Stock Option,
Deferred
Stock and
Restricted
Stock Plan
|
|
Total
|
Shares
reserved for
issuance |
|
1,759,430 |
|
|
2,500,000 |
|
|
550,000 |
|
|
400,000 |
|
|
200,000 |
|
|
270,576 |
|
|
5,680,006 |
|
| Granted |
|
(2,048,816 |
) |
|
(2,747,250 |
) |
|
(570,000 |
) |
|
(93,000 |
) |
|
(42,000 |
) |
|
(270,576 |
) |
|
(5,771,642 |
) |
| Forfeited |
|
298,574 |
|
|
601,849 |
|
|
20,000 |
|
|
2,000 |
|
|
—
|
|
|
—
|
|
|
922,423 |
|
| Expired |
|
(9,188 |
) |
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,188 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available for
grant |
|
—
|
|
|
354,599 |
|
|
—
|
|
|
309,000 |
|
|
158,000 |
|
|
—
|
|
|
821,599 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
At December 31, 1999,
we had outstanding options under the plans with expiration dates
ranging from the year 2000 through 2009, as illustrated in the
following table:
|
|
|
Number of
Option Shares
|
|
Exercise Price
Range
|
|
Weighted-Average
Exercise Price
|
| Outstanding at December 31, 1996 |
|
1,154,890 |
|
|
$
7.28–18.87 |
|
$12.67 |
|
Granted |
|
901,000 |
|
|
6.97
–34.41 |
|
28.71 |
|
Exercised |
|
(118,990 |
) |
|
6.97
–17.50 |
|
10.15 |
|
Forfeited |
|
(178,500 |
) |
|
6.97
–28.44 |
|
26.13 |
| |
|
|
|
|
|
|
|
| Outstanding at December 31, 1997 |
|
1,758,400 |
|
|
7.88
–34.41 |
|
19.70 |
|
Granted |
|
629,000 |
|
|
17.94–35.20 |
|
25.17 |
|
Exercised |
|
(160,101 |
) |
|
7.88
–28.44 |
|
12.17 |
|
Forfeited |
|
(81,599 |
) |
|
8.69
–35.20 |
|
28.11 |
| |
|
|
|
|
|
|
|
| Outstanding at December 31, 1998 |
|
2,145,700 |
|
|
7.88
–35.20 |
|
21.55 |
|
Granted |
|
1,254,826 |
|
|
13.81
–19.53 |
|
15.26 |
|
Exercised |
|
(40,500 |
) |
|
14.72
–20.50 |
|
17.81 |
|
Forfeited |
|
(452,250 |
) |
|
8.75
–35.20 |
|
30.33 |
| |
|
|
|
|
|
|
|
| Outstanding at December 31, 1999 |
|
2,907,776 |
|
|
$
7.88–34.41 |
|
$17.49 |
| |
|
|
|
|
|
|
|
| Exercisable at December 31, 1999 |
|
1,641,736 |
|
|
$
7.88–34.41 |
|
$16.97 |
| |
|
|
|
|
|
|
|
The following table
illustrates information about stock options outstanding at
December 31, 1999:
|
|
|
Outstanding
|
|
Exercisable
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted-
Average
Remaining
Life (in years)
|
|
Weighted-
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted-
Average
Exercise
Price
|
| $
7.88–13.31 |
|
738,712 |
|
5.01 |
|
$11.84 |
|
738,712 |
|
$11.84 |
| $13.47
–15.63 |
|
854,250 |
|
8.93 |
|
$14.26 |
|
210,000 |
|
$15.32 |
| $16.56
–23.63 |
|
729,114 |
|
8.01 |
|
$18.30 |
|
351,014 |
|
$18.16 |
| $24.13
–34.41 |
|
585,700 |
|
7.71 |
|
$28.32 |
|
342,010 |
|
$27.84 |
| |
|
|
|
|
|
|
|
|
|
|
| $
7.88–34.41 |
|
2,907,776 |
|
7.46 |
|
$17.49 |
|
1,641,736 |
|
$16.97 |
| |
|
|
|
|
|
|
|
|
|
|
On October 14, 1999,
our stockholders voted to amend the Amended and Restated 1995
Stock Option and Incentive Plan to increase the number of shares
reserved for issuance by 500,000. During 1999, we repurchased
216,500 out-of-the-money stock options granted under the Amended
and Restated 1995 Stock Option and Incentive Plan. These
options, which had exercise prices ranging from $34.13 to
$35.20, were repurchased for $598,000, which was included in
compensation expense for the year ended December 31, 1999. The
amount paid for each option was based on the option’s fair
value determined using a Black-Scholes option pricing model.
These options are included in the total options available for
grant at December 31, 1999.
Statement of Financial Accounting Standards
No. 123 Pro Forma Disclosure
We adopted Statement
No. 123 effective January 1, 1996, but continue to account for
employee and director stock-based compensation plans under the
intrinsic value method prescribed by APB 25. Statement No. 123
requires that stock-based compensation to parties other than
employees and directors be accounted for under the fair value
method. Accordingly, no compensation cost has been recognized
for our stock option awards to
employees and directors in 1999, 1998 and 1997, except as
discussed above. The weighted-average fair value of options
granted to employees and directors was $6.76, $7.97 and $7.96
per share in 1999, 1998 and 1997, respectively. Had compensation
cost related to our stock option awards to employees and
directors been determined under the fair value method prescribed
under Statement No. 123, our net income and earnings per share
would have been the pro forma amounts illustrated in the table
below for the periods indicated:
|
|
|
For
the Year Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands, except per
share amounts) |
|
| Net
income: |
|
|
Actual |
|
$28,964 |
|
$22,719 |
|
$14,021 |
|
Pro
forma |
|
$26,321 |
|
$20,557 |
|
$12,866 |
| Net
income per share: |
|
Actual
basic earnings per share |
|
$
1.37 |
|
$
1.13 |
|
$
1.09 |
|
Pro
forma basic earnings per share |
|
$
1.24 |
|
$
1.03 |
|
$
1.00 |
| Actual
diluted earnings per share |
|
$
1.36 |
|
$
1.12 |
|
$
1.06 |
| Pro
forma diluted earnings per share |
|
$
1.23 |
|
$
1.01 |
|
$
0.98 |
The fair value of
options granted was estimated as of the date of grant using the
Black-Scholes option pricing model with the following
weighted-average assumptions:
|
|
|
For
the Year
Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
| Dividend yield |
|
2.32 |
% |
|
1.48 |
% |
|
1.25 |
% |
| Expected volatility of our common stock |
|
33 |
% |
|
32 |
% |
|
31 |
% |
| Expected risk-free interest rate(1) |
|
6.34 |
% |
|
4.54 |
% |
|
5.67 |
% |
| Expected life of options in years |
|
5.41 |
|
|
5.37 |
|
|
5.10 |
|
(1)
|
The
expected risk-free interest rate was calculated using a term
commensurate with the expected life of the
options.
|
Note
17. Employee Benefit
Plans
We have a 401(k)
thrift plan under which an employee with three or more months of
service may contribute from 2% to 15% of base salary to the
plan. The amount of base salary deferred is not subject to
federal or state income taxes at the time of deferral. After one
year of service, we will match an employee’s contribution
up to 100% of the first 6% of the employee’s base salary,
depending on the employee’s length of service. Our
contribution was $2.3 million for the year ended December 31,
1999, $2.1 million for 1998 and $1.4 million for
1997.
