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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________________to___________________
Commission file number 0-17901
BAY VIEW CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3078031
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1840 GATEWAY DRIVE
SAN MATEO, CALIFORNIA 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 573-7300
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statement
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K [ ]
As of February 27, 1998, there were outstanding 20,189,000 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 February 27, 1998, was $701,568,000. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the registrant that such person is an affiliate of the
registrant).
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of Proxy Statement for 1998 Annual Meeting of
Stockholders.
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1
FORM 10-K
Part I
Item 1. Business
General.............................................................. 4
Lending Activities................................................... 5
Securities Investment Activities..................................... 8
Retail Deposit Activities............................................ 8
Borrowing Activities................................................. 9
Debt................................................................. 9
Competition.......................................................... 10
Supervision and Regulation........................................... 10
Other Subsidiaries................................................... 12
Employees............................................................ 13
Executive Officers of the Registrant................................. 13
Item 2. Properties.............................................................. 14
Item 3. Legal Proceedings....................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders..................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters... 15
Item 6. Selected Financial Data - Five-Year Financial Information............... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 47
Item 8. Financial Statements and Supplementary Data............................. 51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 90
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 90
Item 11. Executive Compensation.................................................. 90
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 90
Item 13. Certain Relationships and Related Transactions.......................... 90
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 90
SIGNATURES
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
Certain statements included in this Form 10-K or in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases or other shareholder communications or in oral statements made with the
approval of an authorized executive officer, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and are subject to a number of risks
and uncertainties. Any such forward-looking statements should not be relied
upon as predictions of future events. Certain such forward-looking statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "are expected to," "will," "will allow," "will continue,"
"will likely result," "should," "would be," "seeks," "approximately," "intends,"
"plans," "projects," "estimates" or "anticipates" or similar expressions or the
negative thereof or other variations thereof or comparable terminology, or by
discussions of strategy, plans or intentions. In addition, all information
included herein or therein with respect to
2
projected or future results of operations, financial condition, financial
performance or other financial or statistical matters constitute such forward-
looking statements. Such forward-looking statements are necessarily dependent
on assumptions, data or methods that may be incorrect or imprecise and that may
be incapable of being realized and in some instances are based on consensus
estimates of analysts not affiliated with the Company. In that regard, the
following factors, among others, could cause actual results and other matters to
differ materially from those in such forward-looking statements: increases in
defaults by borrowers and other loan delinquencies; increases in the provision
for loans losses; failure by the Company to realize expected cost savings or
revenue enhancements from the merger with America First Eureka Holdings, Inc.
("AFEH"); deposit attrition, customer loss or revenue loss following the merger;
costs or difficulties related to the integration of the businesses of the
Company and AFEH and their respective subsidiaries following the merger; the
Company's ability to sustain or improve the performance of CTL, CGC, Ultra and
EurekaBank; the ability to identify suitable future acquisition candidates;
changes in interest rates which may, among other things, adversely affect
margins; competition in the banking, financial services and related industries;
government regulation and tax matters; the outcome of pending or threatened
legal or regulatory disputes and proceedings; credit and other risks of lending
and investment activities; changes in conditions in the securities markets
including the value of the Company's common stock; and changes in regional and
national business and economic conditions and inflation. As a result of the
foregoing, no assurance can be given as to future results of operations or
financial condition or as to any other matters covered by any such forward-
looking statements, and the Company wishes to caution investors not to rely on
any such forward-looking statements.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
3
PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
Bay View Capital Corporation (the "Company" or "BVCC"), a Delaware
corporation, is a diversified financial services company incorporated in 1989.
The Company has been focused on the diversification of its asset origination
activities and expects to continue this process prospectively (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Strategic Overview" for further discussion of these diversification efforts).
The Company's principal business activities consist of three operating
platforms: a Banking Platform, a Consumer Finance Platform and a Commercial
Finance Platform. The Company operates these platforms through its wholly owned
subsidiaries (i) Bay View Bank ("BVB" or the "Bank"), a federally chartered
capital stock savings bank, (ii) Bay View Acceptance Corporation ("BVAC"), a
Nevada corporation operating as a consumer finance company originating prime
motor vehicle loans through its wholly owned subsidiaries, Bay View Credit
("BVC"), formerly California Thrift & Loan ("CTL"), and Ultra Funding, Inc.
("Ultra"), and (iii) Concord Growth Corporation ("CGC"), a California
corporation operating as a commercial finance company, including its asset-based
lending division, Bay View Financial Corporation ("BVFC"). The Company is also
the holding company for Bay View Securitization Corporation ("BVSC"), a Delaware
corporation formed for the purpose of issuing asset-backed securities through a
trust and Regent Financial Corporation ("Regent"), a California corporation
providing item processing services.
Effective January 2, 1998, the Company acquired America First Eureka Holdings,
Inc. ("AFEH") and its wholly owned subsidiary, EurekaBank, a Federal Savings
Bank. At December 31, 1997, AFEH had $2.3 billion in assets and 36 retail
banking branches operating throughout the San Francisco Bay Area.
BAY VIEW BANK
BVB is a federally chartered capital stock savings bank incorporated in 1911
and is the basis of the Company's Banking Platform. In 1986, BVB converted from
a mutual to a stock association, and in 1989, became a wholly owned subsidiary
of the Company. In 1997, the Bank changed its name from Bay View Federal Bank
to Bay View Bank. BVB is a member of the Federal Home Loan Bank of San
Francisco ("FHLBSF").
At December 31, 1997, BVB had 27 branches serving primarily the San
Francisco Bay Area. Its principal business consists of attracting deposits from
the general public and using those deposits, together with borrowings and other
funds, to fund the activities of the Banking, Consumer Finance and Commercial
Finance Platforms. All of the mortgage loans originated by BVB are secured by
properties located in California, primarily Northern California. BVB originates
both fixed rate and adjustable rate loans. BVB has shifted the concentration of
its real estate loan portfolio to adjustable rate mortgages ("ARMs"), which are
sensitive to fluctuations in market interest rates. The majority of these loans
are secured by multifamily residential properties. BVB also originates real
estate loans secured by commercial and industrial properties. During 1996, BVB
discontinued its single family mortgage lending activity.
BAY VIEW ACCEPTANCE CORPORATION
BVAC, formed in 1997, is the Company's Consumer Finance Platform and is a
subsidiary of BVB. BVAC's wholly owned subsidiaries are Bay View Credit and
Ultra Funding, Inc.
Bay View Credit (formerly California Thrift & Loan)
- ---------------------------------------------------
CTL was acquired by the Company effective June 1, 1996 in a business
combination accounted for as a purchase. CTL was an FDIC-insured industrial loan
company incorporated under the laws of the State of California. Effective
December 31, 1997, CTL ceased accepting deposits (and is therefore no longer
regulated as
4
a depository institution) and was renamed Bay View Credit. In conjunction with
this reorganization, BVC now operates as a consumer finance company. All
references to this subsidiary from this point forward will reflect its new name,
Bay View Credit.
Based in Covina, California, BVC operates 10 offices throughout California and
the Western United States offering primarily motor vehicle financing. Its
business niche strategy is to originate prime motor vehicle loans at yields
which are generally above those offered by conventional financing sources (such
as commercial banks) while applying its traditional underwriting criteria on a
case-by-case basis to mitigate any potential loan losses. BVC underwrites and
purchases both new and used fixed rate prime motor vehicle loans.
Ultra Funding, Inc.
- -------------------
Ultra was formed during 1997 and effective October 1, 1997 acquired the
origination capabilities and certain assets of Ultra Funding, Ltd. ("Ultra
Funding") of Austin, Texas. From November 1996 through October 1997, the
Company had a strategic alliance with Ultra Funding whereby the Company had a
right of first refusal to purchase all of the motor vehicle installment
contracts originated by Ultra Funding which met the Company's underwriting
criteria. Ultra operates one office in Austin, Texas and originates fixed rate
new and used prime motor vehicle loans.
CONCORD GROWTH CORPORATION
The Company created its Commercial Finance Platform through the acquisition of
EXXE Data Corporation ("EXXE") and its wholly owned subsidiary, Concord Growth
Corporation on March 17, 1997. Subsequent to the acquisition, EXXE was merged
into CGC and liquidated and CGC became a first-tier stand-alone subsidiary of
the Company. The acquisition was accounted for as a purchase effective April 1,
1997. CGC, based in San Mateo, California, offers factoring, warehouse and re-
discount lines, and Bay View Financial Corporation, a division of CGC based in
Encino, California, offers asset-based lending. CGC and BVFC operate 11 loan
production offices throughout the United States.
LENDING ACTIVITIES
BAY VIEW BANK
Residential Lending
- -------------------
Multifamily Mortgage Loans (five or more units). At December 31, 1997, loans
secured by multifamily residential real estate totaled $1.03 billion,
representing approximately 42.6% of the Company's consolidated loan portfolio.
In general, these loans were originated as ARMs with terms of 30 years, although
some of these loans have monthly payments calculated on a 30-year amortization
period with a balloon payment due at maturity, typically 15 years. The majority
of the ARMs originated by BVB prior to 1996 were indexed to the Eleventh
District Cost of Funds Index ("COFI"). During 1996, management re-directed its
business lending practices and BVB moved away from COFI as its index for ARMs.
Currently, BVB utilizes the London Interbank Offered Rate ("LIBOR") and prime
rate as its variable interest rate indices for the majority of its new
originations.
BVB generally does not lend more than 75% of the appraised value of
multifamily residences on a first mortgage loan. The property's net income
available for loan payments is also a limiting factor on the approved loan
amount for multifamily residences. Properties securing multifamily loans are
required to generate cash flow sufficient to cover loan payments and other
property expenditures.
5
Single Family Mortgage Loans (one to four units). At December 31, 1997,
single family loans totaled $550.5 million, representing 22.9% of the Company's
consolidated loan portfolio. Generally, ARMs secured by single family
residential properties have terms of 30 years. During 1996, BVB discontinued
its single family loan origination operations.
Commercial Real Estate Lending
- ------------------------------
At December 31, 1997, loans secured by commercial real estate totaled $348.8
million, representing 14.5% of the Company's consolidated loan portfolio.
Substantially all of BVB's commercial real estate loans are ARMs. ARMs secured
by commercial real estate are generally made upon the same terms and conditions
as ARMs secured by multifamily residences.
Most of BVB's commercial real estate loans consist of loans secured by
improved property such as office buildings, warehouses and retail sales
facilities. A majority of these loans are in amounts ranging from $250,000 to
$1 million. BVB generally does not originate commercial real estate loans which
have a loan-to-value ("LTV") ratio exceeding 70%. The property's cash flow
available for loan payments is a limiting factor on the approved loan amount.
Properties securing commercial real estate loans are required to generate cash
flow sufficient to cover loan payments and other property expenditures.
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, the payment experience on loans secured by commercial
real estate properties is typically dependent on the successful operation of the
properties, as well as favorable conditions in the real estate market or the
economy in general.
Underwriting Policies and Procedures - Real Estate Loans
- --------------------------------------------------------
BVB originates multifamily and commercial real estate loans through internal
loan production personnel. As part of the loan underwriting process, staff
appraisers or qualified independent appraisers inspect and appraise the property
that would secure the loan. A loan underwriter analyzes the merits of the loan
based on information obtained relative to the borrower and property (i.e.,
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.
BVB requires the American Land Title Association form of title insurance on
all loans secured by real property and requires that fire and extended coverage
casualty insurance in amounts sufficient to rebuild or replace the improvements
at current replacement costs be maintained on all properties securing the loans.
BVB also requires flood insurance for properties in flood hazard zones to
protect the property securing its interest. Consistent with regional industry
practices, BVB does not necessarily require earthquake insurance as part of its
general underwriting practices, however, BVB may require mudslide, earthquake
and/or other hazard insurance depending on the location of the property.
Consumer Lending
- ----------------
At December 31, 1997, home equity and other consumer loans totaled $121.7
million, representing 5.1% of the Company's consolidated loan portfolio.
Approximately $67.1 million of this balance is comprised of a portfolio of home
equity loans acquired by BVB in August 1997.
Business Lending
- ----------------
BVB offers business lending products (i.e., business loans, credit lines and
term loans) and other services in order to expand BVB's customer base and make
BVB more competitive in the community banking environment. As of December 31,
1997, BVB's business loan portfolio was not material in relation to its other
lending.
6
BAY VIEW CREDIT
Motor Vehicle Lending
- ---------------------
At December 31, 1997, motor vehicle loans totaled $160.7 million, representing
6.7% of the Company's consolidated loan portfolio. BVC underwrites and
purchases high quality, fixed rate loans on both new and used prime motor
vehicles on a non-recourse basis, currently with Fair, Isaac Credit Bureau
("FICO") scores averaging 700. BVC's typical motor vehicle loan customer
desires a higher relative loan amount and/or longer term than is offered by many
automobile financing sources. In return for the flexibility of the product it
offers, management expects to continue to charge interest rates of 200 to 300
basis points over the rates typically offered by traditional sources of motor
vehicle financing such as banks and captive finance companies. Management's
primary focus is on the credit quality of the customer rather than the value of
the collateral, and BVC will accordingly finance the full retail sales price of
the automobile plus taxes, licensing fees, insurance, dealer preparation fees
and extended warranty. BVC uses available technology, including a custom credit
scoring system, to process approval decisions typically within three hours of
receipt of information from a dealer.
BVC began offering 84-month motor vehicle loan financing in December 1994.
Prior to this, the typical motor vehicle loan had a term of 48 to 72 months.
Management believes that 84-month financing allows it to further distinguish its
motor vehicle loan product without significantly increasing charge-offs or
delinquencies.
Management initially anticipated periodic sales of its motor vehicle loans to
BVSC and their subsequent securitization. During the first quarter of 1997,
$253 million of BVC's motor vehicle loans were sold and securitized, with the
premium from the sale recorded as part of purchase accounting. The transaction
enabled the Company to significantly reduce the goodwill associated with the BVC
acquisition and return an additional $26 million of capital for redeployment
during the first quarter of 1997. In addition, a gain of $925,000 was realized
from the sale representing the improvement in the fair value of the motor
vehicle loans due to a change in market interest rates between the acquisition
date and the sale date.
In conjunction with the Company's May 1997 announcement of the acquisition of
AFEH and its wholly owned subsidiary, EurekaBank, as discussed elsewhere herein,
the Company discontinued the sale and securitization of BVC's motor vehicle
loans. This acquisition, which closed on January 2, 1998, is expected to
provide the Company with an enhanced and expanded lower cost funding base for
its higher yielding Consumer and Commercial Finance Platforms.
Other Consumer Lending
- ----------------------
At December 31, 1997, BVC's portfolio of other consumer financing loans
totaled $18.7 million, representing 0.8% of the Company's consolidated loan
portfolio. This lending activity was discontinued in November 1996.
Mortgage Loans, Revolving Credit Lines and Real Estate Participations
- ---------------------------------------------------------------------
BVC had historically maintained a portfolio of mortgage loans, revolving
credit lines and real estate loan participations. The mortgage loan portfolio
was primarily comprised of first and second deeds of trust secured by single
family residences. Effective September 30, 1997, all of BVC's mortgage and real
estate loan participations (approximately $99.7 million) were sold to BVB at
their book value, which approximated fair value.
Commercial Equipment Leasing
- ----------------------------
Prior to December 1996, BVC offered fixed-rate commercial equipment leases
principally in the state of California. In December 1996, BVC sold its entire
commercial equipment leasing portfolio for $60 million in cash. This sale
enabled BVC to return $15 million of capital to the Company for redeployment on
December 31, 1996.
7
ULTRA FUNDING INC.
At December 31, 1997, Ultra's loan portfolio, comprised entirely of motor
vehicle loans, totaled $126.1 million, representing 5.2% of the Company's
consolidated loan portfolio. These loans are serviced by BVC.
Ultra originates high quality, fixed rate loans on both new and used motor
vehicles on a non-recourse basis, currently with FICO scores averaging 670.
Ultra's motor vehicle loan product is more traditional than that of BVC with the
corresponding yields approximately 200 to 300 basis points lower than BVC's
motor vehicle loan yields.
CONCORD GROWTH CORPORATION
At December 31, 1997, CGC's loan portfolio serviced for BVB, comprised
entirely of commercial loans, totaled $54.1 million, representing 2.2% of the
Company's consolidated loan portfolio. CGC, including its asset-based lending
division, BVFC, comprises the Company's Commercial Finance Platform.
SECURITIES INVESTMENT ACTIVITIES
The Company's securities investment activities primarily involve the purchase
and sale of mortgage-backed securities ("MBS") by BVB. BVB purchases securities
when high quality loan production is not available. The portfolio consists
primarily of MBS issued by the Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA").
Securities are classified as held to maturity or available for sale. The
Company does not maintain a trading portfolio. Securities in the held to
maturity category consist of securities purchased for long-term investment in
order to enhance the Company's ongoing stream of net interest income and core
earnings. Securities deemed held to maturity are classified as such because the
Company has both the intent and ability to hold the securities to maturity.
Securities purchased which may be sold prior to maturity are designated as
available for sale at the time of purchase.
As part of the Company's strategic objectives, management is de-emphasizing
the less profitable aspects of its business such as wholesale investment
activities (which is primarily comprised of a large MBS portfolio funded by
borrowings from the FHLBSF). As a result, BVB sold $20.5 million of its MBS in
1997, $57.6 million in 1996 and $103.4 million in 1995. There were no MBS
purchased in 1997, 1996 or 1995.
RETAIL DEPOSIT ACTIVITIES
BAY VIEW BANK
BVB attracts both short-term and long-term deposits from the general public by
offering a wide range of deposit products and services. BVB, through its branch
network, provides its banking customers with the following services:
. Money market accounts
. Savings and checking accounts
. Certificates of deposit
. Individual retirement accounts
. 24-hour automated teller machines (STAR(R) System and Plus(R) Network)
8
Enhancing the value of BVB's retail branch franchise remains one of the
Company's primary objectives. BVB plans to continue to expand its retail
banking presence in Northern California through internal growth, new product
development and the acquisition or purchase of deposits from other institutions.
This objective led to the Company's acquisition of EurekaBank, which was
announced in May 1997 and completed on January 2, 1998. Including EurekaBank,
BVB's retail deposit franchise is now the largest of any financial institution
operating exclusively in the San Francisco Bay Area.
Throughout 1997, BVB continued to emphasize the development and marketing of
its transaction account products, and as a result BVB has increased its
percentage of lower-cost transaction accounts in relation to total retail
customer deposits (excluding BVB brokered deposits at December 31, 1997 and
excluding BVC transaction accounts at December 31, 1996) to 34.6% at December
31, 1997 compared with 30.3% and 21.3% at December 31, 1996 and 1995,
respectively.
BAY VIEW CREDIT
BVC's customer deposits were primarily comprised of thrift certificates, which
were similar to certificates of deposits with the exception that they were
callable at par plus accrued interest. When thrift certificates were purchased
by customers, BVC reserved the right to repurchase the certificates at any time
upon thirty days notice. Utilizing this call provision, BVC redeemed the higher
cost component (higher than BVB's incremental borrowing cost) of these deposits
at face value (approximately $267 million) as of December 31, 1996. The
remainder of the BVC customer deposits (which were lower in cost than BVB's
incremental borrowing cost) were sold to BVB in June 1997.
BORROWING ACTIVITIES
The Company's borrowing activities are primarily conducted by BVB. The
Federal Home Loan Bank ("FHLB") System functions in a reserve credit capacity
for savings institutions. As a member, BVB is required to own capital stock in
the FHLBSF and has the authority to apply for advances from the FHLBSF utilizing
FHLBSF capital stock, qualifying mortgage loans and MBS as collateral.
The FHLBSF offers a full range of borrowing programs on its advances with
terms of up to ten years at competitive market rates. A prepayment penalty is
usually imposed for early repayment of FHLBSF advances. BVB is also a member of
the Federal Reserve System ("Federal Reserve") and may borrow from the Federal
Reserve Bank of San Francisco. Thrifts are required to utilize their FHLBSF
borrowing capacity before borrowing from the Federal Reserve.
BVB also utilizes borrowings under reverse repurchase agreements with
securities dealers and the FHLBSF. Reverse repurchase agreements are sales of
securities owned by BVB to securities dealers with a commitment by BVB to
repurchase such securities for a predetermined price at a future date.
DEBT
At December 31, 1997, the Company had approximately $150 million of debt
outstanding. This debt is comprised of $100 million in 9.125% subordinated
notes issued in August 1997 and $50 million in 8.42% senior debentures issued in
May 1996.
9
COMPETITION
BAY VIEW BANK
BVB faces strong competition both in originating loans and in attracting
deposits. Competition in originating multifamily and commercial real estate
mortgage loans comes primarily from other savings institutions, commercial banks
and mortgage bankers located in the San Francisco Bay Area. BVB competes for
mortgage loans principally on the basis of interest rates, types of products,
loan fees charged and the quality of customer service it provides to borrowers.
Competition in attracting deposits comes primarily from other savings
institutions, commercial banks, brokerage firms, mutual funds, credit unions and
other types of investment companies. The ability of BVB to attract and retain
deposits depends on a number of factors which include:
. Interest rates offered on deposit products
. Fees
. Types of deposit products
. Convenient office locations
. Advertising
. Automated teller machines (ATMs)
. Quality customer service
BVB has ATMs located throughout the San Francisco Bay Area which provide 24-
hour cash availability to its customers. BVB also participates in the STAR
System and the Plus Network, which link BVB ATMs with those of a number of major
financial institutions. This linkage provides customers with cash availability
worldwide.
BVB also has a wholly owned subsidiary, MoneyCare, Inc., which offers
uninsured investment products, such as mutual funds and annuities, providing
BVB's customers with additional choices and products that meet their individual
investment needs.
BAY VIEW CREDIT AND ULTRA FUNDING, INC.
BVC and Ultra have experienced increased competition for their motor vehicle
loan programs. This competition comes primarily from large, well-capitalized
lending institutions and finance companies. Management intends to build
origination and purchase volumes through more competitive loan pricing and
further improvements in products, service and marketing. It also intends to
expand origination capability and market share through geographic expansion,
strategic alliances with other consumer finance companies and additional
business acquisitions, as warranted.
CONCORD GROWTH CORPORATION
CGC has also experienced intense competition from other commercial finance
companies competing for market share. This competition has translated to lower
yields. Management has countered this impact by expanding the asset-based
lending segment of the business by adding personnel with significant industry
experience, relocating the asset-based business to Southern California, one of
the top asset-based lending markets in the country, and adding new and enhanced
products to the Commercial Finance Platform's product array.
SUPERVISION AND REGULATION
GENERAL
The Company, together with its subsidiaries, is subject to extensive
examination, supervision and regulation by the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC").
10
Applicable regulations govern, among other things, BVB's lending and investment
powers, the types of deposit and/or loan accounts it is permitted to offer, the
types of business in which it may engage and requirements for regulatory
capital. The Company is also subject to the regulations of the Board of
Governors of the Federal Reserve System with respect to required reserves and
certain other matters.
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and
its non-savings institution subsidiaries which also permits the OTS to restrict
or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution.
BAY VIEW BANK
Federal Regulation of Savings Institutions. The OTS has extensive authority
over the operations of savings institutions. As part of this authority, BVB is
required to file periodic reports with the OTS and the FDIC. The OTS has
extensive enforcement authority over all savings institutions and their holding
companies, including BVB and the Company, and their affiliated parties such as
directors, officers, agents and other persons providing services to the
institution or holding company.
Insurance of Accounts and Regulation by the FDIC. BVB is a member of the
Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC.
BVB's deposits are insured up to applicable limits by the FDIC. As insurer, the
FDIC has adopted a risk-based deposit insurance system that assesses deposit
insurance premiums for all FDIC-insured banks and thrifts according to the level
of risk involved in an institution's activities. An institution's risk category
is based upon whether the institution is classified as "well capitalized",
"adequately capitalized" or "undercapitalized" and within each risk category
there are three subcategories based upon an institution's risk classification.
BVB's current assessment rate is approximately 6.48 basis points.
The FDIC is authorized to increase assessment rates, on a semiannual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. In addition, the FDIC may impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
Regulatory Capital Requirements. Federally insured savings institutions such
as BVB are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings institutions. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual institutions on a case-by-case basis.
At December 31, 1997, BVB was deemed "well capitalized" under current capital
regulations and exceeded its fully phased-in regulatory capital requirements.
In August 1993, the OTS issued a final rule for the calculation of an interest
rate risk component for institutions with a greater than "normal" (i.e., greater
than 2%) level of interest rate risk exposure. Currently, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1997, if
the interest rate risk component regulation had been implemented, BVB would not
have been subject to an interest rate risk capital deduction for risk-based
capital purposes.
Limitations on Dividends and Other Capital Distributions. The retained
earnings of BVB are substantially restricted based on certain laws and
regulations relating to the payment of dividends. Federal regulations impose
various restrictions or requirements on institutions with respect to their
ability to pay dividends or make other distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the equity account.
11
Generally, Tier I institutions, which are institutions that before and after
the proposed distribution meet or exceed their capital requirements, may, after
the receipt of no objection by the OTS, make capital distributions during any
calendar year equal to the greater of 100% of net income on a year-to-date basis
plus 50% of the amount by which the institution's tangible core or risk-based
capital exceeds its respective fully phased-in capital requirement, as measured
at the beginning of the calendar year, or 75% of its net income for the most
recent four quarter period. BVB meets the requirements for a Tier I
institution.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1997, BVB was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements
imposed by the OTS.
Federal Home Loan Bank System. BVB is a member of the FHLBSF, one of 12
regional FHLBs. Each FHLB serves as a reserve or central bank for its members
within its assigned geographic region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and
procedures are subject to the regulation and oversight of the Federal Housing
Finance Board. All advances from the FHLBSF are required to be fully secured by
sufficient collateral as determined by the FHLBSF. In addition, all long-term
advances are restricted to providing funds for residential home financing.
