---

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended September 30, 2001





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




For the transition period from
                         to





Commission file number 001-14879





BAY VIEW CAPITAL CORPORATION


(Exact name of registrant as specified in its charter)





Delaware

94-3078031(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)





1840 Gateway Drive, San Mateo, California 94404


(Address of principal executive offices)    (Zip Code)





Registrants telephone number, including area code (650) 312-7200





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





Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest practicable date.





Common Stock, Par Value $.01

Outstanding at October 31, 2001(Title of Class)

62,542,594 shares





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FORM 10-Q





INDEX





BAY VIEW CAPITAL CORPORATION





Page(s)PART I.   FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited):Consolidated Statements of Financial Condition


4Consolidated Statements of Operations and Comprehensive Income (Loss)


5-6Consolidated Statements of Stockholders Equity


7Consolidated Statements of Cash Flows


8-9Notes to Consolidated Financial Statements


10-19Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations


20-50Item 3.

Quantitative and Qualitative Disclosures About Market Risk


51-54PART II.   OTHER INFORMATIONOther Information


55Signatures


56




2


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Forward-Looking Statements





This Form 10-Q contains forward-looking statements which describe our future plans, strategies and
expectations. All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and which may cause our actual results, performance or achievements to differ materially from the
results, performance or achievements that we anticipate. Factors that might affect forward-looking statements include, among other things:





| |  |  | our ability to remain in compliance with certain written agreements with government agencies;
| | - |  | ---------------------------------------------------------------------------------------------




| |  |  | the demand for our products;
| | - |  | ----------------------------




| |  |  | actions taken by our competitors;
| | - |  | ---------------------------------




| |  |  | tax rate changes, new tax laws and revised tax law interpretations;
| | - |  | -------------------------------------------------------------------




| |  |  | adverse changes occurring in the securities markets;
| | - |  | ----------------------------------------------------




| |  |  | inflation and changes in prevailing interest rates that reduce our margins or the fair value of the financial instruments we hold;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------




| |  |  | economic or business conditions, either nationally or in our market areas, that are worse than we expect;
| | - |  | ---------------------------------------------------------------------------------------------------------




| |  |  | global, political, or general economic impact of the recent terrorist attacks on September 11th;
| | - |  | ------------------------------------------------------------------------------------------------




| |  |  | legislative or regulatory changes that adversely affect our business;
| | - |  | ---------------------------------------------------------------------




| |  |  | the timing, impact and other uncertainties of our asset sales or securitizations;
| | - |  | ---------------------------------------------------------------------------------




| |  |  | technological changes that are more difficult or expensive than we expect;
| | - |  | --------------------------------------------------------------------------




| |  |  | increases in delinquencies and defaults by our borrowers and other loan delinquencies;
| | - |  | --------------------------------------------------------------------------------------




| |  |  | increases in our provision for losses on loans and leases;
| | - |  | ----------------------------------------------------------




| |  |  | our inability to sustain or improve the performance of our subsidiaries;
| | - |  | ------------------------------------------------------------------------




| |  |  | our inability to achieve the financial goals in our strategic plans, including any financial goals related to both contemplated and consummated asset sales or acquisitions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the outcome of lawsuits or regulatory disputes;
| | - |  | -----------------------------------------------




| |  |  | credit and other risks of lending, leasing and investment activities; and
| | - |  | -------------------------------------------------------------------------




| |  |  | our inability to use the net operating loss carryforwards we currently have.
| | - |  | ----------------------------------------------------------------------------




As a result of the above, we cannot assure you that our future results of operations or financial condition or any other matters will be
consistent with those presented in any forward-looking statements. Accordingly, we caution you not to rely on these forward-looking statements. We do not undertake, and specifically disclaim any obligation, to update these forward-looking
statements, which speak only as of the date made.




3


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PART I.    FINANCIAL INFORMATION





Item 1.Financial Statements





Bay View Capital Corporation and Subsidiaries





Consolidated Statements Of Financial Condition


(Unaudited)


September 30, 2001

December 31, 2000(Dollars in thousands)ASSETSCash and cash equivalents:Cash and due from depository institutions


$    137,032




$    694,934Short-term investments


366,399




503,431




694,934Securities available-for-sale:Investment securities


76,054




33,009Mortgage-backed securities


271,830




578Securities held-to-maturity:Mortgage-backed securities







535,478Mortgage-backed securities due from creditor







106,572Loans and leases held-for-sale


97,951




345,207Loans and leases held-for-investment, net of allowance for loan and lease losses of $49.7 million at
    September 30, 2001 and $73.7 million at December 31, 2000


2,368,729




2,751,794Investment in operating lease assets, net


379,234




479,829Investment in stock of the Federal Home Loan Bank of San Francisco


23,759




40,190Investment in stock of the Federal Reserve Bank


11,866




19,590Real estate owned, net


14,070




1,041Premises and equipment, net


14,013




17,303Intangible assets


126,377




134,936Other assets


216,015




200,470Total assets


$4,103,329




$5,360,931LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Transaction accounts


$1,953,768




$1,608,499Retail certificates of deposit


1,430,104




1,872,562Brokered certificates of deposit







265,2513,383,872




3,746,312Advances from the Federal Home Loan Bank of San Francisco


99,942




804,837Short-term borrowings







197,375Subordinated Notes, net


149,615




149,567Other borrowings


1,071




1,664Other liabilities


45,546




73,327Total liabilities


3,680,046




4,973,082Guaranteed Preferred Beneficial Interest in our Junior Subordinated Debentures (Capital Securities)


90,000




90,000Stockholders equity:Serial preferred stock; authorized, 7,000,000 shares; outstanding, none







Common stock ($.01 par value); authorized, 80,000,000 shares; issued,
200162,607,646 shares;            200032,640,039 shares; outstanding, 200162,542,594 shares; 200032,574,987 shares


626




326Additional paid-in capital


594,478




456,045Accumulated deficit


(260,825
)



(156,877
)Treasury stock, at cost; 65,052 shares


(1,081
)



(1,081
)Accumulated other comprehensive income:Unrealized gain on securities
available-for-sale, net of tax


1,156




10Debt of Employee Stock Ownership Plan


(1,071
)



(574
)Total stockholders equity


333,283




297,849Total liabilities and
stockholders equity


$4,103,329




$5,360,931





The accompanying notes are an integral part of these consolidated financial
statements.




4


---




Bay View Capital Corporation and Subsidiaries





Consolidated Statements of Operations and Comprehensive Income (Loss)


(Unaudited)





For the Three Months EndedSeptember 30, 2001

September 30, 2000(Amounts in thousands, except per share amounts)Interest income:Interest on loans and leases


$55,156




$   88,478Interest on mortgage-backed securities


4,231




16,669Interest and dividends on investment securities


5,942




13,27665,329




118,423Interest expense:Interest on deposits


30,691




47,747Interest on borrowings


3,151




25,250Interest on Subordinated Notes


3,716




3,72537,558




76,722Net interest income


27,771




41,701Provision for losses on loans and leases


3,257




13,000Net interest income after provision for losses on loans and leases


24,514




28,701Noninterest income:Leasing income


22,675




25,272Loan fees and charges


1,106




1,765Loan servicing income


289




1,090Account fees


2,015




1,932Sales commissions


1,623




1,398Gain (loss) on sale of assets and liabilities, net


2,251




(4,847
)Other, net


283




1,30230,242




27,912Noninterest expense:General and administrative


37,027




34,176General and administrativeFMAC loan production







4,588Restructuring expenses


(1,812
)



10,482Revaluation of FMAC-related assets


(1,382
)



42,485Leasing expenses


16,567




17,345Dividend expense on Capital Securities


2,287




2,235Real estate owned operations, net


261




65Amortization of intangible assets


2,804




2,769Amortization of intangible assetsFMAC







2,462Write-off of intangible assetsFMAC







192,62255,752




309,229Loss before income taxes


(996
)



(252,616
)Income tax benefit


(364
)



(18,160
)Net loss


$      (632
)



$(234,456
)Basic loss per share


$     (0.01
)



$        (7.18
)Diluted loss per share


$     (0.01
)



$        (7.18
)Weighted-average basic shares outstanding


62,608




32,644Weighted-average diluted shares outstanding


62,608




32,644Net loss


$      (632
)



$(234,456
)Other comprehensive income (loss), net of tax:Change in unrealized gain on securities available-for-sale, net of
tax expense of $1,420 and              $80 for the three months ended September 30, 2001 and September 30, 2000, respectively


2,014




113Comprehensive income (loss)


$   1,382




$(234,343
)Dividends declared per share


$       




$        0.10





The accompanying notes are an integral part of these consolidated financial
statements.




5


---




Bay View Capital Corporation and Subsidiaries





Consolidated Statements of Operations and Comprehensive Loss


(Unaudited)





For the Nine Months EndedSeptember 30, 2001

September 30, 2000(Amounts in thousands, except per share amounts)Interest income:Interest on loans and leases


$192,698




$273,189Interest on mortgage-backed securities


27,852




45,236Interest and dividends on investment securities


23,333




29,144243,883




347,569Interest expense:Interest on deposits


114,065




128,868Interest on borrowings


28,673




79,481Interest on Subordinated Notes


11,146




11,153153,884




219,502Net interest income


89,999




128,067Provision for losses on loans and leases


62,990




30,500Net interest income after provision for losses on loans and leases


27,009




97,567Noninterest income:Leasing income


70,682




72,409Loan fees and charges


4,195




6,078Loan servicing income


3,654




4,036Account fees


5,937




5,891Sales commissions


4,421




4,206Loss on sale of assets and liabilities, net


(9,845
)



(481
)Other, net


1,356




3,84180,400




95,980Noninterest expense:General and administrative


117,150




101,005General and administrativeFMAC loan production







15,561General and administrativeBankers Mutual







6,311Restructuring expenses


8,214




10,482Revaluation of FMAC-related assets


68,646




42,485Leasing expenses


61,610




49,660Dividend expense on Capital Securities


6,862




6,702Real estate owned operations, net


252




48Amortization of intangible assets


8,476




8,431Amortization of intangible assetsFMAC







9,608Write-off of intangible assetsFMAC







192,622271,210




442,915Loss before income taxes


(163,801
)



(249,368
)Income tax benefit


(59,853
)



(15,634
)Net loss


$(103,948
)



$(233,734
)Basic loss per share


$        (2.22
)



$        (7.16
)Diluted loss per share


$        (2.22
)



$        (7.16
)Weighted-average basic shares outstanding


46,914




32,632Weighted-average diluted shares outstanding


46,914




32,632Net loss


$(103,948
)



$(233,734
)Other comprehensive loss, net of tax:Change in unrealized gain on securities available-for-sale, net of
tax expense of $808              and $358 for the nine months ended September 30, 2001 and September 30, 2000,
             respectively


1,146




508Comprehensive loss


$(102,802
)



$(233,226
)Dividends declared per share


$          




$        0.30





The accompanying notes are an integral part of these consolidated financial
statements.




6


---




Bay View Capital Corporation and Subsidiaries





Consolidated Statements of Stockholders Equity


(Unaudited)





Number of Shares Issued

Common Stock

Preferred Stock

Additional Paid-in Capital

Retained Earnings (Accumulated Deficit)

Treasury Stock

Unrealized Gain (Loss) on Securities Available-for- Sale, Net of Tax

Debt of Employee Stock Ownership Plan

Total Stockholders Equity(Amounts in thousands, except per share amounts)Balance at December 31, 1999


32,629


$      326


$      



$455,964


$     179,100


$(1,094
)


$      (293
)



$(2,809
)



$  631,194Exercise of stock options, including tax      benefits


6









48



















48Distribution of directors retirement plan      shares


5









46



















46Distribution of restricted shares












(13
)




13













Cash dividends declared ($0.30 per share)















(9,780
)















(9,780
)Unrealized gain on securities available-for-     sale, net of tax






















303









303Repayment of debt



























2,235




2,235Net loss















(326,197
)















(326,197
)Balance at December 31, 2000


32,640


326






456,045


(156,877
)

(1,081
)


10




(574
)



297,849Distribution of directors retirement plan      shares


10









73



















73Proceeds from issuance of common stock,      net of expenses of $2.0 million


23,967


240






107,760



















108,000Proceeds from issuance of 5,991,369 shares      of preferred stock, net of expenses of
     $1.1 million








60



26,340



















26,400Conversion of preferred stock to common      stock


5,991


60


(60
)






















Expense recognized on stock options with      below market strike price












4,260



















4,260Unrealized gain on securities available-for-     sale, net of tax






















1,146









1,146Change in debt of ESOP



























(497
)



(497
)Net loss















(103,948
)















(103,948
)Balance at September 30, 2001


62,608


$      626


$      



$594,478


$    (260,825
)

$(1,081
)


$    1,156




$(1,071
)



$  333,283





The accompanying notes are an integral part of these consolidated financial
statements.




7


---




Bay View Capital Corporation and Subsidiaries





Consolidated Statements of Cash Flows


(Unaudited)


For the Nine Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet loss


$(103,948
)



$   (233,734
)Adjustments to reconcile net loss to net cash provided by operating activities:Amortization of intangible assets


8,476




18,039Write-off of intangible assetsFMAC







192,622Provision for losses on loans and leases and real estate owned


62,990




30,500Depreciation and amortization of premises and equipment


3,761




9,847Depreciation and amortization of investment in operating lease
assets


43,623




45,612Amortization of premiums, net of discount accretion


7,441




9,091Revaluation of FMAC-related assets


68,646




42,485Loss on sale of assets and liabilities, net



9,845




481Increase in other assets


(65,857
)



(42,437
)Decrease in other liabilities


(27,781
)



(50,971
)Other, net


4,224




(473
)Net cash
provided by operating activities


11,420




21,062CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of assets, net of cash and cash equivalents received







(26,491
)Proceeds from the sale of substantially all of the assets and certain liabilities of 
     Bankers Mutual, net of cash and cash equivalents sold







30,879Net decrease (increase) in loans and leases held-for-investment resulting from 
     originations, net of repayments


89,321




(177,603
)Purchases of loans and leases, net


(12,933
)



(27,849
)Purchases of mortgage-backed securities


(154,021
)



(327,840
)Purchases of investment securities


(77,608
)



(43,798
)Principal payments on mortgage-backed securities


148,180




71,267Principal payments on investment securities


4,124




3,847Increase in loans and leases held-for-sale







(519,248
)Proceeds from securitizations and/or sales of loans and leases held-for-sale


486,541




1,044,432Proceeds from sales of mortgage-backed securities available-for-sale


392,166




8,898Proceeds from sales of investment securities


26,321




30,000Proceeds from sale of real estate owned


1,037




6,389Additions to premises and equipment


(471
)



(2,779
)Decrease in investment in stock of the Federal Home Loan Bank of SanFrancisco


16,431




22,220Decrease (increase) in investment in stock of the Federal Reserve Bank


7,724




(6,114
)Net cash
provided by investing activities


926,812




86,210






8


---




Bay View Capital Corporation and Subsidiaries





Consolidated Statements of Cash Flows (continued)


(Unaudited)





For the Nine Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)CASH FLOWS FROM FINANCING ACTIVITIESNet (decrease) increase in deposits

$    (362,440
)

$    128,794Proceeds from advances from the Federal Home Loan Bank of San Francisco

205,000


1,277,000Repayment of advances from the Federal Home Loan Bank of San Francisco

(908,800
)

(1,682,000
)Proceeds from reverse repurchase agreements




1,923,071Repayment of reverse repurchase agreements

(103,241
)

(1,567,508
)Net decrease in warehouse lines outstanding

(94,134
)

(239,648
)Net decrease in other borrowings

(593
)

(1,630
)Proceeds from issuance of common stock

108,073


59Proceeds from issuance of preferred stock

26,400


Dividends paid to stockholders




(9,780
)Net cash
used in financing activities

(1,129,735
)

(171,642
)Net decrease in cash and cash equivalents

(191,503
)

(64,370
)Cash and cash equivalents at beginning of period

694,934


343,905Cash and cash equivalents at end of period

$    503,431


$    279,535Cash paid during the year for:Interest

$    173,280


$    207,873Income taxes

$                88


$          2,017Supplemental non-cash investing and financing activities:Loans transferred to real estate owned

$       14,181


$          5,103Loans transferred from held-for-investment to held-for-sale,
net

$    242,686


$    983,004Loans securitized and transferred to securities
held-to-maturity

$              


$    268,172Securities transferred from held-to-maturity to
available-for-sale

$    641,663


$              Conversion of preferred stock to common stock

$       26,400


$              The acquisitions of assets involved the following:Fair value of assets acquired, other than cash and cash
equivalents

$              


$       (17,491
)Goodwill




(9,000
)Net cash
and cash equivalents paid

$              


$       (26,491
)





The accompanying notes are an integral part of these consolidated financial
statements.




