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United States
SECURITIES AND EXCHANGE COMMISSION

For the fiscal year ended December 31, 2002

OR

Commission file number 0-14879

BAY VIEW CAPITAL CORPORATION

Registrant’s telephone number, including area code: (650) 312-7200
Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    YES [X]   NO [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    YES [X]   NO [  ]

     The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002 was $397,689,194, based upon the price at which the common equity was last sold on the New York Stock Exchange as of such date.

DOCUMENTS INCORPORATED BY REFERENCE

     Part III of Form 10-K – Portions of the definitive Proxy Statement for Registrant’s 2002 Annual Meeting of Stockholders to be filed not later than April 24, 2003 with the Securities and Exchange Commission are incorporated by reference in Items 10, 11, 12 and 13.

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FORM 10-K

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Forward-Looking Statements

     This Form 10-K Annual Report contains forward-looking statements that describe the implementation and timing of the Plan of Dissolution and Stockholder Liquidity (the “Plan”) adopted by the stockholders of Bay View Capital Corporation (the “Company”) on October 3, 2002. These forward-looking statements are necessarily based on assumptions as of the date of this Form 10-K Annual Report and involve risks and uncertainties. Accordingly, the results of the Company’s dissolution and the timing and amounts of stockholder distributions may differ materially from those that the Company currently anticipates. The factors that may affect these forward-looking statements include the following:

•

The distributions the Company proposes to make in the future to its stockholders are subject to a number of contingencies. The factors that could reduce the amounts ultimately distributed or that could cause a delay in making the distributions include the following:

	•		Until the dissolution of Bay View Bank, N.A. (the “Bank”) is completed later this year, a number of actions the Company and the Bank intend to take, including distributions to the Company’s stockholders, cannot be taken unless approvals are obtained from the Board of Governors of the Federal Reserve System (the “FRB”) in the case of the Company and the Office of the Comptroller of the Currency (the “OCC”) in the case of the Bank;
	•		Unforeseen delays in the disposition of the assets of the Company and the Bank and their formal dissolution may occur;
	•		The realization of the Company’s deferred tax assets could be less than the Company currently projects;
	•		The Company and the Bank may encounter difficulty in selling some of their assets, and certain assets may not be able to be sold for the prices the Company and the Bank currently anticipate;
	•		The Company and the Bank may not be able to discharge certain liabilities for the amounts the Company and the Bank currently estimate;
	•		The Company and the Bank may incur or discover presently unanticipated claims, liabilities or expenses;
	•		The Company’s ability to obtain commercial financing to fund the ongoing operations of our auto lending business, Bay View Acceptance Corporation (“BVAC”);
	•		The amounts the Bank is able to distribute to the Company and the amounts the Company is able to distribute to its stockholders could be adversely affected by the results of operations of the Company’s and the Bank’s remaining operations, particularly in the case of BVAC while the dissolution process is being implemented;
	•		The estimates of the distribution amounts include projections of future events and performance as distant as 2006 and, accordingly, are inherently subject to many uncertainties;
	•		The expenses of the disposition of assets and the dissolution proceeds may exceed the amounts currently estimated; and
	•		Court proceedings could restrict or delay distributions to stockholders if claimants or creditors satisfy the court that the amounts to be distributed by the Bank or the Company to stockholders are needed to provide for the payment of expenses and liabilities of the Company or the Bank; or, if the amounts ultimately required to discharge the expenses and liabilities of the Company or the Bank in full exceeds the value of the remaining assets of the Company or the Bank, respectively.

•

The Company’s stockholders could be liable to the extent they receive distributions in the event the Company does not make adequate provision for all of its expenses and liabilities, including its contingent liabilities, as part of its dissolution.

     As a result of the foregoing factors, there can be no assurance that the anticipated stockholder distributions from the implementation of the Plan will be consistent with those described in any forward-looking statements. Accordingly, no stockholder should place undue reliance on any forward-looking statements. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements and all forward-looking statements speak only as of the date made.

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Part I

Item 1. Business

General and Business Overview

     Bay View Capital Corporation, a Delaware corporation organized in 1989 (the “Company”), is a bank holding company headquartered in San Mateo, California. The Company’s principal subsidiary is Bay View Bank, N.A. (the “Bank”). On November 1, 2002, the Bank’s 57 branches were sold as part of Bay View’s sale of the Bank’s retail banking assets to U.S. Bank, as approved by the stockholders of the Company. (See Note 1 to the Consolidated Financial Statements, “Basis of Presentation,” at Item 8, “Financial Statements and Supplementary Data” for further information on our subsidiaries).

     On August 6, 2002, the Company’s Board of Directors adopted a Plan of Dissolution and Stockholder Liquidity (the “Plan”) pursuant to which the Company, under applicable provisions of the Delaware General Corporation Law, will:

	•		dispose of all of its assets, including all of the assets of the Bank;
	•		pay all of its debts and liabilities and make reasonable provision for any contingent liabilities;
	•		distribute the remaining proceeds from its asset sales to its stockholders; and
	•		dissolve.

     The Company’s stockholders authorized the Plan on October 3, 2002. For further information regarding the Plan, including the full text of the Plan, reference is made to the Company’s September 13, 2002 proxy statement relating to the October 3, 2002 special meeting of stockholders.

     The background of the Plan is as follows:

•     As previously reported, the substantial losses the Company suffered in 2000 materially adversely affected the Company’s regulatory capital levels as well as those of the Bank. The adverse effect on the regulatory capital levels of the Company and the Bank resulted in the imposition of written regulatory agreements pursuant to 12 U.S.C. 1818(b) by the Board of Governors of the Federal Reserve System (the “FRB”) with respect to the Company and by the Office of the Comptroller of the Currency (the “OCC”) with respect to the Bank. Although both the Company and the Bank are now “well-capitalized” within the meaning of the risk-based capital guidelines of the FRB and the OCC and have complied with all of the provisions of the written regulatory agreements, it is likely that the written regulatory agreements will remain in effect until the dissolution of the Bank.

•     In March 2001, in light of the critical financial condition and the uncertain future of the Company and the Bank, the Company and the Bank retained new management to develop and implement a strategic plan to restore the financial stability of the Company and the Bank. The principal elements of the strategic plan were the sale of the Bank’s higher risk assets, including the sale of its franchise loan servicing operations and franchise loans, and a renewed focus on the Bank’s commercial and retail banking platforms.

•     Following the significant and successful turnaround actions undertaken and completed in 2001 under the strategic plan, the Company began active consideration of various alternatives to maximize its value to its stockholders. •     The Company retained Credit Suisse First Boston Corporation to assist the Company in evaluating a variety of transactions. Through this evaluation process, the Company determined that greater stockholder value could be obtained by adopting the Plan and selling the Company’s and the Bank’s assets to a series of purchasers rather than by an alternative approach such as selling or merging the Company or the Bank as a whole.