Bay View Franchise
Mortgage Acceptance Company and Bankers Mutual employees
participate in a separate 401(k) plan. Under the plan, an
employee may elect to enroll at the beginning of any month after
which the employee has been employed for at least six months.
Employees may contribute up to 14% of their salaries to the
plan. We will match 50% of the employee’s contribution up
to 4% of the employee’s compensation.
Effective December 31,
1995, we modified our non-qualified defined benefit retirement
plan for non-employee members of our Board of Directors and
terminated our non-qualified supplemental retirement plan for
executive officers. As of December 31, 1999, we had a $1.1
million liability to certain non-employee members of our Board
of Directors payable in 66,114 shares of our common stock in
satisfaction of the non-qualified
defined benefit retirement plan liability. Such shares were
repurchased in the market and are held in treasury and
restricted as to re-issuance until paid out. The liability is
included in additional paid-in capital. As of December 31, 1999,
we had a $2.0 million liability to certain current and retired
executive officers (relating to the remaining benefits owed
pursuant to the terminated non-qualified supplemental retirement
plan for executive officers) recorded as other
liabilities.
We have an Employee
Stock Ownership Plan, sometimes referred to as the ESOP,
covering all regular full-time and part-time employees who have
completed one year of service. ESOP plan participants become
100% vested in their allocated balances upon the completion of
three years of service. In 1989, we borrowed $6.0 million from a
financial institution and in turn lent it to the ESOP to
purchase shares of our common stock in the open market. The ESOP
held 448,074 shares of our common stock at December 31, 1999 and
439,077 shares at December 31, 1998. All shares of common stock
held by the ESOP are treated as outstanding shares in both our
basic and diluted earnings per share computations. The interest
rate we pay on the ESOP debt is based on 90% of the prime rate.
The ESOP incurred interest expense on its debt totaling $181,000
for the year ended December 31, 1999, $290,000 for 1998 and
$316,000 for 1997. We recorded ESOP-related interest expense of
$131,000 for the year ended December 31, 1999, $176,000 for 1998
and $224,000 for 1997. We recorded ESOP-related compensation
expense of $1.1 million for the year ended December 31, 1999,
$908,000 for 1998 and $421,000 for 1997. We make periodic
contributions to the ESOP primarily to enable the ESOP to pay
principal, interest expense and administrative costs not covered
by cash dividends received by the ESOP on its unallocated shares
of our common stock. We made contributions to the ESOP on a cash
basis totaling $1.1 million for 1999, $639,000 for 1998 and
$649,000 for 1997.
We assumed the
liability associated with a qualified, noncontributory defined
benefit retirement plan in conjunction with our acquisition of
AFEH covering substantially all of AFEH’s former employees.
AFEH had previously frozen the benefits provided under the plan
effective January 1, 1994. Prior to that date, the benefits were
based on the average of each eligible employee’s highest
five consecutive annual salaries in the ten years preceding age
65, or the employee’s termination date, if earlier. Due to
the plan’s frozen status, no additional benefits were
accrued in the plan after January 1, 1994. All plan participants
became fully vested in their accrued benefits on this date. We
may elect to terminate the frozen plan at some point in the
future according to our rights under the plan. The plan assets
consist primarily of a well-diversified portfolio of equities
and fixed-income securities. It is our policy to fund the
minimum amount required.
The following table
illustrates the change in the plan’s projected benefit
obligation for periods indicated:
|
|
|
For
the Year
Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in
thousands) |
| Projected benefit obligation at beginning of
year |
|
$6,158 |
|
|
$7,643 |
|
| Interest cost |
|
391 |
|
|
459 |
|
| Actuarial gain |
|
(685 |
) |
|
(297 |
) |
| Change
in assumptions |
|
—
|
|
|
36 |
|
| Benefits paid |
|
(775 |
) |
|
(1,683 |
) |
| |
|
|
|
|
|
|
| Projected benefit obligation at end of year |
|
$5,089 |
|
|
$6,158 |
|
| |
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The following table
illustrates the change in the plan assets for the periods
indicated:
|
|
|
For
the Year
Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in
thousands) |
| Plan
assets at beginning of year |
|
$5,983 |
|
|
$6,949 |
|
| Actual
return on plan assets |
|
521 |
|
|
717 |
|
| Benefits paid |
|
(775 |
) |
|
(1,683 |
) |
| |
|
|
|
|
|
|
| Plan
assets at end of year |
|
$5,729 |
|
|
$5,983 |
|
| |
|
|
|
|
|
|
The following table
illustrates the plan’s funded status and amounts recognized
in our consolidated statement of financial condition for the
periods indicated:
|
|
|
For
the Year
Ended December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands) |
| Projected benefit obligation |
|
$
5,089 |
|
|
$6,158 |
|
| Fair
value of plan assets |
|
5,729 |
|
|
5,983 |
|
| |
|
|
|
|
|
|
| Plan
assets in excess of (less than) projected benefit
obligation |
|
640 |
|
|
(175 |
) |
Unrecognized gain from past experience different than
originally assumed and from effects
of changes in
assumptions |
|
(1,153 |
) |
|
(485 |
) |
| Recognition of a portion of unrecognized
gain |
|
122 |
|
|
92 |
|
| |
|
|
|
|
|
|
| Total
accrued benefit liability |
|
$
(391 |
) |
|
$
(568 |
) |
| |
|
|
|
|
|
|
| Weighted average discount rate |
|
7.50 |
% |
|
6.75 |
% |
| |
|
|
|
|
|
|
| Expected long-term rate of return on assets |
|
8.00 |
% |
|
6.00 |
% |
| |
|
|
|
|
|
|
During 1999, $600,247
in benefit payments were distributed to plan participants.
During 1998, $1.5 million in benefit payments were distributed
to plan participants. As the benefit payments were in excess of
10% of the plan’s accumulated benefit obligation and in
excess of the plan’s interest cost for the year, the
payments were considered a settlement of plan liabilities under
Statement of Financial Accounting Standards No. 88,
“Employer’s Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits.” The result was an immediate
recognition of a corresponding portion of the associated
unrecognized gain.
The following table
illustrates components of net periodic pension benefit for the
periods indicated:
|
|
|
For
the Year Ended
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
.
(Dollars in
thousands) |
| Interest cost on projected benefit
obligation |
|
$391 |
|
|
$458 |
|
| Assumed
return on plan assets |
|
(446 |
) |
|
(492 |
) |
| Net
amortization of unrecognized gain |
|
(122 |
) |
|
(92 |
) |
| |
|
|
|
|
|
|
| Net
periodic pension benefit |
|
$(177 |
) |
|
$(126 |
) |
| |
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
18. Derivative Financial
Instruments
In the normal course
of business, we use interest rate derivative financial
instruments to hedge mismatches in the rate and maturity of
loans, leases and securities and their funding sources and to
reduce interest rate risk on anticipated transactions, including
loan and lease securitizations and/or sales. During 1999, 1998
and 1997, these derivative financial instruments included
interest rate exchange agreements, Treasury futures contracts,
forward sales of securities, and treasury rate-lock agreements.