9


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BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





September 30, 2001


(Unaudited)





Note 1.    Basis of
Presentation





The accompanying unaudited consolidated financial
statements include the accounts of Bay View Capital Corporation, a bank holding company incorporated under the laws of the state of Delaware, and our wholly owned subsidiaries: Bay View Bank, N.A., a national bank; Bay View Securitization
Corporation, a Delaware corporation; Bay View Capital I, a Delaware business trust; FMAC Insurance Services, a Delaware corporation; FMAC 2000-A Holding Company, a California corporation; and FMAC Franchise Receivables Corporation, a California
Corporation. Bay View Bank includes its wholly owned subsidiaries: Bay View Acceptance Corporation, a Nevada corporation; Bay View Commercial Finance Group, a California corporation; XBVBKRS, Inc., formerly Bankers Mutual, a California corporation;
MoneyCare, Inc., a California corporation; and Bay View Auxiliary Corporation, a California corporation. Bay View Acceptance Corporation includes its wholly owned subsidiary, LFS-BV, Inc., a Nevada corporation. All significant intercompany accounts
and transactions have been eliminated.





On November 1, 1999, we
acquired Franchise Mortgage Acceptance Company, sometimes referred to as FMAC, which included the operations of Bankers Mutual and FMAC Insurance Services. On June 30, 2000, substantially all of the assets and certain liabilities of Bankers Mutual
were sold to Berkshire Mortgage Finance Limited Partnership. On September 11, 2000, we announced the restructuring of FMACs franchise lending operations. The shutdown of this division was effective as of September 30, 2000 and involved the
termination of all related production and marketing personnel. Effective February 28, 2001, substantially all of the assets and liabilities of FMAC Insurance Services were sold. On June 22, 2001, we completed the stock sale by Bay View Bank of the
legal entity Bay View Franchise Mortgage Acceptance Company (BVFMAC) and its related servicing platform.





During the second quarter of 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 have begun to implement a new strategic plan adopted by our Board of Directors. The new strategic plan includes exiting businesses inconsistent with a California-focused bank and includes 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 the third quarter and for the first nine months of 2001 include specific charges consistent with our new
strategic plan. Specific charges recognized during the first nine months of 2001 include $68.6 million related to the revaluation of franchise-related assets, $10.0 million of additional provision for impairment primarily as a result of revising the
estimated residual values associated with the auto lease portfolio and $8.2 million in restructuring charges primarily related to the reduction in our workforce. The restructuring charges consisted of $6.7 million of severance and $3.3 million of
facilities charges that were recorded in the second quarter partially offset by a $1.8 million reversal of an accrual related to severance payments which were disallowed by our primary regulator during the third quarter. As previously announced, the
reduction in our workforce will affect about 100 employees primarily from business lines that we are exiting, such as franchise operations, and certain redundant operations. As of September 30, 2001, $1.3 million in severance payments have been made
to 25 employees impacted by the restructuring. Our results for the first nine months of 2001 also included $9.8 million in net losses on sales of assets, including losses on the sale of BVFMAC and the home equity loans offset by gains received
during the first quarter of 2001 on December 2000 asset sales and net gains on the sale of mortgage-backed and other securities and franchise loans during the first nine months of the year. The year-to-date loan loss provision totaled $63.0 million
which includes the reductions in the allowance for loan and lease losses related to the mark-to-market on loans transferred from held-for-investment to held-for-sale, primarily during the second quarter, as well as additional reserves provided on
the remaining franchise loan portfolio.




10


---



BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The information provided in these interim financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of our financial
condition as of September 30, 2001 and December 31, 2000, the results of our operations for the three- and nine-month periods ended September 30, 2001 and 2000, and our cash flows for the three- and nine-month periods ended September 30, 2001 and
2000. These adjustments are of a normal, recurring nature unless otherwise disclosed in this Form 10-Q. As necessary, reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications had
no effect on our financial condition, results of operations or stockholders equity. These interim financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all of the necessary
information and footnotes for a presentation in conformity with generally accepted accounting principles.





The information included herein was written assuming that you have read or have access to our 2000 Annual Report on Form 10-K, which contains the latest audited consolidated
financial statements and notes, along with Managements Discussion and Analysis of Financial Condition as of December 31, 2000 and 1999 and Results of Operations for the years ended December 31, 2000, 1999 and 1998. Accordingly, only certain
changes in financial condition and results of operations are discussed in this Form 10-Q. Furthermore, the interim financial results for the three- and nine-month periods ended September 30, 2001 are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim period.





Note 2.    Earnings Per Share





Basic earnings per share are calculated by dividing net
earnings or loss for the period by the weighted-average common shares outstanding for that period. There is no adjustment to the number of outstanding shares for potential dilutive instruments, such as stock options or warrants. Diluted earnings or
loss per share takes into account the potential dilutive impact of such instruments and uses the average share price for the period in determining the number of incremental shares to add to the weighted-average number of shares outstanding. For the
three- and nine-month periods ended September 30, 2001, average dilutive potential common shares of 157,661 and 31,276 shares, respectively, related to shares issuable upon the exercise of options were not included in the computation because they
were anti-dilutive.





The following table illustrates the
calculation of basic and diluted loss per share for the periods indicated:





For the Three Months Ended,

For the Nine Months Ended,September 30, 2001

September 30, 2000

September 30, 2001

September 30, 2000(Amounts in thousands, except per share amounts)Net loss


$      (632
)



$(234,456
)



$(103,948
)



$(233,734
)Weighted-average basic share outstanding


62,608




32,644




46,914




32,632Add: Dilutive potential common shares

















Weighted-average diluted shares outstanding


62,608




32,644




46,914




32,632Basic loss per share


$     (0.01
)



$        (7.18
)



$        (2.22
)



$        (7.16
)Diluted loss per share


$     (0.01
)



$        (7.18
)



$        (2.22
)



$        (7.16
)





Note 3.    Stock Options





As of September 30, 2001, we had five employee stock option plans and three
non-employee director stock option plans. The employee stock option plans were as follows: the Amended and Restated 1986 Stock Option and Incentive Plan, the Amended and Restated 1995 Stock Option and Incentive Plan, the
1998-2000




11


---

BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)

Performance Stock Plan, the 1999 FMAC Stock Option, Deferred Stock and Restricted Stock Plan, and the 2001 Stock Option and Incentive Plan which authorize the
issuance of 1,759,430, 2,500,000, 400,000, 270,756, and 3,200,000 shares of common stock, respectively. The non-employee director stock option plans were as follows: the Amended and Restated 1989 Non-Employee Director Stock Option and
Incentive Plan, the 1998 Non-Employee Director Stock Option and Incentive Plan, and the 2001 Non-Employee Director Stock Option Plan which authorize the issuance of up to 550,000, 200,000, and 500,000 shares of common
stock, respectively.





The following table illustrates the stock
options available for grant as of September 30, 2001:





Employee Stock Option  and Incentive Plans

Non-Employee Director  Stock Option and  Incentive Plans

TotalShares reserved for issuance


8,130,006




1,250,000




9,380,006Granted


(9,019,892
)



(1,102,000
)



(10,121,892
)Forfeited


2,157,018




88,000




2,245,018Expired


(394,688
)



(63,000
)



(457,688
)Total available for grant


872,444




173,000




1,045,444At September 30, 2001, we had outstanding options under the plans with expiration dates ranging
from the  year 2002 through 2013, as illustrated in the following table:Number of  Option Shares

Exercise Price Range

Weighted-Average  Exercise PriceOutstanding at December 31, 2000


2,821,490




$5.41-34.41




$        15.43Granted


3,527,000




4.59-7.70




4.63Forfeited


(419,059
)



5.41-34.41




14.97Outstanding at September 30, 2001


5,929,431




$4.59-34.41




$          9.04Exercisable at September 30, 2001


2,650,658




$4.59-34.41




$        13.02





During the second
and third quarters of 2001, we recognized a total of $4.3 million in expenses related to the issuance of stock options with below market strike prices. We will amortize an additional $5.0 million of compensation expense over the next twenty-two
months.





Note 4.    Merger and Acquisition-Related Activity





| | Franchise Mortgage Acceptance Company
| | -------------------------------------




We completed our acquisition of Franchise Mortgage Acceptance Company and its wholly owned division, Bankers Mutual, collectively referred to as FMAC, on
November 1, 1999. Under the terms of the agreement, as amended, we acquired all of the common stock of FMAC for consideration valued at approximately $285 million. Each share of FMAC common stock was exchanged for, at the election of the holder,
either $9.80 in cash or 0.5444 shares of our common stock. In total, cash elections were limited to 15% of the shares of FMAC common stock outstanding immediately prior to closing and the elections for our common stock were limited to 85% of the
shares of FMAC common stock outstanding immediately prior to closing. We paid






















12


---



BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




approximately $48 million in cash, including payments for certain acquisition costs, and issued 13,868,805 shares of our common stock, a portion of which were issued from our shares in treasury.
Upon consummation of the acquisition, we contributed substantially all of FMACs assets and liabilities to newly formed subsidiaries of Bay View Bank. The acquisition of FMAC was accounted for under the purchase method of accounting. The amount
of goodwill recorded as of the merger date, which represented the excess of the total purchase price over the estimated fair value of net assets acquired, was approximately $199 million. This amount was associated entirely with FMACs lending
operations, which was the core business acquired, and was initially amortized on a straight-line basis over 15 years.





On June 30, 2000, substantially all of the assets and certain liabilities of Bankers Mutual were sold to or assumed by Berkshire Mortgage Finance Limited Partnership for
approximately $40 million in cash. On September 11, 2000, we announced the restructuring of FMACs franchise lending operations. The shutdown of this division was effective as of September 30, 2000 and involved the termination of all related
production and marketing personnel. In connection with this restructuring, goodwill of $192.6 million was written off, representing the entire unamortized balance associated with FMAC. On June 22, 2001, we completed the stock sale by Bay View Bank
of the legal entity Bay View Franchise Mortgage Acceptance Company and its related servicing platform to a group of independent investors who were formerly part of BVFMAC management. The Company realized a loss of $23 million as a result of the
sale.





| | Goodman Factors, Inc.
| | ---------------------




On February 1, 2000, we acquired the assets and operations of Goodman Factors, Inc., a Texas-based general purpose factoring company for a total purchase price of $24.3 million.
The average balance of the factoring receivable assets acquired was approximately $15.3 million. The amount of goodwill related to this acquisition was approximately $9.0 million, which is being amortized on a straight-line basis over 12 years. This
goodwill amount represents the excess of the total purchase price over the estimated fair value of net assets acquired.





| | Concord Growth Corporation
| | --------------------------




We completed our acquisition of EXXE Data Corporation and its wholly owned commercial finance subsidiary, Concord Growth Corporation, on March 17, 1997. At
the close of the transaction, EXXE became a stand-alone subsidiary of Bay View Capital Corporation. Subsequent to the close of the transaction, EXXE was merged into Concord Growth Corporation and liquidated and Concord Growth Corporation became a
first-tier, stand-alone subsidiary of Bay View Capital Corporation. The former holders of EXXE capital stock, warrants and options received an initial aggregate cash payment of $19.8 million and were entitled to potential future cash payments of up
to $34 million, expiring in 2000, depending upon the financial performance of Concord Growth Corporation. We accrued for cash payments of $10.0 million pursuant to this agreement in 2000 which are considered part of the total purchase price. A cash
payment of $9.0 million was made in January 2001 and a final payment of $700,000 was made during the second quarter of 2001. The balance of $300,000 was used to discharge certain pre-acquisition legal liabilities of Concord Growth Corporation in
March 2001. The acquisition was accounted for under the purchase method of accounting effective April 1, 1997. The total purchase price exceeded the estimated fair value of net assets acquired by approximately $22.0 million, which was recorded as
goodwill and which is being amortized on a straight-line basis over 15 years. During 1998, Concord Growth Corporation was renamed Bay View Commercial Finance Group. Effective March 1, 1999, Bay View Capital Corporation contributed the capital stock
of Bay View Commercial Finance Group to Bay View Bank in conjunction with the March 1, 1999 conversion of Bay View Bank from a federal stock savings bank to a nationally chartered commercial bank.




13


---



BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 5.    Agreements with Regulatory Agencies





During the third quarter of 2000, we entered into formal agreements with the Office of the Comptroller of the Currency, sometimes referred to as the OCC, and the Federal Reserve
Bank of San Francisco.





The agreement between Bay View Bank and the
OCC was dated September 6, 2000. The provisions of this agreement, among other things, require that Bay View Banks Board of Directors adopt a new budget as well as new strategic, earnings and capital plans. The new strategic plan establishes
objectives for Bay View Banks overall risk profile, earnings performance, growth, and capital adequacy. In addition, a provision of the agreement states that Bay View Bank may not declare or distribute any dividends without the prior written
approval of the OCC.





The agreement between Bay View Capital
Corporation and the Federal Reserve Bank was dated September 28, 2000. The provisions of this agreement, among other things, also require that we adopt a new budget and new strategic, earnings and capital plans. The agreement also states that we may
not declare or pay any cash or stock dividends or make any interest payments on our Capital Securities without the prior written approval of the Federal Reserve Bank. The agreement further requires the prior written approval of the Federal Reserve
Bank to increase the principal balance of any category of debt above the levels outstanding as of June 30, 2000. Finally, we may not repurchase any stock without the prior written approval of the Federal Reserve Bank.





At December 31, 2000, our Tier 1 leverage ratio was below the minimum required amount
and accordingly, in January 2001, we filed a capital plan, pursuant to the terms of our regulatory agreement with the Federal Reserve Bank of San Francisco, indicating our intention to meet and maintain the required minimum capital ratios. At
September 30, 2001, Bay View Capital Corporation exceeded all of the Federal Reserve Banks minimum capital requirements.





Note 6.    Investment Securities





During the second quarter of 2001, we transferred $641.7 million in held-to-maturity securities to our available-for-sale portfolio. We sold $282 million of GNMA securities in June
2001 and realized a gain of $11.9 million. During the third quarter of 2001, we sold an additional $97 million of mortgage-backed securities and $20 million of other investment securities and realized net gains of $1.6 million. As a result of the
transfer and subsequent sales of investment securities from our held-to-maturity portfolio, we do not intend to hold any investment securities as held-to-maturity for the foreseeable future.





Note 7.    Income Taxes





We recorded a tax benefit of $0.4 million on the pre-tax loss of $1.0 million for the third quarter of 2001. We recorded a tax benefit of $59.9 million on the pre-tax loss of
$163.8 million for the first nine months of 2001. The effective tax rate for both the third quarter of 2001 and the first nine months of 2001 is a 36.5% tax benefit. This effective tax rate benefit differs from the statutory rate primarily due to
the impact of state taxes and nondeductible goodwill amortization.





The total net deferred tax asset as of September 30, 2001 is $153.0 million, which is net of the $26 million valuation allowance as established in 2000.




14


---



BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Note 8.    Allowance for
Loan and Lease Losses





The allowance for losses on loans and
leases was $49.7 million and $73.7 million at September 30, 2001 and December 31, 2000, respectively.