BAY VIEW CREDIT
BVC was subject to supervision and regulation by the Department of
Corporations of the State of California and, as a federally insured depository
institution, by the FDIC. In addition, BVC was also subject to regulation in
Arizona, Colorado, Illinois, Nevada, New Mexico, Oregon and Texas as a result of
its operations in those states. The Company began implementing a significant
restructuring of BVC in late 1996 which culminated in BVC being de-regulated
effective December 31, 1997 and converted to a consumer finance company. As a
subsidiary of BVAC, a wholly owned subsidiary of BVB, BVC is subject to
supervision and regulation by the OTS.
OTHER SUBSIDIARIES
BVSC, a wholly owned subsidiary of BVCC, is a Delaware corporation formed in
1997 for the purpose of issuing asset-backed securities through a trust. BVSC
purchased, and subsequently securitized, approximately $253 million of motor
vehicle loans from BVC in January 1997. The Company subsequently ceased its
securitization activities in conjunction with the announcement of the EurekaBank
acquisition.
Regent, a wholly owned subsidiary of BVCC, is a California corporation engaged
in providing item processing services for BVB and other financial institutions.
MoneyCare, a wholly owned subsidiary of BVB, sells uninsured investment
products, such as mutual funds and annuities, through an arrangement with a
registered broker-dealer. MoneyCare receives commissions on the sales of such
products. BVB stresses cross-selling to improve profitability and solidify
customer relationships.
BVB has two other subsidiaries: Bay View Auxiliary Corporation and Bay View
Acceptance Corporation. Bay View Auxiliary Corporation acts as trustee under
deeds of trust originated through BVB's loan activity. BVAC is the parent
Corporation for BVC and Ultra.
12
EMPLOYEES
At December 31, 1997, the Company's principal entities had a total of 640
employees on a full-time equivalent ("FTE") basis as follows:
Bay View Bank 305
Bay View Credit 156
Bay View Capital Corporation 84
Concord Growth Corporation 72
Ultra Funding, Inc. 23
---
Total 640
===
The Company's employees are not represented by any collective bargaining
groups. The Company considers its relations with its employees to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Registrant.
YEAR
NAME AGE POSITION APPOINTED
- --------------------------------- --------- ------------------------------------------------------ ----------------
Edward H. Sondker 50 Director, President and Chief Executive Officer 1995
Richard E. Arnold 57 Executive Vice President and Director of Sales and 1997
Banking Administration
John N. Buckley 40 Executive Vice President and Director of Credit 1994
Administration
Robert J. Flax 48 Executive Vice President, General Counsel and 1985
Corporate Secretary
David A. Heaberlin 48 Executive Vice President and Chief Financial 1995
Officer
Ronald L. Reed 51 Executive Vice President and Director of 1997
Management Information Systems and Loan Servicing
The business experience of each of the executive officers of the Company is as
follows:
Mr. Sondker has served as a Director, President and Chief Executive Officer of
the Company since 1995. Previously, he served as President and Chief Executive
Officer of Independence One Bank of California, FSB, a subsidiary of Michigan
National Corporation. From 1985 to 1990, he was the President and Chief
Executive Officer of La Jolla Bank & Trust Company. Prior to 1985, Mr. Sondker
held executive and management positions with a community bank holding company in
Kansas City, Missouri.
Mr. Arnold, Executive Vice President, has served as Director of Sales and
Banking Administration since 1997. Prior to joining the Company, he served as
an Executive Vice President of First Interstate Bank and was responsible for all
branch banking activities in Northern California. Prior to joining First
Interstate in 1990, he held executive and management positions at Security
Pacific Bank in a career that spanned over thirty years.
Mr. Buckley, Executive Vice President, has served as Director of Credit
Administration since 1995 and Manager of Credit Administration and Asset
Management since 1994. He joined the Company in September 1993. Previously, he
served at Bank of America in various capacities from 1985 to 1993. His last
position was Vice President and Regional Credit Administrator for the Real
Estate Industries Division at Bank of America.
Mr. Flax, Executive Vice President, has served as General Counsel of BVB since
1985 and has served in various capacities since 1980. He has served as General
Counsel and Corporate Secretary of the Company since
13
its formation in 1989. Before joining BVB, he was a trial attorney in private
practice in San Francisco from 1976 to 1980.
Mr. Heaberlin, Executive Vice President, has served as Chief Financial Officer
of the Company since 1995 and Chief Operating Officer of BVB since 1997.
Previously, he served as Senior Vice President and Chief Financial Officer for
First California/Mortgage Service America. During 1993 and 1994, he was
Executive Vice President and Treasurer of ITT Residential Capital Corporation.
Prior to ITT, he was the financial executive for various entities including
Bowery Bank, Exchange National Bank of Chicago, Financial Corporation of Santa
Barbara and Numerica Financial. He has over 20 years experience in commercial
banking, savings banks and the financial services industry. Mr. Heaberlin is a
Certified Public Accountant.
Mr. Reed, Executive Vice President, has served as Director of Management
Information Systems and Loan Servicing since 1997. Previously, he served as
Chief Information Officer for Weyerhaeuser and WMC Mortgage Corporation. He has
over 30 years of corporate management, information technology and servicing
experience and has held senior management positions with Technology Management
Corporation, American Savings Bank and Home Savings of America / HF Ahmanson.
There is no family relationship among the above officers. All executive
officers serve at the pleasure of the Board of Directors.
ITEM 2. PROPERTIES
- --------------------
As of December 31, 1997, the Company and its subsidiaries occupied 56 offices
and the Company's administrative corporate office under operating lease
arrangements expiring at various dates through 2012. BVB owns the property in
which one of its branches is located. In 1996, the Company sold its corporate
office complex and entered into an operating lease arrangement for new
facilities. Also in 1996, BVC's corporate office complex was sold and BVC
relocated its administrative offices.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
See Note 19 of the Consolidated Financial Statements at Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
The following was submitted for a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
(a) Special Meeting of Shareholders of the Company held on October 23, 1997 to
consider the proposal to approve the adoption of the Agreement and Plan of
Merger dated May 8, 1997 by and among the Company, America First Eureka
Holdings, Inc., America First Financial Fund 1987-A Limited Partnership and
America First Capital Associates Limited Partnership Five. The vote on the
proposal was as follows:
FOR AGAINST ABSTAIN
- ----------------------- ---------------- ------------------
10,301,761 43,897 97,937
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The Company's common stock is traded on the Nasdaq National Market. The
Company's common stock symbol was changed to BVCC from BVFS in May 1997. At
December 31, 1997, there were 12,070,474 shares of the Company's common stock
outstanding, as adjusted for a 2 for 1 stock split in the form of a 100% stock
dividend paid in June 1997 (the "Stock Split"), which were owned by 1,854
shareholders of record.
The following is a summary of quarterly stock price activity and dividends
declared for 1997 and 1996 (amounts have been adjusted for the Stock Split):
-----------------------------------------------------------------------------------------------
1997
-----------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------- -------------------- -------------------- --------------------
Stock price - high $28.63 $26.75 $28.13 $36.25
Stock price - low $20.63 $22.63 $24.88 $27.69
Dividends $ 0.08 $ 0.08 $ 0.08 $ 0.10
-----------------------------------------------------------------------------------------------
1996
-----------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------- -------------------- -------------------- --------------------
Stock price - high $16.56 $17.75 $19.63 $21.75
Stock price - low $13.13 $15.13 $16.00 $17.38
Dividends $0.075 $0.075 $0.075 $ 0.08
The ability of the Company to pay dividends may be limited by certain
regulatory restrictions. See "Supervision and Regulation - Limitations on
Dividends and Other Capital Distributions" at Item 1 and Note 14 of the
Consolidated Financial Statements at Item 8.
The following is a summary of year-end values for 1997 and 1996.
-------------------- --------------------
December 31, 1997 December 31, 1996
-------------------- --------------------
Stock price $36.25 $21.19
Book value per share $14.38 $14.98
Price/book ratio 252% 141%
Tangible book value per share (1) $11.94 $14.22
Price/tangible book ratio 304% 149%
Earnings per diluted share $ 1.06 $ 0.79
Earnings multiple 34.2 26.8
Core earnings per diluted share (2) $ 1.48 $ 1.28
Core earnings multiple (2) 24.5 16.6
Tangible cash earnings per diluted share (2) (3) $ 1.73 $ 1.42
Tangible cash earnings multiple (2) (3) 21.0 14.9
15
The following is a summary of selected financial ratios, excluding special
mention items, for 1997 and 1996. See also Item 6 for selected financial ratios
including special mention items:
-----------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996
-------------------- --------------------
Ratio of general and administrative expenses
to average assets, including securitized assets
(2) 1.90% 1.65%
Efficiency ratio (2) (4) 61.75% 58.04%
Return on average assets (2) (5) 0.63% 0.55%
Return on average equity (2) (5) 10.24% 8.70%
Tangible cash return on average assets (2) (6) 0.73% 0.62%
Tangible cash return on average equity (2) (7) 13.49% 10.40%
Dividend payout ratio 21.84% 23.92%
The following is a summary of selected quarterly financial data for 1997 and
1996:
-----------------------------------------------------------------------------------------------
1997
-----------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Core earnings (2) $5,283 $4,331 $4,755 $5,230
Per diluted share data:
Core earnings (2) $ 0.39 $ 0.32 $ 0.36 $ 0.41
Tangible cash earnings
(2) (3) $ 0.43 $ 0.39 $ 0.43 $ 0.48
-----------------------------------------------------------------------------------------------
1996
-----------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Core earnings (2) $3,993 $4,216 $4,648 $4,868
Per diluted share data:
Core earnings (2) $ 0.28 $ 0.30 $ 0.34 $ 0.36
Tangible cash earnings
(2) (3) $ 0.31 $ 0.34 $ 0.37 $ 0.40
(1) Tangible book value per share was computed by dividing tangible book value
by the number of shares outstanding at December 31, 1997. Tangible
book value is defined as equity less intangible assets.
(2) Core earnings and corresponding ratios are calculated excluding special
mention items. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Special Mention Items" for further
discussion. Core earnings are not a measure of performance under generally
accepted accounting principles and should not be considered as an
alternative to net income (loss) as an indicator of the Company's operating
performance. Core earnings and the corresponding ratios are included herein
as management believes they are useful tools for investors and analysts in
assessing the Company's performance and trends excluding the impact of such
items. These measures may not be comparable to similarly titled measures
reported by other companies. See Item 6 for selected financial ratios
including special mention items.
(3) Tangible cash earnings are calculated based on core earnings and exclude
non-cash charges related to the amortization of intangibles and the Employee
Stock Ownership Plan ("ESOP").
(4) The efficiency ratios were computed by dividing general and administrative
expenses by the sum of net interest income and noninterest income.
(5) The return on average assets and return on average equity were computed by
dividing net income (loss) by average assets and average equity,
respectively.
(6) The return on average tangible assets was computed by dividing tangible cash
earnings by average tangible assets. Average tangible assets are defined as
average assets less average intangible assets.
(7) The return on average tangible equity was computed by dividing tangible cash
earnings by average tangible equity. Average tangible equity is defined as
average equity less average intangible assets.
16
ITEM 6. SELECTED FINANCIAL DATA - FIVE-YEAR FINANCIAL INFORMATION (INCLUDING
- ------------------------------------------------------------------------------
BVC EFFECTIVE JUNE 1, 1996, CGC EFFECTIVE APRIL 1, 1997 AND ULTRA EFFECTIVE
- ---------------------------------------------------------------------------
OCTOBER 1, 1997)
- ----------------
-------------------------------------------------------------------------------
AT DECEMBER 31,
-------------------------------------------------------------------------------
SELECTED BALANCE SHEET INFORMATION 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total assets $3,246,476 $3,300,262 $3,004,496 $3,166,529 $2,663,542
Investment securities 10,639 29,006 47,963 32,841 11,399
Mortgage-backed securities 470,261 577,613 731,378 921,680 718,696
Loans receivable 2,373,113 2,474,717 2,062,268 2,054,563 1,776,820
Customer deposits 1,677,135 1,763,967 1,819,840 1,707,376 1,694,263
Borrowings 1,355,976 1,245,537 941,465 1,219,958 741,414
Stockholders' equity 173,627 200,062 207,977 217,315 210,976
========== ========== ========== ========== ==========
----------------------------------------------------------------------------
SELECTED RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31,
INFORMATION ----------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
Interest income $ 242,244 $ 241,755 $ 216,463 $ 197,326 $ 191,526
Interest expense (154,908) (160,773) (160,547) (130,401) (121,850)
--------- --------- --------- --------- ---------
Net interest income 87,336 80,982 55,916 66,925 69,676
Provision for losses on loans (1,952) (1,898) (4,284) (2,367) (7,031)
Gain (loss) on loans and securities 925 (1,453) (2,510) (1,081) 1,091
Other income 11,830 10,017 8,652 8,619 8,465
General and administrative expenses (71,913) (58,955) (57,016) (47,287) (46,871)
SAIF recapitalization assessment - (11,750) - - -
Income (expense) from real estate owned 543 4,806 1,081 95 (1)
Recovery of (provision for) losses on real
estate 585 103 (749) (145) (819)
Amortization and write-down of intangibles (4,088) (2,606) (3,944) (2,418) (2,104)
--------- --------- --------- --------- ---------
Income (loss) before income tax expense 23,266 19,246 (2,854) 22,341 22,406
Income tax (expense) benefit (9,245) (8,277) 708 (7,828) (9,765)
Extraordinary items, net of tax - - (2,544) - (132)
--------- --------- --------- --------- ---------
Net income (loss) $ 14,021 $ 10,969 $ (4,690) $ 14,513 $ 12,509
========= ========= ========= ========= =========
Earnings (loss) per diluted share:
Income (loss) before extraordinary item $ 1.06 $ 0.79 $ (0.15) $ 1.01 $ 0.90
Net income (loss) $ 1.06 $ 0.79 $ (0.32) $ 1.01 $ 0.89
Dividends per share $ 0.34 $ 0.305 $ 0.30 $ 0.30 $ 0.30
========= ========= ========= ========= =========
-----------------------------------------------------------------------
AT AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED OTHER INFORMATION (1) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------
Net interest margin 2.86% 2.57% 1.86% 2.34% 2.74%
Ratio of general and administrative
expenses to average assets 2.16% 1.84% 1.84% 1.59% 1.78%
Efficiency ratio 71.85% 64.79% 88.30% 62.60% 59.98%
Return on average assets 0.45% 0.34% (0.15)% 0.49% 0.47%
Return on average equity 7.32% 5.39% (2.11)% 6.79% 6.14%
Ratio of average equity to average assets 6.11% 6.37% 7.17% 7.17% 7.61%
Ratio of total equity to total assets 5.35% 6.06% 6.92% 6.86% 7.92%
Book value per share $ 14.38 $ 14.98 $ 14.65 $ 15.16 $ 14.95
Dividend payout ratio 30.53% 38.61% (93.75)% 29.70% 33.71%
Nonperforming assets $15,766 $24,310 $ 38,811 $50,577 $72,365
Ratio to total assets 0.49% 0.74% 1.29% 1.60% 2.72%
Troubled debt restructures $ 731 $ 509 $ 15,641 $13,948 $14,188
Ratio to total assets 0.02% 0.02% 0.52% 0.44% 0.53%
======= ======= ======== ======= =======
(1) The selected other information is based upon data as of the end of, and for
the respective years, except that average assets, average intangible assets
and average equity have been calculated by averaging the relevant month-end
amounts for each respective year.
17
Item 7. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------
Results of Operations
- ---------------------
INDEX
Strategic Overview............................. 19
The Company's Mission Statement.............. 19
The Company's Strategy....................... 19
Banking Platform Strategies.................. 19
Consumer Finance Platform Strategies......... 20
Commercial Finance Platform Strategies....... 22
Capital Redeployment Strategies.............. 22
Results of Operations.......................... 23
Earnings by Business Platform................ 24
Tangible Cash Earnings....................... 25
Net Interest Income and Margin by Platform... 25
Interest Income.............................. 28
Interest Expense............................. 29
Provision For Loan Losses.................... 30
Noninterest Income........................... 30
Noninterest Expense.......................... 31
Income Taxes................................. 33
Extraordinary Item........................... 33
Special Mention Items.......................... 34
Balance Sheet Analysis......................... 36
Securities Investment........................ 36
Loans and Real Estate Owned.................. 37
Customer Deposits............................ 42
Borrowings................................... 43
Liquidity and Regulatory Capital............... 44
Liquidity.................................... 44
Regulatory Capital........................... 45
Year 2000...................................... 45
Impact of New Accounting Standards............. 45
Impact of Inflation and Changing Prices........ 46
18
STRATEGIC OVERVIEW
The Company is a diversified financial services company which operates from
three distinct business platforms:
. A Banking/Depository/Wholesale Platform ("Banking Platform"), which is
comprised primarily of mortgage loans, home equity loans and MBS.
. A Consumer Finance Platform, which is comprised of motor vehicle loans
originated by BVC and Ultra.
. A Commercial Finance Platform, which is comprised of the factoring, re-
discount and warehouse lending activities of CGC and the asset-based
lending activities of BVFC, a division of CGC.
THE COMPANY'S MISSION STATEMENT
To build a diversified financial services company by investing in niche
businesses with risk-adjusted returns that enhance shareholder value.
THE COMPANY'S STRATEGY
The Company's strategy is to continue expanding net interest margin. In order
to realize this objective, management is pursuing a strategy that encompasses
the following:
. Replacing lower yielding mortgage loans with consumer and commercial assets
with higher risk-adjusted returns, shorter maturities and less sensitivity to
interest rate fluctuations.
. Enhancing BVB's deposit base by reducing higher cost deposits and expanding
lower cost transaction accounts by emphasizing relationship banking and
capitalizing on cross-sell opportunities with customers.
. De-emphasizing the less profitable elements of the Company's activities by
ceasing residential mortgage loan originations and reducing BVB's wholesale
activities.
. Maintaining the capital of BVB at or above the minimum "well-capitalized" (as
defined for bank regulatory purposes) level and returning any excess capital
to the Company.
. Redeploying such excess capital in businesses intended to generate assets
with higher risk-adjusted returns than those typically provided by mortgage
loans.
BANKING PLATFORM STRATEGIES
The Banking Platform's strategic focus is designed to expand the retail
deposit franchise by focusing on the growth of "transaction accounts" (i.e.
checking, savings and money market) instead of higher cost certificates of
deposit as a source of financing and to reduce wholesale activities.
Change in Name to Bay View Bank
- -------------------------------
Marking its transition from a traditional savings bank to a community bank,
Bay View Federal Bank changed its name to Bay View Bank, effective March 17,
1997.
19
Acquisition of America First Eureka Holdings, Inc. and EurekaBank
- -----------------------------------------------------------------
The Company completed its acquisition of America First Eureka Holdings, Inc.
and its wholly owned subsidiary, EurekaBank, a Federal Savings Bank, on January
2, 1998. Pursuant to the Merger Agreement, the Company paid $90 million in cash
and $210 million in stock (8,076,923 shares of the Company's common stock) 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 shares issued
was based on the average value of the Company's 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 $34.3031 during this period, pursuant to the Merger
Agreement, the number of shares issued was determined by dividing the $210
million stock portion of the purchase price by $26.00 per share.
The acquisition of AFEH will be accounted for as a purchase effective January
2, 1998. The amount of goodwill to be recorded as of the merger date is
expected to be $98 million which will be amortized on a straight-line basis over
20 years and which excludes core deposit intangibles estimated at $12 million.
This goodwill amount represents the preliminary estimate of the excess of the
purchase price over the fair value of net assets acquired and liabilities
assumed based on information available as of this date. No assurance can be
given that the final goodwill amount will not be more or less than the estimated
amount.
The following represents selected financial data for the Company as of
December 31, 1997 and selected pro forma financial data for the Company combined
with EurekaBank, reflecting the impact of the acquisition as of December 31,
1997:
---------------------- ------------------------
PRO FORMA
THE COMPANY COMBINED
---------------------- ------------------------
(DOLLARS IN THOUSANDS)
Assets $3,246,476 $5,594,702
Core deposit intangibles 1,758 13,915
Goodwill 27,749 126,034
Deposits 1,677,135 3,685,216
Equity 173,627 383,511
Book value per diluted share 14.38 19.04
Tangible book value per diluted share 11.94 12.09
EurekaBank will initially operate under its own name. The Company anticipates
that by May 31, 1998, the systems and products of EurekaBank and BVB will be
fully integrated at which time all EurekaBank branches will convert to BVB
branches. The combined entity will have 56 full service branches and will
represent the largest deposit franchise of any financial institution operating
exclusively in the San Francisco Bay Area.
The acquisition is expected to be accretive on a tangible cash earnings basis,
as defined in Item 5, in 1998. The Company expects to incur during 1998
approximately $5.0 million ($2.9 million after tax) representing costs
associated with integrating EurekaBank into the Company, including training,
systems and operations integration and costs for transitional personnel.
CONSUMER FINANCE PLATFORM STRATEGIES
The Consumer Finance Platform is comprised of motor vehicle loans originated
by Bay View Acceptance Corporation and its wholly owned subsidiaries, Bay View
Credit and Ultra Funding, Inc.
Bay View Credit
- ---------------
In late 1996, the Company's management began implementing a significant
restructuring of BVC's balance sheet. The following is a summary of the actions
taken:
. Sale of entire equipment leasing portfolio of $60 million.
20
. Redemption and transfer of customer deposits.
. Sale and securitization of $253 million of the motor vehicle loan portfolio.
Sale of Equipment Leasing Portfolio
BVC signed a definitive agreement during 1996 for the sale of its entire
equipment leasing portfolio for cash. The leases sold aggregated $60 million
and this transaction closed in December, 1996. The proceeds from this
transaction slightly exceeded the value established during the purchase
accounting valuation process. This sale, combined with other restructuring
efforts outlined herein, enabled BVC to return $15 million of capital to the
Company on December 31, 1996 for redeployment.
Reduction of High Cost Customer Deposits
BVC's customer deposits were primarily comprised of thrift certificates which
were similar to certificates of deposit with the exception that they were
callable at par plus accrued interest. When thrift certificates were purchased
by customers, BVC reserved the right to repurchase the certificates at any time
upon thirty days notice. Utilizing this call provision, BVC redeemed the higher
cost component (higher than BVB's incremental borrowing cost) of these deposits
at face value (approximately $267 million) as of December 31, 1996. The
remainder of the BVC customer deposits (which were lower in cost than BVB's
incremental borrowing cost) were sold to BVB in June 1997.
Sale and Securitization of Motor Vehicle Loan Portfolio
In January 1997, BVC sold $253 million of its motor vehicle loan portfolio to
BVSC, a Delaware corporation formed for the purpose of issuing asset-backed
securities through a trust. The motor vehicle loan portfolio was recorded at
its fair value upon acquisition assuming that such loans would be securitized
and sold. As a result, the only gain recorded on the sale and securitization
was relating to the changes in the market interest rates between the acquisition
date of BVC and the sale and securitization of the loans. In conjunction with
the decision to securitize the motor vehicle loan portfolio, management entered
into certain hedges which materially insulated the purchase accounting valuation
from movements in interest rates.
In January 1997, $253 million of motor vehicle receivable-backed securities
were issued through a trust. Capital Markets Assurance Corporation provided
credit enhancement for this transaction. The Company ceased its securitization
activities in conjunction with the announcement of the EurekaBank acquisition.
Ultra Funding, Inc.
- -------------------
A significant source of the Consumer Finance Platform's loan purchases has
been a strategic alliance that began in November 1996 with Ultra Funding, an
originator of prime motor vehicle loans, whereby the Company had a right of
first refusal to purchase all of the motor vehicle installment contracts
originated by Ultra Funding which met the Company's underwriting criteria.
Effective October 1, 1997, the Company, through its newly created subsidiary,
Ultra Funding, Inc., acquired the origination capabilities and certain assets of
Ultra Funding.
Strategic Alliances
- -------------------
In January 1998, the Company announced the formation of a strategic alliance
with Onyx Acceptance Corporation ("Onyx") whereby the Company will purchase
motor vehicle loans originated by Onyx.
In March 1998, the Company announced agreements with Lendco Financial Services
("Lendco") to purchase motor vehicle operating leases from Lendco. The
agreements also provide the Company with
21
an option to acquire Lendco.
These strategic alliances are consistent with management's strategy to
continue expanding the Company's net interest margin by focusing on generating
assets in the Consumer and Commercial Finance Platforms with higher
risk-adjusted yields.
COMMERCIAL FINANCE PLATFORM STRATEGIES
The Commercial Finance Platform is comprised of CGC's asset-based lending and
factoring, warehouse and re-discount lines. CGC's corporate vision is to become
a preeminent nationwide provider of asset-based lending, factoring and warehouse
and re-discount lines to small and middle market companies. Management believes
that meaningful expansion opportunities exist due to the highly fragmented
nature of the segment of the commercial finance industry serving small to medium
size companies.
Asset-Based Lending
- -------------------
CGC's asset-based lending includes credit secured by accounts receivable,
inventory, machinery and equipment and real estate. At December 31, 1997, these
loan products represented approximately 75% of the Commercial Platform's loan
portfolio and had average yields approximating 17%.
In December 1997, the Company announced an expansion of the Commercial Finance
Platform including the formation of a new asset-based lending group known as Bay
View Financial Corporation. BVFC, a division of CGC, is located in Southern
California, one of the top asset-based lending markets in the country. This
expansion represents a significant step in achieving the Company's goal of
establishing a $200-300 million nationwide asset-based lending platform.
Factoring, Warehouse and Re-Discount Lines
- ------------------------------------------
CGC's lending includes accounts receivable factoring, warehouse and re-
discount lines. At December 31, 1997, these loan products represented
approximately 25% of the Commercial Platform's loan portfolio and had average
yields approximating 39%.
CAPITAL REDEPLOYMENT STRATEGIES
Stock Repurchase Program
- ------------------------
The Company's outstanding shares of common stock at December 31, 1997 and 1996
were 12,070,474 shares and 13,349,270 shares, respectively. The decrease in the
number of outstanding shares was attributable to the repurchase of shares in
1997 partially offset by the exercise of stock options. As a result of the
stock repurchases, weighted average shares outstanding (including dilutive
potential common shares) used for earnings per diluted share calculations
decreased to 13,203,000 shares for 1997 from 13,900,000 shares for 1996.