Derivative financial instruments involve, to varying degrees,
elements of credit risk. Credit risk is defined as the
possibility of sustaining a loss because other parties to the
financial instrument fail to perform in accordance with the
terms of the contract.
Interest Rate Exchange
Agreements
We were a party to
interest rate exchange agreements with a notional principal
amount of $256.5 million at December 31, 1999 and $365.5 million
at December 31, 1998. The following tables illustrate the
maturities and weighted-average interest rates for swaps
outstanding as of December 31, 1999 and 1998. The information is
based on interest rates at December 31, 1999 and 1998. To the
extent that rates change, variable interest rate information
will change.
|
|
|
Maturities of Derivatives Instruments
At December 31, 1999
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
Thereafter
|
|
Total
|
|
|
|
(Dollars in thousands) |
| Pay
fixed generic swaps: |
|
| Notional amount |
|
$100,000 |
|
|
$54,000 |
|
|
$—
|
|
$25,000 |
|
|
$—
|
|
$77,500 |
|
|
$256,500 |
|
Weighted-average receive rate (3-month
LIBOR) |
|
6.15 |
% |
|
6.14 |
% |
|
—
|
|
6.14 |
% |
|
—
|
|
6.16 |
% |
|
6.15 |
% |
| Weighted-average pay rate (fixed) |
|
6.10 |
% |
|
7.09 |
% |
|
—
|
|
7.27 |
% |
|
—
|
|
6.07 |
% |
|
6.41 |
% |
|
|
|
Maturities of Derivatives Instruments
At December 31, 1998
|
|
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
Thereafter
|
|
Total
|
|
|
|
(Dollars in thousands) |
| Pay
fixed generic swaps: |
|
| Notional amount |
|
$34,000 |
|
|
$100,000 |
|
|
$79,000 |
|
|
$—
|
|
$50,000 |
|
|
$102,500 |
|
|
$365,500 |
|
Weighted-average receive rate
(3-month LIBOR) |
|
5.46 |
% |
|
5.40 |
% |
|
5.43 |
% |
|
—
|
|
5.41 |
% |
|
5.40 |
% |
|
5.41 |
% |
| Weighted-average pay rate (fixed) |
|
6.75 |
% |
|
6.10 |
% |
|
6.81 |
% |
|
—
|
|
6.94 |
% |
|
6.06 |
% |
|
6.42 |
% |
Our outstanding
interest rate swaps at December 31, 1999 and 1998 were
collateralized by mortgage-backed securities with a total par
value of $9.7 million and $10.7 million, respectively. The
effect of interest rate swaps was to increase interest expense
by $3.1 million for the year ended December 31, 1999, $2.4
million for 1998 and $2.8 million for 1997.
Treasury Futures Contracts
As of December 31,
1999, we had open positions with a notional amount of $32.5
million related to United States Treasury futures contracts used
to hedge fixed-rate franchise loans classified as held-for-sale.
At December 31, 1999, our unrealized net gain on these futures
contracts was $103,000.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Forward Sales of Mortgage-Backed
Securities
In the past, we have
utilized forward sales contracts of mortgage-backed securities
to hedge portfolios of mortgage loans because of their
historical effectiveness as a hedge. In connection with the
market and interest rate volatility experienced during the third
quarter of 1998, the correlation between our outstanding forward
sale contracts and the underlying portfolio of loans was
disrupted, triggering the settlement of the forward sale
contracts and resulting in a $940,000 recognized loss for the
year ended December 31, 1998. There were no forward sale
contracts in effect at December 31, 1998 or December 31,
1999.
Treasury Rate-Lock
Agreements
During 1997, we
entered into $105 million of Treasury rate-lock agreements to
hedge the anticipated issuance of $100 million in Subordinated
Notes. These agreements guaranteed a stated rate of interest for
a stated period of time and we paid the difference between the
lock rate and the effective Treasury rate on the settlement
date. In conjunction with the settlement of the Treasury
rate-lock agreements, approximately $307,000 was deferred and is
being recognized as an adjustment to net interest expense over
the life of the Subordinated Notes.
Note
19. Commitments and
Contingencies
Premises
In 1980, we sold a
building which formerly housed our headquarters for $3.45
million, and, concurrent with the sale, leased back the entire
building under a twenty-year lease which has been accounted for
as a capital lease. We occupy a minor portion of this building
and receive sublease rental income from the remaining portion,
and are responsible for all operating and maintenance expenses
associated with the building. During the years ended December
31, 1999, 1998 and 1997, depreciation expense on the capital
lease was $303,000 for each year. Accumulated depreciation on
the capital lease was $3.8 million at December 31, 1999 and $3.5
million at December 31, 1998.
At December 31, 1999,
we occupied 113 offices plus our administrative corporate office
under operating lease arrangements expiring at various dates
through the year 2016. In most instances, these lease
arrangements include options to renew or extend the lease at
market rates and terms. Bay View Bank owns the property in which
four of its branches and offices are located. Rental expense was
$10.1 million for the year ended December 31, 1999, $10.6
million for 1998 and $5.6 million for 1997. Sublease rental
income totaled $584,000 for the year ended December 31, 1999,
$1.4 million for 1998 and $670,000 for 1997.
Future minimum
payments under noncancellable lease obligations, net of
approximately $5.1 million in sublease rental income from
existing sublease rental arrangements through the year 2008, are
summarized as follows:
|
|
|
At
December 31, 1999
|
|
|
|
Capital Lease
Payments
|
|
Operating Lease
Payments
|
|
|
|
(Dollars in thousands) |
| 2000 |
|
$497 |
|
|
$10,615 |
| 2001 |
|
—
|
|
|
9,664 |
| 2002 |
|
—
|
|
|
8,925 |
| 2003 |
|
—
|
|
|
7,889 |
| 2004 |
|
—
|
|
|
5,279 |
| Thereafter |
|
—
|
|
|
22,320 |
| |
|
|
|
|
|
|
|
|
497 |
|
|
$64,692 |
| |
|
|
|
|
|
| Less
amount representing interest |
|
(21 |
) |
|
|
| |
|
|
|
|
|
| Net
capital lease obligation |
|
$476 |
|
|
|
| |
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Loans
At December 31, 1999,
we had outstanding commitments to originate $9.6 million in
mortgage loans, $12.4 million in construction loans, $113.4
million in consumer loans, and $49.3 million in commercial loans
and letters of credit. We have outstanding recourse and
subordination contingencies at December 31, 1999 relating to
$2.2 billion in principal balances of loans securitized and/or
sold (see Note 5).
Bankers Mutual
participates in the Fannie Mae Delegated Underwriting and
Servicing program. Because of Bankers Mutual’s loss sharing
arrangement with Fannie Mae, we are required under federal
banking regulations to hold capital against all loans sold under
the program as if we owned 100% of these loans. The amount of
capital that we were required to hold against these loans was
$15.0 million at December 31, 1999.
Litigation
We are involved as
plaintiff or defendant in various legal actions arising in the
normal course of business. In the opinion of management, after
consultation with counsel, the resolution of these legal actions
will not have a material adverse effect on our consolidated
financial condition or results of operations.