The following table illustrates the changes in the allowance for losses on loans and leases for the periods indicated:





Three Months Ended September 30, 2001

Nine Months Ended September 30, 2001

Year Ended December 31, 2000(Dollars in thousands)Beginning balance


$54,606




$73,738




$52,161Transfers of loans to held-for-sale


(1,486
)



(53,606
)



(15,210
)Charge-offs:Mortgage


(464
)



(1,380
)



(422
)Home Equity


(1,364
)



(14,378
)



(18,014
)Auto


(967
)



(2,352
)



(2,953
)Asset-based loans, factoring loans and commercial leases


(1,061
)



(6,346
)



(4,425
)Franchise


(4,088
)



(11,886
)



(1,128
)Business







(1,971
)



(7,926
)(7,944
)



(38,313
)



(34,868
)Recoveries:Mortgage


27




79




218Home Equity


492




1,947




3,157Auto


434




1,089




1,488Asset-based loans, factoring loans and commercial leases


359




1,821




1,366Franchise












2,8261,312




4,936




9,055Net charge-offs


(6,632
)



(33,377
)



(25,813
)Provision for losses on loans and leases


3,257




62,990




62,600Ending balance


$49,745




$49,745




$73,738Net charge-offs to average loans and leases (annualized)


1.03
%



1.54
%



0.65
%





The decrease in the
allowance for losses on loans and leases was primarily related to the decrease in loans held-for-investment during the first nine months of 2001 due to loans transferred from held-for-investment to held-for-sale and subsequently sold. The transfer
of loans from held-for-investment to held-for-sale resulted in a $53.6 million reduction to the allowance for loan and lease losses related to mark-to-market adjustments on these loans, consisting of $1.5 million in net reductions related to
approximately $59 million in additional franchise loans that have been contracted to sell in the fourth quarter, $47.3 million related to the loans sold to Goldman Sachs Mortgage Co., and $4.8 million related to the sale of home equity loans during
the second quarter of 2001.




15


---



BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 9.    Commitments and Contingencies





| | Litigation
| | ----------




On November 9, 2000, Morgan Guaranty Trust filed a claim in the U.S. District Court, Southern District of New York, against Bay View Franchise Mortgage Acceptance Company alleging
breach of certain representations and warranties in connection with the sale of loans to Morgan Guaranty Trust by the former Franchise Mortgage Acceptance Company. The liability, if any, cannot be estimated at this time. The matter will continue to
be vigorously defended.





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 legal actions will not have a material
adverse effect on our consolidated financial condition or results of operations.





Note 10.    Segment
and Related Information





We have two operating segments that we
refer to as business platforms. The platforms were determined primarily based upon the characteristics of our interest-earning assets and their respective distribution channels and reflect the way that we monitor, measure and evaluate our primary
business activities. Our platforms are as follows:





A Retail
Platform which is comprised of single-family real estate loans, home equity loans and lines of credit, auto loans and leases, mortgage-backed securities and other investments, and consumer banking products and services. The Retail Platforms
revenues are derived from customers throughout the United States.





A Commercial Platform which is comprised of multi-family and commercial real estate loans, franchise loans, franchise asset-backed securities, asset-based loans, factoring loans,
commercial leases, and business banking products and services. The Commercial Platforms revenues are derived from customers throughout the United States.





Each of our business platforms contributes to our overall operations. We evaluate the performance of our segments based upon contribution
by platform. Contribution by platform is defined as each platforms net interest income and noninterest income less each platforms allocated provision for losses on loans and leases, direct general and administrative expenses, including
certain expense allocations, and other noninterest expense, including the amortization of intangible assets.





In computing net interest income by platform, the interest expense associated with our warehouse lines, which are used primarily to fund franchise loans held-for-sale, is allocated
directly to the Commercial Platform. The interest expense associated with our remaining funding sources, including the noninterest expense associated with our 9.76% Capital Securities, is allocated to each platform on a pro-rata basis determined by
the relative amount of average interest-bearing liabilities, excluding warehouse lines, that are required to fund the platforms interest-earning assets.





The Retail Platform incurs the direct general and administrative expenses related to operating our branch network which serves primarily to generate deposits
used to fund interest-earning assets in the Retail and Commercial Platforms. A portion of these direct general and administrative expenses is allocated to the Commercial Platform based upon the relative amount of average interest-bearing liabilities
that are required to fund the platforms interest-earning assets.




16


---



BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







All indirect general and administrative expenses not specifically identifiable with, or allocable to, our business platforms are included in indirect corporate overhead. Indirect
corporate overhead includes expenses associated with our administrative and support functions.





The following tables illustrate each platforms contribution for the periods indicated. The tables also illustrate the reconciliation of total contribution by platform to our
consolidated net loss for the periods indicated. Reconciling items generally include indirect corporate overhead and income tax expense.





For the Three Months Ended September 30, 2001Retail

Commercial

Total(Dollars in thousands)Interest income

$       28,595


$       36,734


$       65,329Interest expense

(22,279
)

(15,279
)

(37,558
)Provision for losses on loans and leases

(500
)

(2,757
)

(3,257
)Noninterest income

29,047


1,195


30,242Direct general and administrative expenses

(26,060
)

(3,477
)

(29,537
)Allocation of branch network general and administrative expenses

7,361


(7,361
)

Restructuring expenses




1,812


1,812Revaluation of FMAC--related assets




1,382


1,382Leasing expenses

(16,567
)




(16,567
)Dividend expense on Capital Securities

(1,323
)

(964
)

(2,287
)Real estate owned operations, net

(261
)




(261
)Amortization of intangible assets

(2,076
)

(728
)

(2,804
)Contribution by platform

$         (4,063
)

$       10,557


$         6,494Indirect corporate overhead







(7,490
)Income tax benefit







364Net loss







$             (632
)AtSeptember 30, 2001:Interest-earning assets plus operating lease assets

$1,997,610


$1,647,957


$3,645,567Noninterest-earning assets







457,762Total
assets







$4,103,329




17


---



BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







For the Three Months Ended September 30, 2000Retail

Commercial

Total(Dollars in thousands)Interest income

$       56,121


$       62,302


$    118,423Interest expense

(40,348
)

(36,374
)

(76,722
)Provision for losses on loans and leases




(13,000
)

(13,000
)Noninterest income

25,877


2,035


27,912Direct general and administrative expenses

(19,438
)

(9,069
)

(28,507
)Direct general and administrative expensesFMAC loan production




(4,588
)

(4,588
)Allocation of branch network general and administrative expenses

5,154


(5,154
)

Restructuring chargesFMAC




(10,482
)

(10,482
)Revaluation of FMAC-related assets




(42,485
)

(42,485
)Leasing expenses

(17,345
)




(17,345
)Dividend expense on Capital Securities

(1,217
)

(1,018
)

(2,235
)Real estate owned operations, net

(23
)

(42
)

(65
)Amortization of intangible assets

(2,176
)

(593
)

(2,769
)Amortization of intangible assetsFMAC




(2,462
)

(2,462
)Write-off of intangible assetsFMAC




(192,622
)

(192,622
)Contribution by platform

$         6,605


$    (253,552
)

$    (246,947
)Indirect corporate overhead







(5,669
)Income tax benefit







18,160Net loss







$    (234,456
)AtSeptember 30, 2000:Interest-earning assets plus operating lease assets

$2,889,534


$2,592,955


$5,482,489Noninterest-earning assets







545,183Total
assets







$6,027,672




18


---



BAY VIEW CAPITAL CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







For the Nine Months Ended September 30, 2001Retail

Commercial

Total(Dollars in thousands)Interest income

$112,356


$131,527


$243,883Interest expense

(88,860
)

(65,024
)

(153,884
)Provision for losses on loans and leases

(6,109
)

(56,881
)

(62,990
)Noninterest income (expense)

89,708


(9,308
)

80,400Direct general and administrative expenses

(76,094
)

(18,527
)

(94,621
)Allocation of branch network general and administrative expenses

21,388


(21,388
)

Restructuring expenses

(4,998
)

(3,216
)

(8,214
)Revaluation of FMAC-related assets

(2,733
)

(65,913
)

(68,646
)Leasing expenses

(61,610
)




(61,610
)Dividend expense on Capital Securities

(3,932
)

(2,930
)

(6,862
)Real estate owned operations, net

(252
)




(252
)Amortization of intangible assets

(6,290
)

(2,186
)

(8,476
)Contribution by platform

$  (27,426
)

$(113,846
)

$(141,272
)Indirect corporate overhead







(22,529
)Income tax benefit







59,853Net loss







$(103,948
)





For the Nine Months Ended September 30, 2000Retail

Commercial

Total(Dollars in thousands)Interest income

$168,781


$178,788


$347,569Interest expense

(119,783
)

(99,719
)

(219,502
)Provision for losses on loans and leases

(5,200
)

(25,300
)

(30,500
)Noninterest income

80,669


15,311


95,980Direct general and administrative expenses

(56,724
)

(23,192
)

(79,916
)Direct general and administrative expensesFMAC loan production




(15,561
)

(15,561
)Direct general and administrative expensesBankers Mutual




(6,311
)

(6,311
)Allocation of branch network general and administrative expenses

13,841


(13,841
)

Restructuring chargesFMAC




(10,482
)

(10,482
)Revaluation of FMAC-related assets




(42,485
)

(42,485
)Leasing expenses

(49,660
)




(49,660
)Dividend expense on Capital Securities

(3,900
)

(2,802
)

(6,702
)Real estate owned operations, net

(17
)

(31
)

(48
)Amortization of intangible assets

(6,628
)

(1,803
)

(8,431
)Amortization of intangible assetsFMAC




(9,608
)

(9,608
)Write-off of intangible assetsFMAC




(192,622
)

(192,622
)Contribution by platform

$   21,379


$(249,658
)

$(228,279
)Indirect corporate overhead







(21,089
)Income tax benefit







15,634Net loss







$(233,734
)




19


---




Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





Strategic Overview





Bay View Capital Corporation is a commercial bank holding company headquartered in San Mateo, California. Our principal subsidiary is Bay View Bank, N.A. We operate two distinct
business platforms representing the two basic distribution channels of our primary businesses, retail and commercial banking.





Our Retail Platform includes 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. The platforms results include the income and expenses related to these business activities.





Our Commercial Platform includes multi-family and commercial real estate loans, franchise loans, asset-based loans, factoring
loans, commercial leases, and other business banking products and services. The platforms results include the income and expenses related to these business activities.





Our Mission and 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. On March 28, 2001, our Board of Directors approved a $110 million
common stock rights offering. Common stockholders of record as of April 23, 2001 received one transferable right for each share of common stock held, which entitled the holder to purchase .734 additional shares of Bay View common stock at a price of
$4.59 per share. These rights expired on May 14, 2001. Our Board of Directors also approved a $27.5 million concurrent offering of securities to certain institutional and other investors who would act as standby purchasers in the rights offering. We
entered into agreements with these standby purchasers in the rights offering pursuant to which they agreed to purchase up to $110 million of the shares that were not subscribed for in the rights offering. Keefe Ventures, LLC. acted as our financial
consultant in identifying these standby purchasers. The rights offering and the concurrent offering to the standby purchasers were completed during the second quarter and generated aggregate gross proceeds of $137.5 million. With this additional
capital, we have begun to implement a new strategic plan adopted by our Board of Directors. The new strategic plan includes exiting businesses inconsistent with a California-focused bank and includes assumptions related to the liquidation of our
remaining franchise-related assets and operations and our remaining high loan-to-value home equity loans. During the second quarter, we completed the stock sale of the legal entity BVFMAC and its related servicing platform and sold home equity loans
totaling $143 million in outstanding principal which included approximately $90 million of high loan-to-value home equity loans. During the third quarter, we completed the sale of $278 million of franchise loans to Goldman Sachs Mortgage Company,
which further reduced our franchise asset exposure, and contracted to sell approximately $59 million in additional franchise loans during the fourth quarter. Net of mark-to-market valuation adjustments, the net book value of our franchise loan
portfolio was $252.8 million at September 30, 2001 as compared to $779.9 at December 31, 2000.





Retail Platform Strategy





One of the principal businesses of the Retail Platform is Bay
View Banks 57 full-service branch banking network. A primary objective of the Retail Platform is to enhance the value of our deposit franchise by focusing on deposit growth and expanding and enhancing products and services. A primary component
of the Retail Platforms deposit growth strategy has been to focus on lower-cost transaction accounts (e.g., checking, savings and money market accounts) as a source of financing. We also offer a full array of consumer banking products and
services. We continued to make progress on our goal of expanding our deposit base by growing transaction accounts and business deposits. During the first nine months of 2001, our transaction accounts grew




20


---

$345.3 million, or 21.5%, and increased to 57.7% of total retail deposits at September 30, 2001, as compared to 46.2% at December 31, 2000, reflecting the continued strength of our deposit
franchise.





The Retail Platform includes our single-family loan
portfolio. We discontinued originating single-family loans in 1996 to reduce our concentration risk and facilitate the change-out of our balance sheet from mortgage-based assets to higher-yielding commercial bank-like assets. As a result, the
portfolio of single-family loans is decreasing over time as these loans are repaid or sold.





The Retail Platforms home equity loan portfolio includes conventional home equity loans and lines of credit and certain high loan-to-value home equity loans. We define
conventional home equity loans and lines of credit as having combined loan-to-value ratios of less than or equal to 100% at origination. We define high loan-to-value home equity loans as having combined loan-to-value ratios of greater than 100% at
origination. Our home equity loan production efforts are focused on conventional home equity loans and lines of credit originated through our branch-banking network. A significant portion of our high loan-to-value home equity loans was sold during
2000. Substantially all of the remaining high loan-to-value home equity loan portfolio was sold in June 2001.





The Retail Platform also originates and purchases fixed-rate loans secured by new and used autos. In executing our strategy, we identify product niches which are not the primary
focus of traditional competitors in the auto lending area, such as banks and captive finance companies. One such niche includes auto loans where a highly qualified borrower desires a higher relative loan amount and/or a longer term than is offered
by 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.





Commercial Platform Strategy





The Commercial Platforms objective is to increase our earnings potential and enhance our deposit
franchise by providing commercial bank-like products and services to small and middle-market businesses within California. The Commercial Platforms strategy centers on originating and purchasing commercial loans with higher risk-adjusted
returns.





The Commercial Platform originates multi-family and
commercial real estate loans, asset-based loans and factoring loans. We also purchased and originated franchise loans until the restructuring of our franchise lending division, which was shut down in September 2000. In connection with this
restructuring, we intend to reduce our concentration of franchise assets by selling our remaining franchise loans classified as held-for-sale. We sold $295.8 million and $432.3 million of franchise loans during the third quarter of 2001 and the
first nine months of 2001, respectively. As of September 30, 2001, our franchise loans held-for-sale totaled $98.0 million.





Results of Operations





Our net loss for the third
quarter of 2001 was $0.6 million, or $0.01 per diluted share, as compared to net loss of $234.5 million or $7.18 per diluted share, for the third quarter of 2000. Our net loss for the first nine months of 2001 was $103.9 million or $2.22 per diluted
share, as compared with $233.7 million or $7.16 per diluted share, for the first nine months of 2000. Results for the first nine months of 2001 include specific charges consistent with our new strategic plan which has been implemented following the
successful completion of our $137.5 million rights offering.