In January 1997, the Company approved a repurchase program of $25 million to
redeploy its excess capital and in May 1997, an additional $25 million was
approved. During 1997, the Company repurchased 1,399,000 shares of its common
stock at an average price of $28.48 per share. In December 1997, the Company's
Board of Directors rescinded the remaining share repurchase authorization in
order to explore opportunities to use the stock's "currency value" for potential
future acquisitions which may be accounted for as a pooling-of-interests.
Since the inception of the stock repurchase program in late 1995, the Company
has repurchased nearly 3 million shares at an average cost of $21.81 per share.
This represents over 20% of the shares outstanding at December 31, 1995. In
January 1998, the Company's treasury shares were reissued in conjunction with
the acquisition of AFEH.
22
Other Capital Strategies
- ------------------------
On August 28, 1997, the Company issued $100 million in subordinated notes.
The notes are unsecured obligations of the Company and are subordinated in right
of payment to all existing and future senior indebtedness, as defined, of the
Company. The notes mature on August 15, 2007, and are callable upon a change of
control, within 180 days of the occurrence of the change, at the option of the
Company and upon certain other events. The issuance has a stated coupon rate of
9.125% and yields 9.225%.
The Company expects to continue utilizing this capital pool to pursue
accretive acquisition opportunities to expand its Consumer and Commercial
Finance Platforms. Management will also continue to explore the acquisition of
other potential high quality, niche origination capabilities, as well as
opportunities to further enhance BVB's deposit franchise.
RESULTS OF OPERATIONS
Consolidated net income was $14.0 million, or $1.06 per diluted share, for the
year ended December 31, 1997 as compared with $11.0 million, or $0.79 per
diluted share, for 1996, and a net loss of $4.7 million, or $0.32 per share, for
1995. Operating results for 1997 included $5.6 million (after tax) in special
mention items, primarily related to EurekaBank acquisition-related expenses.
Operating results for 1996 included $6.8 million (after tax) in special mention
items, primarily relating to a one-time special assessment to recapitalize the
Savings Association Insurance Fund as well as other offsetting special mention
items. Operating results for 1996 also included the benefit associated with the
$253 million of motor vehicle loans which were sold and securitized in January
1997. Operating results for 1995 included $11.3 million (after tax) in special
mention items. See "Special Mention Items" elsewhere herein for further
discussion.
Core earnings (net income excluding special mention items) were $19.6 million,
or $1.48 per diluted share for 1997, as compared with $17.7 million, or $1.28
per diluted share, for 1996 and $6.6 million, or $0.45 per share, for 1995.
The following table reconciles net income (loss) to core earnings for the
years indicated:
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 (1) 1995
---------------------- ----------------------- ----------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) $14,021 $10,969 $(4,690)
Special mention items, net of tax 5,578 6,756 11,336
---------------------- ----------------------- ----------------------
Core earnings (2) $19,599 $17,725 $ 6,646
====================== ======================= ======================
Core earnings per diluted share (2) $ 1.48 $ 1.28 $ 0.45
====================== ======================= ======================
(1) 1996 includes an estimated $4.2 million in earnings (after tax) associated
with the $253 million of motor vehicle loans which were sold and
securitized in January 1997.
(2) Core earnings are calculated excluding special mention items. See
"Special Mention Items" for further discussion. Core earnings are not a
measure of performance under generally accepted accounting principles and
should not be considered as an alternative to net income (loss) as an
indicator of the Company's operating performance. Core earnings are
included herein as management believes they are a useful tool for
investors and analysts in assessing the Company's performance and trends
excluding the impact of such items. These measures may not be comparable
to similarly titled measures reported by other companies.
The increases in earnings and earnings per diluted share over prior years were
due to a continued expansion of net interest margin as well as the impact of
share repurchases. Net interest margin for 1997 was 2.86% as
23
compared with 2.57% for 1996 and 1.86% for 1995. This improvement reflects the
continued strategic shift in the Company's balance sheet from commodity
oriented, real estate-based assets with lower risk-adjusted yields and higher
prepayment risk to consumer and commercial loans with higher risk-adjusted
yields, shorter maturities and lower prepayment risk.
EARNINGS BY BUSINESS PLATFORM
Net earnings (loss), by business platform, are summarized as follows for the
years indicated:
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 (2) 1995
----------------------- ---------------------- --------------------
PER PER PER
DILUTED DILUTED DILUTED
EARNINGS SHARE EARNINGS SHARE LOSS SHARE
-------- ------- -------- ------- ------ -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Banking $12,351 $ 0.94 $ 8,827 $0.63 $(4,690) $(0.32)
Consumer Finance (1) 1,784 0.13 2,142 0.16 - -
Commercial Finance (1) (114) (0.01) - - - -
------- ------ ------- ----- ------- ------
Total $14,021 $ 1.06 $10,969 $0.79 $(4,690) $(0.32)
======= ====== ======= ===== ======= ======
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform
was created with the acquisition of CGC in April 1997.
(2) 1996 includes an estimated $4.2 million in earnings (after tax) associated
with the $253 million of motor vehicle loans which were sold and
securitized in January 1997.
Core earnings, by business platform, are summarized as follows for the years
indicated:
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 (2) 1995
----------------------- ---------------------- ---------------------
PER PER PER
CORE DILUTED CORE DILUTED CORE DILUTED
EARNINGS (3) SHARE EARNINGS (3) SHARE EARNINGS (3) SHARE
------------ ------- ------------ ------- ------------ -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Banking $17,044 $1.29 $16,826 $1.21 $6,646 $0.45
Consumer Finance (1) 2,143 0.16 899 0.07 - -
Commercial Finance (1) 412 0.03 - - - -
------- ----- ------- ----- ------ -----
Total $19,599 $1.48 $17,725 $1.28 $6,646 $0.45
======= ===== ======= ===== ====== =====
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform
was created with the acquisition of CGC in April 1997.
(2) 1996 includes an estimated $4.2 million in earnings (after tax) associated
with the $253 million of motor vehicle loans which were sold and
securitized in January 1997.
(3) See definition and discussion of core earnings included elsewhere herein.
24
TANGIBLE CASH EARNINGS
Tangible cash earnings are based on core earnings for each period and exclude
charges related to the amortization of intangibles and the Employee Stock
Ownership Plan ("ESOP").
Tangible cash earnings are summarized as follows for the years indicated:
---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996 1995
---------------------- ------------------------ -----------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Core earnings (1) $19,599 $17,725 $6,646
Adjustments:
Amortization of intangibles 2,936 1,746 2,758
ESOP 242 222 203
------- ------- ------
Tangible cash earnings $22,777 $19,693 $9,607
======= ======= ======
Tangible cash earnings per diluted share $ 1.73 $ 1.42 $ 0.66
======= ======= ======
(1) See definition and discussion of core earnings included elsewhere herein.
NET INTEREST INCOME AND MARGIN BY BUSINESS PLATFORM
Consolidated net interest income was $87.3 million for the year ended December
31, 1997 as compared with $81.0 million for 1996 and $55.9 million for 1995.
The consolidated net interest margin for 1997 was 2.86% as compared with 2.57%
for 1996 and 1.86% for 1995.
This improvement in the consolidated net interest margin over prior years was
primarily due to lower funding costs due to a decrease in the cost of retail
deposits, continued originations and purchases of higher yielding assets by the
Consumer and Commercial Finance Platforms and the Banking Platform's purchase of
$70 million in home equity loans in 1997. This impact was partially offset by
additional interest expense associated with the subordinated debt issued in 1997
and the senior debt issued in 1996.
Consolidated net interest income and margin, by business platform, is
summarized as follows for the years indicated:
--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 (2) 1995
-------------------- --------------------- --------------------
NET NET NET NET NET NET
INTEREST INTEREST INTEREST INTEREST INTEREST INTEREST
INCOME MARGIN INCOME MARGIN INCOME MARGIN
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Banking Platform $69,174 2.45% $70,331 2.36% $55,916 1.86%
Consumer Finance (1) 10,592 5.54 10,651 5.80 - -
Commercial Finance (1) 7,570 19.05 - - - -
------- ----- ------- ---- ------- ----
Total $87,336 2.86% $80,982 2.57% $55,916 1.86%
======= ===== ======= ==== ======= ====
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform
was created with the acquisition of CGC in April 1997.
(2) 1996 includes an estimated $7.3 million in incremental interest income (pre
tax) associated with the $253 million of motor vehicle loans which were
sold and securitized in January 1997.
25
Banking Platform
- ----------------
The Banking Platform's 1997 net interest margin was 2.45%, as compared with a
net interest margin 2.36% for 1996 and 1.86% for 1995. The 9 basis point
improvement in net interest margin for 1997 was primarily due to a lower cost of
funds throughout the year as well as the purchase of home equity loans. The 50
basis point improvement in net interest margin for 1996 was primarily due to
higher yields on mortgage loans combined with a lower cost of deposits.
Consumer Finance Platform
- -------------------------
The Consumer Finance Platform's 1997 net interest margin was 5.54%. This
compares with a net interest margin of 5.80% in 1996. The decrease in the net
interest margin from 1996 was primarily due the impact of securitizing the $253
million motor vehicle loan portfolio in January 1997 as well as continued
originations by Ultra which are at yields lower than those of BVC.
Commercial Finance Platform
- ---------------------------
The Commercial Finance Platform's 1997 net interest margin was 19.05%. This
platform was created as a result of the Company's acquisition of CGC effective
April 1, 1997.
Average Balance Sheet. The following table sets forth certain information
relating to the Company's consolidated statements of financial condition and
reflects the average yields on interest-earning assets and average rates paid on
interest-bearing liabilities for the years indicated. Such yields and rates are
derived by dividing interest income or expense by the average balances of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods shown.
26
----------------------------------------------------------------------------------
AVERAGE BALANCES, YIELDS AND RATES PAID
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996
----------------------------------------- ------------------------------------
AVERAGE ACTUAL AVERAGE AVERAGE ACTUAL AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Assets
- ------
Interest-earning assets:
Loans (1) (2) $2,369,200 $197,898 8.35% $2,387,063 $192,443 8.12%
Mortgage-backed securities (3) 531,493 34,317 6.46 654,671 42,081 6.43
Investments (3) 154,027 10,029 6.51 126,056 7,231 5.74
---------- -------- ---- ---------- -------- ----
Total interest-earning assets 3,054,720 242,244 7.93 3,167,790 241,755 7.67
-------- ---- -------- ----
Other assets 76,674 31,761
---------- ----------
Total assets $3,131,394 $3,199,551
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Customer deposits $1,646,683 76,484 4.64 $1,971,128 100,225 5.08
Borrowings (4) 1,242,442 78,424 6.31 979,069 60,548 6.18
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities 2,889,125 154,908 5.36 2,950,197 160,773 5.45
-------- ---- -------- ----
Other liabilities 50,834 45,677
---------- ----------
Total liabilities 2,939,959 2,995,874
Stockholders' equity 191,435 203,677
Total liabilities and stockholders'
equity $3,131,394 $3,199,551
========== ==========
Net interest income/net interest
spread $ 87,336 2.57% $ 80,982 2.22%
======== ==== ======== ====
Net interest earning assets $ 165,595 $ 217,593
========== ==========
Net interest margin 2.86% 2.57%
==== ====
--------------------------------------------
AVERAGE BALANCES, YIELDS AND RATES PAID
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995
--------------------------------------------
AVERAGE ACTUAL AVERAGE
BALANCE INTEREST YIELD/RATE
------- -------- ----------
(Dollars in thousands)
Assets
- ------
Interest-earning assets:
Loans (1) (2) $2,108,897 $155,853 7.48%
Mortgage-backed securities (3) 810,982 54,236 6.69
Investments (3) 110,720 6,374 5.76
---------- -------- ----
Total interest-earning assets 3,030,599 216,463 7.20
-------- ----
Other assets 69,143
----------
Total assets $3,099,742
==========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Customer deposits $1,805,517 93,398 5.17
Borrowings (4) 1,049,107 67,149 6.40
---------- -------- ----
Total interest-bearing liabilities 2,854,624 160,547 5.62
-------- ----
Other liabilities 22,886
----------
Total liabilities 2,877,510
Stockholders' equity 222,232
Total liabilities and stockholders' ----------
equity $3,099,742
==========
Net interest income/net interest
spread $ 55,916 1.58%
======== ====
Net interest earning assets $ 175,975
==========
Net interest margin 1.86%
====
(1) Average loan balances include nonaccrual loans. Nonaccrual loans were
$11.0 million, $16.1 million and $10.8 million at December 31, 1997, 1996
and 1995, respectively.
(2) Loan interest income and yields include the amortization of deferred loan
origination costs, net of fees, of $187,000, $1.4 million and $452,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(3) Average balances and yields for securities available for sale are based on
historical amortized cost balances and do not include any unrealized gains
or losses.
(4) Interest expense for borrowings includes interest expense on interest rate
swaps of $2.8 million, $2.6 million and $40,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
27
INTEREST INCOME
Interest Income on Loans Receivable
- -----------------------------------
Interest income on loans receivable was $197.9 million for the year ended
December 31, 1997 as compared with $192.4 million for 1996 and $155.9 million
for 1995.
Interest income on loans receivable, by business platform, is summarized as
follows for the years indicated:
------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 (2) 1995
-------------------------- ---------------------------- ------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Banking $168,955 7.88% $172,370 7.88% $155,853 7.48%
Consumer Finance (1) 19,328 10.46 20,073 10.91 - -
Commercial Finance (1) 9,615 24.20 - - - -
-------- ----- -------- ----- -------- ----
Total $197,898 8.35% $192,443 8.12% $155,853 7.48%
======== ===== ======== ===== ======== ====
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform
was created with the acquisition of CGC in April 1997.
(2) 1996 includes an estimated $7.3 million in incremental interest income
(pre tax) associated with the $253 million of motor vehicle loans which
were sold and securitized in January 1997.
Banking Platform
Loan yields for 1997 and 1996 were the same at 7.88%. This is a result of the
average monthly COFI for 1997 approximating 1996. A substantial portion of the
Banking Platform's ARMs reprice to COFI on a monthly basis. The decrease in
interest income on loans is due to a slight decrease in the average loan
balance.
Loan yields increased by 40 basis points from 1995 to 1996. The average
monthly COFI for the year ended December 31, 1996, which impacted ARMs,
increased by 16 basis points. The average loan balances for 1996 and 1995 were
essentially the same at $2.07 billion and $2.08 billion, respectively.
Consumer Finance Platform
The decrease in motor vehicle loan yields to 10.46% for 1997 as compared with
10.91% in 1996 was primarily due to the sale of the $253 million motor vehicle
loan portfolio in January 1997 to BVSC. The sale of these loans was offset
partially by current year loan activity, including Ultra originations and
purchases which were at lower average yields than the motor vehicle loans
originated by BVC.
Commercial Finance Platform
The commercial loan yield for 1997 was 24.20%. This platform was created as a
result of the acquisition of CGC effective April 1, 1997.
Interest Income on Mortgage-backed Securities
- ---------------------------------------------
Interest income on the Company's MBS was $34.3 million for the year ended
December 31, 1997 as compared with $42.1 million for 1996 and $54.2 million for
1995. The decrease in interest income on MBS was primarily attributable to
lower average balances resulting from sales and principal amortization. There
were no MBS purchased in 1997, 1996 or 1995 consistent with management's
strategy to restructure the balance sheet and de-emphasize the Company's
wholesale investment and borrowing activities.
28
Interest and Dividends on Investments
- -------------------------------------
Interest and dividend income from the Company's investment portfolio was $10.0
million for the year ended December 31, 1997 as compared with $7.2 million for
1996 and $6.4 million for 1995. The increase in interest and dividend income on
investments was primarily due to the impact of higher average balances and
yields on investments.
INTEREST EXPENSE
Interest Expense on Customer Deposits
- -------------------------------------
Interest expense on the Company's customer deposits was $76.5 million for the
year ended December 31, 1997 as compared with $100.2 million for 1996 and $93.4
million for 1995. The decrease in interest expense in 1997 as compared with
1996 was a result of lower average customer deposit balances, a lower cost of
retail deposits and the redemption of the higher-cost component of BVC deposits
(approximately $267 million) at year-end 1996.
The decrease in the Company's cost of retail deposits was primarily due to
favorable repricing of certificates of deposit and an increase in transaction
accounts which are at lower rates than certificates of deposit. The cost of
retail deposits at December 31, 1997 for BVB was 4.71%, which included the
retail deposits of BVC sold to BVB in June 1997. BVB's cost of retail deposits
was 24 basis points below COFI at December 31, 1997 and 1996 as compared with 12
basis points above COFI at December 31, 1995. BVB's cost of retail deposits was
higher at December 31, 1997, as compared to the average cost for the year of
4.64%, due to the impact of brokered certificates of deposit held at year-end
and a transaction account promotion conducted during the fourth quarter of 1997.
Transaction accounts for BVB as a percentage of total retail deposits increased
to 34.6% at December 31, 1997 as compared to 30.3% and 21.3% at December 31,
1996 and 1995, respectively.
The increase in interest expense on customer deposits from 1995 to 1996 was
primarily due to the acquisition of BVC effective June 1996.
BVB's cost of retail deposits compared to COFI is summarized as follows:
---------------------------------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
------------------------ -------------------------- ----------------------
Cost of retail deposits 4.71% 4.60% 5.24%
COFI 4.95 4.84 5.12
------------------------ -------------------------- ----------------------
Spread (below) above COFI (0.24)% (0.24)% 0.12%
======================== ========================== ======================
Interest Expense on Borrowings
- ------------------------------
Interest expense on the Company's borrowings was $78.4 million for the year
ended December 31, 1997 as compared with $60.5 million for 1996 and $67.1
million for 1995.
The increase in interest expense on borrowings was due to higher average
balances arising from a decrease in average customer deposits as well as the
impact of the $100 million in subordinated notes issued in August 1997 (9.6%
all-in cost) and the $50 million in senior debentures issued in May 1996 (8.9%
all-in cost).
The decrease in interest expense on borrowings between 1996 and 1995 was
primarily due to lower average balances arising from lower borrowing
requirements consistent with the level of interest-earning assets maintained,
combined with the prepayment of higher cost borrowings in late 1995. Interest
expense on borrowings for 1996 reflects the impact of the prepayment of $190
million of higher cost borrowings in the fourth quarter of 1995 which were
replaced with short-term lower cost borrowings. In conjunction with the
prepayment of these borrowings, the Company entered into interest rate swap
agreements to provide interest rate risk
29
protection for the short-term lower cost borrowings by matching the floating
interest rate characteristics and lengthening their maturities.
The following table sets forth the changes in net interest income due to
changes in the rate and volume of the Company's interest-earning assets and
interest-bearing liabilities. Rate and volume changes are calculated excluding
nonperforming assets. Changes in rate and volume (changes in weighted average
interest rate multiplied by average portfolio balance), which cannot be
segregated, have been allocated proportionately to the change in rate and the
change in volume.
---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 VS. 1996
---------------------------------------------------------------------------------
RATE VOLUME TOTAL
VARIANCE VARIANCE VARIANCE
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS)
Interest income:
Loans $ 7,380 $ (1,925) $ 5,455
Mortgage-backed securities 190 (7,954) (7,764)
Investments 1,055 1,743 2,798
----------------------- ----------------------- -----------------------
8,625 (8,136) 489
----------------------- ----------------------- -----------------------
Interest expense:
Customer deposits (8,180) (15,561) (23,741)
Borrowings 1,276 16,600 17,876
----------------------- ----------------------- -----------------------
(6,904) 1,039 (5,865)
----------------------- ----------------------- -----------------------
Net interest income $15,529 $ (9,175) $ 6,354
======================= ======================= =======================
---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 VS. 1995
---------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest income:
Loans $ 6,463 $ 30,127 $ 36,590
Mortgage-backed securities (2,039) (10,116) (12,155)
Investments 104 753 857
----------------------- ----------------------- -----------------------
Total 4,528 20,764 25,292
----------------------- ----------------------- -----------------------
Interest expense:
Customer deposits (692) 7,519 6,827
Borrowings (2,169) (4,432) (6,601)
----------------------- ----------------------- -----------------------
Total (2,861) 3,087 226
----------------------- ----------------------- -----------------------
Net interest income $ 7,389 $ 17,677 $ 25,066
======================= ======================= =======================
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans was $2.0 million for the year ended December
31, 1997 as compared with $1.9 million for 1996 and $4.3 million for 1995. The
decreases in 1997 and 1996 were due to continued improvements in the credit
quality of the portfolio, as evidenced by the significant decline in
nonperforming assets to $15.8 million at December 31, 1997 from $24.3 million at
December 31, 1996 and $38.8 million at December 31, 1995. Additionally, the
decrease in 1997 is also due to recoveries of approximately $1.8 million
received during the year and credited to the allowance for losses on loans. See
the "Allowance for Losses on Loans" section below for a more detailed
discussion.
NONINTEREST INCOME
Noninterest income was $12.8 million for the year ended December 31, 1997 as
compared with $8.6 million for 1996 and $6.1 million for 1995, which included
losses on the sale of securities of $800,000 and $2.5 million in 1996 and 1995,
respectively. There was no net gain or loss on securities sold in 1997.
30
The increase in noninterest income in 1997 as compared with 1996 is due to an
increase in loan fees attributable to commercial finance assets due to the
acquisition of CGC effective April 1, 1997. Also, in January 1997, BVC sold $253
million of motor vehicle loans to BVSC and recognized a gain of $925,000
representing the improvement in the fair value of the loans as a result in
changes in market interest rates between the acquisition date and the sale date.
During 1996, BVB sold $57.6 million in MBS and recognized a loss of $507,000.
Also, in conjunction with the anticipated securitization of BVC's auto loan
portfolio, during the fourth quarter of 1996, BVC entered into a short sale of
Treasury securities to hedge the valuations from movements in interest rates. A
loss of $293,000 was recorded in the fourth quarter of 1996 associated with this
short sale of Treasury securities. During 1995, BVB sold $103.4 million in MBS
and recognized a loss of $2.5 million. BVB's interest rate risk profile was
favorably impacted by the sale of these securities.
NONINTEREST EXPENSE
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $71.9 million for the year ended
December 31, 1997 as compared with $59.0 million for 1996 and $57.0 million for
1995. General and administrative expenses for 1997 included $8.8 million in
special mention items, primarily EurekaBank acquisition-related expenses.
General and administrative expenses for 1996 included $6.1 million in special
mention items, primarily related to systems conversion, sublease loss accruals
and long-term incentive expenses. General and administrative expenses for 1995
included $9.6 million in special mention items, primarily related to the write-
down due to the sale of the Company's corporate office complex and severance
payments. See "Special Mention Items" elsewhere herein for further discussion.
General and administrative expenses, by principal entity, are summarized as
follows for the years indicated:
-----------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
------------------ --------------- ----------------
(DOLLARS IN THOUSANDS)
The Company and BVB $51,722 $48,783 $57,016
BVC (1) 13,119 10,172 -
Ultra (1) 661 - -
CGC (1) 6,411 - -
------------------ --------------- ----------------
$71,913 $58,955 $57,016
================== =============== ================
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform
was created with the acquisition of CGC in April 1997.
The increase in consolidated general and administrative expenses for 1997 was
primarily attributable to the acquisitions of CGC and Ultra in 1997 and BVC in
1996 as well as a higher level of special mention items. Additionally, general
and administrative expenses for BVC have declined (on an annualized basis)
during the period subsequent to acquisition due to the termination of certain
employee functions, the impact of the sale of the entire leasing portfolio and
the continued implementation of cost reduction opportunities. The decrease in
general and administrative expenses for the Company and BVB in 1996 was due to a
decrease in special mention items as well as lower compensation and benefits
expense and the impact of other cost reduction initiatives.
31
Consolidated core general and administrative expenses, excluding special
mention items, were $63.1 million for the year ended December 31, 1997 as
compared with $52.8 million for 1996 and $47.4 million for 1995. Core general
and administrative expenses, by principal entity, are summarized as follows for
the years indicated:
-----------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
------------------ --------------- ----------------
(DOLLARS IN THOUSANDS)
The Company and BVB $44,288 $42,649 $47,446
BVC (1) 12,646 10,172 -
Ultra (1) 661 - -
CGC (1) 5,523 - -
------------------ --------------- ----------------
Total (2) $63,118 $52,821 $47,446
================== =============== ================
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform was
created with the acquisition of CGC in April 1997.
(2) Consolidated core general and administrative expenses are calculated
excluding special mention items. See "Special Mention Items" for further
discussion. Core general and administrative expenses are not a measure of
performance under generally accepted accounting principles and should not be
considered as an alternative to consolidated general and administrative
expenses as an indicator of the Company's operating performance. Core
general and administrative expenses are included herein as management
believes they are a useful tool for investors and analysts in assessing the
Company's performance and trends excluding the impact of such items.
The increases in consolidated core general and administrative expenses for
1997 and 1996 were primarily attributable to the acquisitions of CGC and Ultra
in 1997 and BVC in 1996.
Consolidated general and administrative expenses as a percentage of
consolidated average assets (including securitized assets) were 2.16% for the
year ended December 31, 1997 as compared with 1.84% for both 1996 and 1995. The
increase in the general and administrative expense ratio over the prior years
was primarily due to the acquisition of the Commercial Finance Platform.
Consolidated core general and administrative expenses, excluding special
mention items, as a percentage of consolidated average assets (including
securitized assets) were 1.90% for the year ended December 31, 1997 as compared
with 1.65% for 1996 and 1.53% for 1995. The ratio of core general and
administrative expenses to average assets (including securitized assets), by
business platform, is summarized as follows for the years indicated:
--------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- ---------------------
Banking (includes the Company) 1.69% 1.56% 1.53%
Consumer Finance (1) 2.35% 3.11% -
Commercial Finance (1) 10.05% - -
--------------------- -------------------- ---------------------
Total (2) 1.90% 1.65% 1.53%
===================== ==================== =====================
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform was
created with the acquisition of CGC in April 1997.