Note
20. Estimated Fair Value of Financial
Instruments
The following
disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, “Disclosures about
Fair Value of Financial Instruments.” Fair value estimates,
methods and assumptions, set forth below for our financial
instruments, are made solely to comply with the requirements of
Statement No. 107 and should be read in conjunction with our
consolidated financial statements and related notes.
We have determined the
estimated fair value amounts by using market information and
valuation methodologies that we consider appropriate. However,
considerable judgment is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
we could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts. For
all of these reasons, the aggregation of the fair values
presented herein does not represent, and should not be construed
to represent, our underlying value.
The following methods
and assumptions have been used to estimate the fair value of
each class of financial instrument for which it is practicable
to estimate the value.
Cash and cash
equivalents: This category includes cash and deposits due
from depository institutions, federal funds sold and commercial
paper. The cash equivalents are readily convertible to known
amounts of cash or are so near their maturity that they present
insignificant risk of changes in value. For these short-term
financial instruments, the carrying amount is a reasonable
estimate of fair value.
Securities: The
fair values of investment securities and mortgage-backed
securities are based on published market prices or quotes
obtained from independent registered securities brokers. The
fair values of retained interests in loan and lease
securitizations are estimated by discounting future cash flows
using a discount rate commensurate with the risks
involved.
Loans and leases:
The fair value of fixed-rate and variable-rate loans and
leases is based on prices for similar loans and leases in the
secondary whole loan or securitization markets or, absent this
information, estimated by discounting contractual cash flows
using discount rates that reflect our current pricing for loans
and
leases with similar credit ratings and for the same remaining
maturities. Prepayment estimates are based on historical
experience and published data for similar loans and
leases.
Investments in
stock of the Federal Home Loan Bank of San Francisco and the
Federal Reserve Bank: The carrying amounts of the
investments in stock of the Federal Home Loan Bank of San
Francisco and the Federal Reserve Bank are used as a reasonable
estimate of fair value.
Deposits: The
fair value of transaction accounts with no stated maturity, such
as savings accounts, checking accounts and money market accounts
is equal to the amount payable on demand at the reporting date
and is assumed to equal the carrying amount. The fair value of
certificates of deposit is estimated using the rates currently
offered for certificates of deposit with similar remaining
maturities. The fair value of deposits does not include the
benefit that results from the lower-cost funding provided by our
deposits as compared with the cost of borrowing funds in the
market.
Debt and other
borrowings: Rates currently available to us for debt and
other borrowings with similar terms and remaining maturities are
used to estimate the fair value of existing debt, including
advances from the Federal Home Loan Bank of San Francisco,
Senior Debentures, Subordinated Notes, other borrowings, and
Capital Securities. For short-term borrowings, the carrying
amount is a reasonable estimate of fair value.
Off-balance sheet
commitments: We have not estimated the fair value of
off-balance sheet commitments to extend credit. Because of the
uncertainty in attempting to assess the likelihood and timing of
a commitment being drawn upon, coupled with the lack of an
established market for these financial instruments, we do not
believe it is meaningful or practicable to provide an estimate
of fair value.
Interest rate
swaps: The unrealized gain (loss) on interest rate swaps is
the estimated amount that we would receive or pay to terminate
the swap agreements at the reporting date, taking into account
current interest rates and the current creditworthiness of the
swap counterparties.
Treasury futures
contracts: The unrealized gain (loss) on Treasury futures
contracts is the estimated amount that we would receive or pay
to terminate the contracts at the reporting date, taking into
account current interest rates.
Limitations:
The fair value estimates presented herein are based on
pertinent information available to us as of December 31, 1999
and 1998. Although we are not aware of any factors that would
significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of
these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from
the amounts presented herein.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The following table
illustrates the estimated fair values of our financial
instruments as of the dates indicated:
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
|
|
(Dollars in thousands) |
| Financial assets |
|
Cash and
cash equivalents |
|
$
343,905 |
|
$
343,905 |
|
$
205,186 |
|
$
205,186 |
|
Investment securities |
|
59,060 |
|
58,891 |
|
5,319 |
|
5,319 |
|
Mortgage-backed securities |
|
654,713 |
|
636,063 |
|
635,389 |
|
634,988 |
|
Loans
and leases, net |
|
4,361,493 |
|
4,361,926 |
|
4,191,269 |
|
4,216,005 |
Investment in stock of the Federal Home Loan Bank
of San Francisco |
|
77,835 |
|
77,835 |
|
90,878 |
|
90,878 |
|
Investment in stock of the Federal Reserve
Bank |
|
13,476 |
|
13,476 |
|
—
|
|
—
|
| Financial liabilities |
|
|
|
Transaction accounts |
|
1,703,123 |
|
1,703,123 |
|
1,627,275 |
|
1,627,275 |
|
Certificates of deposit |
|
2,026,657 |
|
2,065,993 |
|
1,642,362 |
|
1,643,858 |
Advances
from the Federal Home Loan Bank of
San Francisco |
|
1,367,300 |
|
1,340,681 |
|
1,653,300 |
|
1,641,298 |
|
Short-term borrowings |
|
415,421 |
|
415,421 |
|
25,302 |
|
25,342 |
|
Other
borrowings |
|
3,294 |
|
3,242 |
|
5,077 |
|
5,113 |
|
Notes
and Debentures |
|
149,502 |
|
147,275 |
|
149,437 |
|
154,524 |
|
Capital
Securities |
|
90,000 |
|
90,791 |
|
90,000 |
|
90,516 |
|
|
|
Off-Balance Sheet Financial
Instruments
|
|
|
|
At
December 31, 1999
|
|
At
December 31, 1998
|
|
|
|
Carrying
Amount
|
|
Unrealized
Gain/(Loss)
|
|
Carrying
Amount
|
|
Unrealized
Gain/(Loss)
|
|
|
|
(Dollars in thousands) |
| Interest rate swaps |
|
$1,443 |
|
$(1,207 |
) |
|
$(365 |
) |
|
$(10,377 |
) |
| Treasury futures contracts |
|
$
— |
|
$
103 |
|
|
$—
|
|
|
$
— |
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
21. Parent Company Financial
Information
The following table
illustrates the parent company’s condensed statements of
financial condition at December 31, 1999 and 1998 and the
related condensed statements of income and cash flows for the
years ended December 31, 1999, 1998 and 1997:
Condensed Statements of Financial
Condition
|
|
|
At
December 31,
|
|
|
|
1999
|
|
1998
|
|
|
|
(Dollars in thousands) |
|
|
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash on