Specific charges recognized during the first nine months of 2001 included $68.6 million in pre-tax charges associated with the revaluation of franchise-related assets, $10 million
of additional provision for impairment primarily as a result of revising the estimated residual values associated with the auto lease portfolio and




21


---

$8.2 million in restructuring charges primarily related to the reduction in our workforce as discussed elsewhere herein or as previously disclosed. The revaluation charges consisted primarily of
$31.7 million in pre-tax charges, recorded in the second quarter, related to the recently completed sale of $278 million in loans to Goldman Sachs Mortgage Co., as well as writedowns of other franchise-related assets, including $15.5 million in
adjustments to servicing assets, $11.1 million in adjustments to residual interests on securitizations, and $5.0 million in adjustments to equity investments. During the third quarter of 2001, the revaluation charges were reduced by $1.4 million due
to a $1.0 million reduction in previously recorded mark-to-market adjustments on franchise loans associated with a pending sale and a $0.4 million recovery of servicer advances written off in the second quarter of 2001. The year-to-date loan loss
provision totaled $63.0 million which includes the reductions in the allowance for loan and lease losses related to the mark-to-market on loans transferred from held-for-investment to held-for-sale primarily during the second quarter as well as
additional reserves provided on the remaining franchise loan portfolio.





Our results for the first nine months of 2001 also included $9.8 million in net losses on sales of assets, including losses on the sale of BVFMAC and the home equity loans offset
by gains received during the first quarter of 2001 on our December 2000 asset sales and net gains on the sale of $432.3 million of franchise loans and $398.4 million of mortgage-backed securities and other investment securities during the first nine
months of the year.





Net Interest Income and Net Interest Margin





Net interest income was $27.8 million for the third quarter of 2001 as compared to $41.7 million for the
third quarter of 2000. Net interest income for the first nine months of 2001 was $90.0 million as compared to $128.1 million for the first nine months of 2000. Net interest margin was 3.17% for the third quarter of 2001 as compared to 3.09% for the
third quarter of 2000. Net interest margin was 2.96% for the first nine months of 2001 as compared to 3.16% for the first nine months of 2000. The following tables illustrate net interest income and net interest margin, by platform, for the periods
indicated:





For the Three Months EndedSeptember 30, 2001

September 30, 2000Net Interest Income

Net Interest Margin

Net Interest Income

Net Interest Margin(Dollars in thousands)Retail Platform (1)

$   6,316

1.42
%

$   15,773

2.34
%Commercial Platform

21,455

5.11


25,928

3.84Total

$27,771

3.17
%

$   41,701

3.09
%For the Nine Months EndedSeptember 30, 2001

September 30, 2001Net Interest Income

Net Interest Margin

Net Interest Income

Net Interest Margin(Dollars in thousands)Retail Platform (1)

$23,496

1.48
%

$   48,998

2.32
%Commercial Platform

66,503

4.59


79,069

4.09Total

$89,999

2.96
%

$128,067

3.16
%


---

|(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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22


---




The decrease in net interest
income for the third quarter of 2001, as compared to the third quarter of 2000, was due to lower average interest-earning asset balances partially offset by an increase in net interest margin. The decrease in net interest income for the first nine
months of 2001, as compared to the first nine months of 2000, was due to lower average interest-earning asset balances combined with a decrease in net interest margin. The decreases in average interest-earning assets were due primarily to franchise
and home equity loan sales throughout the period from September 2000 to September 2001 as well as the December 2000 sales of franchise asset-backed and mortgage-backed securities and the June 2001 sale of Government National Mortgage Association
(GNMA) mortgage-backed securities, partially offset by higher investment balances due to the deployment of sales proceeds into short-term investments. The increase in our net interest margin and net interest spread for the third quarter
of 2001, as compared to the third quarter of 2000, was due to lower funding costs, primarily the lower cost of deposits, partially offset by lower asset yields. The decrease in our net interest margin and net interest spread for the first nine
months of 2001, as compared to the first nine months of 2000, was primarily due to lower asset yields partially offset by lower funding costs. The decreases in both asset yields and funding costs were primarily due to the lower interest rate
environment. Our net interest margin, calculated in accordance with generally accepted accounting principles (GAAP), excludes the revenue impact of our auto leasing activities, but includes the associated funding costs. Because 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. For a discussion of normalized net interest
income and net interest margin, including the revenue impact of our auto leasing activities, see Non-GAAP Performance MeasuresNormalized Net Interest Income and Net Interest Margin.





Net interest income and net interest margin by platform reflect our strategy to sell off our higher-risk
assets, specifically high loan-to-value home equity loans and franchise loans, and focus on our core banking operations. The decrease in the Retail Platforms net interest margin reflects the increased impact of the funding costs of auto leases
as average interest-earning asset balances decline due to loan sales and securitizations. The increase in the Commercial Platforms net interest margin was due to the impact of franchise loan sales and securitizations, as franchise loans have
lower yields relative to the yields on our asset-based, factoring, and other commercial loans. For more detail, see discussion of Interest Income and Interest Expense. The following tables illustrate average interest-earning
assets, excluding our auto-related operating lease assets, by platform, for the periods indicated:





Average Balances for the Three Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)Retail Platform


$1,842,104



$2,690,107Commercial Platform


1,648,620



2,693,531Total


$3,490,724



$5,383,638





Average Balances for the Nine Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)Retail Platform


$2,105,155



$2,802,157Commercial Platform


1,910,629



2,566,374Total


$4,015,784



$5,368,531





The decrease in the
Retail Platforms average interest-earning assets, which exclude our auto-related operating lease assets, reflects the impact of loan sales from September 2000 through September 2001 as discussed elsewhere herein or as previously disclosed. The
decrease in the Commercial Platforms average




23


---

interest-earning assets reflects franchise loan sales from September 2000 through September 2001, the December 2000 sale of franchise asset-backed securities generated by our on-balance sheet
securitization during the second quarter of 2000 as well as the impact of the writedowns related to the revaluation of our franchise-related assets from September 2000 to September 2001.





The following table illustrates interest-earning assets, excluding our auto-related operating lease
assets, by platform, as of the dates indicated:





September 30, 2001

December 31, 2000

September 30, 2000(Dollars in thousands)Retail Platform


$1,618,376


$1,727,537


$2,381,532Commercial Platform


1,647,957


2,178,619


2,592,955Total


$3,266,333


$3,906,156


$4,974,487





The decrease in the
Retail Platforms interest-earning assets, excluding our auto-related operating lease assets, at September 30, 2001, as compared to December 31, 2000, was due primarily to the sale of $116.4 million in mortgage-backed securities and investment
securities during the third quarter of 2001 and the sale of $282 million in GNMA securities and $143 million of home equity loans during the second quarter of 2001. The loan sales were partially offset by the deployment of loan sales proceeds from
non interest-earning cash at December 31, 2000 into interest-earning short-term investments during the first quarter of 2001. The decrease in the Commercial Platforms interest-earning assets was due primarily to the sale of $432.3 million of
franchise loans during the first nine months of 2001 combined with the impact of the writedowns related to the revaluation of our franchise-related assets.




24


---




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 were calculated by dividing interest income by the average balance of interest-earning assets and by dividing interest expense by the average balance of
interest-bearing liabilities, for the periods indicated. Average balances of interest-earning assets and interest-bearing liabilities were calculated by averaging the relevant month-end amounts for the respective periods.





AVERAGE BALANCES, YIELDS AND RATESFor the Three Months Ended September 30, 2001

For the Three Months Ended September 30, 2000Average Balance

Interest

Average Yield/Rate

Average Balance

Interest

Average Yield/Rate(Dollars in thousands)AssetsInterest-earning assets:Loans and leases

$2,580,268



$55,156



8.50
%


$3,820,770



$  88,478



9.20
%Mortgage-backed securities(1)

310,465



4,231



5.46



917,702



16,669



7.31Investments(1)

599,991



5,942



3.89



645,166



13,276



8.12Total interest-earning assets

3,490,724



65,329



7.44
%


5,383,638



118,423



8.75
%Other assets

732,486











938,532Total assets

$4,223,210











$6,322,170Liabilities and Stockholders EquityInterest-bearing liabilities:Deposits

$3,436,575



$30,691



3.54
%


$3,868,839



$  47,747



4.91
%Borrowings(2)

342,243



6,867



7.97



1,741,421



28,975



6.58Total interest-bearing liabilities

3,778,818



37,558



3.94
%


5,610,260



76,722



5.43
%Other liabilities

114,068











125,457Total liabilities

3,892,886











5,735,717Stockholders equity

330,324











586,453Total liabilities and
stockholders equity

$4,223,210











$6,322,170Net interest income/net interest spread





$27,771



3.50
%






$  41,701



3.32
%Net interest-bearing liabilities

$   (288,094
)










$   (226,622
)Net interest margin(3)









3.17
%










3.09
%


---

|(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.
|--- |  | --------------------------------------------------------------------------



25


---




AVERAGE BALANCES, YIELDS AND RATESFor the Nine Months Ended September 30, 2001

For the Nine Months Ended September 30, 2000Average Balance

Interest

Average Yield/Rate

Average Balance

Interest

Average Yield/Rate(Dollars in thousands)AssetsInterest-earning assets:Loans and leases

$2,882,264


$192,698


8.90
%


$4,051,159


$273,189


8.97
%Mortgage-backed securities(1)

531,533


27,852


6.97



846,476


45,236


7.15Investments(1)

601,987


23,333


5.13



470,896


29,144


8.23Total interest-earning assets

4,015,784


243,883


8.08
%


5,368,531


347,569


8.61
%Other assets

736,270









1,034,945Total assets

$4,752,054









$6,403,476Liabilities and Stockholders EquityInterest-bearing liabilities:Deposits

$3,559,904


$114,065


4.28
%


$3,737,501


$128,868


4.61
%Borrowings(2)

752,740


39,819


7.05



1,874,861


90,634


6.43Total interest-bearing liabilities

4,312,644


153,884


4.77
%


5,612,362


219,502


5.14
%Other liabilities

115,458









176,891Total liabilities

4,428,102









5,789,253Stockholders equity

323,952









614,223Total liabilities and
stockholders equity

$4,752,054









$6,403,476Net interest income/net interest spread




$  89,999


3.31
%





$128,067


3.47
%Net interest-bearing liabilities

$   (296,860
)








$   (243,831
)Net interest margin(3)







2.96
%








3.16
%


---

|(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.
|--- |  | --------------------------------------------------------------------------



26


---




Interest Income





Interest income was $65.3 million for the third quarter of 2001 as compared to $118.4 million for the third quarter of 2000. Interest
income was $243.9 million for the first nine months of 2001 as compared to $347.6 million for the first nine months of 2000. The average yield on interest-earning assets was 7.44% for the third quarter of 2001 as compared to 8.75% for the third
quarter of 2000. The average yield on interest-earning assets was 8.08% for the first nine months of 2001 as compared to 8.61% for the first nine months of 2000. The following tables illustrate interest income, by platform, for the periods
indicated:





For the Three Months EndedSeptember 30, 2001

September 30, 2000Average Balance

Interest Income

Average Yield

Average Balance

Interest Income

Average Yield(Dollars in thousands)Retail Platform:Loans

$    938,810

$18,422


7.81
%


$1,427,939

$   32,539


9.10
%Mortgage-backed securities

310,465

4,231


5.46



917,702

16,669


7.31Investments

592,829

5,942


3.94



344,466

6,913


7.84Total
Retail Platform

1,842,104

28,595


6.17



2,690,107

56,121


8.33Commercial Platform:Loans and leases

1,641,458

36,734


8.89



2,392,831

55,939


9.26Investments

7,162








300,700

6,363


8.41Total
Commercial Platform

1,648,620

36,734


8.85



2,693,531

62,302


9.17Total

$3,490,724

$65,329


7.44
%


$5,383,638

$118,423


8.75
%





For the Nine Months EndedSeptember 30, 2001

September 30, 2000Average Balance

Interest Income

Average Yield

Average Balance

Interest Income

Average Yield(Dollars in thousands)Retail Platform:Loans

$    985,222

$   62,314


8.42
%


$1,674,709

$107,530


8.57
%Mortgage-backed securities

531,533

27,852


6.97



846,476

45,236


7.15Investments

588,400

22,190


4.99



280,972

16,015


7.56Total
Retail Platform

2,105,155

112,356


7.09



2,802,157

168,781


8.04Commercial Platform:Loans and leases

1,897,042

130,383


9.15



2,376,450

165,659


9.24Investments

13,587

1,144


11.35



189,924

13,129


9.21Total
Commercial Platform

1,910,629

131,527


9.17



2,566,374

178,788


9.24Total

$4,015,784

$243,883


8.08
%


$5,368,531

$347,569


8.61
%





| | Retail Platform
| | ---------------




Interest income for the Retail Platform was $28.6 million for the third quarter of 2001 as compared to $56.1 million for the third quarter of 2000. Interest income for the Retail
Platform was $112.4 million for the first nine months of 2001 as compared to $168.8 million for the first nine months of 2000. The average yield on interest-earning assets for the Retail Platform was 6.17% for the third quarter of 2001 as compared
to 8.33% for the third quarter of 2000. The average yield on interest-earning assets for the Retail Platform was 7.09% for the first nine months of 2001 as compared to 8.04% for the first nine months of 2000.




27


---




The Retail Platforms
interest income on loans was $18.4 million for the third quarter of 2001 as compared to $32.5 million for the third quarter of 2000. The Retail Platforms interest income on loans was $62.3 million for the first nine months of 2001 as compared
to $107.5 million for the first nine months of 2000. The Retail Platforms average loan yield was 7.81% for the third quarter of 2001 as compared to 9.10% for the third quarter of 2000. The Retail Platforms average loan yield was 8.42%
for the first nine months of 2001 as compared to 8.57% for the first nine months of 2000. The decreases in interest income on loans for the third quarter of 2001, as compared to the third quarter of 2000, and for the first nine months of 2001, as
compared to the first nine months of 2000, were due to lower average loan balances, as previously discussed, combined with a decrease in the platforms average loan yield due to the prevailing lower interest rate environment.





The Retail Platforms interest income on mortgage-backed securities was $4.2
million for the third quarter of 2001 as compared to $16.7 million for the third quarter of 2000. The Retail Platforms interest income on mortgage-backed securities was $27.9 for the first nine months of 2001 as compared to $45.2 million for
the first nine months of 2000. The Retail Platforms average yield on mortgage-backed securities was 5.46% for the third quarter of 2001 as compared to 7.31% for the third quarter of 2000. The Retail Platforms average yield on
mortgage-backed securities was 6.97% for the first nine months of 2001 as compared to 7.15% for the first nine months of 2000. The decreases in net interest income on mortgage-backed securities for the third quarter of 2001, as compared to the third
quarter of 2000, and for the first nine months of 2001, as compared to the first nine months of 2000, were due to lower average balances and lower yields. The average balance decreased as purchases of mortgage-backed securities were more than offset
by sales, including the sale of $231 million of Government National Mortgage Association (sometimes referred to as GNMA) securities during December 2000. These securities were transferred from our held-to-maturity portfolio to available-for-sale in
connection with our adoption of Statement No. 133 on October 1, 2000. During the second quarter of 2001, we transferred our remaining held-to-maturity securities to available-for-sale and sold $282 million of GNMA mortgage-backed securities in June
2001. Approximately $97 million in additional mortgage-backed securities were sold during the third quarter of 2001. The decrease in average yield was primarily due to the lower interest rate environment combined with the impact of the sales of
relatively higher-yielding GNMA securities during 2001 as discussed above.





The Retail Platforms interest income on investment securities, which consist primarily of short-term investments and our retained interests in auto loan securitizations, was
$5.9 million for the third quarter of 2001 as compared to $6.9 million for the third quarter of 2000. The Retail Platforms interest income on investment securities was $22.2 million for the first nine months of 2001 as compared to $16.0
million for the first nine months of 2000. The Retail Platforms average yield on investment securities was 3.94% for the third quarter of 2001 as compared to 7.84% for the third quarter of 2000. The Retail Platforms average yield on
investment securities was 4.99% for the first nine months of 2001 as compared to 7.56% for the first nine months of 2000. The decrease in interest income on investments for the third quarter of 2001, as compared to the third quarter of 2000, was
primarily due to a decrease in average yield partially offset by an increase in average balance. The increase in interest income for the first nine months of 2001, as compared to the first nine months of 2000, was due primarily to a higher average
balance partially offset by a decrease in average yield. The increases in average balances were primarily due to purchases of Federal Home Loan Bank (FHLB) securities throughout the first nine months of 2001 using proceeds from
year-to-date asset sales. The decreases in average yields were attributable to the lower interest rate environment.





| | Commercial Platform
| | -------------------




Interest income for the Commercial Platform was $36.7 million for the third quarter of 2001 as compared to $62.3 million for the third quarter of 2000. Interest income for the
Commercial Platform was $131.5 million for the first nine months of 2001 as compared to $178.8 million for the first nine months of 2000. The average yield on interest-earning assets for the Commercial Platform was 8.85% for the third quarter of
2001 as compared to 9.17% for the third quarter of 2000. The average yield on interest-earning assets for the Commercial Platform was 9.17% for the first nine months of 2001 as compared to 9.24% for the first nine months of 2000.