     As a result of the decision to proceed with the Plan, the Company and the Bank are primarily engaged in asset disposition activities. The two principal asset disposition transactions effected to date have been the sale of

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approximately $1.0 billion of multifamily and commercial real estate loans to Washington Mutual Bank, FSA in August 2002 and the sale of the Bank’s retail banking assets (the Bank’s deposits, branches and branch, MoneyCare and service center operations), as well as approximately $327.7 million of single family residential mortgages, home equity and commercial loans, to U.S. Bank National Association on November 1, 2002.

     Since November 1, 2002, the Bank has not operated any branches, has not accepted any deposits, and has not otherwise conducted traditional banking activities. Our principal business activity as a commercial bank in liquidation is to earn interest on the remaining loans, leases and investment securities that are funded by borrowings. The difference between interest received and interest paid comprises the majority of our operating earnings. As we continue to sell our assets and repay our liabilities, these operating earnings will contract. The only significant subsidiary of the Bank that is currently conducting on-going operations is Bay View Acceptance Corporation (“BVAC”). BVAC is an automotive finance company engaged primarily in the indirect financing (the purchase of loan contracts from dealers) of automotive purchases by individuals. BVAC currently acquires automobile receivables from over 6,500 manufacturers franchised automobile dealerships in 17 states. At December 31, 2002, the Company had brokered deposits outstanding which provided a significant source of funding for our lending operations. The operating results of our major business segments prior to September 30, 2002 are accounted for and presented by platform. (See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further details and financial information related to our Retail Platform and our Commercial Platform).

     The Company currently anticipates that the dissolution of the Bank will be completed by third quarter 2003, at which time the Company will no longer be a bank holding company subject to regulation by the FRB. The Company further anticipates that its dissolution will be completed by September 2005.

Lending and Leasing Activities

     As of December 31, 2002, our on-going lending activities consist solely of consumer auto lending. All other types of lending were ceased in 2002, or were in the process of liquidation. The following descriptions are provided as a reference to those loan portfolios with outstanding balances at December 31, 2002. All outstanding balances at December 31, 2002 are at their net realizable value and are all classified as held-for-sale.

Consumer Lending

     Automobile Financing - At December 31, 2002, auto loans totaled $142.4 million, representing 45.8% of our loan and lease portfolio. Additionally, auto operating lease assets, excluded from our loan and lease portfolio, totaled $191.0 million at December 31, 2002, representing 21.8% of our consolidated assets. We ceased purchasing auto leases in 2000. We underwrite and purchase fixed-rate prime auto loans on new and used vehicles on an indirect basis. The auto leases are accounted for as operating leases and the lease asset is capitalized and depreciated to its estimated residual value over the term of the lease.

     We underwrite all loans that we purchase. Our underwriting standards focus on the borrower’s ability to repay, as demonstrated by debt-to-income ratios, as well as the borrower’s willingness to repay, as demonstrated by the results of our proprietary credit scoring system.

     We periodically securitize and/or sell our auto loans. During 2002, we securitized and sold $453 million of auto loans. We retained an interest in this securitization with an initial balance of $23.2 million.

Commercial Lending

     Asset-Based Lending, Syndicated Loans, Factoring and Equipment Leasing - At December 31, 2002, our commercial loans and leases, excluding franchise loans and business loans and lines of credit, totaled $104.3 million, representing 33.6% of our loan and lease portfolio. Approximately $91.9 million of the loans and leases outstanding at December 31, 2002 were asset-based loans, $10.7 million in syndicated loans, another $0.7 million of the balance were related to receivable factoring and $1.0 million were equipment leases. On January 31, 2003, $71.0 million of asset-based loans were sold.

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Asset-based loans and factored receivables are primarily adjustable-rate loans based on the prime rate index. Equipment leases are fixed-rate direct financing leases. We have employed underwriting procedures which include, among other things, continuous reviews of the borrower’s financial condition and periodic audits of the receivables, equipment or other assets securing the loans and leases.

     Business Loans and Lines of Credit - At December 31, 2002, our business loans totaled $7.2 million, representing 2.3% of our loan and lease portfolio. Coincident with the sale of the Bank’s retail banking assets, we have ceased originating business loans and lines of credit.

     Franchise Lending - At December 31, 2002, our commercial franchise loans totaled $46.9 million, representing 15.1% of our loan and lease portfolio. We ceased the purchase and origination of franchise loans in September 2000. Since then, we have focused on disposing of our franchise assets through loan sales. During 2002, franchise loan sales, as well as loan payoffs and amortization have helped reduce our franchise loan concentration to $46.9 million at December 31, 2002 from $160.1 million at December 31, 2001.

     Our franchise loans are primarily fully amortizing, long-term, fixed- or adjustable-rate loans provided for the purpose of acquisition or refinance of existing business units. These loans generally have a maximum term of up to 20 years and maximum amortization of up to 25 years. Fixed-rate loans are based upon U.S. Treasury rates at the time of funding plus a credit spread. Adjustable-rate loans are tied to LIBOR plus a credit spread and generally reprice on a monthly basis. At December 31, 2002, total franchise loans included $27.5 million of loans to restaurant operators and $19.4 million of loans to gas station/convenience store and truckstop operators.

Real Estate Lending

     Multi-Family Residential Mortgage Loans (five or more units) - At December 31, 2002, loans secured by multi-family residential real estate totaled $2.4 million, representing 0.8% of our gross loan and lease portfolio. The loans that we hold in our portfolio are primarily fully-amortizing ARMs with original terms of 30 years or 15-year ARMs with monthly payments calculated on a 30-year amortization period with a balloon payment due at maturity.

     Nonresidential Commercial Real Estate Loans - At December 31, 2002, loans secured by nonresidential commercial real estate totaled $7.7 million, representing 2.5% of our loan and lease portfolio. The majority of our commercial real estate loans are ARMs. ARMs secured by commercial real estate are generally made on the same terms and conditions as ARMs secured by multi-family residences.

     We employ monitoring procedures which include, among other things, continuous reviews of the borrower’s financial condition and business results. We focus on the cash flow of the business and the continuing ability of the borrower to operate the business unit in a cash positive manner since cash from operations represents the primary source of repayment over the life of the loan.

Investing Activities

     At December 31, 2002, our investment portfolio totaled $70.7 million. Our portfolio includes mortgage-backed securities issued by Fannie Mae and Freddie Mac and senior tranches of private issue collateralized mortgage obligations, or CMO’s. In addition to these securities, we also hold asset-backed securities, retained interests in loan and lease securitizations, and other short-term securities, including federal funds sold and commercial paper. At December 31, 2002, our investment portfolio consisted of $32.5 million of mortgage-backed securities, $6.3 million in asset-backed securities and $31.9 million in retained interests. During 2002, we sold $254.9 million of mortgage-backed and other investment securities.

     In accordance with liquidation basis accounting which we adopted as of September 30, 2002, all securities are classified as held-for-sale and recorded at their net realizable value based on published information or quotes by registered securities brokers. Adjustments to net realizable value, if any, are recorded on a quarterly basis in earnings

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through the adjustment for liquidation basis. Interest on securities continues to be accrued as income only to the extent considered collectible.