deposit (overdraft) with subsidiary bank |
|
$
794 |
|
$
(192 |
) |
| Investment securities, at fair value |
|
5,393 |
|
—
|
|
| Loans
held-for-investment, net |
|
384,658 |
|
10,000 |
|
| Investment in and advances to subsidiaries |
|
759,505 |
|
596,190 |
|
| Deferred income taxes |
|
23,099 |
|
14,418 |
|
| Other
assets |
|
24,428 |
|
14,653 |
|
| |
|
|
|
|
|
| Total
assets |
|
$1,197,877 |
|
$635,069 |
|
| |
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
| Short-term borrowings |
|
$
346,210 |
|
$
— |
|
| Accounts payable and other liabilities |
|
28,188 |
|
15,037 |
|
| Subordinated Notes and Senior Debentures |
|
99,501 |
|
149,437 |
|
| Junior
Subordinated Debentures |
|
92,784 |
|
92,784 |
|
| Stockholders’ equity |
|
631,194 |
|
377,811 |
|
| |
|
|
|
|
|
| Total
liabilities and stockholders’ equity |
|
$1,197,877 |
|
$635,069 |
|
| |
|
|
|
|
|
Condensed Statements of Income
|
|
|
For
the Year ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands) |
| Income: |
|
|
Dividends from subsidiaries |
|
$
89,563 |
|
|
$
87,000 |
|
|
$13,000 |
|
|
Interest
income |
|
2,887 |
|
|
2,693 |
|
|
2,658 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
92,450 |
|
|
89,693 |
|
|
15,658 |
|
| |
|
|
|
|
|
|
|
|
|
| Expense: |
|
Interest
on Notes and Debentures |
|
21,009 |
|
|
14,650 |
|
|
7,746 |
|
|
General
and administrative expense |
|
4,932 |
|
|
14,262 |
|
|
9,456 |
|
|
Income
tax benefit |
|
(9,441 |
) |
|
(10,713 |
) |
|
(6,120 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
16,500 |
|
|
18,199 |
|
|
11,082 |
|
| |
|
|
|
|
|
|
|
|
|
| Income
before undistributed net income of subsidiaries |
|
75,950 |
|
|
71,494 |
|
|
4,576 |
|
| Undistributed (distribution in excess of) net income of
subsidiaries |
|
(46,986 |
) |
|
(48,775 |
) |
|
9,445 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
income |
|
$
28,964 |
|
|
$
22,719 |
|
|
$14,021 |
|
| |
|
|
|
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
For
the Year ended December 31,
|
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
|
(Dollars in thousands) |
| CASH
FLOWS FROM OPERATING ACTIVITIES |
| Net
income |
|
$
28,964 |
|
|
$
22,719 |
|
|
$
14,021 |
|
Adjustments to reconcile net income to net cash
provided by operating
activities: |
|
Undistributed (distributions in excess of) net income of
subsidiaries |
|
46,986 |
|
|
48,775 |
|
|
(9,445 |
) |
|
Gain on
sale of securities |
|
—
|
|
|
(202 |
) |
|
—
|
|
|
Increase
in other assets |
|
(11,631 |
) |
|
(11,380 |
) |
|
(14,137 |
) |
|
Increase
in other liabilities |
|
7,996 |
|
|
8,929 |
|
|
10,485 |
|
|
Other |
|
3,243 |
|
|
(3,891 |
) |
|
3,758 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
cash provided by operating activities |
|
75,558 |
|
|
64,950 |
|
|
4,682 |
|
| |
|
|
|
|
|
|
|
|
|
| CASH
FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Acquisition of subsidiaries, net of cash and cash
equivalents (paid)
received |
|
(15,453 |
) |
|
82,129 |
|
|
(9,975 |
) |
| Purchases of loans receivable |
|
(374,658 |
) |
|
(10,000 |
) |
|
—
|
|
| Investment in subsidiary |
|
(29,500 |
) |
|
(2,783 |
) |
|
—
|
|
| Purchase of investment securities |
|
(5,393 |
) |
|
(1,956 |
) |
|
(199 |
) |
| Proceeds from sale of investment securities |
|
—
|
|
|
2,357 |
|
|
—
|
|
| Maturity of investment securities |
|
—
|
|
|
—
|
|
|
1,210 |
|
| Advances from (to) subsidiaries |
|
69,820 |
|
|
(200,211 |
) |
|
(53,667 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net
cash used in investing activities |
|
(355,184 |
) |
|
(130,464 |
) |
|
(62,631 |
) |
| |
|
|
|
|
|
|
|
|
|
| CASH
FLOWS FROM FINANCING ACTIVITIES |
| Increase in short-term borrowings |
|
346,210 |
|
|
—
|
|
|
—
|
|
| Issuance of Junior Subordinated Debentures |
|
—
|
|
|
92,784 |
|
|
—
|
|
| Issuance of Subordinated Notes, net of
discount |
|
—
|
|
|
—
|
|
|
99,350 |
|
| Repayment of Senior Debentures |
|
(50,000 |
) |
|
—
|
|
|
—
|
|
| Repurchase of common stock |
|
(8,381 |
) |
|
(24,063 |
) |
|
(39,855 |
) |
| Proceeds from issuance of common stock |
|
498 |
|
|
3,269 |
|
|
2,617 |
|
| Dividends paid to stockholders |
|
(7,715 |
) |
|
(7,207 |
) |
|
(4,419 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net
cash provided by financing activities |
|
280,612 |
|
|
64,783 |
|
|
57,693 |
|
| |
|
|
|
|
|
|
|
|
|
| Net
increase (decrease) in cash |
|
986 |
|
|
(731 |
) |
|
(256 |
) |
| Cash
(overdraft) on deposit with subsidiary bank at beginning of
year |
|
(192 |
) |
|
539 |
|
|
795 |
|
| |
|
|
|
|
|
|
|
|
|
| Cash on
deposit (overdraft) with subsidiary bank at end of
year |
|
$
794 |
|
|
$
(192 |
) |
|
$
539 |
|
| |
|
|
|
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
Note
22. Segment and Related
Information
We have four operating
segments that we refer to as business platforms. The platforms
were determined primarily based upon the characteristics of the
underlying interest-earning assets. Each platform is comprised
of interest-earning assets with similar characteristics,
including marketing and distribution channels, pricing, credit
risk, and interest rate sensitivity. Our platforms are as
follows:
A Banking Platform
which is comprised of single-family, multi-family and commercial
mortgage loans, mortgage-backed securities, retail and business
banking loans, and asset-based commercial participation loans.
The Banking Platform also includes the major businesses and
assets acquired from FMAC. The Banking Platform’s revenues
are derived from customers throughout the United
States.
A Home Equity Platform
which is comprised of home equity loans and lines of credit. The
Home Equity Platform’s revenues are derived from customers
throughout the United States.
An Auto Platform which
is comprised of auto loans and leases. The Auto Platform’s
revenues are derived from customers throughout the United
States.
A Commercial Platform
which is comprised of asset-based lending (excluding asset-based
commercial participation loans), factoring and commercial
leasing activities. The Commercial Platform’s revenues are
derived from customers throughout the United States.
The accounting
policies of our platforms are the same as those described in the
Summary of Significant Accounting Policies (see Note 1). Each of
our business platforms contributes to our overall profitability.
We evaluate the performance of our segments based upon
contribution by platform. Contribution by platform is defined as
each platform’s net interest income and noninterest income
less each platform’s allocated provision for losses on
loans and leases, direct general and administrative expenses,
including certain direct expense allocations, and other
noninterest expense, including the amortization of intangible
assets.
In computing net
interest income by platform, funding costs are allocated to each
platform based upon 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
upon our average cost of transaction accounts for the
appropriate period. The Banking Platform’s and the Home
Equity Platform’s funding costs were determined based upon
the average cost of our remaining funding sources, including the
noninterest expense associated with our Capital
Securities.