28


---




The Commercial Platforms
interest income on loans was $36.7 million for the third quarter of 2001 as compared to $55.9 million for the third quarter of 2000. The Commercial Platforms interest income on loans was $130.4 million for the first nine months of 2001 as
compared to $165.7 million for the first nine months of 2000. The Commercial Platforms average loan and lease yield was 8.89% for the third quarter of 2001 as compared to 9.26% for the third quarter of 2000. The Commercial Platforms
average loan and leases yield was 9.15% for the first nine months of 2001 as compared to 9.24% for the first nine months of 2000. The decreases in interest income on loans and leases for the third quarter of 2001, as compared to the third quarter of
2000, and for the first nine months of 2001, as compared to the first nine months of 2000, were due to lower average loan and lease balances resulting from loan sales and/or securitizations from September 2000 to September 2001 and the writedowns
related to the revaluation of franchise loans from September 2000 to September 2001 combined with a decline in average yields.





There was no interest income on investment securities in the Commercial Platform during the third quarter of 2001. The Commercial Platforms investment securities, which
consist of franchise asset-backed securities and residual interests in franchise loan securitizations, earned interest income of $1.1 million for the first nine months of 2001, $6.4 million for the third quarter ending September 30, 2000 and $13.1
million for the first nine months of 2000. The Company ceased accreting the discount on these securities during the second quarter of 2001. The Commercial Platforms average yield on investment securities was 11.35% for the first nine months of
2001, 8.41% for the third quarter of 2000 and 9.21% for the first nine months of 2000. The decrease in the Commercial Platforms interest income on investment securities was due to lower average balances primarily resulting from the December
2000 sale of franchise asset-backed securities and the revaluation of residual interests in franchise loan securitizations during 2000 and the first nine months of 2001 (see Revaluation of FMAC-related Assets for further discussion).





Interest Expense





| | Deposits
| | --------




Interest expense on our deposits was $30.7 million for the third quarter of 2001 as compared to $47.7 million for the third quarter of 2000. Interest expense on our deposits was
$114.1 million for the first nine months of 2001 as compared to $128.9 million for the first nine months of 2000. The average cost of deposits was 3.54% for the third quarter of 2001 as compared to 4.91% for the third quarter of 2000. The average
cost of deposits was 4.28% for the first nine months of 2001 as compared to 4.61% for the first nine months of 2000. The decreases in interest expense for the third quarter of 2001, as compared to the third quarter of 2000, and for the first nine
months of 2001, as compared to the first nine months of 2000, were primarily due to the lower interest rate environment combined with an increase in our transaction accounts as a percentage of our total retail deposits. Our transaction accounts,
which are generally lower-cost deposits as opposed to retail certificates of deposits, increased to 57.7% of total retail deposits at September 30, 2001 from 48.1% at September 30, 2000. Our overall cost of deposits were 3.13%, 4.01%, and 4.91% at
September 30, 2001, June 30, 2001, and September 30, 2000, respectively.




29


---




The following table summarizes our deposit costs by type and our transaction accounts as a percentage of retail deposits for the periods indicated:
 
 For the Three Months EndedSeptember 30,  2001

June 30,  2001

September 30,  2000Transaction accounts


2.60
%



3.18
%



3.52
%Retail certificates of deposit


4.74




5.58




5.68Total retail deposits


3.54




4.35




4.64Brokered certificates of deposit







7.30




6.82Total deposits


3.54
%



4.44
%



4.91
%Transaction accounts as a percentage of retail deposits


57.7
%



53.2
%



48.1
%
 
 Borrowings 
 Interest expense on our borrowings was $6.9 million for the third quarter of 2001 as compared to $29.0 million for the third quarter of 2000. Interest expense on our borrowings was
$39.8 million for the first nine months of 2001 as compared to $90.6 million for the first nine months of 2000. The average cost of borrowings was 7.97% for the third quarter of 2001 as compared to 6.58% for the third quarter of 2000. The average
cost of borrowings was 7.05% for the first nine months of 2001 as compared to 6.43% for the first nine months of 2000. In accordance with GAAP, these amounts exclude the expense associated with our Capital Securities. The decreases in interest
expense on borrowings for the third quarter of 2001, as compared to the third quarter of 2000, and for the first nine months of 2001, as compared to the first nine months of 2000, were due primarily to lower average balances, partially offset by
higher funding costs. The decrease in average balances was due to the paydown of our borrowings, including warehouse lines, Federal Home Loan Bank advances and securities sold under agreements to repurchase, as we sold interest-bearing assets during
the latter half of 2000 and the first nine months of 2001. The increase in borrowing costs was primarily due to higher costs associated with our warehouse line, including the accelerated amortization of fees resulting from the payoff of the
warehouse line in August 2001.
 
 The following tables illustrate the
changes in net interest income due to changes in the rate and volume of our interest-earning assets and interest-bearing liabilities for the three- and nine-month periods ended September 30, 2001 as compared to the three- and nine-month periods
ended September 30, 2000. Changes in rate and volume which cannot be segregated (e.g., changes in average interest rate multiplied by average portfolio balance) have been allocated proportionately between the change in rate and the change in volume.
 
 For the Three Months Ended  September 30, 2001 vs. 2000Rate  Variance

Volume  Variance

Total  Variance(Dollars in thousands)Interest income:Loans and leases

$   (6,326
)

$(26,996
)

$(33,322
)Mortgage-backed securities

(3,441
)

(8,997
)

(12,438
)Investment securities

(6,465
)

(869
)

(7,334
)(16,232
)

(36,862
)

(53,094
)Interest expense:Deposits

(12,179
)

(4,877
)

(17,056
)Borrowings

7,886


(29,994
)

(22,108
)(4,293
)

(34,871
)

(39,164
)Net interest income

$(11,939
)

$   (1,991
)

$(13,930
)


30


---




For the Nine Months Ended  September 30, 2001 vs. 2000Rate  Variance

Volume  Variance

Total  Variance(Dollars in thousands)Interest income:Loans and leases

$   (2,120
)

$(78,371
)

$   (80,491
)Mortgage-backed securities

(1,102
)

(16,282
)

(17,384
)Investment securities

(22,270
)

16,459


(5,811
)(25,492
)

(78,194
)

(103,686
)Interest expense:Deposits

(8,897
)

(5,906
)

(14,803
)Borrowings

9,759


(60,574
)

(50,815
)862


(66,480
)

(65,618
)Net interest income

$(26,354
)

$(11,714
)

$   (38,068
)
 
 Provision for Losses on Loans and Leases
 
 The provision for losses on loans and leases for the third quarter of 2001 was
$3.3 million as compared to $13.0 million for the third quarter of 2000. The provision for losses on loans and leases for the first nine months of 2001 was $63.0 million as compared to $30.5 million for the first nine months of 2000. The decrease in
the provision for losses on loans and leases for the third quarter of 2001, as compared to the third quarter of 2000, was primarily due to increased mitigation and resolutions of specific franchise problem credits combined with the decline in our
overall held-for-investment loan portfolio. The increase in the provision for losses on loans and leases for the first nine months of 2001, as compared to the first nine months of 2000, was primarily due to $52.1 million in reserve reductions
related to the mark-to-market on loans transferred from held-for-investment to held-for-sale during the second quarter as well as additional reserves provided on the remaining franchise loan portfolio. The following table illustrates the provision
for losses on loans and leases, by platform, for the periods indicated: For the Three Months EndedSeptember 30,  2001

September 30,  2000(Dollars in thousands)Retail Platform

$      500

$      Commercial Platform

2,757

13,000Total

$   3,257

$13,000For the Nine Months EndedSeptember 30,  2001

September 30,  2000(Dollars in thousands)Retail Platform

$   6,109

$   5,200Commercial Platform

56,881

25,300Total

$62,990

$30,500
 31


---




Noninterest Income





Noninterest income for the third quarter of 2001 was $30.2 million as compared to $27.9 million for the third quarter of 2000.
Noninterest income for the first nine months of 2001 was $80.4 million as compared to $96.0 million for the first nine months of 2000. The increase in noninterest income for the third quarter of 2001, as compared to the third quarter of 2000, was
primarily due to higher net gains on sales of assets and liabilities in the Retail Platform partially offset by lower auto leasing income in the Retail Platform and lower loan servicing and fee income in both the Retail and Commercial Platforms. The
decrease in noninterest income for the first nine months of 2001, as compared to the first nine months of 2000, was largely attributable to higher net losses on sales of assets and liabilities in the Commercial Platform and lower auto leasing income
and loan servicing and fee income in the Retail Platform partially offset by higher net gains on sales of assets and liabilities in the Retail Platform. The following tables illustrate noninterest income, by platform, for the periods indicated:


For the Three Months EndedSeptember 30,  2001

September 30,  2000(Dollars in thousands)Retail Platform
$29,047

$25,877Commercial Platform
1,195

2,035Total
$30,242

$27,912For the Nine Months EndedSeptember 30,  2001

September 30,  2000(Dollars in thousands)Retail Platform
$89,708

$80,669Commercial Platform
(9,308
)
15,311Total
$80,400

$95,980


Noninterest income for
the third quarter of 2001 included gains on sales of assets totaling $2.3 million, all of which were in the Retail Platform, consisting of $1.6 million in net gains on sales of mortgage-backed and other investment securities and a $0.6 million
contingent gain received during the third quarter of 2001 related to the June 2001 sale of home equity loans. Noninterest income for the second quarter of 2001 included losses on sales of assets totaling $22.7 million, consisting of net losses of
$23.9 million within the Commercial Platform partially offset by net gains of $1.2 million within the Retail Platform. The loss within the Commercial Platform was largely due to the $22.9 million loss on the sale of BVFMAC. The gain within the
Retail Platform was primarily due to the $11.9 gain on the sale of GNMA mortgage-backed securities offset by the $11.0 loss on the sale of home equity loans. Noninterest income for the first quarter of 2001 included $10.1 million of contingent gains
received during the first quarter of 2001 related to December 2000 asset sales, consisting of $6.5 million within the Commercial Platform and $3.6 million within the Retail Platform.





Noninterest income for the third quarter of 2000 included a $3.2 million charge relating to the valuation of retained interests
associated with our auto loan securitizations and $0.7 million in losses on sales of single-family loans, all of which were in the Retail Platform, and a $0.8 million write-down of an equity security within the Commercial Platform. Noninterest
income for the second quarter of 2000 included a $10.0 million gain on the auction of $180 million of Federal Home Loan Bank liabilities with below-market interest rates and net gains of $1.0 million on sales of loans and leases, all of which were
in the Commercial Platform. These gains were partially offset by a $4.7 million loss on the sale of substantially all of the assets and certain liabilities of Bankers Mutual in the Commercial Platform and $5.1 million in losses in the Retail
Platform primarily related to the revaluation of our retained interests in our 2000 auto loan securitization combined with charges associated with the anticipated exercise of the cleanup call on our 1997 auto loan securitization. Noninterest income
for the first quarter of 2000 included a $2.1 million gain for the Retail Platform associated with the sale of servicing rights and $1.3 million in gains for the Commercial Platform from the sales of multi-family mortgage loans.






32


---




Noninterest Expense





| | General and Administrative Expenses
| | -----------------------------------




General and administrative expenses for the third quarter of 2001 were $37.0 million as compared to $38.8 million for the third quarter of 2000. General and
administrative expenses for the first nine months of 2001 were $117.2 million as compared to $122.9 million for the first nine months of 2000. Excluding special mention items, as discussed below, the decrease in general and administrative expenses
for the third quarter of 2001, as compared to the third quarter of 2000, was primarily due to the elimination of BVFMAC loan production expenses with the shutdown of the division effective September 2000. In addition, by the end of the third quarter
of 2001, we realized certain cost-savings associated with our June 2001 restructuring and the sale of BVFMAC. The decrease in general and administrative expenses for the first nine months of 2001, as compared to the first nine months of 2000, was
due to the elimination of BVFMAC loan production expenses and the realization of certain cost-savings by the end of the third quarter of 2001, as previously discussed, and the elimination of Bankers Mutual expenses with the sale of that subsidiary
effective June 2000.





Special mention items generally include items
recognized during the period that we believe are significant and/or unusual in nature and therefore useful to you in evaluating our performance and trends. These items may or may not be nonrecurring in nature. General and administrative expenses for
the third quarter of 2001 included $3.3 million in special mention items consisting of $2.3 million related to the prepayment of FHLB advances and $1.0 million in other non-recurring items. General and administrative expenses for the second quarter
of 2001 included $8.7 million in special mention items primarily consisting of $2.6 million related to the Companys issuance of stock options during the quarter with below market strike prices, $2.4 million related to the prepayment of FHLB
advances and $2.4 million in legal and professional fees related to the implementation of the Companys new strategic plan. There were no special mention items included in general and administrative expenses for the first quarter of 2001.





General and administrative expenses for the third quarter of 2000
included $0.6 million in special mention items largely related to investment banking fees and BVFMAC transition costs. General and administrative expenses for the second quarter of 2000 included $1.3 million in special mention items largely related
to BVFMAC transition costs and other operational restructuring charges. General and administrative expenses for the first quarter of 2000 included $2.4 million in transition and restructuring charges, including the consolidation of certain loan
servicing operations, the closure of an FMAC satellite loan production office and the outsourcing of our internal audit function.





The following tables illustrate general and administrative expenses, by platform (not reflecting the allocation of branch network general and administrative expenses), for the
periods indicated:





For the Three Months EndedSeptember 30,  2001

September 30,  2000(Dollars in thousands)Retail Platform
$26,060

$19,438Commercial Platform
3,477

13,657Subtotal
29,537

33,095Indirect corporate overhead (1)
7,490

5,669Total
$37,027

$38,764











33


---




For the Nine Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)Retail Platform

$            76,094

$            56,724Commercial Platform

18,527

45,064Subtotal

94,621

101,788Indirect corporate overhead(1)

22,529

21,089Total

$          117,150

$          122,877


---

|(1) |  | Amount represents indirect corporate expenses not specifically identifiable with, or allocable to, our business platforms.
|--- |  | --------------------------------------------------------------------------------------------------------------------------




The following tables illustrate the ratio of general and administrative expenses to
average total assets, including auto-related securitized assets, on an annualized basis for the periods indicated:





For the Three Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)General and administrative expenses

$         37,027


$         38,764Average total assets, including auto-related securitized assets

$    4,357,844


$    6,780,742Annualized general and administrative expenses to average      total assets, including
auto-related securitized assets

3.40
%

2.29
%For the Nine Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)General and administrative expenses

$       117,150


$       122,877Average total assets, including auto-related securitized assets

$    4,909,364


$    6,857,768Annualized general and administrative expenses to average      total assets, including
auto-related securitized assets

3.18
%

2.39
%





Another measure that
management uses to monitor our level of general and administrative expenses is the efficiency ratio. The efficiency ratio is calculated by dividing the amount of general and administrative expenses by operating revenues, defined as net interest
income, as adjusted to include expenses associated with our Capital Securities, the excess of our leasing-related rental income over leasing-related depreciation expense, and other noninterest income. This ratio reflects the level of general and
administrative expenses required to generate $1 of operating revenue.