Deposit Activities

     During 2002, we sold all of Bay View Bank’s retail deposits to U.S. Bank as part of the transaction to sell the 57-branch retail banking business. During the second quarter of 2002, we began acquiring brokered certificates of deposit to provide additional liquidity in anticipation of funding the U.S. Bank sale transaction. At December 31, 2002, the Bank had $224.2 million in brokered deposits, all of which are scheduled to mature by March 31, 2003.

Borrowing Activities

     On December 31, 2001, we completed a financing secured by the contractual cash flows of our auto lease portfolio. The transaction was recorded as a secured financing in accordance with accounting principles generally accepted in the United States of America and resulted in an increase in other borrowings of approximately $136.5 million at December 31, 2001. The transaction was treated as a sale for tax purposes. As of December 31, 2002, the balance of other borrowings was $62.0 million.

     We are currently in the process of negotiating a revolving line of credit facility to finance BVAC’s current portfolio of automotive loans and its future originations of automotive loans. At December 31, 2002, the Company had brokered deposits outstanding which provided a significant source of funding for BVAC’s lending operations. This revolving line of credit is intended to replace the maturing brokered deposits. BVAC intends to periodically securitize and sell its production of automotive loans in order to repay the line of credit. There can be no assurances that the Company will be successful in obtaining this financing.

Debt

     At December 31, 2002, we had $90 million of debt outstanding comprised of 9.76% Capital Securities due December 31, 2028 issued in December 1998 by Bay View Capital I, a Delaware business trust we sponsor. The Capital Securities are callable at par on December 31, 2003.

Competition

     Due to limited nature of our current operations and the active implementation of our plan of dissolution and stockholder liquidity, our auto finance group is the only area of our business affected by competition. The competitive environment is a result primarily of changes in regulation, including the 1999 Financial Services Modernization Act, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. We compete for loans with commercial banks, finance companies and credit unions. Many of these competitors are much larger in total assets and capitalization, have greater access to existing and newly emerging capital markets and offer a broader range of financial services than Bay View. In addition, recent federal legislation may have the effect of further increasing the pace of consolidation within the financial services industry.

Economic Conditions, Government Policies and Legislation

     Our profitability, like most financial institutions, is dependent on interest rate differentials. In general, the difference between the interest rates we pay on our interest-bearing liabilities, such as deposits and other borrowings, and the interest rates we receive on our interest-earning assets, such as loans, leases and securities, comprises a significant portion of our earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment and the impact of future changes in domestic and foreign economic conditions that we cannot predict.

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Supervision and Regulation

General

     Bay View Capital Corporation and Bay View Bank are extensively regulated under federal law. This regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of our stockholders. Set forth below is a summary description of the material laws and regulations which relate to our operations. The description is qualified in its entirety by reference to the applicable laws and regulations. Upon completion of the anticipated voluntary liquidation of Bay View Bank, many of the described regulations will no longer apply.

Bay View Capital Corporation

     As a registered bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended, sometimes referred to as the BHCA. We are required to file with the Federal Reserve Board quarterly, semi-annual and annual reports, and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may conduct examinations of Bay View Capital Corporation and our subsidiaries.

     The Federal Reserve Board may require that we terminate an activity or terminate control of, or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity, or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of our banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, we must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming our equity securities.

     Under the BHCA and regulations adopted by the Federal Reserve Board, we and our nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services by Bay View Bank, N.A. Further, we are required by the Federal Reserve Board to maintain certain levels of regulatory capital.

     Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board’s regulations or both.

     Our securities are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. As such, we are subject to the information, proxy solicitation, insider trading and other requirements and restrictions of the Securities Exchange Act.

     Our common stock trades under the ticker symbol “BVC”, our capital securities trade under the ticker symbol “BVS”, and our Subordinated Notes trade under the ticker symbol “BVC 07”.

Bay View Bank, N.A.

     Bay View Bank, N.A., as a national banking association, is subject to primary supervision, examination and regulation by the Office of the Comptroller of the Currency, sometimes referred to as the OCC. To a lesser extent, Bay View Bank is also subject to regulations of the Federal Deposit Insurance Corporation, sometimes referred to as

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the FDIC, which insures our deposit accounts, and the Federal Reserve Board. Various remedies are available to the OCC if, as a result of an examination, it determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of Bay View Bank’s operations are unsatisfactory, or that Bay View Bank or its management is violating or has violated any law or regulation. Such remedies include the power to enjoin “unsafe or unsound practices”, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of Bay View Bank, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate Bay View Bank’s deposit insurance in the absence of action by the OCC and upon a finding that we are in an unsafe or unsound condition, are engaging in unsafe or unsound activities, or that our conduct poses a risk to the deposit insurance fund or may prejudice the interest of our depositors.

Agreements with Regulatory Agencies

     As previously discussed, during the third quarter of 2000, we entered into formal agreements with the OCC and the Federal Reserve Bank of San Francisco. (See Note 4 to the Consolidated Financial Statements, “Regulatory Matters,” at Item 8, “Financial Statements and Supplementary Data”).

Dividends and Other Transfers of Funds

     Bay View Bank is a legal entity separate and distinct from Bay View Capital Corporation. Bay View Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to us. In addition, the OCC has the authority to prohibit Bay View Bank from paying dividends, depending upon its financial condition, if such payment is deemed to constitute an unsafe or unsound practice. As a national bank, Bay View Bank may pay dividends in any one calendar year equal to its net earnings in that calendar year plus net earnings for the previous two calendar years, less any dividends paid during this three-year period. Under Bay View Bank’s current agreement with the OCC, dividends may not be declared or distributed to us without the prior written approval of the OCC.

     Bay View Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, Bay View Capital Corporation or other affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of our assets. Such restrictions prevent us from borrowing from Bay View Bank unless the loans are secured by designated amounts of specified collateral. Further, unless an exception applies, such secured loans and investments are limited for any one affiliate to 10% of Bay View Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited for all affiliates in total, to 20% of Bay View Bank’s capital and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving Bay View Capital Corporation and other controlling persons of Bay View Bank. Additional restrictions on transactions with affiliates may be imposed on Bay View Bank under the prompt corrective action provisions of federal law. See “Prompt Corrective Action and Other Enforcement Mechanisms.”

Capital Standards

     The Federal Reserve Board and the OCC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, and for items such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with a higher degree of credit risk, such as commercial loans.

     The federal banking agencies require a minimum ratio of qualifying total risk-based capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total

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average assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total average assets is 3%; otherwise, it is generally considered to be 4%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

     At December 31, 2002, we exceeded the minimum requirements necessary to be considered adequately capitalized while Bay View Bank exceeded both the minimum requirements as well as the requirements to be considered well-capitalized. (See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14 to the Consolidated Financial Statements, “Regulatory Capital Requirements,” at Item 8, “Financial Statements and Supplementary Data” for further discussion of our capital ratios).