(2) See definition and discussion of core general and administrative expenses
included elsewhere herein.
The consolidated efficiency ratio was 71.9% for the year ended December 31,
1997 as compared with 64.8% and 88.3% for 1996 and 1995, respectively. The
increase in the consolidated efficiency ratio is also due to the impact of the
acquisitions of the Consumer and Commercial Finance Platforms as well as special
mention items.
32
The consolidated core efficiency ratio, excluding special mention items, was
61.8% for the year ended December 31, 1997 as compared with 58.0% and 73.5% for
1996 and 1995, respectively.
SAIF Recapitalization Assessment
- --------------------------------
Federal legislation to recapitalize and fully fund the Savings Association
Insurance Fund was signed into law on September 30, 1996. Customer deposits for
BVB are SAIF-insured, and as a result of the legislation, BVB was required to
pay a one-time special assessment of $11.7 million pre tax ($6.7 million after
tax, or $0.485 per share) in the third quarter of 1996. The legislation had no
direct effect on BVC, as its deposits were insured under the Bank Insurance
Fund.
Pursuant to this legislation, premiums on SAIF-insured deposits for BVB were
reduced in 1997 which translated into lower annual deposit insurance costs.
Income and Expenses from Real Estate Owned
- ------------------------------------------
Income from operations of real estate owned and net provision/recovery of
losses on real estate owned was $1.1 million for the year ended December 31,
1997 as compared with $4.9 million for 1996 and $332,000 for 1995. The decrease
in 1997 from 1996, as well as the increase from 1995 to 1996, were primarily due
to gains from the sale of, and higher income received from, real estate owned in
1996
Amortization and Write-down of Intangibles
- ------------------------------------------
The amortization and write-down of intangible assets was $4.1 million for the
year ended December 31, 1997 as compared with $2.6 million for 1996 and $3.9
million for 1995. The increase in amortization for 1997 was due to the
amortization of goodwill related to the BVC, CGC and Ultra acquisitions.
The amortization and write-down of intangibles for 1995 includes core deposit
premiums of $854,000, which were written-off due to an impairment in the value
of core deposit premiums attributable to higher than expected decay rates in the
customer deposits acquired. The balance of the core deposit premiums was
subsequently amortized over the remaining useful life. Additionally, during the
fourth quarter of 1995, BVB decided to sell or exchange certain of its acquired
branches for which goodwill was recorded in 1981. Based on the offers received
and management's estimates of the undiscounted future cash flows, the remaining
unamortized goodwill was written-off because management believed that the
goodwill could no longer be assured of recovery. As a result, goodwill of
$758,000 was written-off in the fourth quarter of 1995.
INCOME TAXES
Income tax expense was $9.2 million for the year ended December 31, 1997 as
compared with $8.3 million for 1996. The income tax benefit was $708,000 for
the year ended December 31, 1995. The effective tax rate for 1997 was 39.7%
compared with 43.0% for 1996. The decrease in the effective tax rate for 1997
is primarily due to benefits resulting from enterprise zone tax credits as well
as the finalization of recent tax audits.
EXTRAORDINARY ITEM
As part of its asset/liability management strategy to reduce interest rate
risk exposure, during the fourth quarter of 1995, the Company prepaid $45.0
million of its short-term FHLBSF advances. In addition, the Company committed
to prepay an additional $145.0 million of its short-term FHLBSF advances in
February 1996. As a result, the Company incurred a prepayment charge of $2.5
million (net of applicable income taxes). In accordance with Generally Accepted
Accounting Principles, the prepayment penalties were reported as an
extraordinary charge (net of applicable income taxes). Although the amount of
the charge reduced the Company's earnings at the time the debt was extinguished,
management believes that the Company's future earnings were enhanced by such
actions. For further discussion of the Company's asset/liability management
strategies, see "Asset and Liability Management".
33
SPECIAL MENTION ITEMS
The net income (loss) for the periods indicated below contained certain
items which deserve special mention and which were excluded from net
income (loss) to arrive at core earnings.
1997 Special Mention Items
- --------------------------
The impact of special mention items during the year ended December 31, 1997
was a net expense of $9.6 million ($5.6 million after tax, or $0.42 per diluted
share).
. $7.7 million in charges related to the acquisition of EurekaBank including:
. $6.2 million in related systems, operations and reengineering integration
projects.
. $1.1 million payment to the senior debt holders. The $50 million senior
debt, issued in May 1996, contained certain covenants, including
restrictions on stock repurchases. In conjunction with the proposed
acquisition of EurekaBank announced in May 1997, the Company negotiated
covenant modifications with the senior debt holders to allow the
repurchase of additional shares of stock.
. $450,000 write-off of deferred expenses related to a shelf registration
statement on Form S-3 for $500 million of automobile receivable-backed
securities filed with the Securities and Exchange Commission in November
1996. With the Company's decision in 1997 to cease securitization of motor
vehicle loans, the Company wrote-off the remaining unamortized expenses.
. $1.2 million in charges related to the expansion and reorganization of CGC
and BVC.
. $1.0 million in incremental costs related to the Company's issuance of $100
million subordinated debt in August. The debt proceeds were intended for
corporate funding purposes, including funding for the EurekaBank acquisition.
The incremental costs represent the effective cost of the debt in excess of
the estimated reinvestment rate of the debt proceeds for the period prior to
the EurekaBank acquisition.
. $800,000 expense accrual for long-term incentive plan awards due to an
increase in the Company's stock price.
. $415,000 recovery related to a real estate joint venture previously written-
off.
. $650,000 benefit associated with the decision to remain with Fiserv (the
current data processor for BVB and EurekaBank) and the corresponding reversal
of an accrual for the termination of BVB's data processing contract discussed
below.
The Company has incurred a total of $7.7 million in expenses related to the
EurekaBank acquisition ($4.5 million after tax, or $0.34 per diluted share).
The Company had previously disclosed that it expected to incur pre-merger
expenses of $5 million ($2.9 million after tax, or $0.22 per diluted share).
This amount exceeds the original estimate primarily due to expenses related to
the Bank's systems conversion to EurekaBank's Fiserv - Pittsburgh systems
platform. The decision to convert the Bank to EurekaBank's platform was made
subsequent to the acquisition announcement and therefore not contemplated in the
original estimate.
1996 Special Mention Items
- --------------------------
The impact of special mention items for the year ended December 31, 1996 was a
net expense of $11.8 million ($6.8 million after tax, or $0.49 per diluted
share).
. $11.7 million SAIF recapitalization assessment.
. $4.8 million gain from the sale of and income received from certain real
estate owned properties.
. $2.4 million contribution to pre tax net income resulting from purchase
accounting valuations associated with the BVC assets being held for sale.
. $2.8 million accrual for termination of data processing contracts and write-
down of computer hardware relating to the Company's long-term information
services technology agreement with BISYS.
. $1.3 million loss accrual for lease obligations in excess of related sublease
rentals resulting from unfavorable lease agreement terms.
. $1.2 million expense accrual for long-term incentive plan awards.
34
. $800,000 loss on sale of MBS and short sale of Treasury securities.
. $500,000 additional write-down due to the sale of the Company's corporate
office complex which closed in 1996. The Company had provided a write-down of
$7.1 million on this property in 1995.
. $350,000 write-off of core deposit intangibles and fixed assets due to a
branch closure.
. $300,000 accrual for downsizing loan operations, relocation of administrative
functions and other items.
1995 Special Mention Items
- --------------------------
The impact of special mention items for the year ended December 31, 1995,
incurred primarily during the fourth quarter, was a net expense of $19.0 million
($11.3 million after tax, or $0.77 per share).
. $7.6 million write-down related to the corporate office complex, fixed assets
and refurbishment expenses.
. $2.0 million related to a provision for loan losses on one loan and write-
down related to foreclosed properties.
. $4.4 million prepayment penalties on FHLBSF advances.
. $3.8 million related to impairment of intangible assets and capitalized
excess servicing and other special mention items.
. $1.2 million related to charges for severance payments arising from workforce
reductions and pension plans.
35
BALANCE SHEET ANALYSIS
The Company's total assets at December 31, 1997 and 1996 were $3.2 billion and
$3.3 billion, respectively.
SECURITIES INVESTMENT
The Company's securities investment activities are primarily conducted by BVB.
BVB has historically purchased (no significant purchases in 1997 or 1996)
securities to maintain appropriate interest-earning asset levels when sufficient
high quality loan production was not available. The majority of the securities
purchased are high quality MBS, primarily issued by FHLMC, FNMA, GNMA and
Student Loan Mortgage Association ("SLMA"). Since MBS are collateralized by
mortgages, these assets qualify under the OTS regulations requiring BVB to hold
certain levels of mortgage-related assets. The Company also invests in
investment securities such as U.S. government agency notes and debentures and
other short-term securities.
The composition of the Company's investment securities portfolio at carrying
value is summarized as follows as of the dates indicated:
-------------------------------------------------------------------------------
AT DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- -----------------------
(DOLLARS IN THOUSANDS)
Available for sale
U.S. Treasury Bills $ - $12,792 $ -
FHLMC and SLMA notes - - 7,000
FHLMC preferred stock - 1,010 1,035
Other securities 5,639 - -
---------------------- ---------------------- -----------------------
Total $5,639 $13,802 $ 8,035
====================== ====================== =======================
Held to maturity
FHLMC/FNMA notes and debentures $ - $10,004 $ 9,988
FHLB callable notes - - 24,940
Federal Farm Credit Bank notes 5,000 5,000 5,000
U.S. Treasury Bills - 200 -
---------------------- ---------------------- -----------------------
Total $5,000 $15,204 $39,928
====================== ====================== =======================
The composition of the Company's MBS portfolio is summarized as follows as of
the dates indicated:
AT DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- -----------------------
(DOLLARS IN THOUSANDS)
Available for sale
FHLMC, FNMA, and GNMA $ 54,402 $ 83,154 $149,778
====================== ====================== =======================
Held-to-maturity
FHLMC, FNMA, and GNMA $410,905 $488,557 $572,822
Financial institutions and intermediaries 4,954 5,902 6,128
Other nonrated, nonresidential - - 2,650
---------------------- ---------------------- -----------------------
Total $415,859 $494,459 $581,600
====================== ====================== =======================
The principal balances of MBS sold were $20.5 million, $57.6 million and
$103.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. During 1996, the Company sold $57.6 million of MBS including $2.6
million of MBS which were scheduled to mature within three months of sale. The
$2.6 million
36
MBS was sold from the held to maturity portfolio and the remainder of $55.0
million was from the available for sale portfolio. The Company does not maintain
a trading portfolio. There were no purchases of MBS during 1997, 1996 or 1995.
In November 1995, the Financial Accounting Standards Board ("FASB") issued "A
Guide to Implementation of Statement of Financial Accounting Standards No. 115
("SFAS 115") on Accounting for Certain Investments in Debt and Equity Securities
- - Questions and Answers" ("Special Report"). The Special Report was issued as
an aid in understanding and implementing SFAS 115. For companies that adopted
SFAS 115 in financial statements issued prior to the issuance of this Special
Report, if the effects of initially adopting this implementation guidance
resulted in reclassification of securities between categories, the Special
Report requires that such transfers be accounted for as transfers in accordance
with SFAS 115. As a result, concurrent with the initial adoption of this
implementation guidance, the Company reassessed the appropriateness of the
classifications of all securities held at that time and, in December 1995,
reclassified $147.7 million in mortgage-backed securities from held to maturity
to available for sale. The transfer of the MBS was recorded at a fair value of
$146.0 million with $981,000 of unrealized losses (net of tax) recorded as a
separate component of stockholders' equity.
The unrealized loss on securities available for sale included in stockholders'
equity was $72,000 and $713,000 (net of tax) at December 31, 1997 and 1996,
respectively.
LOANS AND REAL ESTATE OWNED
Loan Portfolio Composition
- --------------------------
The composition of the Company's loan portfolio (before deductions for net
deferred loan origination fees, premiums and discounts and allowance for loan
losses) is summarized as follows as of the dates indicated. Except as shown
below, the Company did not have any loan concentrations that exceeded 10% of
total loans as of December 31, 1997. The Company also did not have any loan
concentrations which may result in uncertainties materially impacting its future
operations.
--------------------------------------------------------------------------------------------
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Banking Platform:
Single family mortgage $ 550,506 $ 692,086 $ 731,310 $ 733,265 $ 424,095
Multifamily mortgage 1,026,148 1,048,291 995,038 980,849 1,019,174
Commercial mortgage 348,754 381,822 333,236 337,483 336,383
---------- ---------- ---------- ---------- ----------
Total mortgage 1,925,408 2,122,199 2,059,584 2,051,597 1,779,652
Home equity and other consumer 128,570 68,018 34,453 30,357 30,020
---------- ---------- ---------- ---------- ----------
2,053,978 2,190,217 2,094,037 2,081,954 1,809,672
Consumer Finance Platform:
Motor vehicle loans 298,627 315,439 396 1,126 5,552
Commercial Finance Platform:
Commercial loans 54,120 - - - -
---------- ---------- ---------- ---------- ----------
Total $2,406,725 $2,505,656 $2,094,433 $2,083,080 $1,815,224
========== ========== ========== ========== ==========
Banking Platform
A major portion of the Banking Platform's loan portfolio consists of loans
collateralized by income-producing properties, all of which are located in
California, principally Northern California. Construction loans have been
insignificant. During 1996, BVB discontinued its single family mortgage loan
originations. The Company believes that income property lending affords an
opportunity to receive interest income at yields higher than those obtainable
from single.
37
family lending. Nevertheless, loans on income properties, particularly
nonresidential properties, generally present a higher risk than do single family
residential loans due to the sensitivity of the underlying property to changes
in economic conditions. Management takes such risks into account when it
establishes the loan rates, underwriting standards, loss allowances and
decisions regarding portfolio mix.
ARMs comprise a significant portion of BVB's loan portfolio. The interest
rates on ARMs may periodically rise or fall (generally based on monthly or semi-
annual adjustment periods) in accordance with an independent index. At December
31, 1997, the ARM portfolio was primarily comprised of loans whose interest
rates were tied to COFI, the one-year Constant Maturity Treasury Index and the
six-month LIBOR rate.
Consumer Finance Platform
The Consumer Finance Platform's loan portfolio consists of prime motor vehicle
loans originated by BVC and Ultra as well as motor vehicle loans purchased from
Ultra Funding, Ltd. prior to the Company's acquisition of Ultra effective
October 1, 1997.
Commercial Finance Platform
The Commercial Finance Platform's loan portfolio consists of commercial loans
originated by CGC related to asset-based and transaction lending.
The percentage of mortgage loans to total loans for each of the years in the
five-year period beginning with the period ended December 31, 1997 was 80.0%,
84.7%, 98.3%, 98.5% and 98.0%, respectively. The percentage of motor vehicle
and other consumer loans to total loans for each of the years in the five-year
period beginning with the period ended December 31, 1997 was 17.8%, 15.3%, 1.7%,
1.5% and 2.0%, respectively. The percentage of commercial loans to total loans
at December 31, 1997 was 2.2%.
The composition of the Company's fixed and adjustable rate loan portfolios
(before deductions for net deferred loan fees, premiums and discounts, and
allowance for loan losses) is summarized as follows as of the dates indicated:
---------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
---------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
Fixed rate loans:
Mortgage $ 295,068 $ 329,358 $ 255,897
Motor vehicle and other consumer 399,318 336,812 5,372
Commercial 15,029 - -
---------------- ------------------ ------------------
709,415 666,170 261,269
Adjustable rate loans:
Mortgage 1,630,340 1,792,841 1,803,687
Motor vehicle and other consumer 27,879 46,645 29,477
Commercial 39,091 - -
---------------- ------------------ ------------------
1,697,310 1,839,486 1,833,164
---------------- ------------------ ------------------
Total $2,406,725 $2,505,656 $2,094,433
================ ================== ==================
38
Loan Originations and Purchases
- -------------------------------
Loans originated and purchased are summarized as follows for each of the years
indicated:
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
Loan Originations:
Real Estate $148,808 $257,377 $244,480
Motor Vehicle (1) 312,863 118,897 -
Commercial (1) 17,672 - -
Other 17,717 29,075 13,950
--------------------- -------------------- --------------------
Total Originations 497,060 405,349 258,430
--------------------- -------------------- --------------------
Loan Purchases:
Real Estate 50,967 35,974 12,928
Home Equity 69,996 - -
--------------------- -------------------- --------------------
Total Purchases 120,963 35,974 12,928
--------------------- -------------------- --------------------
Total Originations and Purchases $618,023 $441,323 $271,358
===================== ==================== ====================
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform was
created with the acquisition of CGC in April 1997.
The shift in the Company's loan origination and purchase activity for 1997 as
compared with 1996 and 1995 is consistent with management's strategy to de-
emphasize mortgage activity and focus on consumer and commercial assets with
higher risk-adjusted yields. Further, management's strategy is to supplement
its loan production with purchases of loans with higher risk-adjusted yields
than real estate loans.
Credit Quality
- --------------
The Company defines nonperforming assets ("NPAs") as nonperforming loans,
defaulted mortgage-backed securities, real estate owned and other repossessed
assets. The Company defines nonperforming loans as loans 90 days or more
delinquent (excluding accruing loans delinquent 90 days or more) and loans less
than 90 days delinquent designated as nonperforming when the Company determines
that the full collection of principal and/or interest is doubtful.
Nonperforming assets are placed on nonaccrual status. Troubled debt
restructurings ("TDRs") are real estate 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.
Overall credit quality has continued to improve as evidenced by significant
declines in NPAs. The Company's NPAs and TDRs are summarized as follows as of
the dates indicated:
-----------------------------------------------------------------------------------------
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccrual loans $10,991 $16,125 $10,755 $36,321 $54,436
Real estate owned 4,146 7,387 24,476 14,255 17,875
Mortgage-backed securities - - 3,580 - -
Other repossessed assets 629 798 - 1 54
------- ------- ------- -------
39
-------
Nonperforming assets 15,766 24,310 38,811 50,577 72,365
Troubled debt restructurings 731 509 15,641 13,948 14,188
------- ------- ------- ------- -------
Total $16,497 $24,819 $54,452 $64,525 $86,553
======= ======= ======= ======= =======
NPAs and NPAs as a percentage of consolidated total assets, by business
platform, are summarized as follows as of the dates indicated:
------------------------------------------------------------------------
NONPERFORMING ASSETS AS A PERCENTAGE OF CONSOLIDATED TOTAL ASSETS
------------------------------------------------------------------------
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
Banking $14,345 0.45% $23,323 0.71% $38,811 1.29%
Consumer Finance (1) 748 0.02% 987 0.03% - -
Commercial Finance (1) 673 0.02% - - - -
------- ---- ------- ---- ------- ----
Total $15,766 0.49% $24,310 0.74% $38,811 1.29%
======= ==== ======= ==== ======= ====
Loans delinquent 60 days or more and loans delinquent 60 days or more as a
percentage of consolidated loans, by business platform, are summarized as
follows as of the dates indicated:
------------------------------------------------------------------------
LOANS DELINQUENT 60 DAYS OR MORE AS A PERCENTAGE OF CONSOLIDATED LOANS
------------------------------------------------------------------------
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
Banking Platform $21,526 0.90% $22,460 0.90% $20,166 0.96%
Consumer Finance (1) 1,045 0.04% 548 0.02% - -
Commercial Finance (1) 673 0.03% - - - -
------- ---- ------- ---- ------- ----
Total $23,244 0.97% $23,008 0.92% $20,166 0.96%
======= ==== ======= ==== ======= ====
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform was
created with the acquisition of CGC in April 1997.
Allowance for Losses on Loans
- -----------------------------
The Company conducts an ongoing review of its asset categories to assess the
adequacy of the allowance for loan losses which are maintained at levels that
management believes are sufficient to cover estimated possible losses in the
portfolios. In determining the necessary level of the allowance for loan
losses, management considers prevailing and anticipated economic conditions,
historical loss experience, the levels of classified, nonperforming and
delinquent assets, weighting by property type, loan portfolio trends and other
factors.
The allowance for losses at December 31, 1997 was $38.5 million as compared
with $36.4 million at December 31, 1996 (including approximately $7.4 million
related to loans held for sale) and $30.9 million at December 31, 1995. The
increase in the allowance over prior years was due to a combination of factors
including reserves for the Commercial Finance Platform acquired effective April
1997, the expansion of the Consumer Finance Platform and approximately $5.6
million in reserves established in connection with the $70 million home equity
portfolio purchased in August 1997.
The allowance for losses as a percentage of NPAs, gross loans and total assets
is summarized as follows as of the dates indicated:
----------------------------------------------------------------------------------------
ALLOWANCE FOR LOSSES AS A PERCENTAGE OF SPECIFIED ASSETS
----------------------------------------------------------------------------------------
40
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
ASSETS PERCENT ASSETS PERCENT ASSETS PERCENT
Nonperforming Assets $ 15,766 244% $ 24,310 150% $ 38,811 80%
Gross Loans $2,406,725 1.60% $2,505,656 1.46% $2,094,433 1.48%
Total Assets $3,246,476 1.18% $3,300,262 1.10% $3,004,496 1.03%
The changes in the allowance for losses on loans are summarized as follows for
the years indicated:
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Beginning balance $29,013 $30,014 $29,115 $33,790 $ 38,434
Reserves related to acquisitions 14,162 2,860 - - -
Charge-offs:
Real Estate and Other (2,699) (6,401) (4,879) (8,514) (11,529)
Motor Vehicle (1) (4,057) - - - -
Commercial (1) (1,685) - - - -
------------- ------------ ------------ ------------ ----------
(8,441) (6,401) (4,879) (8,514) (11,529)
Recoveries:
Real Estate and Other 706 642 1,494 1,472 353
Motor Vehicle (1) 955 - - - -
Commercial (1) 111 - - - -
------------- ------------ ------------ ------------ ----------
1,772 642 1,494 1,472 353
Net charge-offs (6,669) (5,759) (3,385) (7,042) (11,176)
Provision for loan losses 1,952 1,898 4,284 2,367 6,532
------------- ------------ ------------ ------------ ----------
Ending balance $38,458 $29,013 $30,014 $29,115 $ 33,790
============= ============ ============ ============ ==========
Allowance for loans by category:
Real Estate and Other $29,026 $27,969 $29,541 $28,560 $ 33,117
Motor Vehicle (1) 3,240 1,044 473 555 673
Commercial (1) 6,192 - - - -
------------- ------------ ------------ ------------ ----------
Total $38,458 $29,013 $30,014 $29,115 $ 33,790
============= ============ ============ ============ ==========
(1) The Consumer Finance Platform was created with the acquisitions of BVC in
June 1996 and Ultra in October 1997, and the Commercial Finance Platform
was created with the acquisition of CGC in April 1997.
Management believes that the allowance for loan losses is adequate to cover
estimated losses in its asset portfolios, although there can be no assurance in
this regard. Future adjustments may be necessary and earnings could be
significantly adversely affected if circumstances differ substantially from the
assumptions used in making such determinations. Management will continue to
monitor the adequacy of the allowance for losses related to problem assets.
Management monitors the impact of the economic environment on its lending
activities on a periodic basis. If real estate markets weaken in future
periods, no assurance can be given that the Company's future loss experience
will approximate its current estimates. In addition, various regulatory
agencies review the Company's allowance for losses as an integral part of their
examination process. Such agencies may require the Company to recognize
additions to this allowance based on their judgment relating to information
available to them at the time of their examination.
41
CUSTOMER DEPOSITS
As a primary part of the Company's business, deposits are gathered for
purposes of funding loans and purchasing securities. A summary of customer
deposits follows:
--------------------------------------------------------------------------------
AT DECEMBER 31, 1997
--------------------------------------------------------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS)
Transaction accounts $ 553,820 33.0% 2.97%
Retail certificates of deposit 1,045,152 62.3 5.51%
----------------------- ----------------------- -----------------------
Total retail deposits 1,598,972 95.3 4.65%
Brokered certificates of deposit 78,163 4.7 5.82%
----------------------- ----------------------- -----------------------
Total $1,677,135 100.0% 4.71%
======================= ======================= =======================
--------------------------------------------------------------------------------
AT DECEMBER 31, 1996
--------------------------------------------------------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS)
Transaction accounts $ 493,571 27.9% 2.62%
Certificates of deposit 1,100,559 62.4 5.48
Thrift certificates 169,837 9.7 5.55
----------------------- ----------------------- -----------------------
Total $1,763,967 100.0% 4.69%
======================= ======================= =======================
--------------------------------------------------------------------------------
AT DECEMBER 31, 1995
--------------------------------------------------------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS)
Transaction accounts $ 387,610 21.3% 2.38%
Certificates of deposit 1,432,230 78.7 6.02
----------------------- ----------------------- -----------------------
Total $1,819,840 100.0% 5.24%
======================= ======================= =======================
Increasing the value of its retail branch franchise is one of management's
primary objectives. Management believes that a gradual expansion of its retail
deposit base, particularly transaction accounts in Northern California, will
enhance its results of operations by lowering its cost of funds, increasing fee
income and expanding opportunities for cross-selling products and services,
although there can be no assurance in this regard. Throughout 1997 and 1996,
management continued to emphasize the development and marketing of new products
and as a result has successfully increased its percentage of transaction
accounts in relation to total retail deposits which has contributed to lower
cost of funds. Transaction accounts as a percentage of total retail deposits,
and excluding BVC deposits at December 31, 1996, increased to 34.6% at December
31, 1997 as compared with 30.3% and 21.3% at December 31, 1996 and 1995,
respectively.
Included in total customer deposits at December 31, 1996 were deposits held by
BVC, primarily comprised of thrift certificates which were similar to
certificates of deposit with the exception that they were callable at par plus
accrued interest. When thrift certificates were purchased by customers, BVC
reserved the right to repurchase the certificates at any time upon thirty days
notice. Utilizing this call provision, BVC redeemed the higher cost component
(higher than BVB's incremental borrowing cost) of these deposits at face value
(approximately $267 million) at December 31, 1996. The remainder of the BVC
customer deposits (which were lower cost than BVB's incremental borrowing cost)
were sold to BVB in June 1997.