34


---




The following tables illustrate
the efficiency ratio for the periods indicated:





For the Three Months EndedSeptember 30, 2001


September 30, 2000(Dollars in thousands)General and administrative expenses


$   37,027




$   38,764Operating revenues, as defined


$   41,710




$   56,098Efficiency ratio


88.8
%



69.1
%For the Nine Months EndedSeptember 30, 2001


September 30, 2000(Dollars in thousands)General and administrative expenses


$117,150




$122,877Operating revenues, as defined


$142,840




$177,237Efficiency ratio


82.0
%



69.3
%





The increase in the
efficiency ratio for the third quarter of 2001, as compared to the third quarter of 2000, was due to lower net interest income and net leasing-related rental income partially offset by higher noninterest income and lower general and administrative
expenses. The increase in the efficiency ratio for the first nine months of 2001, as compared to the first nine months of 2000, was due to lower net interest income and noninterest income partially offset by lower general and administrative
expenses.





| | Restructuring Expenses
| | ----------------------




As part of the Companys ongoing efforts to focus on its core banking operations, a total of $8.2 million in restructuring charges were recorded during the second and third
quarters of 2001 primarily related to the reduction in our workforce, expected to be completed by the end of 2001. The restructuring charges consisted of $6.7 million of severance and $3.3 million of facilities charges that were recorded in the
second quarter partially offset by a $1.8 million reversal of an accrual related to severance payments which were disallowed by our primary regulator during the third quarter of 2001. As previously announced, the reduction in our workforce will
affect about 100 employees primarily from business lines that we are exiting, such as franchise operations, and other non-core and redundant operations. As of September 30, 2001, $1.3 million in severance payments have been made to 25 employees
impacted by the restructuring.





| | Revaluation of FMAC-Related Assets
| | ----------------------------------




A revaluation of certain FMAC-related assets resulted in a $68.6 million pre-tax adjustment for the first nine months of 2001. The revaluation included a
$31.7 million adjustment, recorded in the second quarter, related to the recently completed sale of approximately $278 million in loans to Goldman Sachs Mortgage Co. as well as writedowns of other franchise-related assets recorded primarily in the
first and second quarters of 2001. The writedowns included $15.5 million in adjustments to servicing assets, $11.1 million in adjustments to residual interests on securitizations, reflecting anticipated market yields, and $5.0 million in adjustments
to equity investments. During the third quarter of 2001, the revaluation charges were reduced by $1.4 million due to a $1.0 million reduction in previously recorded mark-to-market adjustments on franchise loans associated with a pending sale and a
$0.4 million recovery of servicer advances written off in the second quarter of 2001.




35


---




| | Leasing Expenses
| | ----------------




Leasing expenses represent 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 capitalized initial direct lease costs. Leasing expenses were $16.6 million for the
third quarter of 2001 as compared to $17.3 million for the third quarter of 2000. The slight decrease in leasing expenses for the third quarter of 2001, as compared to the third quarter of 2000, was primarily due to lower depreciation expense
associated with the declining balance of the auto lease portfolio. Leasing expenses were $61.6 million for the first nine months of 2001 as compared to $49.7 million for the first nine months of 2000. The increase in leasing expenses for the first
nine months of 2001, as compared to the first nine months of 2000, was due to the $10.0 million of additional provision for impairment primarily as a result of revising the estimated residual values associated with the auto lease portfolio that was
recorded during the second quarter. We ceased purchasing auto leases in June 2000.





| | Capital Securities
| | ------------------




On December 21, 1998, we issued $90 million in Capital Securities through Bay View Capital I, a business trust formed to issue the securities. The Capital Securities incur
quarterly cumulative dividends at an annual rate of 9.76% of the liquidation value of $25 per share. Dividend expense on the Capital Securities was $2.3 million for the third quarter of 2001 as compared to $2.2 million for the third quarter of 2000.
Dividend expense on the Capital Securities was $6.9 million for the first nine months of 2001 and $6.7 million for the first nine months of 2000.





In September of 2000, we entered into an agreement with the Federal Reserve Bank which requires that we obtain their approval prior to disbursing any
dividends associated with our Capital Securities. For the third and fourth quarters of 2000 and the first, second and third quarters of 2001, we did not receive approvals for the dividend payments. As a result, pursuant to the terms of the Capital
Securities, we have deferred distributions until such time as approval can be obtained. We fully intend to continue to seek such approval; however, we cannot predict when approval may be obtained. During this deferral period, distributions to which
holders are entitled will continue to accrue at an annual rate of 9.76% of the liquidation amount of $25 per Capital Security, plus accumulated additional distributions at the same rate, compounded quarterly, on any unpaid distributions (to the
extent permitted by law). Holders of the Capital Securities at the time the distribution of dividends is resumed will receive the cumulative deferred distributions plus the cumulative interest thereon.





| | Amortization of Intangible Assets
| | ---------------------------------




Amortization expense related to intangible assets was $2.8 million for the third quarter of 2001 as compared to $5.2 million for the third quarter of 2000.
Amortization expense related to intangible assets was $8.5 million for the first nine months of 2001 as compared to $18.0 million for the first nine months of 2000. The decreases in amortization expense were due to the elimination of goodwill
related to the BVFMAC loan production unit and Bankers Mutual. As previously discussed, our BVFMAC loan production and related operations were shut down as of September 30, 2000 and our Bankers Mutual subsidiary was sold effective June 30, 2000.





| | Income Taxes
| | ------------




Our income tax benefit was $0.4 million for the third quarter of 2001 and $59.9 million for the first nine months of 2001. This compares to an income tax benefit of $18.2 million
for the third quarter of 2000 and income tax benefit of $15.6 million for the first nine months of 2000. Our effective tax rate for the first nine months of 2001, based on our projected 2001 pre-tax loss, was a 36.5% tax benefit. This compares to an
effective tax rate of 6.3% tax benefit for the first nine months of 2000. The tax benefit rate in 2000 was lower primarily due to the nondeductible write-off of FMAC goodwill.




36


---




The total net deferred tax asset
as of September 30, 2001 is $153.0 million, which is net of the $26 million valuation allowance as established in 2000.





Non-GAAP Performance Measures





The following measures of normalized net interest income and normalized net interest margin are not measures of performance in accordance with GAAP. These measures should not be
considered alternatives to net interest income and net interest margin as indicators of our operating performance. These measures are included because we believe they are useful tools to assist you in assessing our performance and trends. These
measures may not be comparable to similarly titled measures reported by other companies.





Normalized Net Interest Income and
Net Interest Margin





Normalized net interest income and net
interest margin include net rental income from our auto leasing activities (that is, the excess of rental income over depreciation expense on auto-related lease assets), which are principally funded by our deposits, and also include expenses related
to our Capital Securities. Because our auto leases are accounted for as operating leases, the rental income is reflected as noninterest income and the related expenses, including depreciation expense, are reflected as noninterest expenses, in
accordance with GAAP. Normalized net interest income also excludes certain non-recurring interest income and interest expense items.





Normalized net interest income for third quarter of 2001 was $34.1 million as compared to $49.2 million for the third quarter of 2000. Normalized net interest income for the first
nine months of 2001 was $110.2 million as compared to $149.4 million for the first nine months of 2000. Normalized net interest margin for the third quarter of 2001 was 3.48% as compared to 3.33% for the third quarter of 2000. Normalized net
interest margin for the first nine months of 2001 was 3.26% as compared to 3.37% for the first nine months of 2000.





The following tables illustrate normalized net interest income and net interest margin, by platform, for the periods indicated:





For the Three Months EndedSeptember 30, 2001

September 30, 2000Normalized Net Interest Income

Normalized Net Interest Margin

Normalized Net Interest Income

Normalized Net Interest Margin(Dollars in thousands)Retail Platform

$   13,652


2.46
%


$   24,303


3.01
%Commercial Platform

20,492


4.88



24,945


3.70Total

$   34,144


3.48
%


$   49,248


3.33
%For the Nine Months EndedSeptember 30, 2001

September 30, 2000Normalized Net Interest Income

Normalized Net Interest Margin

Normalized Net Interest Income

Normalized Net Interest Margin(Dollars in thousands)Retail Platform

$   46,586


2.42
%


$   73,155


2.92
%Commercial Platform

63,574


4.39



76,250


3.95Total

$110,160


3.26
%


$149,405


3.37
%




37


---




The decrease in normalized net
interest income for the third quarter of 2001, as compared to the third quarter of 2000, was largely attributable to lower average interest-earning asset balances partially offset by an increase in normalized net interest margin. The decrease in
normalized net interest income for the first nine months of 2001, as compared to the first nine months of 2000, was due to lower average interest-earning asset balances combined with a decrease in normalized net interest margin. The decreases in
average interest-earning assets were primarily due to asset sales throughout the period from September 2000 to September 2001, as previously discussed. The increase in normalized net interest margin for the third quarter of 2001, as compared to the
third quarter of 2000, was due to lower funding costs partially offset by lower asset yields. The decrease in normalized net interest margin for the first nine months of 2001, as compared to the first nine months of 2000, was primarily due to lower
asset yields partially offset by lower funding costs. The decreases in both asset yields and funding costs were primarily due to the lower interest rate environment.





The following tables illustrate average interest-earning assets, including our auto-related operating lease assets, by platform, for the
periods indicated:





Average Interest-Earning Assets for the Three Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)Retail Platform


$2,262,802



$3,218,182Commercial Platform


1,648,620



2,693,531Total


$3,911,422



$5,911,713Average Interest-Earning Assets for the Nine Months EndedSeptember 30, 2001

September 30, 2000(Dollars in thousands)Retail Platform


$2,555,613



$3,318,515Commercial Platform


1,910,629



2,566,374Total


$4,466,242



$5,884,889





The decrease in the
Retail Platforms average interest-earning assets, including our auto-related operating lease assets, reflects the impact of loan sales from September 2000 through September 2001 as discussed elsewhere herein or as previously disclosed. The
decrease in the Commercial Platforms average interest-earning assets reflects franchise loan sales from September 2000 through September 2001, the December 2000 sale of franchise asset-backed securities and the impact of the writedowns related
to the revaluation of our franchise-related assets from September 2000 to September 2001.





The following tables illustrate interest-earning assets, including our auto-related operating lease assets, by platform, as of the dates indicated:





At September 30, 2001

At December 31, 2000

At September 30, 2000(Dollars in thousands)Retail Platform


$1,997,610


$2,207,366


$2,889,534Commercial Platform


1,647,957


2,178,619


2,592,955Total


$3,645,567


$4,385,985


$5,482,489




38


---




The decrease in the Retail Platforms interest-earning assets, including our auto-related operating lease assets, at September 30, 2001, as compared to December 31, 2000, reflects the impact of
the sales of mortgage-backed and other investment securities during the second and third quarters of 2001 and the sale of home equity loans during the second quarter of 2001, offset by an increase in short-term investments, as previously discussed.
The decrease in the Commercial Platforms interest earning assets reflects the impact of franchise loan sales during the first nine months of 2001 and the writedowns related to the revaluation of our franchise-related assets.
 
 Balance Sheet Analysis
 
 Our total assets were $4.1 billion at September 30, 2001, as compared to $5.4 billion at December 31, 2000. The decrease in total assets was primarily due to loan and lease sales
and paydowns, sales of investment securities, a decline in cash and short-term investments as we utilized these funds to reduce borrowings during the first nine months of 2001, and the revaluation of our franchise-related assets, partially offset by
loan and lease originations.
 
 Securities
 
 The following table illustrates our securities portfolio, including mortgage-backed securities due from creditor, as of the dates
indicated:
 
 September 30, 2001

December 31, 2000Amortized  Cost

Fair Value

Amortized  Cost

Fair Value(Dollars in thousands)Available-for-saleInvestment securities:Federal National Mortgage Association stock


$         580

$         765

$         580

$         829Federal Home Loan Bank callable notes

10,000

10,000



Freddie Mac structured notes

10,000

10,000



Asset-backed securities

15,720

15,638



Other investment securities

21,864

21,784

3,950

3,950Retained interests in securitizations

17,867

17,867

28,437

28,230Total
investment securities

76,031

76,054

32,967

33,009Mortgage-backed securities:Issued by GNMA

30,222

30,355



Issued by Freddie Mac and Fannie Mae

179,129

181,490

340

341Issued by other financial intermediaries

7,614

7,539



CMOs

52,659

52,446

262

237Total
mortgage-backed securities

269,624

271,830

602

578Total
securities available-for-sale

$345,655

$347,884

$   33,569

$   33,587Held-to-maturityMortgage-backed securities:Issued by GNMA





377,444

387,556Issued by Freddie Mac and Fannie Mae





249,856

246,925Issued by other financial intermediaries





11,827

11,803CMOs





2,923

2,913Total
mortgage-backed securities





642,050

649,197Total
securities held-to-maturity

$         

$         

$642,050

$649,197
 
 Our securities
activities are primarily conducted by Bay View Bank. Bay View Bank has historically purchased securities to supplement loan production. The majority of the securities purchased are high-quality mortgage-backed securities, including securities issued
by GNMA, Fannie Mae and Freddie Mac and senior tranches of private issue collateralized mortgage obligations, or CMOs. In addition to these securities, we also hold retained interests in loan and lease securitizations and hold investment securities
such as U.S. government agency notes and other short-term securities.


39


---




During the second quarter of 2001,
we transferred our remaining held-to-maturity securities to available-for-sale. The decrease in our total securities at September 30, 2001, as compared to December 31, 2000, was primarily due to sales of mortgage-backed and other investment
securities, including the sales of $282.0 million of GNMA securities during the second quarter of 2001 and $116.4 million of mortgage-backed securities and Sallie Mae floating-rate bonds during the third quarter of 2001, combined with the $11.1
million revaluation of our retained interests in loan and lease securitizations during the first and second quarters of 2001, as previously discussed. The revaluation established a new cost basis for our retained interests in loan and lease
securitizations. The decrease was partially offset by purchases of $83.2 million of GNMA mortgage-backed securities, $50.3 million of Fannie Mae and private-label mortgage-backed securities, $19.7 million of Sallie Mae floating-rate bonds, $16.0
million of asset-backed securities, $10.0 million of Federal Home Loan Bank callable notes, $10.0 million of Freddie Mac structured notes and $21.9 million in other investment securities, mainly trust preferred securities, for the first nine months
of 2001. As a result of the transfer and subsequent sales of investment securities from our held-to-maturity portfolio during the second quarter, we do not intend to hold any investment securities as held-to-maturity in the foreseeable future.





Mortgage-backed securities pose risks not associated with fixed
maturity bonds, primarily related to the ability of the borrower to prepay the underlying loan with or without penalty. This risk, known as prepayment risk, may cause the mortgage-backed securities to remain outstanding for a period of time
different than that assumed at the time of purchase. When interest rates decline, prepayments generally tend to increase, causing the average expected remaining maturity of the mortgage-backed securities to decline. Conversely, if interest rates
rise, prepayments tend to decrease, lengthening the average expected remaining maturity of the mortgage-backed securities.