Prompt Corrective Action and Other Enforcement Mechanisms

     Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios. The OCC, which regulates Bay View Bank, has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based upon its capital ratios: “well-capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”. At December 31, 2002, Bay View Bank exceeded the ratios required for classification as “well-capitalized”.

     An institution that, based upon its capital levels, is classified as well-capitalized, adequately capitalized or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. A significantly undercapitalized institution cannot be treated as critically undercapitalized unless its capital ratio actually warrants such treatment.

     Compliance with the standards set forth in the risk-based minimum capital guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends that Bay View Bank or Bay View Capital Corporation may pay. An insured depository institution is prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, if after such transaction the institution would be undercapitalized.

     In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency.

Safety and Soundness Standards

     The federal banking agencies have adopted guidelines designed to assist them in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and preventing those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for

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management and the Board of Directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient to maintain adequate capital and reserves.

Premiums for Deposit Insurance

     Bay View Bank’s deposit accounts are insured by the Savings Association Insurance Fund, or SAIF, as administered by the FDIC, up to the maximum amounts permitted by law. Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the institution’s primary regulator.

     The FDIC charges an annual assessment for the insurance of deposits based on the risk that a particular institution poses to its deposit insurance fund. The risk classification is based on an institution’s capital group and supervisory subgroup assignment. Although Bay View Bank sold most of its deposit accounts to U.S. Bank, it continues to maintain a portfolio of brokered deposits insured by the FDIC. Effective January 2, 2003, our total deposit insurance premium was 18.68 basis points per $100 of insured deposits (See Note 15 to the Consolidated Financial Statements, “Regulatory Capital Requirements,” at Item 8, “Financial Statements and Supplementary Data”).

Interstate Banking and Branching

     The BHCA permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide- and state-imposed concentration limits.

     Pursuant to its agreement with U.S. Bank, Bay View Bank has agreed that it will not establish deposit branches in Northern California for a period of three years from November 1, 2002.

Community Reinvestment Act and Fair Lending Developments

     Bay View Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act, or CRA, activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods. A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities.

     A bank’s compliance with its CRA obligations is based upon a performance-based evaluation system which bases CRA ratings on an institution’s lending, service and investment performance. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve Board will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. Based on an examination conducted April 3, 2000, Bay View Bank was rated “satisfactory” in complying with its CRA obligations.

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Employees

     At December 31, 2002, we had a total of 322 employees on a full-time equivalent basis, consisting of both full-time and permanent part-time employees, as follows:

     Our employees are not represented by any unions or covered by any collective bargaining agreements. We consider our relations with our employees to be satisfactory.

Executive Officers of the Registrant

     The following table sets forth certain information regarding the executive officers of the Registrant:

     The business experience of each of our executive officers is as follows:

     Mr. Cooper has served as a Director, President and Chief Executive Officer of Bay View Capital Corporation since October 2002. He joined Bay View in May 2001, initially serving as Executive Vice President and Chief Credit Officer. Previously, he served as Executive Vice President and Chief Credit Officer at Lone Star Bank of Dallas. Prior to joining Lone Star Bank, he was Senior Vice President of Loan Administration at Compass Bank in Dallas from 1996 to 2000. Mr. Cooper has more than 30 years of experience in the banking industry, including 13 years experience as a bank examiner with the FDIC.

     Mr. Badame has served as President of Bay View Acceptance Corporation since 1998. Prior to joining the Company, he served as Director of Operations for Triad Financial Corporation, a non-prime indirect automobile loan originator. He has over 25 years of experience in the indirect retail and wholesale automobile dealer financing business in a commercial bank environment, including management and executive positions with Bank of America, Marine Midland Bank and Imperial Thrift. Mr. Badame has also held sales, business and general management positions with General Motors, Chrysler and Honda franchisees in the retail automobile industry.

     Mr. Catalano, Senior Vice President, was promoted to General Counsel and Corporate Secretary of Bay View Capital Corporation in December 2002. Mr. Catalano joined Bay View in 1993 and served as Assistant General Counsel from 2000 to 2002. He has also served as Senior Counsel.

     Mr. Culley, Senior Vice President, has served as Director of Risk Management of Bay View Capital Corporation since August 2001. Previously he served as Vice President, Asset Quality for BancFirst in Oklahoma City from July 2000 to July 2001. Mr. Culley was self-employed as a bank consultant from April 1998 to July 2000. Mr. Culley has more than 30 years of experience in the banking industry including 10 years as a bank examiner for the Texas Department of Banking.

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     Mr. Okubo, Executive Vice President, was promoted to Chief Financial Officer of Bay View Capital Corporation in November 2002. Mr. Okubo joined Bay View in 1996 and has held various financial management positions, including Treasurer from June 2001 to his recent promotion and Controller for Bay View Bank from 1998 to 2001. Previously, he served as Executive Vice President and Chief Financial Officer of Home Federal Savings of San Francisco from 1993 to 1996.

     Ms. Soukiassian, Senior Vice President, was promoted to General Auditor in November 2002. Previously she served as Director of Corporate Projects of Bay View Capital Corporation from 1998 to 2002. Previously, she held management positions with KPMG Peat Marwick, LLP in Los Angeles from 1996 to 1998.

     There is no family relationship among the above officers. All executive officers serve at the discretion of the Board of Directors.

Item 2. Properties

     At December 31, 2002, we occupied a total of 18 offices plus our administrative corporate office under operating lease agreements expiring at various dates through the year 2012. In most instances, these lease arrangements include options to renew or extend the lease at market rates. We also own leasehold improvements, furniture and equipment at our offices and branches, all of which are used in our business activities.

Item 3. Legal Proceedings

     As previously reported on our Current Report on Form 8-K dated June 25, 2002, we entered into a settlement agreement with JP Morgan Chase Bank relating to the complaint filed against BVFMAC which we sold during 2001.

     We are involved as plaintiff or defendant in various other legal actions and are occasionally exposed to unasserted claims arising in the normal course of business. In the opinion of management, after consultation with counsel, the resolution of these other legal actions will not have a material adverse effect on our consolidated financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

     At a special meeting of our stockholders, held October 3, 2002, the stockholders considered the following two proposals:

1.		To authorize a plan of dissolution and stockholder liquidity under which we will sell or otherwise dispose of all of our assets, including the sale of the Bank’s retail banking assets to U.S. Bank, and, after we pay or make arrangements to pay our liabilities and expenses, we will distribute the net proceeds of our asset sales to our stockholders; and
2.		To approve the sale of the Bank’s retail banking assets to U.S. Bank pursuant to the terms of the Purchase and Assumption Agreement dated July 22, 2002 between the Bank and U.S. Bank.

The vote on these two proposals were as follows:

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Part II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     At December 31, 2002, our common stock was traded on the New York Stock Exchange under the stock symbol “BVC.” At December 31, 2002, 62,947,396 shares of our common stock were outstanding, which were owned by 1,424 stockholders of record.