42
Retail certificates of deposit of $100,000 or more, by time remaining until
maturity, were as follows:
------------------------------------
AT DECEMBER 31,
------------------------------------
1997 1996
--------------- ---------------
(DOLLARS IN THOUSANDS)
Three months or less $216,815 $ 89,816
Over three through six months 73,230 11,883
Over six through twelve months 60,658 127,357
Over twelve months 26,136 86,189
--------------- ---------------
Total $376,839 $315,245
=============== ===============
BORROWINGS
The Company utilizes collateralized advances from the FHLBSF for purposes of
funding loans. In addition, the Company utilizes other borrowings, on a
collateralized and noncollateralized basis, such as securities sold under
agreements to repurchase (also known as reverse repurchase agreements).
In August 1997, the Company issued $100 million in subordinated notes with a
stated coupon of 9.125% and a yield of 9.225% (all-in cost was 9.62%
annualized). In May 1996, the Company issued $50 million in senior debentures
yielding 8.42% (all-in cost was 8.91% annualized).
The Company's borrowings are summarized as follows:
-------------------------------------------------------------------------
AT DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
Advances from FHLBSF $1,110,270 $ 977,750 $766,790
Securities sold under agreements to repurchase 90,134 210,640 166,738
Subordinated notes, net 99,372 - -
Senior debentures 50,000 50,000 -
Other borrowings 6,200 7,147 7,937
--------------------- --------------------- ---------------------
Total $1,355,976 $1,245,537 $941,465
===================== ===================== =====================
The increases in borrowings at December 31, 1997 was primarily due to a
decrease in customer deposits. In late 1995, management redirected BVB's
strategic focus to restructure the wholesale borrowings in conjunction with the
enhancement of its retail deposit franchise. In the fourth quarter of 1995 and
the first quarter of 1996, BVB prepaid $190 million of short-term high cost
borrowings and replaced them with short-term lower cost borrowings. In
conjunction with the prepayment of these borrowings, the Company entered into
interest rate swap agreements to provide interest rate risk protection for the
short-term lower cost borrowings by matching the floating interest rate
characteristics and lengthening their maturities.
The Company's short-term borrowings are summarized as follows:
---------------------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
Advances from FHLBSF $ 985,270 $774,480 $486,940
Securities sold under agreements to repurchase 90,134 210,640 151,738
--------------------- --------------------- ---------------------
Total $1,075,404 $985,120 $638,678
===================== ===================== =====================
Weighted average interest rate of total
short-term borrowings outstanding at period end 5.88% 5.66% 6.56%
43
The following table sets forth the maximum outstanding balance for each type
of short-term borrowing at any month end during 1997, 1996 and 1995, and the
average balances and weighted average interest rates on short-term borrowings
for 1997, 1996 and 1995:
---------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
Advances from FHLBSF $1,042,480 $774,480 $510,880
Securities sold under agreements to repurchase $ 201,551 $220,281 $248,131
Average amount of total short-term borrowings
outstanding during the year $1,056,836 $762,258 $622,080
Weighted average interest rate of total
short-term borrowings outstanding during the
year 5.75% 5.66% 6.09%
LIQUIDITY AND REGULATORY CAPITAL
Liquidity
The Company's primary sources of funds include:
. Cash flows from operations
. Loan and MBS repayments
. Customer deposits
. Advances from the FHLBSF
. Reverse repurchase agreements
The Company uses its liquidity resources principally as follows:
. Originations and purchases of loans
. Funding the withdrawal of certificates of deposits and other deposit products
. Repayment and/or refinance of maturing FHLBSF advances and reverse repurchase
agreements
The Company expects the foregoing sources of funds will satisfy its liquidity
requirements. However, to the extent that the Company seeks to make additional
acquisitions, it may be required to seek additional sources of outside
financing.
OTS regulations require savings institutions to maintain a specified liquidity
ratio (presently 4.00%) of cash and securities to total customer deposits and
borrowings due in one year or less. Historically, BVB has maintained its liquid
assets above the minimum requirements imposed by the OTS regulations and at a
level believed adequate to meet requirements imposed by the OTS regulations and
at a level believed adequate to meet requirements of normal banking activities,
repayment of maturing debt and potential deposit outflows. BVB maintained
liquidity ratios of 5.42% and 5.39% for the months ended December 31, 1997 and
1996, respectively.
44
REGULATORY CAPITAL
BVB's regulatory capital at December 31, 1997 exceeded the minimum
requirements of each OTS regulatory capital standard on a fully phased-in basis
as follows:
--------------------------------------------------------------------------------------------------------
MINIMUM
ACTUAL REQUIREMENT EXCESS
--------------------------------- ----------------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- ------------- ------------ -------------- -------- -----
(DOLLARS IN THOUSANDS)
Tangible $202,194 6.33% $ 47,932 1.50% $154,262 4.83%
Core 203,308 6.36% 95,898 3.00% 107,410 3.36%
Total Risk-based 228,532 10.87% 168,163 8.00% 60,369 2.87%
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each Federal banking agency, including the OTS, to implement prompt
corrective actions for under capitalized institutions that it regulates. Under
capital guidelines enacted by FDICIA, BVB met the criteria for the "well
capitalized" standard at December 31, 1997 as follows:
--------------------------------------------------------------------------------------------------------
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
--------------------------------- ----------------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- ------------- ------------ -------------- -------- -----
(DOLLARS IN THOUSANDS)
Leverage $203,308 6.36% $159,830 5.00% $43,478 1.36%
Tier I Risk-based 203,308 9.67% 126,122 6.00% 77,186 3.67%
Total Risk-based 228,532 10.87% 210,204 10.00% 18,328 0.87%
YEAR 2000
The Year 2000 issue arises from computer programs that were written using two
digits rather than four to define the applicable year. As a result, computer
programs with time-sensitive software may have a difficult time distinguishing
between the year 2000 and the year 1900, causing potential disruptions of
operations, including among other things, potential miscalculations or inability
to process transactions.
The majority of the Company's EDP processing capabilities are either currently
provided by third party vendors or are on systems that are in the process of
converting to third party vendors. Contracts with each of these vendors require
that the vendor be Year 2000 compliant. The Company continues to monitor these
vendors' progress towards Year 2000 compliance. Additionally, the Company is
evaluating all internal systems for potential Year 2000 compliance issues. The
Company currently estimates that its total internal and external costs
associated with making these internal systems Year 2000 compliant will be
approximately $750,000 which will be funded through operating cash flows.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income", which requires that an enterprise report, any major components and as a
single total, the change in its net assets during the period from nonowner
sources; and Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures About Segments of an Enterprise and Related Information", which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flow, and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
45
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles which
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 almost all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than general levels of inflation. Interest rates do not necessarily
move in the same direction or magnitude as the prices of goods and services.
46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT
The objective of the Company's asset/liability management activities is to
improve earnings by adjusting the type and mix of assets and liabilities to
effectively address changing conditions and risks. Through overall management of
its balance sheet and by controlling various risks, the Company seeks to
optimize its financial returns within safe and sound parameters. The Company's
operating strategies for attaining this objective include:
. Managing net interest margin through appropriate risk/return pricing
of assets and liabilities.
. Increasing retail deposits as a percentage of interest-bearing
liabilities and reducing the Company's cost of funds.
. Utilizing the Company's strong capital position to boost the earnings
power through acquisition of quality assets with higher risk-adjusted
yields.
. Controlling noninterest expense and enhancing noninterest income,
utilizing improved information systems to facilitate the analysis of
the profitability of individual business units and products.
. Utilizing interest rate swap agreements and other hedging strategies
to reduce exposure to fluctuations in interest rates.
. Enhancing internal analysis capability for measuring, evaluating and
monitoring risk.
INTEREST RATE RISK
Financial institutions are subject to interest rate risk to the degree that
interest-bearing liabilities reprice or mature on a different basis and at
different times than interest-earning assets. The Company's strategy has been
to reduce the sensitivity of its earnings to interest rate fluctuations by more
closely matching the effective maturities or repricing characteristics of its
assets and liabilities. Certain assets and liabilities, however, may react in
different degrees to changes in market interest rates. Further, interest rates
on certain types of assets and liabilities may fluctuate prior to changes in
market interest rates, while rates on other types may lag behind. Additionally,
certain assets, such as ARMs, have features, including payment and rate caps,
which restrict changes in their interest rates. The Company considers the
anticipated effects of these factors when implementing its interest rate risk
management objectives.
The Company pursues balance sheet strategies that should, in the long run,
mitigate its exposure to rising interest rates. The Company also considers
other strategies to minimize the variability of the net interest margin
including off-balance sheet activities. The Company has initiated numerous
actions which significantly reduced the Company's exposure to fluctuations in
interest rates. These actions are discussed as follows.
Interest Rate Swaps
- -------------------
The Company uses interest rate swap agreements to reduce the interest rate
fluctuation risk related to certain assets and liabilities. Interest rate swaps
involve the exchange of fixed and floating rate interest payment obligations
without the exchange of the underlying notional amounts. At December 31, 1997
and 1996, the Company was party to interest rate swap agreements with notional
principal amounts of $449 million and $421 million, respectively, which involve
the receipt of floating interest rates (based on 3-month LIBOR) and payment of
fixed interest rates on the underlying notional amounts.
During the fourth quarter of 1995, the Company prepaid $45 million of its
short-term high cost borrowings. In addition, the Company committed to prepay
another $145 million of its short-term high cost borrowings in February 1996.
As a result, the Company incurred a prepayment charge of $2.5 million (net of
applicable income taxes). In conjunction with the prepayment of these
borrowings, the Company entered into interest rate swap agreements with notional
principal amounts of $200 million. The impact of these actions was a reduction
of the Company's interest rate risk exposure by prepaying its short-term high
cost borrowings and replacing the
47
prepayments with short-term lower cost borrowings. The interest rate swap
agreements were used to provide interest rate risk protection for the short-term
borrowings by matching the floating interest rate characteristics and
lengthening their maturities.
Sale of MBS
- -----------
During 1997 and 1996 the Company sold $20.5 million and $57.6 million of
fixed rate MBS. The purpose of the sales was to reduce the Company's exposure
to interest rate increases. Additionally, during the fourth quarter of 1995 the
Company reclassified $148 million of its MBS from held to maturity to available
for sale as a result of adopting the implementation guide to SFAS 115. This
reclassification allowed the Company to position these securities for potential
sale, which assisted in the reduction of its interest rate risk exposure without
tainting its remaining held to maturity portfolio.
Hedging Issuance of Subordinated Debt
- -------------------------------------
During 1997, the Company entered into $105 million in Treasury rate lock
agreements to hedge the anticipated issuance of subordinated debt. These
agreements guaranteed a stated rate of interest for a stated period of time and
the Company paid the difference between the lock rate and the effective treasury
rate on the settlement date. In conjunction with the Treasury rate lock
agreements, approximately $307,000 was deferred and recognized as an adjustment
of interest expense over the life of the subordinated debt.
Hedging Auto Loans Pending Securitization
- -----------------------------------------
As discussed elsewhere herein, in conjunction with the decision to sell
BVC's auto loans and their subsequent securitization by BVSC, management entered
into a short sale of Treasury securities that materially insulated the purchase
accounting valuations from movements in interest rates. The short sale
transaction was paired-off in December 1996 with a loss of $293,000 recorded as
a loss on securities. At December 31, 1996, a Treasury rate lock transaction
with a notional principal amount of $210 million was entered into to hedge the
auto loans pending sale by BVC and securitization by BVSC.
INTEREST RATE SENSITIVITY
The Company's interest rate risk policies are established and monitored by
its Asset/Liability Committee ("ALCO"). The ALCO reviews the sensitivity of the
Company's net interest income and market value of equity to interest rate
changes. The objective of the Company's ALCO activities is to improve earnings
by adjusting the types of assets and liabilities to effectively address changing
conditions and risks. Management believes that its asset/liability activities
have improved earnings within safe and sound parameters.
In measuring interest rate sensitivity, the Company uses simulation
modeling to estimate the potential effects of movements in interest rates.
Interest rate sensitivity analysis measures the Company's interest rate risk by
computing estimated market value of equity ("MVE") based on the net present
value of cash flows from assets, liabilities and off-balance sheet items in the
event of a range of assumed changes in market interest rates. MVE is equal to
the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items. This analysis assesses the risk
of loss in market risk sensitive instruments in the event of a sudden and
sustained 100 to 400 basis point increase or decrease in market interest rates.
48
The following table presents BVB's projected change in MVE, with and
without interest rate swaps, for the various basis points ("bp") rate shock
levels at December 31, 1997. All market risk sensitive instruments presented in
this table are held to maturity or available for sale. The Company has no
trading securities.
----------------------------------------------------------
CHANGES IN MARKET VALUE OF EQUITY
----------------------------------------------------------
Projected Effect: +100 BP +200 BP +300 BP +400 BP
------------- ------------- ------------ -------------
MVE without swaps $244,637 $218,753 $188,545 $153,974
MVE with swaps $256,706 $242,328 $223,102 $199,020
Impact of swaps $ 12,069 $ 23,575 $ 34,557 $ 45,046
----------------------------------------------------------
CHANGES IN MARKET VALUE OF EQUITY
----------------------------------------------------------
Projected Effect: -100 BP -200 BP -300 BP -400 BP
------------- ------------ ------------- -------------
MVE without swaps $281,024 $293,970 $313,508 $340,147
MVE with swaps $271,539 $274,513 $283,554 $299,132
Impact of swaps $ (9,485) $(19,457) $(29,954) $(41,015)
The change in MVE as a percentage of the present value of assets from an
immediate 200 bp increase in interest rates was 0.59% and 1.15% at December 31,
1997 and 1996, respectively.
The computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the Company may undertake in response to changes in
interest rates. Certain shortcomings are inherent in the method of analysis
presented in the computation of MVE. Actual values may differ from those
projections set forth in the table, should market conditions vary from
assumptions used in the preparation of the table.
To measure the Company's interest rate sensitivity, a cumulative gap
measure can also be used to assess the impact of potential changes in interest
rates on net interest income. The repricing gap represents the net position of
assets and liabilities subject to repricing in specified time periods. Assets
and liabilities are categorized according to the expected repricing time frames
based on management's judgment. A cumulative gap measure alone cannot be used
to evaluate interest rate sensitivity because interest rate changes do not
affect all categories of assets and liabilities equally or simultaneously.
49
The following table sets forth information regarding asset and liability
repricing for the Company as of December 31, 1997:
REPRICING PERIOD
------------------------------------------------------------------------------
UNDER OVER OVER OVER
ONE ONE TO THREE THREE TO FIVE FIVE
YEAR YEARS YEARS YEARS TOTAL
---------- ------------- -------------- --------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
- ------
Cash and investments $ 257,588 $ 5,000 $ 0 $ 0 $ 262,588
Loans and mortgage-backed securities (1) 1,950,582 371,275 201,178 320,339 2,843,374
---------- --------- --------- --------- ----------
Total interest rate sensitive assets $2,208,170 $ 376,275 $ 201,178 $ 320,339 $3,105,962
========== ========= ========= ========= ==========
LIABILITIES
- -----------
Deposits:
Transaction accounts $ 553,820 - - - 553,820
Certificates of deposit 1,007,420 $ 110,987 $ 4,908 - $1,123,315
Borrowings 1,101,604 135,000 20,000 $ 99,372 1,355,976
---------- --------- --------- --------- ----------
Total interest rate sensitive liabilities $2,662,844 $ 245,987 $ 24,908 $ 99,372 $3,033,111
---------- --------- --------- --------- ----------
Repricing gap-positive (negative) before impact
of interest rate swaps $ (454,674) $ 130,288 $ 176,270 $ 220,967 $ 72,851
==========
Impact of interest rate swaps 389,250 (111,750) (100,000) (177,500)
---------- --------- --------- ---------
(65,424) 18,538 76,270 43,467
---------- --------- --------- ---------
Cumulative repricing gap-positive (negative) $ (65,424) $ (46,886) $ 29,384 $ 72,851
========== ========= ========= =========
1997 (2.11%) (1.51%) 0.95% 2.35
1996 5.72% (2.61%) (4.23%) 5.69%
(1) Based on assumed annual prepayment and amortization rates which approximate
the Company's historical experience.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
------------------------------------------
AT DECEMBER 31,
------------------------------------------
1997 1996
------------------ ------------------
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
ASSETS
Cash and cash equivalents:
Cash and due from depository institutions $ 40,885 $ 22,608
Interest-bearing deposits and short-term investments 190,937 84,220
---------- ----------
231,822 106,828
Loans held for sale - 294,949
Securities available for sale:
Investment securities 5,639 13,802
Mortgage-backed securities 54,402 83,154
Securities held to maturity:
Investment securities (fair value: 1997 - $5,015; 1996 - $15,112) 5,000 15,204
Mortgage-backed securities (fair value: 1997 - $413,980; 1996 - $483,461) 415,859 494,459
Loans receivable held for investment, net of
allowance for losses: 1997 - $38,458; 1996 - $29,013 2,373,113 2,179,768
Investment in stock of FHLBSF 61,012 51,891
Real estate owned 4,146 7,387
Premises and equipment, net 16,164 6,905
Intangibles 29,507 10,197
Other assets 49,812 35,718
---------- ----------
Total Assets $3,246,476 $3,300,262
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits:
Transaction accounts $ 553,820 $ 493,571
Certificates of deposit 1,123,315 1,270,396
---------- ----------
1,677,135 1,763,967
Advances from FHLBSF 1,110,270 977,750
Securities sold under agreements to repurchase 90,134 210,640
Subordinated notes, net 99,372 -
Senior debentures 50,000 50,000
Other borrowings 6,200 7,147
Other liabilities 39,738 90,696
---------- ----------
Total Liabilities 3,072,849 3,100,200
---------- ----------
Commitments and contingencies (Note 19)
Stockholders' equity:
Serial preferred stock; authorized, 7,000,000 shares;
outstanding, none - -
Common stock ($.01 par value); authorized, 60,000,000 shares;
issued, 1997 - 15,125,874 shares and 1996 - 15,005,384 shares;
outstanding, 1997 - 12,070,474 and 1996 - 13,349,270 151 150
Additional paid-in capital 103,052 100,436
Retained earnings (substantially restricted) 141,065 131,324
Treasury stock, at cost, 1997 - 3,055,400 shares and 1996 - 1,656,114 (66,352) (26,497)
shares
Unrealized loss on securities available for sale, net of tax (72) (713)
Debt of Employee Stock Ownership Plan (4,217) (4,638)
---------- ----------
Total Stockholders' Equity 173,627 200,062
---------- ----------
Total Liabilities and Stockholders' Equity $3,246,476 $3,300,262
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
51
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Interest income:
Interest on loans receivable $197,898 $192,443 $155,853
Interest on mortgage-backed securities 34,317 42,081 54,236
Interest and dividends on investments 10,029 7,231 6,374
-------- -------- --------
242,244 241,755 216,463
Interest expense:
Interest on customer deposits 76,484 100,225 93,398
Interest on senior debentures and notes 7,716 2,623 -
Interest on borrowings 70,708 57,925 67,149
-------- -------- --------
154,908 160,773 160,547
Net interest income 87,336 80,982 55,916
Provision for losses on loans 1,952 1,898 4,284
-------- -------- --------
Net interest income after provision for loan 85,384 79,084 51,632
losses
Noninterest income:
Loan fees and charges 5,679 4,930 3,691
Gain (loss) on sale of loans and securities 925 (1,453) (2,510)
Rental income from premises - 534 781
Other, net 6,151 4,553 4,180
-------- -------- --------
12,755 8,564 6,142
Noninterest expense:
General and administrative:
Compensation and employee benefits 35,646 27,956 25,148
Office occupancy and equipment 10,677 9,865 8,658
Write-down of corporate office complex - 500 7,100
Professional services 3,655 849 1,223
Data processing service bureau 2,811 4,243 1,683
Marketing 2,612 1,568 997
Deposit insurance premiums and regulatory fees 1,475 4,911 4,473
Other, net 15,037 9,063 7,734
-------- -------- --------
71,913 58,955 57,016
SAIF recapitalization assessment - 11,750 -
Income from real estate owned, net (543) (4,806) (1,081)
Provision for (recovery of) losses on real estate (585) (103) 749
Amortization and write-down of intangible assets 4,088 2,606 3,944
-------- -------- --------
74,873 68,402 60,628
Income (loss) before income tax expense (benefit)
and extraordinary item 23,266 19,246 (2,854)
Income tax expense (benefit) 9,245 8,277 (708)
-------- -------- --------
Income (loss) before extraordinary item 14,021 10,969 (2,146)
Extraordinary item, net of tax - - (2,544)
-------- -------- --------
Net income (loss) $ 14,021 $ 10,969 $ (4,690)
======== ======== ========
Basic earnings per share:
Income (loss) before extraordinary item $ 1.09 $ 0.80 $ (0.15)
Extraordinary item - - (0.17)
-------- -------- --------
Net income (loss) per share $ 1.09 $ 0.80 $ (0.32)
======== ======== ========
Diluted earnings per share:
Income (loss) before extraordinary item $ 1.06 $ 0.79 $ (0.15)
Extraordinary item - - (0.17)
-------- -------- --------
Net income (loss) per share $ 1.06 $ 0.79 $ (0.32)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
52
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------------------------
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS (1) STOCK
--------- ------ ----------- ------------ ---------
(Dollars in thousands except per share amounts)
Balance at December 31, 1994 14,335 $143 $ 92,559 $133,624 $ -
Repurchase of common stock (8,577)
Exercise of stock options, including tax benefits 468 5 4,925 (53) 141
Cash dividends declared ($0.30 per share) (4,394)
Unrealized gain, net of tax
Repayment of debt
Net loss (4,690)
------ ---- -------- -------- --------
Balance at December 31, 1995 14,803 148 97,484 124,487 (8,436)
Repurchase of common stock (16,971)
Repurchase of common stock for retirement plan 1,090 (1,090)
Exercise of stock options 202 2 1,862
Cash dividends declared ($0.305 per share) (4,132)
Unrealized loss, net of tax
Repayment of debt
Net income 10,969
------ ---- -------- -------- --------
Balance at December 31, 1996 15,005 150 100,436 131,324 (26,497)
Repurchase of common stock (39,855)
Exercise of stock options, including tax benefits 121 1 2,616
Cash dividends declared ($0.34 per share) (4,280)
Unrealized gain, net of tax
Repayment of debt
Net income 14,021
------ ---- -------- -------- --------
Balance at December 31, 1997 15,126 $151 $103,052 $141,065 $(66,352)
====== ==== ======== ======== ========
---------------------------------------------------------
UNREALIZED DEBT OF
LOSS EMPLOYEE
ON SECURITIES STOCK TOTAL
AVAILABLE FOR SALE OWNERSHIP STOCKHOLDERS'
(NET OF TAX) PLAN EQUITY
---------------------------------------------------------
(Dollars in thousands except per share amounts)
Balance at December 31, 1994 $ (3,634) $(5,377) $217,315
Repurchase of common stock (8,577)
Exercise of stock options, including tax benefits 5,018
Cash dividends declared ($0.30 per share) (4,394)
Unrealized gain, net of tax 2,951 2,951
Repayment of debt 354 354
Net loss (4,690)
-------- ------- --------
Balance at December 31, 1995 (683) (5,023) 207,977
Repurchase of common stock (16,971)
Repurchase of common stock for retirement plan -
Exercise of stock options 1,864
Cash dividends declared ($0.305 per share) (4,132)
Unrealized loss, net of tax (30) (30)
Repayment of debt 385 385
Net income 10,969
-------- ------- --------
Balance at December 31, 1996 (713) (4,638) 200,062
Repurchase of common stock (39,855)
Exercise of stock options, including tax benefits 2,617
Cash dividends declared ($0.34 per share) (4,280)
Unrealized gain, net of tax 641 641
Repayment of debt 421 421
Net income 14,021
-------- ------- --------
Balance at December 31, 1997 $ (72) $(4,217) $173,627
======== ======= ========
(1) Substantially restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
53
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ----------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 14,021 $ 10,969 $ (4,690)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Write-down on disposal of premises and equipment 18 1,767 7,100
Write-down and amortization of intangible assets 4,088 2,606 3,944
Proceeds from loans securitized and sold 265,203 9,668 135
Provision for losses on loans and real estate owned 1,367 1,795 5,033
Depreciation and amortization of premises and equipment 2,974 2,210 3,079
Amortization of deferred loan costs 187 1,396 452
Amortization of premiums, net of discounts 4,139 5,160 4,343
(Gain) loss on sale of loans and securities (925) 1,160 2,510
(Increase) decrease in other assets (7,421) 1,866 (1,722)
Increase (decrease) in other liabilities (54,707) 47,933 6,991
Other, net (473) (3,741) (14)
--------- -------- --------
Net cash provided by operating activities 228,471 82,789 27,161
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash and cash equivalents
received (9,975) (61,505) -
Net (increase) decrease in loans resulting from originations
net of principal payments (57,327) 41,391 (31,575)
Purchase of loans (120,963) (35,974) (12,928)
Principal payments on mortgage-backed securities 83,643 91,748 88,580
Proceeds from sale of mortgage-backed securities held to maturity - 2,602 -
Proceeds from sale of mortgage-backed securities available for sale 20,465 54,458 101,242
Proceeds from maturities/calls of investment securities held to
maturity 10,204 24,493 17,000
Proceeds from maturities/calls of investment securities available
for sale 13,802 15,000 -
Purchase of investment securities held to maturity - (3,041) (32,000)
Purchase of investment securities available for sale (5,639) - -
Proceeds from sale of real estate owned 12,528 32,690 20,435
Proceeds from sale of leasing portfolio held for sale - 59,848 -
Proceeds from sale of premises and equipment - 10,648 -
Additions to premises and equipment (11,694) (1,577) (3,155)
(Increase) decrease in investment in stock of FHLBSF (9,121) (10,558) 10,196
--------- -------- --------
Net cash provided by (used in) investing activities (74,077) 220,223 157,795
--------- -------- --------
54
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
---------------------- ------------------ --------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES
Net deposit inflows (outflows) (86,832) (245,268) 112,464
Redemption of BVC deposits - (267,500) -
Proceeds from advances from FHLBSF 5,509,532 1,644,226 480,000
Repayment of advances from FHLBSF (5,377,012) (1,433,266) (669,520)
Repurchase of common stock (39,855) (24,359) (2,279)
Issuance of subordinated notes, net of discount 99,350 - -
Issuance of senior debentures - 50,000 -
Proceeds from reverse repurchase agreements 519,338 373,272 166,738
Repayment of reverse repurchase agreements (639,844) (329,370) (255,106)
Net change in other borrowings (10,865) (4,406) (605)
Proceeds from issuance of common stock 1,207 1,864 4,294
Dividends paid to stockholders (4,419) (4,137) (4,374)
----------- ----------- ---------
Net cash used in financing activities (29,400) (238,944) (168,388)
----------- ----------- ---------
Net increase in cash and cash equivalents 124,994 64,068 16,568
Cash and cash equivalents at beginning of year 106,828 42,760 26,192
----------- ----------- ---------
Cash and cash equivalents at end of year $ 231,822 $ 106,828 $ 42,760
=========== =========== =========
Cash paid during the year for:
Interest $ 148,615 $ 164,315 $ 80,226
Income taxes $ 14,674 $ 4,951 $ 4,450
Supplemental noncash investing and financing activities:
Loans transferred to real estate owned $ 8,252 $ 10,065 $ 31,070
Transfer of mortgage-backed securities from held to maturity
to available for sale (Note 1) $ - $ - $ 147,661
Loans originated to sell real estate owned $ 1,904 $ 5,011 $ 8,905
The acquisitions of subsidiaries involved
the following (Note 2):
Liabilities assumed $ 13,667 $ 476,492
Fair value of assets acquired, other than cash and
cash equivalents (1,986) (531,029)
Goodwill (21,656) (6,968)
----------- ---------
Acquisition of subsidiaries, net of cash and cash
equivalents received $ (9,975) $ (61,505)
=========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements include the consolidated accounts of
Bay View Capital Corporation, a holding company incorporated in Delaware (the
"Company" or "BVCC"), and its wholly owned subsidiaries: Bay View Bank ("BVB"),
Bay View Acceptance Corporation ("BVAC") and its wholly owned subsidiaries, Bay
View Credit ("BVC"), formerly California Thrift & Loan ("CTL") and Ultra
Funding, Inc. ("Ultra"), Concord Growth Corporation ("CGC"), Bay View
Securitization Corporation ("BVSC"), a Delaware corporation and Regent Financial
Corporation ("Regent"), a California corporation. All significant intercompany
accounts and transactions have been eliminated. As used herein, the terms
"Company" or "BVCC" refer to the Company and its consolidated subsidiaries
unless otherwise indicated.