Loans and Leases





The following table illustrates
our loan and lease portfolio as of the dates indicated:





September 30, 2001

December 31, 2000(Dollars in thousands)Loans and leases receivable:Retail Platform:Single-family mortgage loans


$    306,788



$    383,140High
loan-to-value home equity loans and lines of credit


13,455



100,573Other
home equity loans and lines of credit


128,780



202,324Auto
loans(1)


410,529



287,020Total
retail loans


859,552



973,057Commercial Platform:Multi-family mortgage loans


680,684



611,484Commercial mortgage loans


300,265



339,764Franchise
loans


154,837



443,622Asset-based loans, factoring loans and commercial leases


332,653



353,362Business
loans


76,020



81,365Total
commercial loans and leases


1,544,459



1,829,597Premiums and discounts and deferred fees and costs, net


14,463



22,878Gross loans and leases held for investment


2,418,474



2,825,532Allowance for losses on loans and leases


(49,745
)


(73,738
)Loans and leases held-for-investment, net


2,368,729



2,751,794Loans and leases held-for-sale(2)


97,951



345,207Loans and leases receivable


$2,466,680



$3,097,001


---

|(1) |  | Amounts exclude auto-related operating lease assets reported separately from loans and leases totaling $379.2 million at September 30, 2001 and $479.8 million at December 31,
2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes loans with an unpaid principal balance of $107.8 million at September 30, 2001 and $388.3 million at December 31, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------



40


---




Consistent with our strategy of exiting non-core businesses and eliminating high-risk assets, we sold $432.3 million of franchise loans, $143.0 million of home equity loans, which included approximately $90
million of high loan-to-value home equity loans, and $7.0 million of commercial loans during the first nine months of 2001. The franchise loan sales include the previously announced sale of $278 million of franchise loans to Goldman Sachs Mortgage
Company which was completed in the third quarter. The sale reduced our portfolio of franchise loans to about $274 million in unpaid principal balance, down 67% from $823 million at the beginning of the year. Net of mark-to-market valuation
adjustments, the net book value of our franchise loan portfolio was $252.8 million at September 30, 2001 as compared to $779.9 million at December 31, 2000. Approximately $59 million in additional franchise loans has been contracted to sell in the
fourth quarter further reducing this portfolio. Loans held-for-sale totaled $98.0 million as of September 30, 2001, all of which represented franchise loans held-for-sale. We are actively pursuing opportunities to sell our remaining held-for-sale
franchise loan portfolio to further reduce our concentration in franchise assets.
 
 We currently focus our loan and lease origination efforts on high-quality consumer and commercial loans and leases including multi-family and commercial mortgage loans. The
following tables illustrate our loan and lease originations for the periods indicated:
 
 For the Three Months EndedSeptember 30,  2001

September 30,  2000(Dollars in thousands)Loan and lease originations:Home
equity loans and lines of credit


$   30,928



$       17,050Auto
loans and leases


87,106



75,420Multi-family and commercial mortgage loans


89,508



43,917Franchise
loans






41,821Asset-based loans, factoring loans and commercial leases


7,806



36,036Business
loans


16,908



19,534Total originations


$232,256



$    233,778For the Nine Months EndedSeptember 30,  2001

September 30,  2000(Dollars in thousands)Loan and lease originations:Home
equity loans and lines of credit


$   68,830



$       54,470Auto
loans and leases(1)


240,270



330,271Multi-family and commercial mortgage loans


185,240



144,829Franchise
loans






299,103Bankers
Mutual multi-family mortgage loans(2)






220,145Asset-based loans, factoring loans and commercial leases


55,988



112,721Business
loans


42,172



51,212Total originations


$592,500



$1,212,751
 
  (1)

Includes auto-related operating lease assets totaling $114.6 million for the nine months ended September 30, 2000 which are not included in our total loan and lease portfolio
in accordance with GAAP. (2)

100% of Bankers Mutual multi-family loans were originated and sold through seller-servicer programs administered by Fannie Mae and Freddie Mac.


41


---




Credit Quality
 
 We define nonperforming assets as nonaccrual loans and leases, real estate owned, defaulted
mortgage-backed securities, and other repossessed assets. We define nonaccrual loans and leases as loans and leases 90 days or more delinquent as to principal and interest payments (unless the principal and interest are well secured and in the
process of collection) and loans and leases less than 90 days delinquent designated as nonperforming when we determine that the full collection of principal and/or interest is doubtful. We do not record interest on nonaccrual loans and leases.
 
 The following table illustrates our nonperforming assets as of
the dates indicated: September 30,  2001

December 31,  2000(Dollars in thousands)Nonaccrual loans and leases

$68,566

$   99,608Real estate owned

14,070

1,041Other repossessed assets

554

524Nonperforming assets

$83,190

$101,173
 
 The decrease in
nonaccrual loans and leases at September 30, 2001, as compared to December 31, 2000, was primarily due to resolutions of specific franchise problem credits during the first nine months of 2001. Non-franchise nonaccrual loans and leases decreased to
$22.0 million at September 30, 2001 from $29.4 million at December 31, 2000. The increase in real estate owned was primarily due to the foreclosure of certain franchise properties.
 
 The following table illustrates, by platform, nonperforming assets and nonperforming assets as a percentage of consolidated total
assets:
 
 Nonperforming Assets as a Percentage  of Consolidated Total AssetsSeptember 30,  2001

December 31, 2000(Dollars in thousands)Retail Platform:Single-family mortgage loans

$   3,319

0.08
%

$     4,599

0.09
%Home equity loans and lines of credit

465

0.01


3,919

0.07Auto loans

885

0.02


706

0.01Total
retail platform

4,669

0.11


9,224

0.17Commercial Platform:Multi-family mortgage loans

560

0.01


337

0.01Commercial real estate loans

12,936

0.32


12,025

0.23Franchise loans

61,181

1.50


71,790

1.34Asset-based loans, factoring loans and commercial leases

3,417

0.08


6,565

0.12Business loans

427

0.01


1,232

0.02Total
commercial platform

78,521

1.92


91,949

1.72Total

$83,190

2.03
%

$101,173

1.89
%


42


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The following table illustrates, by platform, loans and leases delinquent 60 days or more as a percentage of gross loans and leases, including loans and leases held-for-sale:
 
 Loans and Leases Delinquent 60 Days or More  as a Percentage of Gross Loans and LeasesSeptember 30, 2001

December 31, 2000(Dollars in thousands)Retail Platform

$   8,045

0.32
%

$15,139

0.48
%Commercial Platform

80,800

3.21


68,648

2.16Total

$88,845

3.53
%

$83,787

2.64
%
 
 The increase in
loans and leases delinquent 60 days or more at September 30, 2001, as compared to December 31, 2000, was primarily due to an increase in franchise loan delinquencies.
 
 Allowance for Loan and Lease Losses
 
 Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. While
we follow underwriting and credit monitoring procedures which we believe are appropriate in both growing and managing the loan and lease portfolio, in the event of nonperformance by these other parties, our potential exposure to credit losses could
significantly affect our consolidated financial position and results of operations.
 
 Lending money involves an inherent risk of nonpayment. Management seeks to reduce such credit risk by administering lending policies and underwriting procedures combined with its
monitoring of the loan and lease portfolio. The allowance for losses on loans and leases represents managements estimate of probable inherent losses which have occurred as of the date of the financial statements. The process of determining the
necessary levels of allowances for loan and lease losses is subjective and requires considerable judgement. In accordance with applicable guidelines, this process results in an allowance for losses on loans and leases that consists of three
components as described below:
 
 1.

Allowance for loans and leases that have been individually evaluated and identified as loans or leases which have probable losses.    These loans
and leases are generally larger-balance commercial or income producing real estate loans or leases which are evaluated on an individual basis. Allowance for these loans and leases are attributable to specific weaknesses in these loans or leases
evidenced by factors such as a deterioration in the borrowers ability to meet its obligations, a deterioration in the quantity or quality of the collateral securing the loan or lease, payment delinquency, or other events of default under the
terms of the loan or lease agreement or promissory note. 
 2.

Allowance for groups of smaller-balance homogenous loans and leases that are collectively evaluated for impairment and for groups of performing larger-balance loans and
leases which currently exhibit no identifiable weaknesses.    The smaller-balance homogenous loans and leases generally consist of single-family mortgage loans and consumer loans, including auto loans, home equity loans and
lines of credit and unsecured personal loans. The larger-balance loans and leases generally consist of commercial or income producing real estate loans and leases. These loans and leases have specific characteristics which indicate that it is
probable that a loss has been incurred in a group of loans or leases with those similar characteristics. Allowance for these groups of loans and leases are determined based on a combination of factors including historical loss experience, asset
concentrations, levels and trends of classified assets, and loan and lease delinquencies. Allowance for these groups of loans and leases also include an additional allowance for certain products we have introduced more recently, such as high
loan-to-value home equity loans and franchise loans and leases, where we do not have extensive historical data, other than industry experience, upon which to base our allowance levels. This additional allowance is intended to provide for those
situations where our experience may be different from industry experience.


43


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| | 3. |  | Unallocated Allowance.    Management determines the unallocated portion of the allowance for losses on loans and leases based on factors that are not
necessarily associated with a specific credit, group of loans or leases or loan or lease category. These factors include, but are not limited to, managements evaluation of economic conditions in regions where we lend money, loan and lease
concentrations, lending policies or underwriting procedures, and trends in delinquencies and nonperforming assets. The unallocated portion of the allowance for losses on loans and leases reflects managements efforts to ensure that the overall
allowance appropriately reflects the probable losses inherent in the loan and lease portfolio.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The allowance for losses on loans and leases at September 30, 2001 was $49.7 million as compared to $73.7 million at December 31, 2000. The decrease in the allowance for losses on
loans and leases was primarily related to the decrease in loans held-for-investment during the first nine months of 2001 due to loans transferred from held-for-investment to held-for-sale and subsequently sold. The transfer of loans from
held-for-investment to held-for-sale resulted in a $53.6 million reduction to the allowance for loan and lease losses related to mark-to-market adjustments on these loans, consisting of $1.5 million in net reductions related to approximately $59
million in additional franchise loans that have been contracted to sell in the fourth quarter, $47.3 million related to the loans sold to Goldman Sachs Mortgage Co., and $4.8 million related to the sale of home equity loans during the second quarter
of 2001.





The allowance for loan and lease losses at September 30,
2001 represents 2.06% of total loans held-for-investment. Within this allowance, $21.7 million is specifically allocated to the franchise portfolio and represents 14.04% of that portfolio. The balance of the allowance of $28.0 million represents
1.24% of the remaining loan portfolio. In addition, within the held-for-investment portfolio of loans is another $11.7 million of mark-to-market valuation adjustments on loans transferred from held-for-sale to held-for-investment which is available
to absorb losses on these loans.





The following table illustrates
the allowance for losses on loans and leases as a percentage of both nonperforming assets and gross loans and leases held-for-investment:





Allowance for Losses on Loans and Leases as a Percentage of Specified AssetsSeptember 30, 2001

December 31, 2000Assets

Percent

Assets

Percent(Dollars in thousands)Nonperforming assets

$       83,190

60
%

$    101,173

73
%Gross loans and leases held-for-investment

$2,418,474

2.06
%

$2,825,532

2.61
%




44


---




The following table illustrates
the changes in the allowance for losses on loans and leases for the periods indicated:





Three Months Ended September 30, 2001

Nine Months Ended September 30, 2001

Year Ended December 31, 2000(Dollars in thousands)Beginning balance


$54,606




$73,738




$52,161Transfers of loans to held-for-sale


(1,486
)



(53,606
)



(15,210
)Charge-offs:Mortgage


(464
)



(1,380
)



(422
)Home Equity


(1,364
)



(14,378
)



(18,014
)Auto


(967
)



(2,352
)



(2,953
)Asset-based loans, factoring loans and commercial leases


(1,061
)



(6,346
)



(4,425
)Franchise


(4,088
)



(11,886
)



(1,128
)Business







(1,971
)



(7,926
)(7,944
)



(38,313
)



(34,868
)Recoveries:Mortgage


27




79




218Home Equity


492




1,947




3,157Auto


434




1,089




1,488Asset-based loans, factoring loans and commercial leases


359




1,821




1,366Franchise












2,8261,312




4,936




9,055Net charge-offs


(6,632
)



(33,377
)



(25,813
)Provision for losses on loans and leases


3,257




62,990




62,600Ending balance


$49,745




$49,745




$73,738Net charge-offs to average loans and leases (annualized)


1.03
%



1.54
%



0.65
%





The increases in the
annualized percentage of net charge-offs to average loans and leases for the third quarter of 2001 and the nine months ended September 30, 2001, as compared to the year ended December 31, 2000, were primarily due to lower average loan and lease
balance combined with higher annualized net charge-offs.





Deposits





As a primary part of our business, we generate deposits for the purpose of funding loans, leases and
securities. The following table illustrates deposits as of the dates indicated:





September 30, 2001

December 31, 2000Amount

% of Total Deposits

Amount

% of Total Deposits(Dollars in thousands)Transaction accounts

$1,953,768

57.7
%

$1,608,499

42.9
%Retail certificates of deposit

1,430,104

42.3


1,872,562

50.0Total retail deposits

3,383,872

100.0


3,481,061

92.9Brokered certificates of deposit






265,251

7.1Total

$3,383,872

100.0
%

$3,746,312

100.0
%




45


---




Borrowings
 
 In addition to deposits, we utilize collateralized advances from the Federal Home Loan Bank of San
Francisco and other borrowings, such as subordinated debt, capital securities, warehouse lines, and securities sold under agreements to repurchase, on a collateralized and noncollateralized basis, for various purposes including the funding of loans,
leases and securities as well as to support the execution of our business strategies.
 
 The following table illustrates outstanding borrowings as of the dates indicated:
 
 September 30,  2001


December 31,  2000(Dollars in thousands)Advances from the Federal Home Loan Bank of San Francisco


$   99,942



$    804,837Securities sold under agreements to repurchase






103,241Warehouse lines






94,134Subordinated Notes, net


149,615



149,567Other borrowings


1,071



1,664Capital Securities


90,000



90,000Total


$340,628



$1,243,443
 
 The lower borrowing
level at September 30, 2001, as compared to December 31, 2000, was primarily due to a $705 million decrease in Federal Home Loan Bank advances resulting from prepayments of approximately $514 million during the second and third quarters of 2001
combined with $191 million in maturities during the first nine months of 2001 that were not renewed. In addition, we paid down our securities sold under agreements to repurchase used primarily to fund the securities generated from our June 2000
on-balance sheet franchise loan securitization that was subsequently sold as well as our warehouse lines related to franchise loans during the first nine months of 2001.
 
 Liquidity
 
 The objective of our liquidity management program is to ensure that funds are available in a timely manner to meet loan demand and depositors needs, and to service other
liabilities as they come due, without causing an undue amount of cost or risk, and without causing a disruption to normal operating conditions.
 
 We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding
patterns, present and forecasted market and economic conditions, and existing and planned business activities. Our Risk Management Committee provides oversight to the liquidity management process and recommends policy guidelines, subject to Board of
Directors approval, and courses of action to address our actual and projected liquidity needs.
 
 The ability to attract a stable, low-cost base of deposits is a significant source of liquidity. Other sources of liquidity available to us include short-term borrowings, which
consist of advances from the Federal Home Loan Bank of San Francisco, repurchase agreements, warehouse lines and other short-term borrowing arrangements. Our liquidity requirements can also be met through the use of our portfolio of liquid assets.
Liquid assets, as defined by us, include cash and cash equivalents in excess of the minimum levels necessary to carry out normal business operations, federal funds sold, commercial paper, and other short-term investments.
 
 On September 6, 2000, Bay View Bank entered into an agreement with the Office of the
Comptroller of the Currency. This agreement states that Bay View Bank may not declare or distribute any dividends without prior approval of the Office of the Comptroller of the Currency.


46


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On September 29, 2000, Bay View Capital Corporation entered into an agreement with the Federal Reserve Bank of San Francisco. In addition to requiring prior approval to pay common stock dividends, the agreement
requires us to obtain prior approval to disburse dividends associated with our 9.76% Capital Securities. We did not receive approval to disburse the quarterly dividend in the third and fourth quarters of 2000 and the first three quarters of 2001.
Pursuant to the terms of the Capital Securities, we have deferred distributions on the debentures. During this deferral period, distributions to which holders are entitled will continue to accrue at an annual rate of 9.76% of the liquidation amount
of $25 per Capital Security, plus accumulated additional distributions at the same rate, compounded quarterly, on any unpaid distributions (to the extent permitted by law). We fully intend to continue to seek permission to distribute the dividends
at the earliest available opportunity, as the interest on these unpaid dividends is one of our highest borrowing costs.
 