     The following tables illustrate quarterly closing stock price activity for 2002 and 2001:

     No dividends were declared in 2002 and 2001. Our ability to pay dividends is subject to certain restrictions and limitations pursuant to applicable laws and regulations. During the third quarter of 2000 we entered into an agreement with the Federal Reserve Bank that, among other matters, requires prior approval of any dividend payments on our common stock. Our primary source of income is dividends from Bay View Bank. Bay View Bank is prohibited from paying dividends to us without prior approval of the OCC under its agreement with the OCC. (See Note 15 to the Consolidated Financial Statements, “Regulatory Capital Requirements,” at Item 8, “Financial Statements and Supplementary Data”).

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Item 6. Selected Financial Data - Five-Year Financial Information

⁽¹⁾     Includes the acquisitions of America First Eureka Holdings effective January 2, 1998, Franchise Mortgage Acceptance Company effective November 1, 1999 and Goodman Factors, Inc. effective February 1, 2000

⁽²⁾     Amounts at December 31, 2002 were prepared under the liquidation basis of accounting.

⁽³⁾     Amounts for the three months ended December 31, 2002 were prepared under the liquidation basis of accounting while the amounts for the first nine months of 2002 were presented on a going concern basis.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INDEX

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Strategic Overview

     Bay View Capital Corporation (the “Company”) is a commercial bank holding company headquartered in San Mateo, California. Our principal subsidiary is Bay View Bank, N.A. (the “Bank”) which, through October 31, 2002, operated a 57 full-service branch-banking network.

Our Strategy

     From 1996 to 1999, our strategy was to transform Bay View Bank from a traditional thrift to a commercial bank. During this period, we nearly doubled in size, replaced a majority of our mortgage-based loans with higher-yielding consumer and commercial loans and leases and transformed a significant portion of our deposits into lower-cost transaction accounts.

     We incurred substantial losses in 2000 that adversely affected our regulatory capital level and that of the Bank, and resulted in the imposition of written regulatory agreements. Since late 2000, our primary focus has been the restoration of our financial stability under the direction of new management that joined us in March 2001.

     In May 2001, we completed a rights offering and a concurrent offering to standby purchasers that generated aggregate gross proceeds of $137.5 million. With this additional capital, we implemented a new strategic plan that included exiting businesses inconsistent with a California-focused bank and included assumptions related to the liquidation of our remaining franchise-related assets and operations and our remaining high loan-to-value home equity loans. Our results for 2001 included specific charges consistent with our new strategic plan. The specific charges were primarily related to the stock sale of the legal entity Bay View Franchise Mortgage Acceptance Company (“BVFMAC”) and its related servicing platform, the disposition of franchise-related assets, restructuring charges primarily related to the reduction in our workforce announced in May 2001 and prepayment penalties related to a reduction in higher-cost borrowings.

     As a result of the significant and successful turnaround actions undertaken and completed in 2001 under the strategic plan, the Company began active consideration of various alternatives to maximize its value to its stockholders and retained Credit Suisse First Boston Corporation to assist in that process. We initially considered a variety of transactions. However, through this evaluation process, the Company determined that greater stockholder value could be obtained by adopting a plan of dissolution and selling selected assets of the Company and the Bank to more than one purchaser rather than by an alternative approach such as selling all of the Company or the Bank as a whole. We believe this fact is largely the result of the mismatch between the character of the Bank’s and the Company’s assets and liabilities, which resulted from strategies of prior management.

     On July 22, 2002, Bay View Bank executed a definitive agreement with U.S. Bank, a wholly owned subsidiary of U.S. Bancorp, pursuant to which U.S. Bank agreed to purchase Bay View Bank’s deposits, branches and branch and service center operations, as well as approximately $373.0 million of single family, home equity and commercial loans. Bay View Bank also executed a definitive agreement on the same date with Washington Mutual pursuant to which Washington Mutual would purchase approximately $1.0 billion of multi-family and commercial real estate loans from the Bank.

     On August 6, 2002, our Board of Directors approved a plan of dissolution and stockholder liquidity (the “Plan”). Under the Plan, we intend to dispose of our remaining assets in an orderly manner and to collect all additional monies owed to us. We have made and will continue to make adequate reserves for the payment of all of our liabilities and obligations, including all expenses related to the sale of our assets and the Plan. Our Board of Directors, at its discretion, may also set aside a contingency reserve to pay any claims that may arise against us, whether known or unknown. We will make one or more liquidating distributions to our stockholders, representing the net proceeds of our asset sales. Any liquidating distributions will be made to our stockholders based on their pro rata ownership of our common stock as of the record date to be established for each distribution.

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     It is not possible at this time to indicate an exact amount for the distributions we intend to make to our stockholders for a number of reasons, including: the need to obtain the Board of Governors of the Federal Reserve System (“FRB”) and Office of the Comptroller of the Currency (“OCC”) approval to make any distributions; possible negative post-closing purchase price adjustments pursuant to the Bank’s agreements with U.S. Bank and Washington Mutual; the proceeds that we in fact receive from the disposition of other assets that are not yet subject to purchase commitments could be less than we currently anticipate; and our expenses and other obligations prior to liquidation could be greater than we currently anticipate. As a result, no assurance can be given as to the amount of the distributions that will be made to our stockholders, either in cash or in the stock of operating companies.

     On September 6, 2002, the sale of $995.5 million of multi-family and commercial real estate loans to Washington Mutual was completed.

     Our stockholders approved the Plan and the sale of the Bank’s retail banking assets to U.S. Bank at a special meeting held on October 3, 2002. At a meeting also held on October 3, 2002, holders of the Capital Securities of Bay View Capital I approved a waiver of those provisions of the legal instruments governing the Capital Securities and the Company’s 9.76% Junior Subordinated Deferrable Interest Debentures that would, absent the waiver, prevent us from disposing of all of our assets pursuant to the Plan.

     As a result of the stockholders’ approval of the Plan and the close of the U.S. Bank transaction on November 1, 2002, we adopted liquidation basis accounting, effective September 30, 2002, in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

     On November 1, 2002, the Company completed the U.S. Bank sale transaction. At the closing of the transaction, U.S. Bank paid Bay View Bank the sum of: (i) a 14% deposit premium (based on the average daily balances of deposits for the 30 calendar days ending on the business day prior to the closing date) plus $5.0 million, or approximately $463.7 million; (ii) the principal amount of the loans acquired of approximately $327.7 million less a loan loss reserve of approximately $2.2 million; (iii) the net book value of real property and personal property utilized by the branches and improvements thereto and other assets assumed of approximately $15.2 million and (iv) the face amount of coins and currency of approximately $9.8 million. Bay View Bank paid to U.S. Bank at the closing an amount equal to the deposits being assumed by U.S. Bank of approximately $3.307 billion, less amounts payable by U.S. Bank to Bay View Bank as described above. The amounts paid at closing were subject to a post-closing adjustment based upon a balance sheet as of the closing date.

Segments

     As a result of our adoption of liquidation basis accounting effective September 30, 2002, we currently operate in a single segment focused on liquidating the Company’s assets and liabilities.