Nature of Operations
The Company is a diversified financial services company headquartered in
San Mateo, California. BVB is a federally chartered capital stock savings bank
with 27 full-service community banking centers throughout the San Francisco Bay
Area. BVC and Ultra operate as consumer finance companies throughout California,
Texas and the Western United States. CGC operates as a commercial finance
company throughout the United States. BVSC was formed for the purpose of
issuing asset-backed securities through a trust. Regent provides item
processing services.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities,
disclosure of contingent 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.
Cash and Cash Equivalents
Cash equivalents 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 have insignificant interest rate risk.
Loans Receivable
Loans receivable originated or purchased by the Company are identified as
either held for sale or held for investment at, or soon after, origination or
purchase and are recorded at cost net of discounts, deferred loan origination
fees, and allowance for loan losses as applicable. Loans receivable held for
investment are carried at amortized cost and are not adjusted to the lower of
cost or market because management intends and the Company has the ability, to
hold these loans to maturity. Interest is accrued as income only to the extent
considered collectible. Generally, the Company discontinues interest accruals
on loans 90 days or more past due. Interest income on nonaccrual loans is
measured on a cash basis. Loans classified as held for sale are carried at the
lower of cost or market on an aggregate basis by property type. Market value
for these loans is based on prices for similar loans in the secondary loan
market.
56
The Company charges fees for originating loans at the time the loan is
granted. The Company recognizes these loan origination fees, net of certain
direct costs, as a yield adjustment over the life of the related loan using the
interest method. Amortization of net deferred loan origination fees are
discontinued on nonperforming loans. When a loan is sold or paid off, any
unamortized net loan origination fees are included in income at that time.
Statement of Financial Accounting Standards No. 114 ("SFAS 114"),
"Accounting by Creditors for Impairment of a Loan" as amended by Statement of
Financial Accounting Standards No. 118 ("SFAS 118"), "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures" was effective
January 1, 1995. A loan is impaired when, based on current information and
events, it is probable that the Company is unable to collect all amounts due
according to the contractual terms of the loan agreement. The Company considers
nonperforming loans and troubled debt restructurings as impaired loans.
Nonperforming loans are defined as loans 90 days or more delinquent (excluding
accruing loans delinquent 90 days or more) and loans less than 90 days
delinquent when the Company determines that full collection of principal and
interest is doubtful. Troubled debt restructurings are loans which have been
modified based on interest rate concessions and/or payment concessions. SFAS
114 is not applicable to large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment. The Company considers its single
family residential and consumer loans as homogeneous loans for purposes of the
application of SFAS 114.
Charge-offs are recorded when the measure of the impaired loan is less than
the recorded investment in the loan. In determining charge-offs for specific
loans, management evaluates its loans on an individual basis that includes
assessing the creditworthiness and financial status of the borrower and
analyzing cash flows and current property appraisals. SFAS 114 requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company's impaired loans
are measured based on the fair value of the collateral because they are
collateral dependent.
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan. The Company recognizes interest income on impaired
loans on a cash basis.
Allowance for Loan Losses
Allowances for loan losses are maintained at levels that management deems
adequate to cover estimated losses and are continually reviewed and adjusted.
The Company adheres to an internal asset review system and an established loan
loss reserve methodology. Management evaluates factors such as the prevailing
and anticipated economic conditions, historic loss experiences, composition of
the loan portfolio by property type, levels and trends of classified loans and
loan delinquencies in assessing overall valuation allowance levels to be
maintained.
While management uses currently available information to provide for losses
on loans, additions to the allowance may be necessary based on new information
and/or future economic conditions. When the property collateralizing a
delinquent mortgage loan is foreclosed on by the Company and transferred to real
estate owned, the difference between the loan balance and the fair value of the
property less estimated selling costs is charged-off against the allowance for
loan losses.
Loan Sales and Servicing
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement establishes standards under which, after a
57
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. Under SFAS 125, the Company records a servicing asset for the
present value of the retained interest in a transferred asset representing
servicing fees net of related costs. Any retained interest in excess of such
servicing fees is recorded on a net present value basis as an available for sale
security and stated at fair value. SFAS 125 was effective, on a prospective
basis, for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. Prior to January 1, 1997, when a
participating interest in loans sold had an average contractual interest rate,
adjusted for normal servicing fees, which was different than the agreed upon
yield to the purchaser, the sales price was adjusted by the present value of the
differential for the estimated remaining life of the loans (capitalized excess
servicing). Any resulting net premium or discount is amortized to interest
income over the estimated remaining life of the loans based on a methodology
that approximates the effective interest yield method. The aggregate amount of
unamortized premiums arising from loan sales was $1.2 million and $575,000 at
December 31, 1997 and 1996, respectively and is included as other assets. At
December 31, 1997, there was no impairment relating to servicing assets.
Amortization of servicing assets and any related impairments are included in
noninterest income as incurred. Gains or losses on the sale of loans are
recognized at the time of sale.
Securities
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities" establishes
the classification of investments into three categories: held to maturity,
available for sale and trading. Securities classified as held to maturity are
recorded at amortized cost because management intends and the Company has the
ability to hold these securities to maturity. Securities classified as available
for sale are reported at fair value. Fair value for these securities is
obtained principally from published information or quotes by registered
securities brokers. Securities for which quotes are not readily available are
valued based on the present value of discounted estimated future cash flows.
The Company does not have a trading portfolio.
Securities are identified as either available for sale or held to maturity
at, or soon after, purchase and are accounted for accordingly. 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 until realized. 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 using a method
approximating the 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.
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities
Questions and Answers" ("Special Report"). The Special Report was issued as an
aid in understanding and implementing SFAS 115. For companies that adopted SFAS
115 prior to the issuance of this Special Report and the effects of adoption
resulted in reclassification of securities between categories, the guidance
stipulated that the transfers should be accounted for in accordance with SFAS
115. As a result, concurrent with the initial adoption of the Special Report,
the Company reassessed the appropriateness of its classifications for all
securities held at that time and, in December 1995, reclassified $147.7 million
in mortgage-backed securities from held to maturity to available for sale. The
transfer was recorded at a fair value of $146.0 million with $981,000 of
unrealized losses (net of tax) recorded as a separate component of stockholders'
equity.
58
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. Thereafter, specific
valuation allowances are established for adverse changes in the fair value of
the underlying assets.
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.
Intangibles
Core deposit premiums arise from the acquisition of deposits and are
amortized on a straight-line basis over the estimated life of the deposit base
acquired, generally eight years. The Company continually evaluates the periods
of amortization to determine whether later events and circumstances warrant
revised estimates. In addition, the market value of core deposit premiums is
established on an annual basis to evaluate the recoverability of its carrying
value for inclusion as a component of regulatory capital.
Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is amortized to expense over a period no greater than the
estimated remaining life of the long-term interest-earning assets acquired. If
the assets acquired do not include a significant amount of long-term interest-
earning assets, goodwill is amortized over a period that does not exceed the
estimated remaining life of the existing customer deposit base. Goodwill is
amortized on a straight-line basis over a period of up to 15 years. If it
becomes probable that the estimated undiscounted future cash flows will be less
than the carrying amount of goodwill, a reduction in the carrying amount is
recognized.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles to be held and used
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of 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 identifiable intangibles that
management expects to hold and use are based on the fair value of the asset.
Long-lived assets and certain identifiable intangibles to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which are considered financing activities. The
obligations to repurchase the securities are reflected as liabilities, and the
related underlying securities for the agreements, which are pledged as
collateral and held by the counterparties, are included in the Company's
securities portfolio as recorded assets.
59
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory 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 taxes for a change
in tax rates is recognized in income during the period of enactment.
Derivative Financial Instruments
The Company uses interest rate derivative financial instruments (e.g.,
swaps and treasury rate locks) primarily to hedge mismatches in the rate and
maturity of loans and their funding sources and reduce interest rate risk on
anticipated transactions. These instruments serve to reduce rather than
increase the Company's exposure to movements in interest rates. At the
inception of the hedge, the Company identifies an individual asset, liability,
or anticipated transaction or an identifiable group of essentially similar
assets or liabilities that expose the Company to interest rate risk at the
consolidated or subsidiary level. Interest rate derivatives are accounted for
by the deferral or accrual method only if they are designated as a hedge and are
expected to be and are effective in substantially reducing interest rate risk
arising from the assets, liabilities or anticipated transactions identified as
exposing the Company to risk. Treasury rate locks 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 anticipated
transactions). For interest rate swaps, their notional amount, interest rate
index and life must closely match the related terms of the hedged assets or
liabilities. If periodic assessment indicates derivatives no longer provide an
effective hedge, the derivatives are closed out or settled; previously
unrecognized hedge results, and the net settlement upon close-out or termination
that offset changes in value of the hedged asset or liability are deferred and
amortized over the life of the asset or liability with excess amounts 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 the interest income or
expense reported on the hedged asset or liability. If a hedged asset or
liability settles before maturity of the hedging interest rate derivatives, the
derivatives are closed out or settled, and previously unrecognized hedge results
and the net settlement upon close-out or termination are accounted for as part
of the gains and losses on the hedged asset or liability. If interest rate
derivatives used in an effective hedge are closed out or terminated before the
hedged item settles, previously unrecognized hedge results and the net
settlement upon close-out or termination are deferred and amortized over the
life of the hedged asset or liability.
When an anticipated transaction occurs, the derivatives hedging the
anticipated transaction are closed out or settled, and previously unrecognized
hedge results and the net settlement upon close-out or termination are deferred
and amortized over the life of the hedged asset or liability. If the
anticipated transaction is a sale of assets, the derivatives hedging the
anticipated transaction are closed out or settled, and previously unrecognized
hedge results and the net settlement upon close-out or termination are accounted
for as part of the gains and losses on the sale of the hedged asset. If the
anticipated transaction does not occur, the derivatives hedging the anticipated
transaction are closed out or settled, and are accounted for as gains and losses
on the hedge.
The Company is also exposed to loss of future interest differential
payments (credit risk) in the event of nonperformance by the counterparties to
the interest rate exchange agreements. The Company manages the credit risk of
its interest rate exchange agreements by maintaining exposure limits and
adhering to a strict counterparty selection process. The Company does not
anticipate nonperformance by the other parties.
60
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APB") No. 25 "Accounting for Stock Issued to Employees".
Earnings (Loss) Per Share
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Measurement of Earnings Per Share" ("SFAS 128"). SFAS 128 replaces
Primary and Fully Diluted Earnings Per Share ("EPS") with Basic EPS and Diluted
EPS for fiscal years ending after December 15, 1997. Basic EPS is calculated by
dividing net earnings for the period by the weighted-average common shares
outstanding for that period. There is no adjustment to the number of outstanding
shares for dilutive instruments, such as stock options. Diluted EPS takes into
account the dilutive impact of such instruments and uses the average share price
for the period in determining the number of incremental shares to add to the
weighted average number of shares outstanding.
All prior period earnings per share amounts have been restated to reflect
the adoption of SFAS 128. The basic and diluted loss per share for 1995 were
calculated using the weighted average number of shares outstanding, excluding
the impact of dilutive potential common shares.
61
The calculation of basic and diluted earnings per share is summarized as
follows:
----------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Net earnings (loss) available to common stockholders $14,021 $10,969 $(4,690)
Weighted average shares outstanding 12,860 13,703 14,587
Add: Dilutive potential common shares 343 197 -
------- ------- -------
Diluted weighted average shares outstanding 13,203 13,900 14,587
------- ------- -------
Basic earnings (loss) per share $ 1.09 $ 0.80 $ (0.32)
======= ======= =======
Diluted earnings (loss) per share $ 1.06 $ 0.79 $ (0.32)
======= ======= =======
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income," which requires that an enterprise
report any major components and as a single total, the changes in its assets
during the period from nonowner sources; and Statement of Financial Accounting
Standard No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these statements
will not materially impact the Company's consolidated financial position,
results of operations or cash flows, and any effect will be limited to the form
and content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Management has not yet determined its operating segments approach to SFAS 131.
Reclassification
Certain reclassifications have been made to the prior year balances in
order to conform to the current year presentation.
NOTE 2. MERGER-RELATED ACTIVITY
California Thrift & Loan
Effective June 1, 1996, the Company acquired all the outstanding stock of
CTL Credit, Inc. and its wholly owned subsidiary California Thrift & Loan for
cash.
CTL was an FDIC-insured California industrial loan company with a specific
focus on consumer lending. The acquisition was accounted for using the purchase
method of accounting in accordance with APB No. 16, "Business Combinations". In
an acquisition accounted for as a purchase, the purchase price is allocated to
assets acquired and liabilities assumed based on their estimated fair values at
the time of consummation of the transaction.
The Company issued $50 million of 8.42% Senior Debentures in May 1996 of
which a portion was used to partially finance the acquisition.
62
The aggregate acquisition purchase price of approximately $62 million
exceeded the estimated fair value of net assets acquired by approximately $7
million and is being amortized on a straight-line basis over seven years.
Results of operations for the acquired entity have been included in the
Company's consolidated financial statements commencing as of the effective date
of acquisition.
Effective December 31, 1997, CTL was de-regulated and renamed Bay View
Credit. BVC is a subsidiary of BVAC, a subsidiary of BVB. All references to this
subsidiary from this point forward will reflect its new name, Bay View Credit.
Concord Growth Corporation
The Company completed its acquisition of EXXE Data Corporation ("EXXE") and
its wholly owned commercial finance subsidiary, Concord Growth Corporation, on
March 17, 1997. At the close of the transaction, EXXE became a stand-alone
subsidiary of the Company. Subsequent to the close of the transaction, EXXE was
merged into CGC and liquidated and CGC became a first-tier stand-alone
subsidiary of the Company. The former holders of EXXE capital stock, warrants
and options received an initial aggregate payment of $19.8 million and will be
entitled to potential future cash payments, of up to $34 million, depending upon
the financial performance of CGC. The acquisition was accounted for as a
purchase effective April 1, 1997. The aggregate costs exceeded the fair value
of the net assets acquired by approximately $21 million, which was recorded as
goodwill and which is being amortized on a straight-line basis over a 15-year
period.
Ultra Funding, Inc.
Effective October 1, 1997, the Company, through its newly formed
subsidiary, Ultra Funding, Inc., acquired the origination capabilities and
certain assets of Ultra Funding, Ltd. of Austin, Texas. The purchase price
exceeded the fair value of net assets acquired by approximately $400,000, which
is being amortized on a straight-line basis over a 7-year period.
America First Eureka Holdings, Inc.
The Company completed its acquisition of America First Eureka Holdings,
Inc. ("AFEH") and its wholly owned subsidiary EurekaBank, a Federal Savings
Bank, on January 2, 1998. Pursuant to the Merger Agreement, the Company paid
$90 million in cash and $210 million in stock (8,076,923 shares of the Company's
common stock) 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 shares issued was based on the average value of the Company's common
stock for the 20 full trading days ending on the fifth business day prior to the
merger closing date. Based on the average value of $34.3031 during this period,
pursuant to the Merger Agreement, the number of shares issued was determined by
dividing the $210 million stock portion of the purchase price by $26.00 per
share.
The acquisition of AFEH will be accounted as a purchase effective January
2, 1998. The amount of goodwill to be recorded as of the merger date is
expected to be $98 million which will be amortized on a straight-line basis over
20 years and which excludes core deposit intangibles estimated at $12 million.
This goodwill amount represents the preliminary estimate of the excess of the
acquisition costs over the fair value of assets acquired and liabilities assumed
based on information available as of this date. No assurance can be given that
the final goodwill amount will not be more or less than the estimated amount.
63
NOTE 3. CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents are summarized as follows:
-------------------------
AT DECEMBER 31,
-------------------------
1997 1996
--------- ----------
(DOLLARS IN THOUSANDS)
Noninterest-earning deposits due from
depository institutions $ 40,885 $ 22,608
Interest-earning deposits 137 220
Short-term investments 190,800 84,000
-------- --------
Total $231,822 $106,828
======== ========
Generally, the Company's banking depositories either pay interest on
deposits or apply an imputed interest credit to deposit balances which is used
as an offset to charges for banking services rendered. The Company has no
compensating balance arrangements or lines of credit with banks. Cash balances
for BVB required to be held at the Federal Reserve Bank totaled approximately
$1.4 million and $5.5 million at December 31, 1997 and 1996, respectively.
There were no similar cash balance reserve requirements for BVC.
NOTE 4. INVESTMENT SECURITIES
The Company's investment securities are summarized as follows:
----------------------------------------------
AT DECEMBER 31, 1997
-----------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------- ----- -------- -------
(DOLLARS IN THOUSANDS)
Available for sale
Other securities $5,639 $ - $ - $5,639
====== ==== ==== ======
Held to maturity
Federal Farm Credit Bank callable note $5,000 $15 $ - $5,015
====== === ==== ======
AT DECEMBER 31, 1996
-------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ----- -------- ---------
(DOLLARS IN THOUSANDS)
Available for sale
U. S. Treasury Bills $12,792 $ - $ - $12,792
Federal Home Loan Mortgage
Corporation preferred stock 1,000 10 - 1,010
------- --- ---- -------
Total $13,792 $10 $ - $13,802
======= === ==== =======
Held to maturity
Federal Home Loan Mortgage Corporation
debentures $ 5,004 $ - $(27) $ 4,977
Federal Home Loan Mortgage Corporation
notes 5,000 - (19) 4,981
Federal Farm Credit Bank callable note 5,000 - (46) 4,954
U. S. Treasury Bills 200 - - 200
------- --- ---- -------
Total $15,204 $ - $(92) $15,112
======= === ==== =======
64
The Company's debt security held to maturity at December 31, 1997 has a
weighted average yield of 6.40% and matures in 2000. The weighted average yield
of investment securities available for sale and held to maturity at December 31,
1996 was 5.29% and 6.67%, respectively.
There were no sales of investment securities during 1997, 1996 and 1995.
The Company's investment in Federal Home Loan Mortgage Corporation ("FHLMC")
notes and debentures of $10.0 million was called at par in 1997 and the
Company's FHLMC preferred stock of $1.0 million was redeemed by FHLMC at book
value in 1997.
In conjunction with the securitization of BVC's auto loan portfolio in
January of 1997, BVC entered into a short sale of Treasury securities during the
fourth quarter of 1996 to hedge the valuations from movements in interest rates.
A loss of $293,000 was recorded in the fourth quarter of 1996 associated with
the close out of this short sale of Treasury securities.
NOTE 5. MORTGAGE-BACKED SECURITIES
The Company's mortgage-backed securities are summarized as follows:
---------------------------------------------
AT DECEMBER 31, 1997
---------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Available for sale
Federal National Mortgage Association $ 54,526 $ - $ (124) $ 54,402
======== ==== ======= ========
Held to maturity
Federal Home Loan Mortgage Corporation $165,383 $154 $(1,114) $164,423
Federal National Mortgage Association 244,908 328 (1,431) 243,805
Government National Mortgage Association 614 26 - 640
Financial institutions and financial
intermediaries 4,954 158 - 5,112
-------- ---- ------- --------
Total $415,859 $666 $(2,545) $413,980
======== ==== ======= ========
---------------------------------------------
AT DECEMBER 31, 1996
---------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Available for sale
Federal National Mortgage Association $ 84,401 $ - $ (1,247) $ 83,154
======== ==== ======== ========
Held to maturity
Federal Home Loan Mortgage Corporation $202,402 $ 77 $ (4,805) $197,674
Federal National Mortgage Association 285,495 104 (6,754) 278,845
Government National Mortgage Association 660 22 - 682
Financial institutions and financial
intermediaries 5,902 358 - 6,260
-------- ---- -------- --------
Total $494,459 $561 $(11,559) $483,461
======== ==== ======== ========
The weighted average yields of mortgage-backed securities ("MBS") available
for sale and held to maturity at December 31, 1997 were 6.84% and 6.44%,
respectively. The weighted average yields of MBS available for sale and held to
maturity at December 31, 1996 were 6.61% and 6.44%, respectively.
65
There were no adjustable rate MBS as of December 31, 1997. At December 31,
1996, the amount of adjustable rate MBS was $664,000. The Company uses MBS as
full or partial collateral for borrowings. The total amount of pledged MBS at
December 31, 1997 and 1996 was $455.7 million and $560.0 million, respectively.
Proceeds from sales of MBS available for sale during 1997 were $20.5
million. Gross gains of $13,000 and gross losses of $13,000 were realized on
those sales. There were no sales of MBS held to maturity during 1997. Proceeds
from sales of MBS available for sale during 1996 were $54.5 million. Gross
gains of $411,000 and gross losses of $918,000 were realized on those sales.
Proceeds from the sale of MBS held to maturity (scheduled to mature within three
months from sale date) during 1996 was $2.6 million and there was no gain or
loss on this sale. Proceeds from sales of MBS available for sale during 1995
were $101.2 million. Gross gains of $688,000 and gross losses of $2.9 million
were realized on those sales.
66
The following table sets forth the remaining contractual terms to maturity of
the Company's MBS portfolio as of December 31, 1997:
-----------------------------------------------------------------------------------------------------
OVER OVER
ONE YEAR THROUGH FIVE YEARS THROUGH
WITHIN ONE YEAR FIVE YEARS TEN YEARS OVER TEN YEARS TOTAL
------------------- ------------------- ------------------ -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Available for sale
FNMA $ - $ - $ - $ 54,526 6.84% $ 54,526 6.84%
======= ======== ======== ======== ========== ======== ==========
Fair Value $ - $ - $ - $ 54,402 $ 54,402
======= ======== ======== ======== ========
Held to maturity
FHLMC, FNMA
and GNMA $10,654 5.29% $ 6,885 5.74% $ 33,669 6.35% $359,697 6.44% $410,905 6.40%
Financial
institutions and
intermediaries - - 100 8.88% - - 4,854 10.93% 4,954 10.89%
------- ---------- -------- ---------- -------- ----------- -------- ---------- -------- ----------
Total amortized
cost $10,654 5.29% $ 6,985 5.78% $ 33,669 6.35% $364,551 6.50% $415,859 6.44%
======= ========== ======== ========== ======== =========== ======== ========== ======== ==========
Fair Value $10,618 $ 6,928 $ 33,487 $362,947 $413,980
======= ======== ======== ======== ========
67
NOTE 6. LOANS RECEIVABLE
The Company originates loans for the purpose of enabling borrowers to purchase
or refinance multifamily (five or more units) and nonresidential real estate
through its wholly owned subsidiary, BVB. During 1996, management re-directed
its business lending practices and de-emphasized its focus on single family real
estate lending. As a result, the Company discontinued its loan origination
operations for those specific products. BVB's loans receivable are primarily
secured by real property located in Northern California with the heaviest
concentration in the counties of San Mateo, San Francisco and Santa Clara.
Although BVB has a diversified loan portfolio, the geographic concentration of
its borrowers implies a dependence on the regional economy and local real estate
markets. The loan portfolio for BVC and Ultra consist primarily of motor
vehicle loans, while CGC's loan portfolio consists of loans secured by
receivables and equipment. BVC's motor vehicle loans were classified as held
for sale at December 31, 1996, because they were subsequently sold to BVSC for
securitization.