 At September 30, 2001, we had liquidity levels with cash and overnight deposits in excess of $503.4 million, representing approximately 14.9% of total deposits.
 
 To assist you in analyzing our liquidity, you should review our Consolidated
Statements of Cash Flows at Item 1. Financial Statements and Supplementary Data.
 
 Capital Resources
 
 Management seeks to maintain adequate capital to support
anticipated asset growth and credit risks, and to ensure that Bay View Capital Corporation and Bay View Bank are in compliance with all regulatory capital guidelines. Stockholders equity totaled $333.3 million at September 30, 2001, as
compared to $297.8 million at December 31, 2000. Tangible stockholders equity, which excludes intangible assets, was $206.9 million at September 30, 2001, as compared to $162.9 million at December 31, 2000. Both increases were due to the net
proceeds from our $137.5 million rights offering offset by the losses incurred for the first nine months of 2001.
 
 The following table illustrates the reconciliation of our stockholders equity to tangible stockholders equity as of the dates indicated:
 
 September 30,  2001

December 31,  2000(Dollars in thousands, except  per share amounts)Stockholders equity


$333,283




$297,849Intangible assets


(126,377
)



(134,936
)Tangible stockholders equity


$206,906




$162,913Book value per share


$        5.33




$        9.14Tangible book value per share


$        3.31




$        5.00
  47


---




The following table illustrates
the changes in our tangible stockholders equity for the periods indicated:





Nine Months Ended September 30, 2001

Year Ended December 31, 2000(Dollars in thousands)Beginning tangible stockholders equity


$162,913




$302,189Net loss


(103,948
)



(326,197
)Additional intangible assets related to acquisitions accounted for under the      purchase
method of accounting







(22,095
)Write-off of intangible assets related to Bankers Mutual







2,776Write-off of intangible assets related to FMAC







192,622Net proceeds from issuance of common stock


108,000




Net proceeds from issuance of preferred stock


26,400




Expense realized on stock options with below market strike price


4,260




Amortization of intangible assets


8,476




20,766Exercise of stock options and distribution of directors retirement plan      shares


73




94Cash dividends declared







(9,780
)Other


732




2,538Ending tangible stockholders equity


$206,906




$162,913





Intangible assets
generated from our acquisitions accounted for under the purchase method of accounting are deducted from stockholders equity in the above calculation to arrive at tangible stockholders equity. Conversely, the amortization of intangible
assets increases tangible stockholders equity as well as Bay View Capital Corporations and Bay View Banks Tier 1 regulatory capital.





Bay View Bank is subject to various regulatory capital guidelines administered by the Office of the Comptroller of the Currency. Under these capital
guidelines, the minimum total risk-based capital ratio and Tier 1 risk-based capital ratio requirements are 8.00% and 4.00%, respectively, of risk-weighted assets and certain off-balance sheet items. The minimum Tier 1 leverage ratio requirement is
4.00% of quarterly average assets, as adjusted.





Additionally, the
Federal Deposit Insurance Corporation Improvement Act of 1991 defines five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, depending upon the capital level
of the institution. Each federal banking agency, including the Office of the Comptroller of the Currency, is required to implement prompt corrective actions for undercapitalized institutions that it regulates.





Bay View Banks regulatory capital levels at September 30, 2001 exceeded both
the minimum requirements as well as the requirements necessary to be considered well-capitalized as illustrated in the following table:





Actual

Minimum Requirement

Well-Capitalized RequirementAmount

Ratio

Amount

Ratio

Amount

Ratio(Dollars in thousands)Tier 1 Leverage

$220,770

5.67
%

$155,846

4.00
%

$194,808

5.00
%Tier 1 Risk-based

$220,770

7.46
%

$118,379

4.00
%

$177,568

6.00
%Total Risk-based

$307,999

10.41
%

$236,758

8.00
%

$295,947

10.00
%





Similarly, Bay View
Capital Corporation is subject to various regulatory capital guidelines administered by the Board of Governors of the Federal Reserve. The capital guidelines provide definitions of regulatory capital ratios and the methods of calculating capital and
each ratio for bank holding companies. The federal banking




48


---

agencies require a minimum ratio of qualifying total risk-based capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the
risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total average assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five
categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total average assets is 3%. For organizations not rated in the highest of the five categories, the regulations advise an additional
cushion of at least 100 basis points. 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 September 30, 2001, Bay View Capital Corporation exceeded the minimum regulatory capital requirements as illustrated in the following table:





Actual

Minimum RequirementAmount

Ratio

Amount

Ratio(Dollars in thousands)Tier 1 leverage

$162,041

4.09
%

$158,561

4.00
%Tier 1 risk-based

$162,041

4.80
%

$135,113

4.00
%Total risk-based

$285,460

8.45
%

$270,226

8.00
%





Share Repurchase Program





In August 1998, our Board of Directors authorized the repurchase of up to $50 million in shares of our
common stock. During 1999 we repurchased 460,000 shares of our common stock for $8.3 million at an average price of $18.22 per share. In November 1999, our treasury shares were reissued in conjunction with the acquisition of FMAC. At September 30,
2001, we had approximately $17.6 million in remaining authorization available for future share repurchases. Pursuant to our agreement with the Federal Reserve Bank of San Francisco, we must obtain prior written approval before repurchasing shares.





Impact of New Accounting Standards





In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies the
criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately.
Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also
require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company has adopted the provisions of Statement 141 effective July 1, 2001 and is required to adopt Statement 142 effective January 1, 2002.





Statement 141 will require, upon adoption of Statement 142, that the Company evaluate its existing
intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, the Company will be required to reassess the useful lives and residual




49


---

values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In
addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle as of January 1, 2002.





In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill
(and equity-method goodwill) is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting
units carrying amount. To the extent a reporting units carrying amount exceeds its fair value, an indication exists that the reporting units goodwill may be impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair value of the reporting units goodwill, determined by allocating the reporting units fair value to all of it assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible,
but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Companys statement of earnings.





And finally, any unamortized negative goodwill (and negative equity-method goodwill) existing at the
date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle.





As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $119.3 million and unamortized identifiable intangible assets in the amount of $4.5
million, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill and other identifiable intangible assets was $20.8 million for the year ended December 31, 2000 and $8.5 million
for the nine months ended September 30, 2001. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Companys financial
statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.




50


---




Item 3.Quantitative and Qualitative Disclosures About Market Risk





Asset and Liability Management





The objective of our asset and liability management activities is to improve our earnings by adjusting the type and mix of assets and liabilities to effectively address changing
conditions and risks. Through overall management of our balance sheet and by controlling various risks, we seek to optimize our financial returns within safe and sound parameters. Our operating strategies for attaining this objective include
managing net interest margin through appropriate risk/return pricing of assets and liabilities and emphasizing growth in retail deposits, as a percentage of interest-bearing liabilities, to reduce our cost of funds. Our strategy includes originating
and purchasing quality assets with higher risk-adjusted yields and selling assets with lower risk-adjusted yields or repricing characteristics that do not meet our objectives for interest rate risk. We also seek to improve earnings by controlling
noninterest expense, enhancing noninterest income and utilizing improved information systems to facilitate our analysis of the profitability of our business platforms. We also may use risk management instruments to modify interest rate
characteristics of certain assets or liabilities to hedge against our exposure to interest rate fluctuations, reducing the effects these fluctuations might have on associated cash flows or values. These risk management instruments, also referred to
as derivative instruments, included interest rate exchange agreements, or swaps, forward sales contracts, and interest rate option contracts, commonly referred to as caps. Derivative financial instruments involve, to varying
degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. Finally, we perform internal analyses to
measure, evaluate and monitor risk.





Interest Rate Risk





Interest rate risk is the most significant market risk impacting the Company. Interest rate risk occurs
when interest rate sensitive assets and liabilities do not reprice simultaneously and in equal volumes. A key objective of asset and liability management is to manage interest rate risk associated with changing asset and liability cash flows and
values and market interest rate movements. Our Risk Management Committee provides oversight to our interest rate risk management process and recommends policy guidelines regarding exposure to interest rates for approval by our Board of Directors.
Adherence to these policies is monitored on an ongoing basis, and decisions related to the management of interest rate exposure are made when appropriate in accordance with our policies.





Financial institutions are subject to interest rate risk to the degree that interest-bearing liabilities
reprice or mature on a different basis and at different times than interest-earning assets. Our strategy has been to reduce the sensitivity of our earnings to interest rate fluctuations by more closely matching the effective maturities or repricing
characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Further, interest rates on certain types of assets and liabilities may fluctuate prior to
changes in market interest rates, while rates on other types may lag behind. Additionally, certain assets, such as adjustable rate mortgages, have features, including payment and rate caps, which restrict changes in their interest rates. We consider
the anticipated effects of these factors when implementing our interest rate risk management objectives.





| | Swaps
| | -----




We have historically used interest rate exchange agreements, or swaps, to offset mismatches in the rate and maturity of certain of our assets and their funding sources and to
mitigate the risk of the effects of interest rate fluctuations on the value of our fixed-rate loans classified as held-for-sale. Interest rate swaps involve the exchange of fixed-rate and variable-rate interest payment obligations without the
exchange of the underlying notional amounts. We were a party to interest rate swaps with notional principal amounts of $194.0 million at December 31, 2000. These swaps were reported at their fair value with realized gains and losses charged to
earnings when incurred. By June 30, 2001, all of our open swap positions either matured or were closed-out.




51


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| | Treasury Futures Contracts
| | --------------------------




We had open positions related to United States Treasury futures contracts with notional amounts of $154.7 million at December 31, 2000. These contracts were
used to offset fixed-rate franchise loans classified as held-for-sale. These contracts were settled daily and were reported at their fair value with realized gains and losses charged to earnings when incurred. By June 30, 2001, we closed-out all of
our remaining open United States Treasury futures positions.





| | Forward Sale Contracts
| | ----------------------




We had open forward contract positions related to Fannie Mae benchmark notes with notional amounts of $70.0 million at December 31, 2000. These contracts are used to offset
fixed-rate franchise loans classified as held-for-sale. These contracts are reported at fair value with realized gains and losses charged to earnings when incurred. By July 2001, we closed out all open forward contract positions.





| | Caps
| | ----




Interest rate caps are option contracts that limit the cap holders risk associated with an increase in interest rates. If rates go above a specified interest rate (strike
price or cap rate), the cap holder is entitled to receive cash payments equal to the excess of the market rate over the strike price multiplied by the notional amount. As of September 30, 2001 and December 31, 2000, we had interest rate caps with
notional amounts totaling $180 million and cap rates at 7.00% and a cap index based on either the one-or three-month LIBOR rate. These caps are reported at their fair value with realized and unrealized gains and losses charged to earnings when
incurred.





Other types of market risk also affect us in the normal
course of our business activities. The impact on us resulting from other market risks is deemed immaterial and no separate disclosure of quantitative information related to such market risks is deemed necessary. We do not maintain a portfolio of
trading securities and do not intend to engage in such activities in the foreseeable future.





Interest Rate Sensitivity





Our monitoring activities related to managing interest rate
risk include both interest rate sensitivity gap analysis and the use of a simulation model. While traditional gap analysis provides a simple picture of the interest rate risk embedded in the balance sheet, it provides only a static view
of interest rate sensitivity at a specific point in time and does not measure the potential volatility in forecasted results relating to changes in market interest rates over time. Accordingly, we combine the use of gap analysis with the use of a
simulation model which provides a dynamic assessment of interest rate sensitivity.





The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated to reprice within a specific time period and the amount of
interest-bearing liabilities anticipated to reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets repricing within a specific time period exceeds the amount of interest-bearing
liabilities repricing within that same time period. Positive cumulative gaps suggest that earnings will increase when interest rates rise. Negative cumulative gaps suggest that earnings will increase when interest rates fall.




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The following table illustrates
our combined asset and liability repricing as of September 30, 2001:





Repricing PeriodUnder One Year

Between One and Three Years

Between Three and Five Years

Over Five Years

Total(Dollars in thousands)AssetsCash and investments

$    457,868


$          


$   17,867


$     2,343


$    478,078Mortgage-backed securities and loans and      leases(1)

2,112,818


563,632


225,441


265,598


3,167,489Total
interest rate sensitive assets

$2,570,686


$563,632


$243,308


$267,941


$3,645,567LiabilitiesDeposits:Transaction accounts(2)

$1,447,730


$282,774


$211,353


$   11,911


$1,953,768Retail certificates of deposit

1,371,092


56,106


2,552


354


1,430,104Borrowings(3)




100,000





240,628


340,628Total
interest rate sensitive liabilities

$2,818,822


$438,880


$213,905


$252,893


$3,724,500Repricing gap-positive (negative)

$    (248,136
)

$124,752


$   29,403


$   15,048


$      (78,933
)Cumulative repricing gap-positive (negative)

$    (248,136
)

$(123,384
)

$  (93,981
)

$  (78,933
)


---

|(1) |  | Based on assumed annual prepayment and amortization rates, which approximate our historical experience.
|--- |  | -------------------------------------------------------------------------------------------------------

|(2) |  | We estimate transaction accounts repricing based on historical trends and the nature and types of our transaction accounts.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes Capital Securities.
|--- |  | ----------------------------



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The simulation model discussed
above also provides Risk Management Committee with the ability to simulate our net interest income. In order to measure, at September 30, 2001, the sensitivity of our forecasted net interest income to changing interest rates, both a rising and
falling interest rate scenario were projected and compared to a base market interest rate forecast derived from the current treasury yield curve. For the rising and falling interest rate scenarios, the base market interest rate forecast was
increased or decreased, on an instantaneous and sustained basis, by 100 and 200 basis points. At September 30, 2001, our net interest income related to these hypothetical changes in market interest rates was within our policy guidelines as
illustrated in the following table:





Net Interest Income200 bp

100 bp



+100 bp

+200 bpProjected effect:Net interest income

$151,154


$149,115




$145,302


$144,784%Increase (decrease) from base net interest income

2.62
%

1.23
%



(1.36
)%

(1.71
)%Policy guideline

0.00
%

(5.00
)%



(10.00
)%

(15.00
)%





The computation of
prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, asset prepayments and deposit decay, and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates. Actual amounts may differ from those projections set forth above should market conditions vary from the underlying assumptions used.




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PART II.    OTHER INFORMATION





|Item |  | 1.Legal Proceedings
|---- |  | -------------------




On November 9, 2000, Morgan Guaranty Trust filed a claim in the U.S. District Court, Southern District of New York, against Bay View Franchise Mortgage
Acceptance Company alleging breach of certain representations and warranties in connection with the sale of loans to Morgan Guaranty Trust by the former Franchise Mortgage Acceptance Company. The liability, if any, cannot be estimated at this time.
The matter will continue to be vigorously defended.





|Item |  | 2.    Changes in Securities
|---- |  | ---------------------------




None





|Item |  | 3.     Defaults Upon Senior Securities
|---- |  | --------------------------------------




None





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




None





|Item |  | 5.    Other Information
|---- |  | -----------------------




None





|Item |  | 6.    Exhibits and Reports on Form 8-K
|---- |  | --------------------------------------




a(i)

Computation of Ratios of Earnings to Fixed Charges (Exhibit 12)b(i)

The Registrant filed the following report on Form 8-K dated July 13, 2001 as amended by Form 8-K/A during the three months ended September 30, 2001:








On July 10, 2001, the registrant terminated KPMG LLP as principal accountants and engaged Arthur Andersen LLP as the Companys principal accountants for the fiscal year ending
December 31, 2001.




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SIGNATURES





Pursuant to the requirements
of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





BAY VIEW CAPITAL
CORPORATION  RegistrantDATE: November 14, 2001/s/    JOHN W. ROSE BY: John W. Rose Executive Vice President and Chief Financial Officer (Principal Financial Officer)/s/    JEFFREY O.
BUTCHER BY: Jeffrey O. Butcher Senior Vice President and Controller (Principal Accounting Officer)




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