     Prior to September 30, 2002, we operated two distinct business platforms representing the two basic distribution channels of our primary businesses, retail and commercial banking. The platform’s results include the income and expenses related to these business activities.

     The Retail Platform has historically included single-family real estate loans, home equity loans and lines of credit, auto loans and leases, mortgage-backed securities and other investments, and other consumer banking products and services. Since November 2002, we have not conducted any retail banking activities other than originating and purchasing fixed-rate loans secured by new and used autos where a highly qualified borrower desires a higher relative loan amount and/or a longer term than is offered by other more traditional auto financing sources. In return for the flexibility of the products offered, we charge higher interest rates while still applying traditional underwriting criteria to mitigate potential loan losses. We ceased purchasing auto leases in June 2000.

     The Commercial Platform historically included multi-family and commercial real estate loans, franchise loans, asset-based loans, syndicated loans, factored receivables, commercial leases, and other business banking products and services. We purchased and originated franchise loans until the franchise lending division was shut down in

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September 2000. We ceased originating multi-family and commercial mortgage loans in August 2002 subsequent to the Washington Mutual sale transaction.

Critical Accounting Policies

     We have identified the most critical accounting policies upon which our financial status depends. We determined the critical policies by considering accounting principles that involve the most complex or subjective decisions or assessments. We have identified our most critical accounting policies to be those related to investment in operating lease assets, income taxes and the value of assets and liabilities in liquidation and the reserve for estimated costs during the period of liquidation. See Note 2 to the Consolidated Financial Statements, “Plan of Dissolution and Stockholder Liquidity,” at Item 8, “Financial Statements and Supplementary Data” for further discussion of our liquidation basis accounting policies.

Investment in Operating Lease Assets

     The Company performs a quarterly impairment analysis of its automobile operating lease portfolio in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which we adopted effective January 1, 2002. Statement No. 144, which supersedes Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” retains the fundamental provisions of Statement No. 121 related to the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. There was no financial statement impact upon adoption of Statement No. 144. A lease is considered impaired if its gross future undiscounted cash flows are less than the net book value of the lease. The net book value of the lease is defined as the original capitalized cost of the automobile, including initial direct capitalized costs, less the cumulative amount of depreciation recorded against the automobile and the cumulative amount of amortization of the initial direct capitalized costs recorded since the inception of the lease and less any impairment charges recorded-to-date on that lease.

     In determining gross future undiscounted cash flows, the Company contracts with Automotive Lease Guide, commonly referred to as ALG, to provide estimates of the residual value of the underlying automobiles at the end of their lease terms assuming that the vehicles are in average condition. The Company then estimates the probability that i.) the automobiles will be purchased by the lessee prior to the end of the lease term, ii.) the automobile will be purchased by the lessee at the end of the lease term, either at a discount or at the full contractual residual amount, or iii.) the automobile will be returned to the lessor at the end of the lease term. These probabilities are estimated using a number of factors, including the Company’s experience-to-date and industry experience.

     Using the projected ALG residual values, the Company’s experience-to-date relative to the projected ALG residual values (for example, for vehicle classes where actual amounts realized were less than what ALG had projected, the Company reduced the projected ALG residual values to equal the Company’s experience-to-date), and the probabilities of each of the three disposition scenarios discussed above occurring, the Company determines a probability-weighted gross future undiscounted cash flow for each automobile lease. For those leases where the gross future undiscounted cash flows are less than net book value, the lease is considered impaired.

     For those leases considered impaired, the Company then estimates the fair value of the lease. The fair value is determined by calculating the present value of the future estimated cash flows again assuming the probabilities of each of the three disposition scenarios. The present value is calculated using current market rates which are similar to the original contract lease rate. For those impaired leases where the estimated fair value is less than the net book value, an impairment charge is recorded for the difference. Since the inception of the lease portfolio in June 1998, the Company has recorded additional monthly depreciation charges, also included in leasing expense, to provide for losses that may be incurred at the end of the lease terms.

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Income Taxes

     As a result of the Company’s Plan, a valuation allowance of $21.5 million was established based on the realizability of deferred tax assets in years after 2002. The realization of the net deferred tax assets of $5.9 million, which is net of the established valuation allowance, is dependent upon the total projected future income through the final liquidation of the Company.

Liquidation Basis Accounting

     The Company adopted liquidation basis accounting effective September 30, 2002 in accordance with GAAP. Accordingly, assets have been valued at their estimated net realizable values and liabilities include accruals for estimated costs associated with carrying out the Plan. In accordance with liquidation basis accounting, our stockholders’ equity was transferred to net assets in liquidation. See Note 2 to the Consolidated Financial Statements, “Plan of Dissolution and Stockholder Liquidity,” at Item 8, “Financial Statements and Supplementary Data” for further discussion of our liquidation basis accounting policies.

     Under liquidation basis accounting, the Company has estimated future liabilities associated with carrying out the Plan. The Company has not reflected any future revenues and expenses of and operating nature, as such income and expenses will be recognized when realized.

     The reserve for estimated costs during the period of liquidation include accruals for severance payments and facility closures, investment banking and other professional fees and estimated litigation expense. These expense accruals are reviewed for adequacy on a quarterly basis. Changes to the accruals will be recorded as adjustments in liquidation basis in future periods.

Results of Operations

     As discussed above, we adopted liquidation basis accounting effective September 30, 2002, in accordance with GAAP. Under the liquidation basis of accounting, we are now reporting the value of, and the changes in, net assets available for distribution to stockholders (“net assets in liquidation”) instead of results from continuing operations. Accordingly, our financial statements as of and for the quarter ended December 31, 2002 have been prepared under the liquidation basis of accounting including the replacement of the Consolidated Statement of Operations and Comprehensive Income with the Consolidated Statement of Changes in Net Assets in Liquidation. For reporting periods prior to September 30, 2002, our financial statements are presented on a going concern basis of accounting. Since we adopted liquidation basis accounting on September 30, 2002, the Consolidated Statement of Operations and Comprehensive Income for the nine months ended September 30, 2002 is presented in a similar format as the going concern financial statements. As a result, we are providing, in Item 8. Financial Statements and Supplementary Data, a (1) Consolidated Statement of Net Assets (Liquidation Basis) as of December 31, 2002 and a Consolidated Statement of Financial Condition (Going Concern Basis) as of December 31, 2001, a (2) Consolidated Statement of Changes in Net Assets in Liquidation (Liquidation Basis) for the three months ended December 31, 2002 and (3) Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine month period ended September 30, 2002 (Liquidation Basis) and the years ended December 31, 2001 and 2000 (Going Concern Basis).