All indirect general
and administrative expenses not specifically identifiable with,
or allocable to, our business platforms are included in indirect
corporate overhead. Indirect corporate overhead includes both
recurring items, such as our administrative and support
functions, and certain non-recurring items, such as expenses
associated with corporate-wide process and systems
re-engineering projects, acquisition and integration expenses
and third-party Year 2000 compliance-related
activities.
Our prior period
platform results were revised to reflect an expanded number of
business platforms and to reflect the methodology discussed
above. Intercompany revenues and expenses are eliminated in the
measurement of platform contribution.
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
The following tables
illustrate each platform’s contribution for the periods
indicated. The tables also illustrate the reconciliation of
total contribution by platform to our consolidated net income
for the periods indicated. Reconciling items generally include
indirect corporate overhead and income tax expense.
|
|
|
For
the Year Ended December 31, 1999
|
|
|
|
Banking
|
|
Home
Equity
|
|
Auto
|
|
Commercial
|
|
Total
|
|
|
|
(Dollars in thousands) |
| Net
interest income |
|
$
97,579 |
|
|
$
33,008 |
|
|
$
24,944 |
|
|
$
14,953 |
|
|
$
170,484 |
|
| Provision for losses on loans and leases |
|
—
|
|
|
(19,433 |
) |
|
(6,125 |
) |
|
(2,753 |
) |
|
(28,311 |
) |
| Noninterest income |
|
24,775 |
|
|
142 |
|
|
65,218 |
|
|
1,397 |
|
|
91,532 |
|
| Direct
general and administrative expenses |
|
(68,063 |
) |
|
(4,111 |
) |
|
(14,953 |
) |
|
(8,623 |
) |
|
(95,750 |
) |
| Leasing
expenses |
|
—
|
|
|
—
|
|
|
(40,188 |
) |
|
—
|
|
|
(40,188 |
) |
| Dividend expense on Capital Securities |
|
(7,518 |
) |
|
(1,417 |
) |
|
—
|
|
|
—
|
|
|
(8,935 |
) |
| Net
income on real estate owned |
|
238 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
238 |
|
| Amortization of intangible assets |
|
(10,947 |
) |
|
—
|
|
|
(1,314 |
) |
|
(1,426 |
) |
|
(13,687 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contribution by platform |
|
$
36,064 |
|
|
$
8,189 |
|
|
$
27,582 |
|
|
$
3,548 |
|
|
75,383 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indirect corporate overhead |
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,366 |
) |
| Income
tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,053 |
) |
| |
|
|
|
|
|
| Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$
28,964 |
|
| |
|
|
|
|
|
| At
December 31, 1999: |
Interest-earning assets plus operating leased
assets |
|
$4,026,891 |
|
|
$678,735 |
|
|
$990,405 |
|
|
$182,240 |
|
|
$5,878,271 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Noninterest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
620,429 |
|
| |
|
|
|
|
|
| Total
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$6,498,700 |
|
| |
|
|
|
|
|
|
|
|
For
the Year Ended December 31, 1998
|
|
|
|
Banking
|
|
Home
Equity
|
|
Auto
|
|
Commercial
|
|
Total
|
|
|
|
(Dollars in thousands) |
| Net
interest income |
|
$
93,796 |
|
|
$
22,003 |
|
|
$
27,833 |
|
|
$10,969 |
|
|
$
154,601 |
|
| Provision for losses on loans and leases |
|
—
|
|
|
(3,545 |
) |
|
(5,569 |
) |
|
—
|
|
|
(9,114 |
) |
| Noninterest income |
|
16,621 |
|
|
217 |
|
|
13,300 |
|
|
934 |
|
|
31,072 |
|
| Direct
general and administrative expenses |
|
(61,055 |
) |
|
(2,664 |
) |
|
(16,982 |
) |
|
(8,667 |
) |
|
(89,368 |
) |
| Leasing
expenses |
|
—
|
|
|
—
|
|
|
(7,682 |
) |
|
—
|
|
|
(7,682 |
) |
| Dividend expense on Capital Securities |
|
(210 |
) |
|
(34 |
) |
|
—
|
|
|
—
|
|
|
(244 |
) |
| Net
income on real estate owned |
|
131 |
|
|
—
|
|
|
4 |
|
|
105 |
|
|
240 |
|
| Amortization of intangible assets |
|
(8,754 |
) |
|
—
|
|
|
(1,166 |
) |
|
(1,452 |
) |
|
(11,372 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contribution by platform |
|
$
40,529 |
|
|
$
15,977 |
|
|
$
9,738 |
|
|
$
1,889 |
|
|
68,133 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indirect corporate overhead |
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,199 |
) |
| Income
tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,215 |
) |
| |
|
|
|
|
|
|
| Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$
22,719 |
|
| |
|
|
|
|
|
|
| At
December 31, 1998: |
Interest-earning assets plus operating leased
assets |
|
$3,816,993 |
|
|
$657,148 |
|
|
$753,581 |
|
|
$94,888 |
|
|
$5,322,610 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Noninterest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
273,622 |
|
| |
|
|
|
|
|
|
| Total
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$5,596,232 |
|
| |
|
|
|
|
|
|
BAY
VIEW CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
—(Continued)
|
|
|
For
the Year Ended December 31, 1997
|
|
|
|
Banking
|
|
Home
Equity
|
|
Auto
|
|
Commercial
|
|
Total
|
|
|
|
(Dollars in thousands) |
| Net
interest income |
|
$
60,369 |
|
|
$
3,183 |
|
|
$
15,285 |
|
|
$
8,499 |
|
|
$
87,336 |
|
| Provision for losses on loans and leases |
|
(229 |
) |
|
—
|
|
|
(1,458 |
) |
|
(265 |
) |
|
(1,952 |
) |
| Noninterest income |
|
7,906 |
|
|
6 |
|
|
4,280 |
|
|
563 |
|
|
12,755 |
|
| Direct
general and administrative expenses |
|
(47,346 |
) |
|
(424 |
) |
|
(8,706 |
) |
|
(6,411 |
) |
|
(62,887 |
) |
| Net
income on real estate owned |
|
1,128 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,128 |
|
| Amortization of intangible assets |
|
(2,073 |
) |
|
—
|
|
|
(1,038 |
) |
|
(977 |
) |
|
(4,088 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contribution by platform |
|
$
19,755 |
|
|
$
2,765 |
|
|
$
8,363 |
|
|
$
1,409 |
|
|
32,292 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indirect corporate overhead |
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,026 |
) |
| Income
tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,245 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$
14,021 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At
December 31, 1997: |
Interest-earning assets plus operating leased
assets |
|
$2,657,754 |
|
|
$128,570 |
|
|
$304,066 |
|
|
$54,120 |
|
|
$3,144,510 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Noninterest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
101,966 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$3,246,476 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
23. Selected Quarterly Results of
Operations (Unaudited)
|
|
|
For
the Year Ended December 31, 1999
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(Dollars in thousands, except per share
amounts) |
| Interest income |
|
$100,021 |
|
$102,716 |
|
$104,898 |
|
$114,021 |
| Net
interest income |
|
40,783 |
|
42,746 |
|
42,290 |
|
44,665 |
| Provision for losses on loans and leases |
|
5,311 |
|
6,800 |
|
7,000 |
|
9,200 |
| Income
before income tax expense |
|
13,429 |
|
14,184 |
|
16,568 |
|
9,836 |
| Net
income |
|
7,133 |
|
7,536 |
|
9,034 |
|
5,261 |
| Basic
earnings per share |
|
0.37 |
|
0.40 |
|
0.48 |
|
0.19 |
| Diluted
earnings per share |
|
0.37 |
|
0.40 |
|
0.48 |
|
0.19 |
|
|
|
For
the Year Ended December 31, 1998
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(Dollars in thousands, except per share
amounts) |
|
| Interest income |
|
$99,064 |
|
$100,348 |
|
$104,568 |
|
$102,383 |
| Net
interest income |
|
36,934 |
|
38,344 |
|
39,264 |
|
40,059 |
| Provision for losses on loans and leases |
|
660 |
|
1,700 |
|
2,754 |
|
4,000 |
| Income
before income tax expense |
|
9,976 |
|
10,168 |
|
9,945 |
|
13,845 |
| Net
income |
|
5,061 |
|
5,234 |
|
5,025 |
|
7,399 |
| Basic
earnings per share |
|
0.25 |
|
0.26 |
|
0.25 |
|
0.38 |
| Diluted
earnings per share |
|
0.24 |
|
0.25 |
|
0.25 |
|
0.38 |
Independent Auditors’ Report
The Board
of Directors
Bay View
Capital Corporation:
We have audited the
accompanying consolidated statements of financial condition of
Bay View Capital Corporation and subsidiaries (“the Company
”) as of December 31, 1999 and 1998, and the related
consolidated statements of income and comprehensive income,
stockholders’ equity and cash flows for the years then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit. The accompanying consolidated statements of income and
comprehensive income, stockholders’ equity and cash flows
of Bay View Capital Corporation and subsidiaries for the year
ended December 31, 1997 were audited by other auditors whose
report thereon dated January 26, 1998, expressed an unqualified
opinion on those statements.