The Company's loans receivable, which includes loans held for sale, are
summarized as follows:
-----------------------------------------
AT DECEMBER 31,
-----------------------------------------
1997 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential
Single family (one to four units) $ 550,506 $ 692,086
Multifamily (five or more units) 1,026,148 1,048,291
Nonresidential 348,754 381,822
---------------- ----------------
1,925,408 2,122,199
Motor vehicle loans 298,627 315,439
Home equity and other consumer 128,570 68,018
Commercial 54,120 -
---------------- ----------------
Gross loans receivable 2,406,725 2,505,656
Advances to borrowers 1,487 1,173
Less:
Net deferred loan origination fees (2,541) (2,405)
Premiums and discounts 5,900 (694)
Allowance for loan losses (38,458) (29,013)
---------------- ----------------
(35,099) (32,112)
---------------- ----------------
Total $2,373,113 $2,474,717
================ ================
During the first quarter of 1997, $253 million of BVC's motor vehicle loans
were sold and securitized. The BVC motor vehicle loan portfolio was recorded at
its fair value upon acquisition assuming that such loans would be securitized
and sold. As a result the $925,000 gain recorded on the sale was related to the
change in market interest rates between the acquisition date of BVC and the sale
and securitization of the loans. At December 31, 1997, BVC is servicing $145
million of these motor vehicle loans. The Company discontinued the sale and
securitization of BVC's motor vehicle loans in conjunction with the announcement
of the EurekaBank acquisition in May 1997.
BVB has historically sold (none in 1997 or 1996) mortgage loans to the
secondary market and usually retained responsibility for servicing the loans.
At December 31, 1997, 1996 and 1995, BVB serviced participating interests in
loans sold of $372.0 million, $412.4 million, and $466.5 million, respectively.
The Company has agreed to modifications of certain multifamily and
nonresidential mortgage loans. The modifications have taken the form of
interest rate concessions, and/or payment concessions. Such loan modifications
are considered troubled debt restructurings (see Note 1) and are entered into
with the objective of maximizing the Company's long-term recovery of the
investment in the loan when a
68
borrower is experiencing financial difficulties. The Company has no commitments
to lend additional funds to borrowers whose loans were so modified. In the
aggregate, the Company's investment in troubled debt restructurings (excluding
troubled debt restructurings classified as nonaccrual loans) was $731,000 and
$509,000 at December 31, 1997 and 1996, respectively. Interest income with
respect to these loans, under their original terms, as well as actual interest
recognized, was not significant in 1997 or 1996. Under their original terms,
interest income with respect to these would have been $1.1 million in 1995,
while actual interest recognized by the Company on these modified loans was $1.1
million in 1995.
At December 31, 1997 and 1996, nonaccrual loans totaled $11.0 million and
$16.1 million, respectively. Interest on nonaccrual loans that was not recorded
in income was $209,000, $735,000 and $623,000 for the years ended December 31,
1997, 1996, and 1995, respectively. Actual interest recognized by the Company
on these nonaccrual loans was not significant in 1997, 1996 or 1995. At
December 31, 1997, the Company had no commitments to lend additional funds to
these borrowers.
The average investment in impaired loans during 1997 and 1996 was $13.9
million and $15.1 million, respectively. Impaired loans recorded in accordance
with SFAS 114 consist of nonperforming loans (see Note 1) and troubled debt
restructurings and are summarized as follows:
-------------------------------------------------------------
AT DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
------------------ ---------------- ----------------
(DOLLARS IN THOUSANDS)
Nonperforming loans $10,991 $16,125 $10,755
Troubled debt restructurings 731 509 15,641
------------------ ---------------- ----------------
Total $11,722 $16,634 $26,396
================== ================ ================
The changes in the Company's allowance for loan losses are summarized as
follows:
--------------------------------------------------------------
AT AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ----------------
(DOLLARS IN THOUSANDS)
Balance at beginning of year $29,013 $30,014 $29,115
Reserves related to entity and asset
acquisitions 14,162 2,860 -
Charge-offs:
Real estate and other (2,699) (6,401) (4,879)
Motor vehicle (4,057) - -
Commercial (1,685) - -
------------------ ------------------ ----------------
(8,441) (6,401) (4,879)
Recoveries:
Real estate and other 706 522 1,424
Motor vehicle 955 120 70
Commercial 111 - -
------------------ ------------------ ----------------
1,772 642 1,494
------------------ ------------------ ----------------
Net charge-offs (6,669) (5,759) (3,385)
Provision for loan losses 1,952 1,898 4,284
------------------ ------------------ ----------------
Balance at end of year $38,458 $29,013 $30,014
================== ================== ================
Allowance for loans by category:
Real estate and other $29,026 $27,969 $29,541
Motor vehicle 3,240 1,044 473
Commercial 6,192 - -
------------------ ------------------ ----------------
Total $38,458 $29,013 $30,014
================== ================== ================
Allowance for loan losses was provided for all impaired loans at December 31,
1997 and 1996. The portion of the total allowance for loan losses that was
attributable to impaired loans was $1.7 million and
69
$1.9 million at December 31, 1997 and 1996, respectively. Provision for loan
losses, charge-offs and recoveries relating to impaired loans were $2.0 million,
$8.4 million and $1.8 million for the year ended December 31, 1997,
respectively, $1.9 million, $6.4 million and $0.6 million for the year ended
December 31, 1996, respectively, and $4.3 million, $4.9 million and $1.5 million
for the year ended December 31, 1995, respectively.
To facilitate the sale of real estate loans, the Company has in the past
occasionally offered a recourse guaranty on loans sold whereby the Company
agreed to repurchase or substitute loans that became 90 days delinquent. In
addition, the Company on occasion subordinated its retained participation
interest in sold loans. At December 31, 1997 and 1996, the Company had
outstanding recourse and subordination contingencies relating to principal of
$50.9 million and $54.3 million, respectively, on sold mortgage loans.
At December 31, 1997 and 1996, mortgage loans aggregating $1.24 billion and
$1.13 billion respectively, were pledged as collateral for advances from the
FHLBSF.
NOTE 7. PREMISES AND EQUIPMENT
The Company's premises and equipment are summarized as follows:
---------------------------------------
AT DECEMBER 31,
---------------------------------------
1997 1996
---------------- -----------------
(DOLLARS IN THOUSANDS)
Land $ 214 $ 214
Buildings 338 336
Capitalized leases 3,979 3,979
Leasehold improvements 7,505 6,917
Furniture and equipment 20,992 14,736
Other 3,896 361
---------------- -----------------
36,924 26,543
Less:
Accumulated depreciation
and amortization (20,760) (19,638)
---------------- -----------------
Total $ 16,164 $ 6,905
================ =================
During the fourth quarter of 1995, the Company recorded a charge of $7.1
million to adjust the carrying amount of the land and building of its San Mateo,
California corporate office complex to its estimated fair value less costs to
sell as a result of its decision to pursue a sale of the complex. The Company
recorded additional charges of $500,000 as a result of the sale of the complex
in September 1996. During 1996, the Company wrote off $1.2 million of computer
hardware equipment as a result of new specifications relating to the Company's
long-term information services technology agreement with an outside data
processing services vendor. Depreciation and amortization expense for the years
ended December 31, 1997, 1996 and 1995 was $3.0 million, $2.2 million and $3.1
million, respectively.
70
NOTE 8. INTANGIBLE ASSETS
The Company's intangible assets are summarized as follows:
AT DECEMBER 31,
-------------------------------------------
1997 1996
------------------ -------------------
(DOLLARS IN THOUSANDS)
Core deposit premiums $ 1,758 $ 3,810
Goodwill 27,749 6,387
------------------ -------------------
Total $29,507 $10,197
================== ===================
During the fourth quarter of 1995, core deposit premiums of $854,000 were
written-off for the year ended December 31, 1995 resulting from an impairment in
the value of core deposit premiums that was attributable to higher than expected
decay rates in the customer deposits acquired. The balance of core deposit
premiums was subsequently amortized over its remaining useful life.
Amortization expense for core deposit premiums was $2.1 million, $2.0 million
and $1.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
During the fourth quarter of 1995, BVB explored the sale and/or exchange of
certain of its acquired branches which had purchased goodwill dating from 1981.
Based on offers received and management's estimate of undiscounted future cash
flows, it was determined that the recovery of the goodwill associated with these
branches was no longer recoverable and related unamortized goodwill of $758,000
was written off in 1995. Amortization expense for goodwill was $2.0 million,
$581,000 and $396,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE 9. CUSTOMER DEPOSITS
The Company's customer deposits are summarized as follows:
--------------------------------------------------------------------------------
AT DECEMBER 31, 1997
--------------------------------------------------------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS)
Passbook accounts $ 130,856 7.8% 2.28%
Checking accounts 116,114 6.9 0.68
Money market accounts 306,850 18.3 4.44
----------------------- ----------------------- -----------------------
Transaction accounts 553,820 33.0 2.97
Brokered certificates of deposit 78,163 4.7 5.82
Certificates of deposit 1,045,152 62.3 5.51
----------------------- ----------------------- -----------------------
Total $1,677,135 100.0% 4.71%
======================= ======================= =======================
--------------------------------------------------------------------------------
AT DECEMBER 31, 1996
--------------------------------------------------------------------------------
% OF WEIGHTED
AMOUNT TOTAL AVERAGE RATE
----------------------- ----------------------- -----------------------
Passbook accounts $ 189,279 10.7% 2.38%
Checking accounts 111,436 6.3 0.78
Money market accounts 192,856 10.9 3.92
----------------------- ----------------------- -----------------------
Transaction accounts 493,571 27.9 2.62
Certificates of deposit 1,100,559 62.4 5.48
Thrift certificates 169,837 9.7 5.55
----------------------- ----------------------- -----------------------
Total $1,763,967 100.0% 4.69%
======================= ======================= =======================
71
Noninterest bearing deposits were $27.2 million and $24.6 million as of
December 31, 1997 and 1996, respectively. Customer deposits at December 31,
1997 included certificates of deposit scheduled to mature as follows:
-------------------
(DOLLARS IN
THOUSANDS)
-------------------
1998 $1,007,420
1999 95,141
2000 15,846
2001 4,758
2002 150
-------------------
Total $1,123,315
===================
Interest expense on customer deposits, by deposit type, is summarized as
follows (including BVC effective June 1, 1996):
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995
------------------- ------------------ ----------------
(DOLLARS IN THOUSANDS)
Passbook accounts $ 3,667 $ 5,335 $ 3,777
Checking and money market accounts 9,050 6,095 4,468
Certificates of deposit 60,470 73,429 85,153
Thrift certificates 3,297 15,366 -
------------------- ------------------ ----------------
Total $76,484 $100,225 $93,398
=================== ================== ================
At year-end 1996, BVC redeemed approximately $267 million of customer deposits
at face value. In June 1997, BVC sold substantially all of its remaining
deposits to BVB.
NOTE 10. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF SAN FRANCISCO
At December 31, 1997 and 1996, BVB had the following advances outstanding with
the following maturities and rates:
----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
PRINCIPAL AMOUNTS INTEREST RATES
--------------------------------------------- --------------------------------------------
1997 1996 1997 1996
--------------------- ------------------------------------------- -------------------
(DOLLARS IN THOUSANDS)
1997 - $774,480 - 5.69%
1998 $ 985,270 108,270 5.88% 5.87
1999 65,000 35,000 6.14 5.84
2000 20,000 20,000 5.89 5.88
2001 40,000 40,000 7.27 7.18
--------------------- ------------------- ------------------- -------------------
Total $1,110,270 $977,750 5.94% 5.78%
===================== =================== =================== ===================
FHLBSF advances at December 31, 1997 included $5 million of borrowings
maturing in 1998 at interest rates that reset monthly based on the Eleventh
District Cost of Funds Index and $20 million of borrowings maturing in 2001 at
interest rates that reset semi-annually based on the 6-month LIBOR rate. FHLBSF
advances were collateralized by loans and MBS totaling $1.7 billion at both
December 31, 1997 and 1996.
72
BVB is a member of the Federal Home Loan Bank System. As a member, BVB is
required to purchase stock in the FHLBSF at an amount equal to the greater of 1%
of BVB's residential mortgage loans or 5% of outstanding FHLBSF advances. The
stock is purchased at par value ($100 per share) and shares of stock held in
excess of the minimum requirement may be sold back to the FHLBSF at par value.
BVB records its investment in FHLBSF stock at cost (par value). At December 31,
1997, BVB's investment was $58.5 million and its minimum required investment was
$55.5 million. At December 31, 1997, BVC's investment in FHLBSF stock was $2.5
million. The stock is pledged as collateral for advances from the FHLBSF. The
FHLBSF generally declares quarterly stock dividends. The amount of FHLBSF
dividends recorded in income during the years ended December 31, 1997, 1996 and
1995 was $3.4 million, $2.5 million, and $2.2 million, respectively.
As part of its asset/liability management strategy to reduce interest rate
risk exposure, the Company prepaid $45 million of its advances from the FHLBSF,
and during the fourth quarter of 1995, committed to prepay $145 million of its
FHLBSF advances in February 1996. Accordingly, the Company incurred a
prepayment charge of $2.5 million (net of applicable income taxes) in connection
with the early retirement of FHLBSF advances which was reported as an
extraordinary item in 1995.
NOTE 11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are effectively borrowings
secured by mortgage-backed securities. The securities sold under the terms of
these agreements are safekept for the Company by the registered primary
securities dealers who arrange the transactions. Borrowings under reverse
repurchase agreements at December 31, 1997 and 1996 were $90.1 million and
$210.6 million, respectively. The weighted average interest rate on reverse
repurchase agreements at December 31, 1997 and 1996 were 5.76% and 5.53%,
respectively.
These borrowings have maturities of one year or less and are collateralized by
mortgage-backed securities aggregating $93.6 million and $218.2 million
respectively, at December 31, 1997 and 1996. The contractually required market
values of the collateral may range up to 106% of the borrowings. The market
value of the mortgage-backed securities collateralizing such borrowings at
December 31, 1997 and 1996 was $95.5 million and $218.7 million, respectively.
NOTE 12. NOTES AND DEBENTURES
On August 28, 1997, the Company issued $100 million in subordinated notes
registered under the Securities Act of 1933, as amended (the "Securities Act").
The notes are unsecured obligations of the Company and are subordinated in right
of payment to all existing and future senior indebtedness, as defined, of the
Company. The notes mature on August 15, 2007, with a call provision upon a
change of control, within 180 days of the occurrence of the change, or upon the
occurrence of certain other events, at the option of the Company. The issuance
has a stated coupon of 9.125% and yields 9.225%. The all-in cost of the
subordinated debt is approximately 9.6%. The Company may use the net proceeds
for general corporate purposes, which may include, among other things, the
repayment of outstanding indebtedness, investments in or extensions of credit to
its subsidiaries and the financing of acquisitions such as EurekaBank. Interest
expense on the subordinated notes for the year ended December 31, 1997 was $3.2
million.
On May 28, 1996, the Company issued $50 million of 8.42% senior debentures,
which were not registered under the Securities Act, in a private placement under
Section 4 (2) of the Securities Act. A portion of the proceeds were used to
finance the acquisition of BVC. The senior debentures, which have an all-in
cost of approximately 8.9%, are due June 1, 1999. In conjunction with the
acquisition of
73
EurekaBank, the Company negotiated covenant modifications with the senior
debenture holders during 1997 to allow the repurchase of additional shares of
common stock in exchange for a payment of approximately $1.1 million. Interest
expense on the senior debentures was $4.5 million for 1997 and $2.6 million for
1996.
NOTE 13. INCOME TAXES
The Company and its subsidiaries file consolidated federal income tax returns
in which the taxable income or loss of the Company is combined with that of its
subsidiaries. Each subsidiary's share of income tax expense (benefit) is based
on the amount which would be payable if separate returns were filed. The
Company's consolidated income tax expense (benefit), before extraordinary items,
is summarized as follows:
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
FEDERAL STATE TOTAL
------------------------ ----------------------- -----------------------
(DOLLARS IN THOUSANDS)
Current $ 4,940 $ 1,294 $ 6,234
Deferred 2,277 734 3,011
------------------------ ----------------------- -----------------------
Total $ 7,217 $ 2,028 $ 9,245
======================== ======================= =======================
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------------
Current $ 3,007 $ 352 $ 3,359
Deferred 3,046 1,872 4,918
------------------------ ----------------------- -----------------------
Total $ 6,053 $ 2,224 $ 8,277
======================== ======================= =======================
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------------------
Current $(5,652) $(2,482) $(8,134)
Deferred 5,135 2,291 7,426
------------------------ ----------------------- -----------------------
Total $ (517) $ (191) $ (708)
======================== ======================= =======================
Current and deferred income taxes, included in other assets (liabilities), are
summarized as follows:
----------------------------------------------------
AT DECEMBER 31,
----------------------------------------------------
1997 1996
---------------------- ------------------------
(DOLLARS IN THOUSANDS)
Current receivable $ 6,148 $ 2,735
Deferred asset (liability) 4,336 (4,698)
---------------------- ------------------------
Total $10,484 $(1,963)
====================== ========================
The differences between the effective tax rates and the federal statutory
rates are summarized as follows:
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
Federal tax expense, computed at statutory rate of 35% $8,143 $ 6,736 $ (999)
Amortization of goodwill 712 203 -
State tax expense, net of federal tax benefit 1,319 2,439 (192)
Other, net (929) (1,101) 483
-------------------- -------------------- --------------------
$9,245 $ 8,277 $ (708)
==================== ==================== ====================
Effective tax rate, as a percentage of income before
income tax expense (benefit) and extraordinary items 39.7% 43.0% (24.8%)
==================== ==================== ====================
74
The components of the net deferred tax assets are summarized as follows:
------------------------------------------
AT DECEMBER 31,
------------------------------------------
1997 1996
------------------ ------------------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Provision for loan losses $ 12,566 $ 10,579
Real estate joint ventures 885 1,130
Depreciation 617 1,947
State income taxes 1,709 830
Intangible assets 4,584 3,327
Unrealized loss on securities available for sale 57 532
Leases 880 1,347
Net operating loss carryforward 1,128 -
Write-down of corporate office complex - 996
Other 1,482 3,776
------------------ ------------------
Gross deferred tax assets 23,908 24,464
Valuation allowance (1,128) -
------------------ ------------------
Net deferred tax assets 22,780 24,464
Deferred tax liabilities:
Excess over base year reserves (794) (993)
Unrealized gain on loans available for sale (2,099) (12,745)
Loan fees (6,029) (7,213)
FHLBSF stock dividends (8,316) (6,677)
Capitalized excess servicing fees (177) (263)
Other (1,029) (1,271)
------------------ ------------------
Gross deferred tax liabilities (18,444) (29,162)
------------------ ------------------
Net deferred tax asset (liability) $ 4,336 $ (4,698)
================== ==================
In accordance with SFAS 109, a deferred tax liability has not been recognized
for the bad debt reserves of the Company which arose in the tax years which
began prior to December 31, 1987. At December 31, 1997 and 1996, the amount of
these reserves was approximately $17.0 million. The amount of unrecognized
deferred tax liability at December 31, 1997 and 1996 was approximately $6.1
million. The deferred tax liability could be recognized if in the future there
is a change in federal tax law, certain distributions are made with respect to
the stock of the savings institution, or the bad debt reserves are used for any
purpose other than absorbing bad debt losses.
During 1996, the Company and the Internal Revenue Service ("IRS") reached a
final agreement to resolve certain disputed issues related to the taxable years
1987 through 1989. The principal disputed issues related to various savings and
loan industry tax issues for which the Company had previously provided deferred
taxes. During 1997 the Company realized the benefit resulting from the
finalization of these tax audits as well enterprise zone tax credits.
The acquisition of BVC during 1996 increased deferred income tax liabilities
by $7.3 million with subsequent adjustments in 1997 increasing deferred income
tax assets by $800,000. The acquisition of CGC during 1997 increased deferred
income tax assets by $4.8 million.
The net operating loss ("NOL") carryforwards from the acquisition of CGC are
$1.1 million and will expire in 2011. These NOL carryforwards are subject to
the Separate Return Loss Years ("SRLY") rules which may limit their usage
depending upon the revenue generated by CGC on a standalone basis. Accordingly,
a valuation allowance was established against these NOL carryforwards since the
likelihood of recognition does not meet the more likely than not criteria of
Statement of Financial Accounting Standards 109.
75
NOTE 14. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
Federal legislation to recapitalize and fully fund the Savings Association
Insurance Fund ("SAIF") was signed into law on September 30, 1996. Customer
deposits for BVB are SAIF-insured, and as a result of the legislation BVB was
required to pay a one-time special assessment of $11.7 million pre tax ($6.7
million after tax or $.485 per share). The legislation had no direct effect on
BVC, as its deposits were insured under the Bank Insurance Fund.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, BVB must meet specific capital guidelines that involve
quantitative measures of BVB's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. BVB's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Failure to
meet minimum capital requirements can initiate certain mandatory, and possible
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements.
Bay View Bank
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") provides definitions of regulatory capital (tangible capital, core
capital and risk-based capital) and methods of calculating the minimum
requirement for each type of capital. The tangible capital requirement is 1.5%
of tangible assets. The core capital requirement is 3.0% of tangible assets
plus qualifying intangibles. The risk-based capital requirement is 8.0% of
risk-weighted assets. BVB's fully phased-in regulatory capital exceeded the
minimum requirements of each regulatory capital standard in effect at December
31, 1997 and 1996 and is summarized as follows:
------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997
------------------------------------------------------------------------------------------------------------------
ACTUAL MINIMUM REQUIRED EXCESS
----------------------------------- ----------------------------------- --------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- --------------- --------------- --------------- --------------- ------------
(DOLLARS IN THOUSANDS)
Tangible $202,194 6.33% $ 47,932 1.50% $154,262 4.83%
Core (Leverage) $203,308 6.36% $ 95,898 3.00% $107,410 3.36%
Risk-based $228,532 10.87% $168,163 8.00% $ 60,369 2.87%
--------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996
--------------------------------------------------------------------------------------------------------------------
ACTUAL MINIMUM REQUIRED EXCESS
----------------------------------- ----------------------------------- ----------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- --------------- --------------- --------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Tangible $165,110 5.52% $ 44,860 1.50% $120,250 4.02%
Core (Leverage) $168,782 5.64% $ 89,829 3.00% $ 78,953 2.64%
Risk-based $190,981 10.74% $142,308 8.00% $ 48,673 2.74%
76
The reconciliation of BVB's capital (excluding unrealized loss on securities
available for sale, net of tax benefit) under Generally Accepted Accounting
Principles ("GAAP") with its regulatory capital is summarized as follows:
------------------------------------------------------------------------
AT DECEMBER 31, 1997
------------------------------------------------------------------------
TANGIBLE CORE RISK-BASED
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
BVB stockholder's equity (GAAP) $213,718 $213,718 $213,718
Increase (decrease):
Unrealized loss on securities 72 72 72
Core deposit premiums (1,758) (644) (644)
Goodwill (6,259) (6,259) (6,259)
Disallowed servicing assets (811) (811) (811)
Nonincludable investments in subsidiary (2,768) (2,768) (2,768)
Nonqualifying equity investments - - (1,124)
Qualifying general loan loss allowances - - 26,348
-------------------- -------------------- --------------------
BVB regulatory capital $202,194 $203,308 $228,532
==================== ==================== ====================
The Federal Deposit Insurance Corporation Improvement Act of 1991 required
each federal banking agency to implement prompt corrective actions for under
capitalized institutions that it regulates. In response to this requirement,
the Office of Thrift Supervision adopted final rules, effective December 19,
1992, based on FDICIA's five capital tiers: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
The regulations provide that a savings institution is well capitalized if its
Total risk-based capital ratio is 10% or greater, its Tier I risk-based capital
ratio is 6% or greater, its 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, Tier
I capital ratio means the ratio of core capital to risk-weighted assets, and
leverage ratio means the ratio of core capital to adjusted total assets, in each
case as calculated in accordance with current OTS capital regulations. As of
December 31, 1997 and 1996, the most recent notification from the OTS
categorized BVB as well capitalized. There are no conditions or events since
that notification that management believes have changed BVB's category.
Under capital guidelines enacted by FDICIA, BVB met the criteria for the "well
capitalized" standard and is summarized as follows:
-----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------------------------
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
-------------------------------- ----------------------------------- ----------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ --------------- --------------- --------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Leverage $203,308 6.36% $159,830 5.00% $43,478 1.36%
Tier I risk-based $203,308 9.67% $126,122 6.00% $77,186 3.67%
Total risk-based $228,532 10.87% $210,204 10.00% $18,328 0.87%
------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996
------------------------------------------------------------------------------------------------------------------
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
---------------------------------- ----------------------------------- ---------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- --------------- --------------- --------------- --------------- -------------
Leverage $168,782 5.64% $149,716 5.00% $19,066 0.64%
Tier I risk-based $168,782 9.49% $106,731 6.00% $62,051 3.49%
Total risk-based $190,981 10.74% $177,885 10.00% $13,096 0.74%
77
Currently, the OTS has deferred implementation of the interest rate risk
component for institutions with a greater than "normal" (i.e. greater than 2%)
level of interest rate risk exposure. As of December 31, 1997, if the interest
rate risk component regulation had been implemented, BVB would not have been
subject to an interest rate risk capital deduction for risk-based capital
purposes.
The Company is a legal entity separate and distinct from BVB. The Company's
principal source of funds on an unconsolidated basis is expected dividends from
its wholly owned subsidiaries. Dividends declared by BVB to the Company were
$13.0 million in 1997, $0 in 1996, and $29.4 million in 1995. There are various
statutory and regulatory limitations on the extent to which BVB can pay
dividends to, make investments in or loans to, or otherwise supply funds to the
Company. Based on the current financial status of BVB, the Company believes
that such limitations and restrictions will not impair the Company's ability to
continue to pay the current level of dividends.
Bay View Credit
Effective December 31, 1997, BVC was de-regulated. BVC is a subsidiary of
BVAC, which is a subsidiary of BVB. Accordingly, BVC had no regulatory capital
requirements at December 31, 1997.
As of December 31, 1996, the most recent notification from the FDIC
categorized BVC as well capitalized. BVC's capital ratios at December 31, 1997
were as follows:
-----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------------------------
WELL CAPITALIZED
ACTUAL REQUIREMENT EXCESS
---------------------------------- ----------------------------------- --------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- --------------- --------------- --------------- --------------- ------------
(DOLLARS IN THOUSANDS)
Leverage $43,462 9.50% $22,885 5.00% $20,577 4.50%
Tier I Risk-based $43,462 9.97% $26,164 6.00% $17,298 3.97%
Tier II Risk-based $48,913 11.33% $43,179 10.00% $ 5,734 1.33%
BVC declared and paid a dividend of $15 million in 1996 to return excess
capital to the Company.
NOTE 15. STOCK REPURCHASE PROGRAM
During 1995, the Company's Board of Directors authorized a stock repurchase
program enabling the Company to purchase up to 1,200,000 shares (all share
amounts effected for stock split) of the Company's common stock which was
subsequently increased in 1996 to a total of 1,600,000 shares authorized for
repurchase. As of December 31, 1996, the Company had completed its previously
announced stock buy back of 1,600,000 shares (600,000 shares in 1995 and
1,000,000 shares in 1996) which were repurchased at an average cost of $15.99.
In January 1997, the Company's Board of Directors authorized the repurchase of
$25 million in shares of the Company's common stock and in May 1997 an
additional $25 million was approved. During 1997, the Company repurchased
1,399,000 shares of its common stock at an average price of $28.48. In December
1997, the Company's Board of Directors rescinded the remaining share repurchase
authorization. In January 1998, the Company's treasury shares were reissued in
conjunction with the acquisition of AFEH discussed in Note 2.
78
NOTE 16. STOCK OPTIONS
As of December 31, 1997, the Company had three stock option plans: the
"Amended and Restated 1986 Stock Option and Incentive Plan", the "1995 Stock
Option and Incentive Plan" and the "1989 Non-Employee Director Stock Option
Plan", which authorize the issuance of up to 1,759,430, 2,000,000 and 550,000
shares of common stock, respectively. The plans provide for the grant of a
variety of long-term incentive awards to directors, officers and employees as a
means of enhancing and encouraging the recruitment and retention of those
individuals on whom the continued success of the Company most depends. The
exercise price for the purchase of shares subject to a stock option at the date
of grant generally may not be less than 100% of the market value of the shares
covered by the option on that date and the options generally vest over a periods
ranging from 6 months to 3 years.
The following table summarizes the stock options available for grant as of
December 31, 1997:
------------------------------------------------------------------------------------------
1989
NON-EMPLOYEE
1986 STOCK 1995 STOCK DIRECTOR
OPTION PLAN OPTION PLAN OPTION PLAN TOTAL
------------------ ----------------- ------------------ ------------------
Shares reserved for issuance 1,759,430 2,000,000 550,000 4,309,430
Granted (2,048,816) (1,443,000) (516,000) (4,007,816)
Canceled 290,074 198,500 20,000 508,574
Expired (688) - - (688)
------------------ ----------------- ------------------ ------------------
Total available for grant 0 755,500 54,000 809,500
================== ================= ================== ==================
At December 31, 1997, the Company had outstanding options for all three plans
with expiration dates from 1998 to 2007, as follows:
----------------------------------------------------------------------------------------
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
OPTION SHARES RANGE PRICE PER SHARE
------------------------ ------------------------ ---------------------------
Outstanding at January 1, 1995 1,059,170 $ 6.97-11.94 $ 9.14
Granted 434,000 9.37-13.31 12.28
Exercised (477,232) 6.97-11.06 9.00
Canceled (38,844) 8.75-12.50 11.46
------------------------ ------------------------ ---------------------------
Outstanding at December 31, 1995 977,094 6.97-13.31 10.51
Granted 424,000 13.47-18.87 16.01
Exercised (202,204) 6.97-12.50 9.20
Canceled (44,000) 12.50-12.81 12.78
------------------------ ------------------------ ---------------------------
Outstanding at December 31, 1996 1,154,890 7.28-18.87 12.67
Granted 901,000 6.97-34.41 28.71
Exercised (118,990) 6.97-17.50 10.15
Canceled (178,500) 6.97-28.44 26.13
------------------------ ------------------------ ---------------------------
Outstanding at December 31, 1997 1,758,400 $ 7.88-34.41 $19.70
======================== ======================== ===========================
Options exercisable
at December 31, 1997 830,300 $ 7.88-34.41 $13.01
======================== ======================== ===========================
79
The following table summarizes information about stock options outstanding at
December 31, 1997:
-------------------------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
------------------------------------------------------------ ------------------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING LIFE WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 (IN YEARS) EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
- --------------- ----------------- ------------------ ----------------- ----------------- ------------------
$ 7.88 - 13.31 617,000 5.79 $10.91 577,000 $10.80
$ 13.47 - 25.50 610,900 8.56 $19.04 253,300 $18.04
$ 25.53 - 34.41 530,500 9.66 $30.68 0 $ 0.00
- --------------- ----------------- ------------------ ----------------- ----------------- ------------------
$ 7.88 - 34.41 1,758,400 7.92 $19.70 830,300 $13.01
================= ================== ================= ================= ==================
Statement of Financial Accounting Standard (SFAS) 123 Pro Forma Disclosure
The Company accounts for its stock option grants in accordance with APB
Opinion No. 25 "Accounting for Stock Issued to Employees". Had compensation
cost been recorded based on the fair value method of SFAS 123, the Company's net
income and earnings per diluted share would have been as follows:
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net income (loss):
Actual $14,021 $10,969 $(4,690)
Pro forma $12,866 $10,255 $(5,239)
Net income (loss) per diluted share:
Actual $ 1.06 $ 0.79 $ (0.32)
Pro forma $ 0.98 $ 0.74 $ (0.35)
The fair value of options granted was estimated as of the date of grant based
on the Black-Scholes option pricing model given the following weighted-average
assumptions.
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
Dividend yield 1.25% 2.00% 2.50%
Volatility .31 .30 .30
Risk-free interest 5.67% 5.21% 7.78%
Expected term (years) 5.10 4.84 4.84
NOTE 17. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) thrift plan under which an employee with one or more
years of service may contribute from 2% to 15% of base salary to the plan. The
Company will match an employee's contribution up to 100% of the first 6% of the
employee's base salary, depending on the employee's length of service. The
Company's contributions for the years ended December 31, 1997, 1996 and 1995
were $1.4 million, $435,000, and $483,000 respectively.
Effective December 31, 1995, the Company modified its non-qualified defined
benefit retirement plan for non-employee members of its Board of Directors and
terminated its non-qualified supplemental retirement plan for executive officers
(collectively, the "Plans"). As of December 31, 1997, the Company had a $1.1
million liability to certain non-employee members of its Board of Directors
payable in 66,114 shares of the Company's common stock in satisfaction of the
retirement plan liability. Such shares were
80
repurchased in the market and are held in treasury and restricted as to issuance
until paid out. The liability is included in additional paid-in capital. As of
December 31, 1997, the Company had a $1.7 million liability to certain retired
Directors and executive officers (relating to the remaining benefits owed
pursuant to the terminated supplemental retirement plan for executive officers)
recorded as other liabilities.
The Company has an ESOP covering all regular full-time and part-time employees
who have completed one year of employment. The Company borrowed $6.0 million
from a financial institution which it in turn lent to the ESOP to purchase
shares of the Company's common stock in the open market. At December 31, 1997
and 1996, the ESOP held 275,286 and 314,196 shares, respectively, of the
Company's common stock. The interest rate paid by the Company on the ESOP debt
is based on 90% of the prime rate. Total interest expense incurred on the ESOP
debt was $316,000, $362,000 and $407,000 for the years ended December 31, 1997,
1996 and 1995, respectively. The interest expense recorded by the Company was
$224,000, $289,000, and $254,000, for the years ended December 31, 1997, 1996
and 1995, respectively. The Company makes periodic contributions to the ESOP
primarily to enable the ESOP to pay interest expense and administrative costs
not covered by cash dividends received by the ESOP on its shares of the
Company's common stock. Contributions from the Company to the ESOP on a cash
basis totaled $649,000 for 1997, $674,000 for 1996, and $609,000 for 1995.
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Exchange Agreements (Swaps)
At December 31, 1997 and 1996 the Company was party to interest rate swap
agreements with a notional principal amount of $449.3 and $421.0 million,
respectively. The information presented below is based on interest rates at
December 31, 1997 and 1996. To the extent that rates change, variable interest
rate information will change. The maturities and weighted average interest
rates for swap agreements outstanding as of December 31, 1997 are summarized as
follows:
---------------------------------------------------------------------------
MATURITIES OF DERIVATIVES INSTRUMENTS
---------------------------------------------------------------------------
1999 2000 2001 2002+ TOTAL
------------ ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Pay fixed generic swaps
Notional amount $67,750 $100,000 $104,000 $177,500 $449,250
Weighted average receive rate (3-month LIBOR) 6.19% 5.74% 5.78% 5.76% 5.83%
Weighted average pay rate (fixed) 6.31% 6.10% 6.72% 6.41% 6.40%
The maturities and weighted average interest rates for swap agreements
outstanding as of December 31, 1996 are summarized as follows:
---------------------------------------------------------------------------
MATURITIES OF DERIVATIVES INSTRUMENTS
---------------------------------------------------------------------------
1999 2000 2001 2002+ TOTAL
------------ ---------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Pay fixed generic swaps
Notional amount $39,500 $100,000 $104,000 $177,500 $421,000
Weighted average receive rate (3-month LIBOR) 5.55% 5.56% 5.53% 5.53% 5.54%
Weighted average pay rate (fixed) 6.67% 6.10% 6.72% 6.41% 6.44%
The interest rate swaps at December 31, 1997 and 1996 were collateralized by
loans and mortgage-backed securities totaling $9.1 million and $10.4 million,
respectively. The effect of interest rate swap agreements for the years ended
December 31, 1997, 1996 and 1995 was to increase interest expense by $2.8
million, $2.6 million, and $40,000, respectively.
81
Hedging Issuance of Subordinated Debt
During 1997, the Company entered into $105 million in Treasury rate lock
agreements to hedge the anticipated issuance of subordinated debt. These
agreements guaranteed a stated rate of interest for a stated period of time and
the Company paid the difference between the lock rate and the effective treasury
rate on the settlement date. In conjunction with the Treasury rate lock
agreements, approximately $307,000 was deferred and will be recognized as an
adjustment of net interest expense over the life of the subordinated debt.
Hedging Auto Loans Pending Securitization
As discussed in Note 4, in conjunction with the decision to sell BVC's motor
vehicle loans and their subsequent securitization by BVSC, management entered
into a short sale of Treasury securities that has materially insulated the
purchase accounting valuations from movements in interest rates. The short sale
transaction was paired-off in December 1996 with a loss of $293,000 recorded as
a loss on securities. At December 31, 1996, a Treasury rate lock agreement with
a notional principal amount of $210 million was entered into to hedge the motor
vehicle loans sale pending sale by BVC and securitization by BVSC.
NOTE 19. COMMITMENTS AND CONTINGENCIES
Banking Center Premises
In 1980, the Company sold a building which formerly housed its headquarters
for $3.45 million, and, concurrent with the sale, leased back the entire
building under a twenty-year lease which has been accounted for as a capital
lease. The Company occupies a minor portion of this building and receives
sublease rental income from the major portion, and is responsible for all
operating and maintenance expenses associated with the building. Sublease
rentals totaled $670,000, $389,000, and $385,000 during the years ended December
31, 1997, 1996 and 1995, respectively. During the years ended December 31,
1997, 1996 and 1995, depreciation on the capital lease was $303,000 for each
year. Accumulated depreciation at December 31, 1997 and 1996 was $3.2 million
and $2.9 million, respectively.
As of December 31, 1997, the Company and its subsidiaries occupied 56 offices
and the Company's administrative corporate office under operating lease
arrangements expiring at various dates through 2012. BVB owns the property in
which one of its branches is located. In 1996, the Company sold its corporate
office complex and entered into an operating lease arrangement for new
facilities. Also in 1996, BVC's corporate office complex was sold and BVC
relocated its administrative offices. Lease rental expense for the years ended
December 31, 1997, 1996 and 1995 totaled $5.6 million, $3.5 million, and $2.4
million, respectively.
82
Future minimum payments under lease obligations, including
approximately $2.0 million to be recovered from sublease rental arrangements
through 2001, are summarized as follows:
--------------------------------------------------
AT DECEMBER 31, 1997
--------------------------------------------------
CAPITAL LEASE OPERATING LEASE
PAYMENTS PAYMENTS
---------------------- ----------------------
(DOLLARS IN THOUSANDS)
1998 $ 910 $ 5,187
1999 965 4,587
2000 497 3,840
2001 - 3,039
2002 - 2,865
Thereafter - 19,390
---------------------- ----------------------
2,372 $38,908
======================
Less amount representing interest (420)
----------------------
Net capital lease obligation $1,952
======================
Mortgage Loans
As of December 31, 1997 the Company had outstanding commitments to originate
$10.9 million of mortgage loans. The Company has outstanding recourse and
subordination contingencies relating to $50.9 million of sold loans at December
31, 1997 (see Note 6).
Litigation
The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of business. In the opinion of management, after
consultation with counsel, the resolution of these legal actions will not have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
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." The
estimated fair value amounts have been determined by the Company using market
information and valuation methodologies considered appropriate. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
83
The fair value estimates presented herein are based on pertinent information
available to the Company as of December 31, 1997 and 1996. Although the Company
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
---------------------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------- -------------------------------------------------------
(DOLLARS IN THOUSANDS)
Assets
Cash and cash equivalents $ 231,822 $ 231,822 $ 106,828 $ 106,828
Loans held for sale - - 294,949 295,849
Investment securities 10,639 10,654 29,006 28,914
Mortgage-backed securities 470,261 468,382 577,613 566,615
Loans receivable (1) 2,373,113 2,385,822 2,179,768 2,199,646
Investment in stock of the FHLBSF 61,012 61,012 51,891 51,891
Liabilities
Transaction accounts 553,820 553,820 493,571 493,571
Fixed maturity deposits 1,123,315 1,121,654 1,270,396 1,273,581
Advances from the FHLBSF 1,110,270 1,114,463 977,750 980,775
Securities sold under agreements to repurchase 90,134 90,355 210,640 211,341
Debentures and notes 149,372 152,961 50,000 50,166
(1) Carrying amounts are net of allowance for losses
---------------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
---------------------------------------------------------------------------------------
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
------------------------------------------ ---------------------------------------
CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT GAIN/(LOSS) AMOUNT (GAIN)/LOSS
------------------- ------------------ ------------------ ----------------
(DOLLARS IN THOUSANDS)
Interest rate swaps $ 2,835 $ (891) $ 549 $ (3,335)
=================== ================== ================== ================
Treasury rate lock $ - $ - $ - $ 33
=================== ================== ================== ================
The Company believes the carrying amounts of cash and cash equivalents and
investment in stock of the FHLBSF are reasonable estimates of their fair values.
The fair values of investment securities and mortgage-backed securities were
based on published market prices or quotes obtained from independent registered
securities brokers.
The estimated fair value of loans receivable held for investment was
determined by discounting the projected cash flows using current interest rates
at which similar loans would be made to borrowers of similar credit risk.
Prepayment estimates were based on historical experience and published data for
similar loans. Fair values for loans available for sale are based on prices for
similar loans in the secondary loan market.
The fair value of transactions accounts (demand deposits, savings accounts and
money market accounts) is the amount payable on demand and is assumed to equal
the carrying amount. The fair value of fixed maturity deposits for BVB was
estimated using the rates currently offered for certificates of deposit with
similar remaining maturities.
84
Rates currently available to the Company for debt with similar terms and
remaining maturities were used to estimate the fair value of existing debt,
including advances from the FHLBSF, securities sold under agreements to
repurchase, and senior debentures and subordinated notes.
The unrealized loss on interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the swap agreements at the reporting
date, taking into account current interest rates and the current
creditworthiness of the swap counterparties. The unrealized gain on the
Treasury rate lock is the estimated amount that the Company would receive to
terminate the agreement with the counterparty.
85
NOTE 21. PARENT COMPANY FINANCIAL INFORMATION
The Parent Company's condensed statements of financial condition and related
condensed statements of operations and cash flows are as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
------------------------------------------------------------
AT DECEMBER 31,
------------------------------------------------------------
1997 1996
--------------------------- ---------------------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash in Bank $ 539 $ 795
Investment securities 199 1,210
Investment in and advances to subsidiaries 316,972 246,420
Other assets 17,036 2,899
--------------------------- ---------------------------
Total Assets $334,746 $251,324
=========================== ===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 11,747 $ 1,262
Debentures and notes 149,372 50,000
Stockholders' equity 173,627 200,062
--------------------------- ---------------------------
Total Liabilities and Stockholders' Equity $334,746 $251,324
=========================== ===========================
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ---------------
(DOLLARS IN THOUSANDS)
Income:
Dividends from subsidiaries $13,000 $ 3,029 $ 29,400
Interest income 2,658 1,548 1,529
-------------------- -------------------- ----------------
15,658 4,577 30,929
-------------------- -------------------- ----------------
Expense:
Interest on debentures and notes 7,746 2,623 -
General and administrative expense 9,456 1,234 582
Income tax expense (benefit) (6,120) (997) 383
-------------------- -------------------- ----------------
11,082 2,860 965
-------------------- -------------------- ----------------
Income before undistributed net income (loss) of subsidiaries 4,576 1,717 29,964
Undistributed net income (loss) of subsidiaries 9,445 9,252 (34,654)
-------------------- -------------------- ----------------
Net income (loss) $14,021 $10,969 $ (4,690)
==================== ==================== ================
86
CONDENSED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,021 $ 10,969 $ (4,690)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Undistributed net (income) loss of subsidiaries (9,445) (9,252) 34,654
Dividends received (receivable) - 25,000 (25,000)
Increase in other assets (14,137) (2,076) -
Increase in other liabilities 10,485 1,829 -
Other 5,168 (906) (48)
-------------------- -------------------- --------------
Net cash provided by operating activities 6,092 25,564 4,916
-------------------- -------------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash and cash equivalents
received (9,975) (61,505) -
Maturity of investment securities held to maturity 1,210 (200) -
Purchase of investment securities held to maturity (199) - -
Net change in advances to subsidiaries - 6 15
Return of investment from subsidiaries - 11,971 -
Demand note due from subsidiaries (53,667) (456) (1,661)
-------------------- -------------------- -----------------
Net cash used in investing activities (62,631) (50,184) (1,646)
-------------------- -------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to stockholders (4,419) (4,137) (4,374)
Issuance of subordinated notes, net of discount 99,350 - -
Issuance of senior debentures - 50,000 -
Repurchase of common stock (39,855) (24,359) (2,279)
Proceeds from issuance of common stock 1,207 1,864 4,294
-------------------- -------------------- -----------------
Net cash provided by (used in) financing activities 56,283 23,368 (2,359)
-------------------- -------------------- -----------------
Net increase (decrease) in cash (256) (1,252) 911
Cash at beginning of year 795 2,047 1,136
-------------------- -------------------- -----------------
Cash at end of year $ 539 $ 795 $ 2,047
==================== ==================== =================
87
NOTE 22. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 (1)
-----------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Interest income $58,243 $59,339 $61,737 $62,925
Net interest income 21,055 21,768 22,368 22,145
Provision for losses on loans 565 612 651 124
Net income 5,262 4,504 3,064 1,191
Basic earnings per share 0.40 0.35 0.24 0.10
Diluted earnings per share 0.39 0.34 0.23 0.09
------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 (1)
------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER (2) QUARTER
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Interest income $53,409 $57,094 $66,028 $65,224
Net interest income 16,214 18,837 22,878 23,053
Provision for losses on loans 600 498 400 400
Net income (loss) 3,993 4,216 (2,108) 4,868
Basic earnings (loss) per share 0.28 0.31 (0.15) 0.37
Diluted earnings (loss) per share 0.28 0.30 (0.15) 0.36
(1) Includes the acquisitions of BVC effective June 1996, CGC effective April 1997 and Ultra effective October 1997.
(2) Includes SAIF recapitalization assessment (see note 14).
NOTE 23. SIGNIFICANT FOURTH QUARTER 1995 ADJUSTMENTS
The following significant fourth quarter adjustments were recorded in the 1995
Consolidated Statement of Operations:
----------------------
AMOUNT
----------------------
(DOLLARS IN
THOUSANDS)
Write-down of corporate office complex (see Note 7) $ 7,100
Prepayment penalties on FHLBSF advances, pretax (see Note 10) 4,422
Severance payments related to work force reductions and pension plans 1,449
Core deposit premiums written-off (see Note 8) 854
Goodwill written-off (see Note 8) 758
----------------------
Total $14,583
======================
88
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of 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, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Bay View Capital
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
San Francisco, California
January 26, 1998
89
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 Executive Officers of the Company is contained under
the heading "Executive Officers of the Registrant" on page 13 herein.
Information concerning directors of the Registrant and compliance with the
reporting requirements of Section 16(a) of the Securities Exchange Act of 1934
by the Registrant's directors, executive officers and beneficial owners of
greater than ten percent of the Company's equity securities is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on May 28, 1998, a copy of which
will be filed not later than 120 days after the close of the fiscal year. The
compensation report and performance graph included in the Proxy Statement
pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 28, 1998, a copy of which will be
filed not later than 120 days after the close of the fiscal year. The
compensation report and performance graph included in the Proxy Statement
pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
May 28, 1998, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on May 28, 1998, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
All financial statement schedules have been omitted as the required
information is not applicable or has been included in the Notes to Consolidated
Financial Statements.
90
(a) (3) Exhibits:
- ------------------
Regulation Reference to prior
S-K filing or exhibit
Exhibit number attached
Number Document 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 4a
Stockholder Protections Rights Agreement, dated July 31,
1990 (the "Rights Agreement") 4b
First Amendment to the Rights Agreement, dated February 26, 1993 4c
Second Amendment to the Rights Agreement, dated October 10, 1997 4d
Form of Rights Certificate and of Election to Exercise pursuant to the
Rights Agreement 4d
9 Voting trust agreement None
10 Material contracts:
Employment Contracts with Edward H. Sondker 10a
Employment Contracts with Richard E. Arnold 10.1
Employment Contracts with John N. Buckley 10a
Employment Contracts with Robert J. Flax 10a
Employment Contracts with David A. Heaberlin 10a
Employment Contracts with Ronald L. Reed 10.2
Supplemental Executive Retirement Plan 10b
Senior Management Incentive Plan 10c
Senior Management Long-Term Incentive Plan 10d
1986 Stock Option and Incentive Plan 10e
Amended and Restated 1989 Non-Employee Director Stock Option Plan 10f
Amended Outside Directors' Retirement Plan 10a
Stock in Lieu of Cash Compensation Plan for Non-Employee Directors 10a
Deferred Compensation Plan 10a
Amended and Restated 1995 Stock Option and Incentive Plan 10g
11 Statement re computation of per share earnings Not required
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 Deloitte & Touche LLP 23
24 Power of attorney Not required
27 Financial Data Schedule for year ended December 31, 1997 27.1
Restated Financial Data Schedule for the quarters ended September 30, 1997,
June 30, 1997, March 31, 1997, and year ended December 31, 1996 27.2
Restated Financial Data Schedule for the quarters ended September 30, 1996,
June 30, 1996, and March 31, 1996 27.3
99 Additional Exhibits None
91
(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 I to the Registrant's Current Report on Form 8-K filed
January 10, 1994 (File No. 0-17901)
4a Filed as exhibit 4.3 to the Registrant's Registration Statement on Form S-8
filed July 26, 1991 (File No. 33-41924)
4b Filed as exhibit 1 to the Registrant's Registration Statement on Form 8
filed March 9, 1993 (the second amendment to a Form 8-A filed August 6,
1990)(File no. 0-17901)
4c Filed as exhibit 3 to the Registrant's Registration Statement on Form 8
filed March 9, 1993 (the second amendment to a Form 8-A filed August 6,
1990)(File no. 0-17901)
4d Filed as exhibit 4 to the Registrant's Registration Statement on Form 8-A,
as amended on Form 8-A/A-3, filed on October 10, 1997 (File No. 0-17901)
4e 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 Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-17901)
10b-d Filed as exhibits 10.6 to 10.8 respectively, to the Registrant's Annual
Report on Form 10-K filed March 30, 1993 for the year ended December 31,
1992 (File No. 0-17901)
10e Filed as exhibit 4 to the Registrant's Registration Statement on Form S-8
filed August 11, 1995 (File No. 33-95724)
10f Filed as exhibit 4.4 to the Registrant's Registration Statement on Form S-8
filed July 26, 1991 (File No. 33-41924)
10g Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, as amended on Form 10-K/A on June 27,
1997 (File No. 0-17901)
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:
- -------------------------
The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 1997.
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 30, 1998 BAY VIEW CAPITAL CORPORATION
By:/s/ David A. Heaberlin
-----------------------
David A. Heaberlin
Executive Vice President and
Chief Financial Officer
92
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. McKean By: /s/ Edward H. Sondker
------------------ ---------------------
John R. McKean Edward H. Sondker, Director
Chairman of the Board President and Chief Executive Officer
Date: March 30, 1998 Date: March 30, 1998
By: /s/ Paula R. Collins By: /s/ George H. Krauss
---------------------- ---------------------
Paula R. Collins, Director George H. Krauss, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Roger K. Easley By: /s/ Stephen T. McLin
------------------- ---------------------
Roger K. Easley, Director Stephen T. McLin, Director
Date: March 30, 1998 Date: March 30, 1998
By: /s/ Thomas M. Foster By: /s/ Angelo J. Siracusa
-------------------- -----------------------
Thomas M. Foster, Director Angelo J. Siracusa, Director
Date: March 30, 1998 Date: March 30, 1998
By: /s/ Robert M. Greber By: /s/ W. Blake Winchell
--------------------- ---------------------
Robert M. Greber, Director W. Blake Winchell, Director
Date: March 30, 1998 Date: March 30, 1998
93