Liquidation Basis

Net Assets in Liquidation – December 31, 2002 vs. September 30, 2002

     Our net assets in liquidation at December 31, 2002 totaled $410.1 million, or $6.43 in net assets in liquidation per outstanding share as compared to $413.7 million, or $6.50 in net assets in liquidation per outstanding share at September 30, 2002. The decrease in net assets in liquidation and net assets in liquidation per outstanding share was primarily the result of a $6.1 million pre-tax loss from operations recorded during the fourth quarter of 2002 and $2.8 million of net charges for additional liquidation valuation adjustments partially offset by a tax benefit of $4.9 million. The loss from operations for the quarter was primarily a result of an operating loss caused by a delay in closing the sale of our retail deposits to U.S. Bank, N.A. from October 1 to November 1. Our liquidation of earning assets in

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advance of the anticipated October 1 sale date resulted in sharply lower interest revenues during October. The $2.8 million charge for additional liquidation valuation adjustments was primarily due to a decrease in the market value of the loan portfolio.

     During the fourth quarter, we reduced our valuation allowance for deferred tax assets from $24.0 million to $21.5 million in recognition of additional future operating income from the Company’s auto lending business available to absorb existing deferred tax benefits. Our 2002 effective tax rate of 72% is higher than the federal statutory rate due primarily to state income taxes, the valuation allowance on deferred tax assets, disposition of nondeductible goodwill, and nondeductible compensation associated with the Plan. The effective tax rate for the fourth quarter declined to 55%, primarily as a result of an increase in state taxes partially offset by reductions to the valuation allowance.

     As discussed above, on November 1, 2002, we completed the U.S. Bank transaction. U.S. Bank, N.A. assumed the Bank’s retail deposits totaling $3.307 billion, its branches and service center operations, and purchased $327.7 million of loans. On November 29, 2002, we prepaid the entire $100 million of our 9 1/8% Subordinated Notes due 2007 at a premium of 4.563%. Additionally, on December 9, 2002, the Bank redeemed the entire $50 million of its outstanding 10% Subordinated Notes due 2009.

     In December of 2002, we received approval from the FRB to pay the cumulative distributions on our Capital Securities. On December 31, 2002, we paid the cumulative deferred distributions, the interest on the deferred distributions and the current quarterly distribution. The total amount paid per share as of December 31, 2002 was $6.10 for the 10 quarterly distributions plus $0.715 in accrued interest. Although we intend to pay out future dividends as scheduled, it continues to be subject to a formal agreement with the FRB and, accordingly, future distributions will remain subject to FRB approval.

     In accordance with the Plan, we sold loans totaling $456.4 million in outstanding principal, including the $327.7 million of loans sold to U.S. Bank, N.A., during the fourth quarter. The loans sold consisted of approximately $157.4 million of home equity loans, $139.4 million of single-family loans, $57.4 million of business loans, $38.4 million of commercial real estate loans, $25.6 million of factored receivables, $21.1 million of commercial leases, $14.4 million of franchise loans and $2.7 million of consumer loans.

     Year-to-date, we have completed the sale of approximately $2.0 billion of loans. The loans sold consisted of $859.6 million of multi-family mortgage loans, $207.7 million of commercial real estate loans, $157.4 million of home equity loans, $139.4 million of single-family loans, $67.8 million of business loans, $60.6 million of franchise loans, $50.8 million of factored receivables, $21.1 million of commercial leases and $2.7 million of consumer loans. Additionally, we securitized and sold $453.2 million of our auto loans.

     Our loans and leases portfolio decreased to $311.0 million at December 31, 2002 from $2.4 billion at December 31, 2001.

     Loan sales during the quarter and during 2002 were partially offset by originations totaling $84.9 million and $686.2 million, respectively. Originations for the quarter included $69.5 million of auto loans, $8.8 million of commercial and business loans and $6.6 million of home equity loans. Originations for 2002 included $314.7 million of auto loans, $204.3 million of multi-family mortgage loans, $87.5 million of home equity loans, $66.2 million of commercial and business loans and $13.5 million of commercial real estate loans. Going forward, we will continue to originate auto loans, however, we ceased all other loan production activities during the fourth quarter of 2002.

Investment in Operating Lease Assets

     Leasing expense represents expenses related to our auto leasing activities. Because the leases are accounted for as operating leases, the corresponding assets are capitalized and depreciated to their estimated residual values over their lease terms. This depreciation expense is included in leasing expenses, along with the amortization of

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capitalized initial direct lease costs and impairment charges. Leasing expenses were $10.9 million for the fourth quarter of 2002 as compared to $24.5 million for the fourth quarter of 2001. The decrease in leasing expenses was primarily due to lower provision for impairment combined with lower depreciation expense associated with the declining balance of our auto-related operating lease portfolio. We ceased purchasing auto leases in June 2000.

     At December 31, 2002, approximately 4,839 of the 11,428 vehicles in our automobile lease portfolio, or 42%, were considered impaired. However, this impairment is subject to a number of significant assumptions that could change in the near term, and adversely affect the valuation of the automobile lease portfolio. These assumptions were previously described under Critical Accounting Policies, Investment in Operating Lease Assets. Two of these assumptions—including the residual values of individual leases that are projected by ALG and the relative probabilities of the three alternatives for disposing of vehicles—are particularly susceptible to changes in market conditions. As an illustration of the sensitivity of these assumptions—if the market values of the individual vehicles declined by $250, an additional 2% of the leases would be deemed to be impaired and, therefore, potentially subject to an impairment charge. Furthermore, if the percentage of vehicles returned to the Company were greater than was projected at year-end, the impairment charge could increase because the value realized under this scenario is normally less than if the lessee purchased the automobile prior to the end of the lease term.

Income Taxes

     We recorded a tax benefit of $4.9 million for the fourth quarter of 2002 and a tax benefit of $26.0 million for the fourth quarter of 2001. Our 2002 effective tax rate of 72% is higher than the federal statutory rate due primarily to state income taxes, the valuation allowance on deferred tax assets, disposition of nondeductible goodwill and nondeductible compensation associated with the Plan. Our effective tax rate for 2001 was 45.9%. During the fourth quarter, we reduced our valuation allowance for deferred tax assets from $24.0 million to $21.5 million in recognition of additional future operating income from the Company’s auto lending business available to absorb existing deferred tax benefits.

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Going Concern Basis

Results of Operations – First Nine Months of 2002 versus First Nine Months of 2001

     Our net income for the first nine months of 2002, including net adjustments required to convert from a going concern basis to a liquidation basis of accounting effective September 30, 2002, totaled $71.7 million, or $1.13 per diluted share. Our net loss for the first nine months of 2001, presented on a going concern basis of accounting, was $103.9 million, or $2.22 per diluted share. Excluding the liquidation adjustments, our operating income before taxes totaled $5.9 million for the first nine months of 2002 as compared to a net loss before taxes of $163.8 million for the first nine months of 2001.