We conducted our
audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all
material respects, the financial position of Bay View Capital
Corporation and subsidiaries as of December 31, 1999 and 1998,
and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted
accounting principles.
/s/ KPMG
LLP
San
Francisco, California
January
18, 2000
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure
None.
Part
III
Item 10. Directors and Executive Officers
of the Registrant
Information concerning
our executive officers is contained under the heading
“Executive Officers of the Registrant” at Item 1.
“Business.” Information concerning our directors and
compliance with the reporting requirements of Section 16(a) of
the Securities Exchange Act of 1934 by our directors, executive
officers and beneficial owners of greater than ten percent of
our equity securities is incorporated herein by reference from
our Definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on April 27, 2000, a copy of
which will be filed not later than 120 days after the close of
our fiscal year. The compensation report and performance graph
included in the Definitive Proxy Statement pursuant to Items
402(k) and 402(l) of Regulation S-K are specifically not
incorporated by reference herein.
Item 11. Executive
Compensation
Information concerning
executive compensation is incorporated herein by reference from
our Definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on April 27, 2000, a copy of
which will be filed not later than 120 days after the close of
our fiscal year. The compensation report and performance graph
included in the Definitive Proxy Statement pursuant to Items
402(k) and 402(l) of Regulation S-K are specifically not
incorporated by reference herein.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Information concerning
security ownership of certain beneficial owners and management
is incorporated herein by reference from our Definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be
held on April 27, 2000, a copy of which will be filed not later
than 120 days after the close of our fiscal year.
Item 13. Certain Relationships and Related
Transactions
Information concerning
certain relationships and related transactions is incorporated
herein by reference from our Definitive Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on April 27,
2000, a copy of which will be filed not later than 120 days
after the close of our fiscal year.
Part
IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K
(a)
(1) and (2):
Our Financial
Statements and Supplementary Data contained in Item 8 are filed
as part of this report. All financial statement schedules have
been omitted as the required information is not applicable or
has been included in our financial statements and related
notes.
(a)
(3):
Exhibits are listed in
the table below.
Regulation
S-K
Exhibit
Number
|
|
Document
|
|
Reference to prior
filing or exhibit
number attached
hereto
|
| 2 |
|
Plan of
acquisition, reorganization, arrangement, liquidation or
succession |
|
None |
|
|
| 3 |
|
Articles of Incorporation |
|
3a |
|
|
|
Bylaws |
|
3b |
|
|
| 4 |
|
Instruments defining the rights of security holders,
including indentures: |
|
|
|
|
|
Articles of Incorporation |
|
3a |
|
|
|
Bylaws |
|
3b |
|
|
|
Specimen of common stock certificate |
|
4.1 |
|
|
|
Stockholder Protections Rights Agreement, dated July
31, 1990 (the “Rights
Agreement”) |
|
4a |
|
|
|
First
Amendment to the Rights Agreement, dated February 26,
1993 |
|
4b |
|
|
|
Second
Amendment to the Rights Agreement, dated October 10,
1997 |
|
4c |
|
|
|
Third
Amendment to the Rights Agreement, dated September 29,
1998 |
|
4d |
|
|
|
Fourth
Amendment to the Rights Agreement, dated October 22,
1999 |
|
4e |
|
|
|
Form of
Rights Certificate and of Election to Exercise pursuant to the
Rights
Agreement |
|
4f |
|
|
| 9 |
|
Voting
trust agreement |
|
None |
|
|
| 10 |
|
Material contracts: |
|
|
|
|
|
Employment Contract with Richard E. Arnold |
|
10a |
|
|
|
Employment Contract with John N. Buckley |
|
10a |
|
|
|
Employment Contract with David A. Heaberlin |
|
10a |
|
|
|
Employment Contract with Scott H. Ray |
|
10a |
|
|
|
Employment Contract with Ronald L. Reed |
|
10a |
|
|
|
Employment Contract with Edward H. Sondker |
|
10a |
|
|
|
Employment Contract with Carolyn
Williams-Goldman |
|
10a |
|
|
|
Employment Contract with Matthew L.
Carpenter |
|
10.1 |
|
|
|
Employment Contract with Wayne L. Knyal |
|
10.2 |
|
|
|
Employment Contract with Douglas J. Wallis |
|
10.3 |
|
|
|
Supplemental Executive Retirement Plan |
|
10b |
|
|
|
Senior
Management Incentive Plan |
|
10c |
|
|
|
Senior
Management Long-Term Incentive Plan |
|
10d |
|
|
|
Amended
and Restated 1986 Stock Option and Incentive Plan |
|
10e |
|
|
|
Amendment No. One to the Amended and Restated 1986
Stock Option and
Incentive Plan |
|
10f |
|
|
|
Amended
and Restated 1989 Non-Employee Director Stock Option
Plan |
|
10g |
|
|
|
Amended
Outside Directors’ Retirement Plan |
|
10h |
|
|
|
Stock
in Lieu of Cash Compensation Plan for Non-Employee
Directors |
|
10h |
|
|
|
Deferred Compensation Plan |
|
10h |
|
|
|
Amended
and Restated 1995 Stock Option and Incentive Plan |
|
10i |
Regulation
S-K
Exhibit
Number
|
|
Document
|
|
Reference to prior
filing or exhibit
number attached
hereto
|
|
|
|
Amendment No. One to the Amended and Restated 1995
Stock Option and
Incentive Plan |
|
10f |
|
|
|
Amendment No. Two to the Amended and Restated 1995
Stock Option and
Incentive Plan |
|
10f |
|
|
|
1998
—2000 Stock Performance Plan |
|
10j |
|
|
|
1998
Non-Employee Director Stock Option and Incentive
Plan |
|
10j |
|
|
|
Supplemental Phantom Stock Unit Plan |
|
10.4 |
|
|
| 11 |
|
Statement re computation of per share
earnings |
|
11 |
|
|
| 12 |
|
Statements re computation of ratios |
|
12 |
|
|
| 13 |
|
Annual
Report to security holders |
|
Not
required |
|
|
| 16 |
|
Letter
re change in certifying accountant |
|
Not
required |
|
|
| 18 |
|
Letter
re change in accounting principles |
|
None |
|
|
| 21 |
|
Subsidiaries of the Registrant |
|
21 |
|
|
| 22 |
|
Published report regarding matters submitted to vote of
security holders |
|
None |
|
|
| 23 |
|
Consent
of KPMG LLP |
|
23.1 |
|
|
|
Consent
of Deloitte & Touche LLP |
|
23.2 |
|
|
| 24 |
|
Power
of attorney |
|
Not
required |
|
|
| 27 |
|
Financial Data Schedule |
|
27 |
|
|
| 99 |
|
Additional Exhibits—Report of predecessor
independent accountants |
|
99 |
(References to Prior Filings)
| 3a |
|
Filed
as exhibit 4(a) to the Registrant’s Registration
Statement on Form S-3 filed June 20, 1997
(File No. 333-29757) |
|
|
| 3b |
|
Filed
as exhibit 10.3 to the Registrant’s Quarterly Report on
Form 10-Q for the quarterly period ended
September 30, 1999 (File No. 0-14879) |
|
|
| 4a |
|
Filed
as exhibit 1 to the Registrant’s Registration Statement
on Form 8 filed March 9, 1993 (the second
amendment to a Form 8-A filed August 6, 1990) (File No.
0-17901) |
|
|
| 4b |
|
Filed
as exhibit 3 to the Registrant’s Registration Statement
on Form 8 filed March 9, 1993 (the second
amendment to a Form 8-A filed August 6, 1990) (File No.
0-17901) |
|
|
| 4c |
|
Filed
as exhibit 4 to the Registrant’s Registration Statement
on Form 8-A, as amended on
Form 8-A/A-3, filed October 10, 1997 (File No.
0-17901) |
|
|
| 4d |
|
Filed
as exhibit 5 to the Registrant’s Registration Statement
on Form 8-A, as amended on Form 8-A/A-
4, filed September 29, 1998 (File No. 0-17901) |
|
|
| 4e |
|
Filed
as Exhibit 8 to the Registrant’s Registration Statement
on Form 8-A, as amended on
Form 8-A/A, filed November 1, 1999 (File No. 0-14879) |
|
|
| 4f |
|
Filed
as exhibit 2 to the Registrant’s Registration Statement
on Form 8 filed March 9, 1993 (the second
amendment to a Form 8-A filed August 6, 1990) (File No.
0-17901) |
|
|
| 10a |
|
Filed
as an exhibit to the Registrant’s Quarterly Report on
Form 10-Q for the quarterly period ended
September 30, 1998 (File No. 0-17901) |
|
|
| 10b-d |
|
Filed
as exhibits 10.6 to 10.8, respectively, to the Registrant
’s Annual Report on Form 10-K filed
March 30, 1993 for the year ended December 31, 1992 (File No.
0-17901) |
|
|
| 10e |
|
Filed
as exhibit 4 to the Registrant’s Registration Statement
on Form S-8 filed August 11, 1995
(File No. 33-95724) |
| 10f |
|
Filed
as exhibits 10 to 10.2, respectively, to the Registrant’s
Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 (File No.
0-14879) |
|
|
| 10g |
|
Filed
as exhibit 4.4 to the Registrant’s Registration Statement
on Form S-8 filed July 26, 1991
(File No. 33-41924) |
|
|
| 10h |
|
Filed
as an exhibit to the Registrant’s Annual Report on Form
10-K for the fiscal year ended
December 31, 1996, as amended on Form 10-K/A on June 27, 1997
(File No. 0-17901) |
|
|
| 10i |
|
Filed
as an exhibit to the Registrant’s Annual Report on Form
10-K for the fiscal year ended
December 31, 1996, as amended on Form 10-K/A on June 27, 1997
(File No. 0-17901) |
|
|
| 10j |
|
Filed
as an appendix to the Registrant’s Definitive Proxy
Statement on Schedule 14-A filed April 20,
1998 (File No. 0-17901) |
|
|
|
All of such
previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation
S-K. |
|
|
| (b)
Reports on Form 8-K: |
|
|
| b(i) |
|
The
Registrant filed the following report on Form 8-K dated
November 5, 1999 during the three months
ended December 31, 1999: |
|
|
|
The
Registrant entered into the Placement Agency Agreement among
Bay View Capital Corporation,
FMAX Holdings, L.L.C. as selling stockholder and Freidman,
Billings, Ramsey & Co. as placement
agent. The agreement relates to an offering of the Registrant
’s common stock commenced on
November 5, 1999 and was completed on November 10,
1999. |
|
|
| b(ii) |
|
The
Registrant filed the following report on Form 8-K dated
November 1, 1999 during the three months
ended December 31, 1999: |
|
|
|
The
Registrant filed a press release announcing the consummation
of the acquisition of Franchise
Mortgage Acceptance Company. |
|
|
| b(iii) |
|
The
Registrant filed the following report on Form 8-K dated
October 20, 1999 during the three months
ended December 31, 1999: |
|
|
|
The
Registrant filed a press release announcing Bay View Capital
Corporation’s third quarter earnings
for the quarter ended September 30, 1999. |
Signatures
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Date:
March 24, 2000
|
BAY
VIEW CAPITAL CORPORATION
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
By: |
/s/ JEFFREY
O. BUTCHER
|
|
First
Vice President and Controller
(Principal Accounting Officer)
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates
indicated.
| By: |
/s/
JOHN
R. MC
KEAN
|
By: |
/s/ EDWARD
H. SONDKER
|
| John R.
McKean |
Edward
H. Sondker
|
|
Chairman of the Board
|
Director President and Chief Executive
Officer
|
|
(Principal Executive Officer)
|
| March
24, 2000 |
March
24, 2000
|
| By:
|
/s/ PAULA
R. COLLINS
|
By:
|
/s/
WAYNE
L. KNYAL
|
|
Paula R. Collins |
Wayne
L. Knyal
|
| March
24, 2000 |
March
24, 2000
|
| By:
|
/s/
THOMAS
M. FOSTER
|
By: |
/s/ GEORGE
H. KRAUSS
|
| Thomas
M. Foster |
George
H. Krauss
|
| March
24, 2000 |
March
24, 2000
|
| By: |
/s/ ROBERT
M. GREBER
|
By: |
/s/ W. BLAKE
WINCHELL
|
| Robert
M. Greber |
W.
Blake Winchell
|
| March
24, 2000 |
March
24, 2000
|