     In accordance with liquidation basis accounting, our assets have been valued at their estimated net realizable value and liabilities include estimated costs associated with carrying out the Plan. We recorded pre-tax adjustments totaling $266.5 million related to the mark-to-market valuation of our assets and liabilities in connection with our adoption of liquidation basis accounting. The valuation adjustments primarily consisted of the following:

	•		$463.5 million deposit premium, which was calculated as 14% of non-brokered retail deposits based on October average deposit levels plus $5 million pursuant to the agreement with U.S. Bank;
	•		$91.0 million reduction in goodwill related to the deposits being sold;
	•		$37.0 million mark-to-market adjustment related to loan balances reflecting the estimated net realizable value of our remaining loan portfolios under an accelerated timeline to sell such loans pursuant to the Plan;
	•		$51.1 million in charges related to the sale of our retail banking assets including $26.6 million in severance payments, $12.7 million in investment banking and other professional fees, and $11.8 million in net accruals for closed facilities and other contracts and settlements;
	•		$8.8 million in charges related to the prepayment of our and Bay View Bank’s Subordinated Notes including a $4.2 million write-off of issuance costs and $4.6 million in prepayment penalties;
	•		$4.9 million write-off of franchise loan securitization residual assets; and
	•		$3.7 million write-off of unamortized issuance costs on the Capital Securities in anticipation of these securities being called in 2003.

     Also during the third quarter of 2002, we recorded $18.9 million in impairment charges, net of taxes, for goodwill related to three of our commercial lending businesses which was not expected to be realized upon the disposition of these businesses. As required by the transitional provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which we adopted as of January 1, 2002, the impairment loss is measured and recorded as of the date of adoption and recognized as the cumulative effect of a change in accounting principle as of January 1, 2002.

     Our results for the first nine months of 2002 reflected the impact of asset sales consummated to generate the funds necessary to close the U.S. Bank transaction. Through September 30, we completed the sale of approximately $1.0 billion of multi-family mortgage and commercial real estate loans to Washington Mutual. Additionally, we securitized and sold approximately $450.0 million of our auto loan receivables and sold $56.5 million of franchise loans, $25.3 million of factored receivables, $103.6 million of mortgage-backed securities and $59.0 million of other investment securities.

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     Our results for the first nine months of 2002 included a charge of $13.1 million, recorded during the second quarter of 2002, related to the settlement of litigation. As previously reported in Bay View Capital Corporation’s Current Report on Form 8-K dated June 25, 2002, we entered into a settlement agreement with JP Morgan Chase Bank relating to the complaint filed against Bay View Franchise Mortgage Acceptance Company which we sold during 2001. The settlement resulted in a $13.1 million pre-tax charge to second quarter earnings and included the removal of approximately $12 million of nonperforming franchise loans from our consolidated balance sheet.

     On June 5, 2002, we completed the sale of our San Mateo-based factoring business, Bay View Funding, to a group of investors led by the factoring company’s management team. Through this transaction, we converted approximately $6.5 million of goodwill to tangible equity.

Net Interest Income and Net Interest Margin

     Net interest income represents the difference between interest earned on loans, leases and investments and interest paid on funding sources, including deposits and borrowings, and has historically been our principal source of revenue. Net interest margin is the amount of net interest income expressed as a percentage of average interest-earning assets.

Average Balance Sheet

     The following table illustrates average yields on our interest-earning assets and average rates on our interest-bearing liabilities for the periods indicated. These average yields and rates are derived by dividing interest income by the average balances of interest-earning assets and by dividing interest expense by the average balances of interest-bearing liabilities for the years indicated. Average balances of interest-earning assets and interest-bearing liabilities were calculated by averaging the relevant month-end amounts for the respective periods.

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(1)		Average balances and yields for securities and other investments classified as available-for-sale are based on historical amortized cost.
(2)		Interest expense for borrowings excludes expenses related to our Capital Securities.
(3)		Annualized net interest income divided by average interest-earning assets.

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     Net interest income for the first nine months of 2002 was $85.2 million as compared to $90.0 million for the first nine months of 2001. Net interest margin was 3.56% for the first nine months of 2002 as compared to 2.96% for the first nine months of 2001.

     The following table illustrates net interest income and net interest margin, by platform, for the periods indicated (also see Note 23 to the Consolidated Financial Statements, “Segment and Related Information,” at Item 8, “Financial Statements and Supplementary Data” for further discussion of our business platforms):

(1)

The Retail Platform’s net interest margin and net interest income presented above do not include the revenue impact of our auto leasing activities, which is included in noninterest income, but do include the associated funding costs.

     The decrease in net interest income for the first nine months of 2002, as compared to the first nine months of 2001, was primarily due to a decrease in average interest-earning assets partially offset by an increase in net interest margin. The decrease in average interest-earning assets was primarily due to asset sales during the fourth quarter of 2001 and the first nine months of 2002. The increase in net interest margin and net interest spread were due to lower overall cost of funds resulting from the lower cost of deposits, the lower borrowing levels and the prevailing lower interest rate environment which allowed us to reduce the cost of funding more rapidly than the declining asset yields which were due to the lower interest rate environment and sales of higher-yielding loans and mortgage-backed securities during the fourth quarter of 2001 and the first nine months of 2002.

     Our net interest margin, calculated in accordance with GAAP, excludes the revenue from our auto leasing activities, but includes the associated funding costs. Because our auto leases are accounted for as operating leases, the rental income and related expenses, including depreciation expense, are reflected in noninterest income and noninterest expense in accordance with GAAP.

     The following table illustrates average interest-earning assets for the periods indicated:

     The decrease in the Retail Platform’s average interest-earning assets for the first nine months of 2002, as compared to the first nine months of 2001, was primarily due to the impact of asset sales during the fourth quarter of 2001 and throughout 2002 partially offset by purchases of mortgage-backed and investment securities and loan originations during the same periods.

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     The decrease in the Commercial Platform’s average interest-earning assets for the first nine months of 2002, as compared to the first nine months of 2001, reflect the impact of the sales of multi-family mortgage loans, commercial real estate, franchise loans and factored receivables during the fourth quarter of 2001 and throughout 2002 as well as the impact of the writedowns related to the revaluation of our franchise-related assets during 2001.

     The following table illustrates interest-earning assets as of the dates indicated:

     The increase in the Retail Platform’s interest-earning assets at September 30, 2002, as compared to December 31, 2001, reflects the change in the mix of assets, as previously disclosed or as discussed elsewhere herein, as well as purchases of investment securities and loan originations during 2002. These were partially offset by the securitization and sale of auto loans, sales of mortgage-backed and other investment securities and mark-to-market liquidation adjustments to our retail loan portfolio.

     The decrease in the Commercial Platform’s interest-earning assets was primarily due to the sale of multi-family mortgage and commercial real estate loans to Washington Mutual, the sale of Bay View Funding and its factored receivables, franchise loan sales and payoffs and mark-to-market valuation adjustments on our commercial loan portfolio and franchise-related assets in connection with our adoption of liquidation basis accounting. These were partially offset by loan originations during the first nine months of 2002.

Interest Income

     Interest income was $145.2 million for the first nine months of 2002 as compared to $243.9 million for the first nine months of 2001. The average yield on interest-earning assets was 6.08% for the first nine months of 2002 as compared to 8.08% for the first nine months of 2001. The following table illustrates interest income, by platform, for the periods indicated: