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UNITED STATESSECURITIES AND EXCHANGE COMMISSION  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 June 30, 2004 OR o
    
    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  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    94-3078031
(I.R.S. Employer
Identification No.)
 1840 Gateway Drive, San Mateo, California 94404
(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code (650) 312-7300 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x No o 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
(Title of Class)
    
    Outstanding at July 31, 2004
6,587,018 shares
 1




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FORM 10-Q
INDEX BAY VIEW CAPITAL CORPORATION Page(s)PART I.FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited):Condensed
Consolidated Statements of Financial Condition
    
    
    4Condensed
Consolidated Statements of Operations and Comprehensive Loss
    
    
    5Condensed Consolidated Statements of Changes in Net Assets in Liquidation (Liquidation Basis)
    
    
    6Condensed Consolidated Statement of Stockholders Equity
    
    
    7Condensed Consolidated Statements of Cash Flows
    
    
    8-9Notes to Condensed Consolidated Financial Statements
    
    
    10-14Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15-26Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    28PART II.OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    29Signatures
    
    
    
    
    31EXHIBIT 3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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Forward-Looking Statements This Form 10-Q of Bay View Capital Corporation (the Company, we, us,
or our) contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that describe our plans for our
automobile finance company, Bay View Acceptance Corporation (BVAC), and the
continuing disposition of assets and satisfaction of liabilities the Company
acquired when the banking activities of Bay View Bank, N.A. (the Bank) were
discontinued effective September 30, 2003. These forward-looking statements
are identified by use of terms and phrases such as anticipate, believe,
could, estimate, expect, intend, may, plan, predict, project,
will, and similar terms and phrases, including references to assumptions.
These forward-looking statements are necessarily based on assumptions as of the
date of this Form 10-Q and involve risks and uncertainties. Accordingly, the
Companys actual results from the ongoing operations of BVAC and the continuing
disposition of assets and satisfaction of liabilities from the discontinued
banking activities may differ materially from those that the Company currently
anticipates. There are a number of factors that may affect forward-looking statements
regarding the ongoing operations of BVAC including the following:  
    
    Our Board of Directors (the Board) could determine to expand the
Companys and BVACs operations if it decides greater stockholder value
would be realized by doing so;
    
    The Companys ability to obtain financing to fund the ongoing
operations of BVAC, including securitizing and selling automobile
installment contracts in order to repay an existing line of credit;
    
    Changes in general economic and business conditions;
    
    Interest rate fluctuations, including hedging activities;
    
    The Companys financial condition and liquidity, as well as future cash flows and earnings;
    
    Competition;
    
    The Companys level of operating expenses;
    
    The effect of new laws, regulations and court decisions affecting consumer finance transactions;
    
    The condition of the market for the sale of new and used automobiles;
    
    The level of chargeoffs on the contracts that BVAC purchases; and
    
    Significant litigation. The Company anticipates making a series of cash distributions to our
stockholders from the proceeds of the disposition of assets from discontinued
banking activities. The factors that could reduce the amounts ultimately
distributed or that could cause a delay in making the distributions include the
following:  
    
    Unforeseen delays in the disposition of the assets;
    
    The realization of the Companys deferred tax assets could be less than the Company currently projects;
    
    The Company may encounter difficulty in selling some of its assets,
and certain assets may not be able to be sold for the prices the Company
currently anticipates;
    
    The Company may not be able to discharge certain liabilities for the
amounts the Company currently estimates;
    
    The Company may incur or discover presently unanticipated claims,
liabilities or expenses;
    
    Our current estimates of the cash distribution amounts include
projections of future events and performance and, accordingly, are
inherently subject to many uncertainties;
    
    The expenses of the disposition of assets may exceed the amounts
currently estimated;
    
    Our Board could determine to expand the Companys and BVACs
operations if it decides greater stockholder value would be realized by
doing so. As a result of the foregoing factors, no stockholder should place undue
reliance on any forward-looking statements. The Company does not undertake,
and specifically disclaims, any obligation to update any forward-looking
statements and all forward-looking statements speak only as of the date made. 3




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Bay View Capital Corporation and Subsidiaries 
 Condensed Consolidated Statements of Financial Condition
 (Unaudited)
 June 30, 2004
    
    December 31, 2003(Dollars in thousands)ASSETSCash and cash equivalents
    
    $
    5,839
    
    
    $
    11,563Restricted cash
    
    
    37,114
    
    
    
    32,240Securities available-for-sale:Retained interests in securitizations
    
    
    26,718
    
    
    
    28,590Mortgage-backed and other securities
    
    
    201
    
    
    
    6,139Installment contracts and loans held-for-sale:Installment contracts
    
    
    149,637
    
    
    
    165,874Other loans
    
    
    5,312
    
    
    
    12,074Installment contracts held-for-investment, net
of allowance for losses of $480 thousand at June 30, 2004
    
    
    102,502
    
    
    
    Investment in operating lease assets, net
    
    
    27,041
    
    
    
    66,657Real estate owned, net
    
    
    4,254
    
    
    
    4,955Premises and equipment, net
    
    
    460
    
    
    
    371Repossessed vehicles
    
    
    395
    
    
    
    438Income taxes, net
    
    
    15,687
    
    
    
    21,031Goodwill
    
    
    1,846
    
    
    
    1,846Other assets
    
    
    10,869
    
    
    
    12,340Total assets
    
    $
    387,875
    
    
    $
    364,118LIABILITIES AND STOCKHOLDERS EQUITYBorrowings:Warehouse credit facility
    
    $
    220,941
    
    
    $
    138,221Other borrowings
    
    
    6,136
    
    
    
    16,055Junior Subordinated Deferrable Interest Debentures
    
    
    
    
    
    
    24,784Other liabilities
    
    
    11,246
    
    
    
    17,500Liquidation reserve
    
    
    10,290
    
    
    
    11,626Total liabilities
    
    
    248,613
    
    
    
    208,186Stockholders equity:Common stock ($.01 par value); authorized, 80,000,000 shares;
issued, 2004 - 6,587,018 shares; 2003 - 6,579,333 shares;
outstanding, 2004 - 6,579,383 shares; 2003 - 6,575,890 shares
    
    
    66
    
    
    
    658Additional paid-in capital
    
    
    140,904
    
    
    
    156,588Accumulated deficit
    
    
    (1,637
    )
    
    
    (673
    )Treasury stock, at cost; 2004 - 3,443 shares; 2003 - 3,443 shares
    
    
    (587
    )
    
    
    (587
    )Accumulated other comprehensive gain (loss)
    
    
    516
    
    
    
    (54
    )Total stockholders equity
    
    
    139,262
    
    
    
    155,932Total liabilities and stockholders equity
    
    $
    387,875
    
    
    $
    364,118
 See notes to condensed consolidated financial statements. 4




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Bay View Capital Corporation and Subsidiaries 
 Condensed Consolidated Statement of Operations and Comprehensive Loss
 (Unaudited)
 For the Three
    
    For the SixMonths Ended
    
    Months EndedJune 30, 2004
    
    June 30, 2004Going Concern Basis(Dollars in thousands, except pershare amounts)Interest income:Interest on installment contracts and loans
    
    $
    4,508
    
    
    $
    8,663Interest and dividends on investment securities
    
    
    702
    
    
    
    1,430Interest on mortgage-backed securities
    
    
    2
    
    
    
    315,212
    
    
    
    10,124Interest expense:Interest on borrowings
    
    
    2,163
    
    
    
    4,1052,163
    
    
    
    4,105Net interest income
    
    
    3,049
    
    
    
    6,019Provision for credit losses
    
    
    521
    
    
    
    521Net interest income after provision for credit losses
    
    
    2,528
    
    
    
    5,498Noninterest income:Leasing income
    
    
    3,596
    
    
    
    8,824Loan fees and charges
    
    
    224
    
    
    
    724Loan servicing income
    
    
    852
    
    
    
    1,799Gain (loss) on sale of assets and liabilities, net
    
    
    260
    
    
    
    (45
    )Other, net
    
    
    1,324
    
    
    
    2,0956,256
    
    
    
    13,397Noninterest expense:General and administrative
    
    
    6,146
    
    
    
    12,687Leasing expenses
    
    
    2,848
    
    
    
    7,515Real estate owned operations, net
    
    
    (11
    )
    
    
    2808,983
    
    
    
    20,482Loss before income tax benefit
    
    
    (199
    )
    
    
    (1,587
    )Income tax benefit
    
    
    (78
    )
    
    
    (623
    )Net loss
    
    $
    (121
    )
    
    $
    (964
    )Basic loss per share
    
    $
    (0.02
    )
    
    $
    (0.15
    )Diluted loss per share
    
    $
    (0.02
    )
    
    $
    (0.15
    )Weighted-average basic shares outstanding
    
    
    6,591
    
    
    
    6,581Weighted-average diluted shares outstanding
    
    
    6,591
    
    
    
    6,581Net loss
    
    $
    (121
    )
    
    $
    (964
    )Other comprehensive income (loss), net of tax:Change in unrealized gain (loss) on securities
available-for-sale, net of tax expense (benefit)
of ($24) and $364 for the three and six month
periods ended June 30, 2004, respectively
    
    
    (38
    )
    
    
    570Other comprehensive income (loss)
    
    
    (38
    )
    
    
    570Comprehensive loss
    
    $
    (159
    )
    
    $
    (394
    )
 See notes to condensed consolidated financial statements. 5




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Bay View Capital Corporation and Subsidiaries 
 Condensed Consolidated Statements of Changes in Net Assets in Liquidation (Liquidation Basis)
 (Unaudited)
 For the Three
    
    For the SixMonths Ended
    
    Months EndedJune 30, 2003
    
    June 30, 2003(Dollars in thousands)Net assets in liquidation at beginning of period
    
    $
    410,964
    
    
    $
    410,064Pre-tax income from operations
    
    
    720
    
    
    
    2,135Changes in estimated values of assets and liabilities
    
    
    (924
    )
    
    
    (2,588
    )Income tax benefit
    
    
    786
    
    
    
    1,588Net income from operations
    
    
    582
    
    
    
    1,135Dividends on Capital Securities
    
    
    (2,251
    )
    
    
    (4,502
    )Other changes in net assets in liquidation
    
    
    569
    
    
    
    3,167Net assets in liquidation at end of period
    
    $
    409,864
    
    
    $
    409,864
 See notes to condensed consolidated financial statements. 6




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Bay View Capital Corporation and Subsidiaries 
 Condensed Consolidated Statement of Stockholders Equity
 (Unaudited)
 UnrealizedGain (Loss) onNumber
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    Securities
    
    Totalof Shares
    
    Common
    
    Paid-in
    
    Accumulated
    
    Treasury
    
    Available-for-Sale,
    
    StockholdersIssued
    
    Stock
    
    Capital
    
    Deficit
    
    Stock
    
    Net of Tax
    
    Equity(Dollars in thousands)Balance at January 1, 2004
    
    
    6,579
    
    
    $
    658
    
    
    $
    156,588
    
    
    $
    (673
    )
    
    $
    (587
    )
    
    $
    (54
    )
    
    $
    155,932Exercise of stock warrants
    
    
    4
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Distribution of directors stock-in-lieu of cash plan shares
    
    
    8
    
    
    
    1
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182Reclassification of common stock par value to additional
paid-in-capital due to reverse stock split
    
    
    
    
    
    
    (593
    )
    
    
    593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash distribution
    
    
    
    
    
    
    
    
    
    
    (16,478
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,478
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (964
    )
    
    
    
    
    
    
    
    
    
    
    (964
    )Unrealized gain on securities available-for-sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    570Balance at June 30, 2004
    
    
    6,591
    
    
    $
    66
    
    
    $
    140,904
    
    
    $
    (1,637
    )
    
    $
    (587
    )
    
    $
    516
    
    
    $
    139,262
 See notes to condensed consolidated financial statements. 7




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Bay View Capital Corporation and Subsidiaries 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003(Dollars in thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet loss and certain changes in net assets in liquidation
    
    $
    (964
    )
    
    $
    (3,367
    )Adjustments
to reconcile net loss to net cash (used in) provided by operating activities:Net increase in loans and leases held-for-sale resulting from
originations, net of repayments
    
    
    (96,977
    )
    
    
    (73,494
    )Proceeds from sales and /or securitizations of loans and leases held-for-sale
    
    
    14,988
    
    
    
    115,466Provision for credit losses
    
    
    521
    
    
    
    Depreciation and amortization of premises and equipment
    
    
    166
    
    
    
    298Depreciation and amortization of investment in operating lease assets
    
    
    6,924
    
    
    
    16,572Accretion of retained interests in securitizations
    
    
    (1,242
    )
    
    
    (1,489
    )Amortization of premiums and accretion of discount
    
    
    81
    
    
    
    (3,107
    )Provision for deferred taxes
    
    
    (623
    )
    
    
    Loss on sale of assets and liabilities, net
    
    
    45
    
    
    
    32Change in fair value of derivative instruments
    
    
    (1,624
    )
    
    
    Increase in restricted cash
    
    
    (4,874
    )
    
    
    (Increase) decrease in other assets
    
    
    3,604
    
    
    
    (2,089
    )Decrease in other liabilities
    
    
    (3,553
    )
    
    
    (15,187
    )Decrease in reserve for estimated costs during the period of liquidation
    
    
    (1,336
    )
    
    
    (26,616
    )Adjustment for liquidation basis
    
    
    
    
    
    
    2,588Other, net
    
    
    2,056
    
    
    
    1,232Net cash (used in) provided by operating activities
    
    
    (82,808
    )
    
    
    10,839CASH FLOWS FROM INVESTING ACTIVITIESDecrease in investment in operating lease assets
    
    
    32,101
    
    
    
    51,085Principal payments on mortgage-backed securities
    
    
    383
    
    
    
    7,965Principal payments on investment securities
    
    
    4,011
    
    
    
    5,156Proceeds from sale of mortgage-backed securities available-for-sale
    
    
    5,626
    
    
    
    130Proceeds from sale of investment securities available-for-sale
    
    
    
    
    
    
    2,735Proceeds from sale of real estate owned
    
    
    690
    
    
    
    2Additions to premises and equipment
    
    
    (252
    )
    
    
    (17
    )Decrease in investment in stock of the Federal Home Loan Bank
of San Francisco
    
    
    
    
    
    
    15,576Net cash provided by investing activities
    
    
    42,559
    
    
    
    82,632
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Bay View Capital Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (continued)
 (Unaudited)
 For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003(Dollars in thousands)CASH FLOWS FROM FINANCING ACTIVITIESNet decrease in deposits
    
    $
    
    
    
    $
    (224,189
    )Increase in warehouse line of credit outstanding
    
    
    128,399
    
    
    
    13,137Repayment of warehouse line of credit outstanding
    
    
    (45,679
    )
    
    
    Redemption of Junior Subordinated Deferrable Interest Debentures
    
    
    (22,000
    )
    
    
    Net decrease in other borrowings
    
    
    (9,919
    )
    
    
    (26,260
    )Proceeds from issuance of common stock
    
    
    202
    
    
    
    3,167Dividends paid to common stockholders
    
    
    (16,478
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    34,525
    
    
    
    (234,145
    )Net decrease in cash and cash equivalents
    
    
    (5,724
    )
    
    
    (140,674
    )Cash and cash equivalents at beginning of period
    
    
    11,563
    
    
    
    223,295Cash and cash equivalents at end of period
    
    $
    5,839
    
    
    $
    82,621Cash paid during the period for:Interest
    
    $
    3,377
    
    
    $
    7,343Income taxes
    
    $
    264
    
    
    $
    13,603Supplemental non-cash investing and financing activities:Loans transferred to real estate owned
    
    $
    
    
    
    $
    6,970Loans transferred from held-for-sale to held-for-investment
    
    $
    103,023
    
    
    $
    Redemption
of Junior Subordinated Deferrable Interest Debentures
    
    $
    2,784
 See notes to condensed consolidated financial statements. 9




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Bay View Capital Corporation and Subsidiaries 
 Notes to Condensed Consolidated Financial Statements
 June 30, 2004
(Unaudited)
 Note 1. Basis of Presentation Bay View Capital Corporation (the Company, we, us, or our) is a
financial services company headquartered in San Mateo, California. The
condensed consolidated financial statements include the accounts of the Company,
a Delaware corporation, and its wholly-owned subsidiaries: Bay View Acceptance
Corporation (BVAC), a Nevada corporation, along with its subsidiaries, Bay
View Receivables Corporation, a Delaware corporation and Bay View Transaction
Corporation, a Delaware corporation; and the Companys subsidiaries, 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; FMAC Franchise Receivables
Corporation, a California corporation; Bay View Commercial Finance Group, a
California corporation; XBVBKRS, Inc., a California corporation; MoneyCare,
Inc., a California corporation; Bay View Auxiliary Corporation, a California
corporation; and Bay View Bank, N.A. (the Bank), a national bank which was
dissolved effective September 30, 2003. All intercompany accounts
and transactions have been eliminated. The
condensed consolidated financial statements as of June 30, 2004 and December 31,
2003 and for the three- and six-month periods ended June 30, 2004 have been
prepared on a going concern basis. The condensed consolidated financial statements for
the three- and six-month periods ended June 30, 2003 have been prepared under
the liquidation basis of accounting. The information provided in these interim financial statements reflects
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the Companys financial condition as of June 30, 2004, the
results of its operations for the three- and six-month periods ended June 30,
2004, the changes in net assets in liquidation for the three- and six-month
periods ended June 30, 2003, and cash flows for the six-month periods ended
June 30, 2004 and 2003. 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 the Companys financial
position and results of operations. These interim financial statements have
been prepared in accordance with the instructions to Form 10-Q.  10




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Bay View Capital Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2004
(Unaudited) On June 24, 2004, the Companys stockholders approved a 1-for-10 reverse
stock split of the issued and outstanding shares of the Companys common stock.
The reverse stock split was effected at 5:00 p.m., EDT, on June 30, 2004 and
as a result, the Companys issued common stock was reduced from 65,910,689
shares prior to the reverse stock split to 6,590,461 shares following the
reverse stock split, including an adjustment for fractional shares. The
reverse stock split did not impact the par value of the common stock, which
remains at $0.01 per share. Accordingly, the aggregate value of the issued
common stock on the Companys balance sheet was reduced by reclassifying the
cumulative par value of the eliminated shares of common stock to additional paid-in
capital. All shares outstanding and per share amounts are presented on a
post-reverse stock split basis for all periods reported. The Company accounts for its stock-based awards to employees and directors
using the intrinsic value method of accounting in accordance with Accounting
Principles Board Opinion No. 25. Under the intrinsic value method,
compensation cost is generally the excess, if any, of the quoted market price
of the stock at the grant or other measurement date over the exercise price.
There were no stock option awards, and no compensation expense was
recorded under APB 25 for the six months ended June 30, 2004. Had compensation
cost related to stock option awards outstanding to employees and directors been
determined under the fair value method prescribed under Statement No. 123, the
Companys net loss and loss per share on a going-concern basis would have been
the pro forma amounts illustrated in the table below for the period indicated: For the Three
    
    For the SixMonths Ended
    
    Months EndedJune 30, 2004
    
    June 30, 2004(Dollars in thousands, except pershare amounts)As reported net loss in Consolidated Statement of
Operations and Comprehensive Loss
    
    $
    (121
    )
    
    $
    (964
    )Stock-based employee compensation included in
net loss as reported
    
    
    
    
    
    
    Stock-based employee compensation expense
determined under fair value method, net of taxes
    
    
    
    
    
    
    Pro forma net loss, after stock-based employee
compensation expense
    
    $
    (121
    )
    
    $
    (964
    )Net loss per share  basic:As reported
    
    $
    (0.02
    )
    
    $
    (0.15
    )Pro forma
    
    $
    (0.02
    )
    
    $
    (0.15
    )Net loss per share  diluted:As reported
    
    $
    (0.02
    )
    
    $
    (0.15
    )Pro forma
    
    $
    (0.02
    )
    
    $
    (0.15
    )
 For
the three- and six-month periods ended June 30, 2003, we reported our results using the liquidation
basis of accounting under which earnings per share information is not
presented. 11




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Bay View Capital Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2004
(Unaudited) Note 2. Earnings Per Share For the three- and six-month periods
ended June 30, 2003, the Company reported
its results using the liquidation basis of accounting, under which earnings per
share information is not presented. Accordingly, earnings per share
information has not been presented for the three- and six-month periods ended
June 30, 2003. Basic earnings per share is calculated by dividing net earnings or loss
for the period by the weighted-average common shares outstanding for the
period. There is no adjustment to the number of outstanding shares for
potential dilutive instruments, such as stock options. Diluted earnings per
share takes into account the potential dilutive impact of such instruments and
uses the average share price for the period in determining the number of
incremental shares to add to the weighted-average number of shares outstanding.
For the three- and six-month periods ended June 30, 2004, average dilutive
potential common shares issuable upon the exercise of options and warrants of
7,001 and 7,492, respectively, were excluded from the computation because they
were anti-dilutive. The following table illustrates the calculation of basic and diluted
earnings per share for the periods indicated: For the Three
    
    For the SixMonths Ended
    
    Months EndedJune 30, 2004
    
    June 30, 2004(Amounts in thousands,except per share amounts)Net loss
    
    $
    (121
    )
    
    $
    (964
    )Weighted-average basic shares outstanding
    
    
    6,591
    
    
    
    6,581Add: Dilutive potential common shares
    
    
    
    
    
    
    Weighted-average diluted shares outstanding
    
    
    6,591
    
    
    
    6,581Basic earnings per share
    
    $
    (0.02
    )
    
    $
    (0.15
    )Diluted earnings per share
    
    $
    (0.02
    )
    
    $
    (0.15
    )
 12




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Bay View Capital Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2004
(Unaudited) Note 3. Investment in Operating Lease Assets Leasing expense represents expenses related to the Companys 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 and impairment charges. Leasing expenses were $2.8 million for the
second quarter of 2004 compared to $8.0 million for the second quarter of 2003.
Leasing expenses were $7.5 million for the first six months of 2004 as
compared to $17.4 million for the first six months of 2003. The Company performs a quarterly impairment analysis of its automobile
operating lease portfolio in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. A lease is considered impaired if its gross future undiscounted cash
flows are less than the net book value of the lease. The net book value of the
lease is defined as the original capitalized cost of the automobile, including
initial direct capitalized costs, less the cumulative amount of depreciation
recorded against the automobile and the cumulative amount of amortization of
the initial direct capitalized costs recorded since the inception of the lease
and less any impairment charges recorded-to-date on that lease. In determining gross future undiscounted cash flows, the Company contracts
with Automotive Lease Guide, commonly referred to as ALG, to provide estimates
of the residual value of the underlying automobiles at the end of their lease
terms assuming that the vehicles are in average condition. The Company then
estimates the probability that; i.) the automobiles will be purchased by the
lessee prior to the end of the lease term; ii.) the automobile will be
purchased by the lessee at the end of the lease term, either at a discount or
at the full contractual residual amount; or iii.) the automobile will be
returned to the lessor at the end of the lease term. These probabilities are
estimated using a number of factors, including the Companys experience-to-date
and industry experience. Using the projected ALG residual values, the Companys experience-to-date
relative to the projected ALG residual values (for example, for vehicle classes
where actual amounts realized were less than what ALG had projected, the
Company reduced the projected ALG residual values to equal the Companys
experience-to-date), and the probabilities of each of the three disposition
scenarios discussed above occurring, the Company determines
a probability-weighted gross future undiscounted cash flow for each automobile
lease. For those leases where the gross future undiscounted cash flows are
less than net book value, the lease is considered impaired. For those leases considered impaired, the Company then estimates the fair
value of the lease. The fair value is determined by calculating the present
value of the future estimated cash flows, again assuming the probabilities of
each of the three disposition scenarios. The present value is calculated using
current market rates which are similar to the original contract lease rate.
For those impaired leases where the estimated fair value is less than the net
book value, an impairment charge is recorded for the difference. Since the
inception of the lease portfolio in June 1998, the Company has recorded
additional monthly depreciation charges, also included in leasing expense, to
provide for losses that may be incurred at the end of the lease terms. During
the first six months of 2004, we recorded $1.2 million of additional
depreciation. Note 4. Income Taxes The Company recorded tax benefits of $0.1 million and $0.6 million for the
second quarter and the first six months of 2004, respectively. The effective
tax rate used in computing the tax benefit for the second quarter and first six
months of 2004 was 39.2%. This expected 2004 effective tax rate is higher than
the federal statutory rate due primarily to state income and franchise taxes. 13




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Bay View Capital Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2004
(Unaudited) For the second quarter and the first six months of 2003, the Company
recorded tax benefits of $0.8 million and $1.6 million, respectively. The
effective tax rate used in computing the tax benefit for the second quarter and
first six months of 2003 was 32.1%. As of December 31, 2003 and March 31, 2004, the Company had a valuation
allowance of $21.5 million based on the realizability of its deferred tax
asset. The balance of the valuation allowance remained unchanged at June 30,
2004. Note 5. Commitments and Contingencies The Company is involved as plaintiff or defendant in various legal actions
and is 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 its financial statements. Note 6. Liquidation Reserve The liquidation reserve, recorded while the Company was using the
liquidation basis of accounting, includes accruals for severance payments,
costs related to facility closures and estimated litigation expense and
settlement costs. At June 30, 2004, the remaining balance of the liquidation
reserve was $10.3 million, including accruals for severance and facilities of
$1.6 million and $5.7 million, respectively. 14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The information included in Managements Discussion and Analysis of Financial Condition and Results of Operations was written
assuming that you have read or have access to the Companys 2003 Annual Report on Form 10-K, as amended and
restated on Form 10-K/A, which contains the latest audited consolidated financial statements and notes, along with
Managements Discussion and Analysis of Financial Condition and Results of Operations. 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 six-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period. Strategic Overview Bay View Capital Corporation (the Company, we, us, or our) is a
financial services company headquartered in San Mateo, California, whose
primary subsidiary, Bay View Acceptance Corporation (BVAC), specializes in
indirect purchases of retail automobile installment contracts originated by
manufacturer-franchised and independent dealers in connection with the sale of
new and used automobiles. BVAC generates revenue through its investment in
installment contracts, and the subsequent securitization or sale and servicing
of these installment contracts. Reverse Stock Split On
June 24, 2004, our stockholders approved a 1-for-10 reverse
stock split of the issued and outstanding shares of our common stock.
The reverse stock split was effected at 5:00 p.m., EDT, on
June 30, 2004 and as a result, our issued common stock was reduced
from 65,910,689 shares prior to the reverse stock split to 6,590,461
shares following the reverse stock split, including an adjustment for
fractional shares. Accordingly, all shares outstanding and per share
amounts are presented on a post-reverse stock split basis for all
periods reported. Bay View Bank Liquidation On October 3, 2002, we adopted a Plan of Dissolution and Stockholder
Liquidity (the Plan). The Plan contemplated that we, under applicable
provisions of the Delaware General Corporation Law, would:  
    
    dispose of all of our assets, including all of the assets of Bay View Bank, N.A. (the Bank);
    
    pay all of our debts and liabilities and make reasonable provision for any contingent liabilities;
    
    distribute the remaining proceeds from our asset sales to our stockholders; and
    
    dissolve. As a result of the adoption of the Plan, we adopted the liquidation basis
of accounting effective September 30, 2002. During the fourth quarter of 2003, our Board of Directors amended the Plan
to become a plan of partial liquidation (the Amended Plan) under which we are
completing the liquidation of the assets and satisfaction of the liabilities of
the Bank remaining after the Banks September 30, 2003 dissolution,
distributing the proceeds to our stockholders through a series of cash
distributions, and continuing to operate BVAC on an ongoing basis. In
connection with the Amended Plan, we discontinued our use of liquidation basis
accounting and re-adopted the going concern basis of accounting effective
October 1, 2003. During the fourth quarter of 2003, in accordance with the Amended Plan, we
made an initial cash distribution of $263.2 million to our stockholders and
redeemed $63.5 million of the 9.76% Cumulative Capital Securities (Capital
Securities) issued by Bay View Capital I Trust. On June 30, 2004, we redeemed the remaining $22.0 million of the Capital
Securities at a price equal to 100% of the $25.00 par value of each Capital
Security. In connection with the liquidation of assets and satisfaction of the
liabilities of the Bank remaining after the Banks September 30, 2003
dissolution, we also paid a cash distribution of $16.5 million to common
stockholders on June 30, 2004. Automobile Finance BVAC, the Companys auto finance subsidiary, acquires auto installment
contracts from approximately 7,000 manufacturer-franchised and independent auto
dealers in 25 states and has positioned itself in the market as a premium
priced lender for well-qualified borrowers seeking extended financing terms and
higher advances than those generally offered by traditional lenders. The
Company believes this strategy has enabled BVAC to establish 15




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a loyal dealership network and a unique niche by satisfying consumer demand within
this market segment that has not been well served by the large commercial banks
and auto finance companies. Of the contracts purchased in the first half of
2004, approximately 95% were originated by manufacturer franchised dealerships
and approximately 5% were originated by independent dealerships; 55% were
contracts on new vehicles and 45% were contracts on used vehicles. BVAC
purchases installment contracts with limited recourse to the dealer. BVAC places a strong emphasis on borrower stability, credit quality, and
debt serviceability. With Fair, Isaac & Co. FICO credit scores that averaged
734 in the second quarter of 2004, BVACs borrower base is largely comprised of
prime borrowers. BVAC offers loan terms to 96 months and typically finances an
amount in excess of a dealers wholesale value of a vehicle. During the
quarter, the average loan amount BVAC financed was $30,300, the average
contract term was 84 months and the average loan-to-value ratio was 127% of
vehicle wholesale value. BVAC utilizes a proprietary credit scoring system in
connection with its underwriting and credit approvals. The credit scoring
system captures data from consumers credit bureau reports, consumers loan
applications and the terms of proposed loans. Critical Accounting Policies We have identified the most critical accounting policies upon which our
financial status depends. We determined the critical policies by considering
accounting principles that involve the most complex or subjective decisions or
assessments. We have identified our most critical accounting policies to be
those related to our investment in operating lease assets, retained interests
in securitizations, and income taxes. Investment in Operating Lease Assets In accordance with the provisions of Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we perform a quarterly impairment analysis of our long-lived assets
including our automobile leases, which are accounted for as operating leases.
Statement No. 144 addresses the recognition and measurement of the impairment
of long-lived assets and defines impairment as the condition that exists when
the carrying amount of long-lived assets exceeds fair value. When identified,
Statement No. 144 requires the recognition of an impairment loss. Under
Statement No. 144, we consider an auto lease to be impaired if its gross future
undiscounted cash flows are less than the net book value of the lease. The net
book value of the lease is defined as the original capitalized cost of the
automobile, including initial direct capitalized costs, less the cumulative
amount of depreciation recorded against the automobile and the cumulative
amount of amortization of the initial direct capitalized costs recorded since
the inception of the lease and less any impairment charges recorded-to-date on
that lease. In determining gross future undiscounted cash flows, we contract with
Automotive Lease Guide, commonly referred to as ALG, to provide estimates of
the residual value of the underlying automobiles at the end of their lease
terms assuming that the vehicles are in average condition. We then estimate
the probability that i.) the automobiles will be purchased by the lessee prior
to the end of the lease term, ii.) the automobile will be purchased by the
lessee at the end of the lease term, either at a discount or at the full
contractual residual amount, or iii.) the automobile will be returned to the
lessor at the end of the lease term. These probabilities are estimated using a
number of factors, including our experience-to-date and industry experience. Using the projected ALG residual values combined with our
experience-to-date relative to the projected ALG residual values, we reduce the
projected ALG residual values to reflect our experience-to-date. This
experiential analysis, along with the probabilities of each of the three
disposition scenarios discussed above occurring, enables us to determine a
probability-weighted gross future undiscounted cash flow for each automobile
lease. For those leases where the gross future undiscounted cash flows are
less than net book value, the lease is considered impaired. For those leases considered impaired, we then estimate the fair value of
the lease. The fair value is determined by calculating the present value of
the future estimated cash flows again assuming the probabilities of each of the
three disposition scenarios. The present value is calculated using current
market rates, which are similar to the original contract lease rate. For those
impaired leases where the estimated fair value is less than the net book value, 16




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an impairment charge is recorded for the difference. Annual depreciation expense
associated with those leases that have reduced residual values is recomputed
over the remaining term of the lease. Retained Interests in Securitizations BVAC periodically transfers installment contracts to securitization
trusts, which then issue asset-backed securities. BVAC has structured these
transactions as sales of the installment contracts. In order to enhance the
credit rating of these asset-backed securities, BVAC deposits cash into
restricted cash accounts established by the securitization trusts. Excess cash
flow within the securitization trusts  resulting from interest income received
on the installment contracts in excess of interest paid to investors in the
asset-backed securities, credit losses and trust expenses  is utilized to
build the restricted cash account to pre-designated levels and provide further
credit enhancement. Once these pre-designated levels are attained, excess cash
flow is distributed to BVAC. In accounting for these securitization
transactions, BVAC has typically recognized a gain on the sale transaction and
a related asset, a retained interest in the securitization, that represents the
present value of the cash deposit and excess cash flow that is anticipated to
be produced by the securitization trust over the life of the asset-backed
securities. We incorporate various assumptions in calculating the present value of the
cash deposit and excess cash flow. The following table illustrates the
significant assumptions utilized in the valuation of retained interests in
securitizations as of June 30, 2004: Weighted-average discount rate
    
    
    12.0%-12.5
    %Projected annual credit losses, net
    
    
    1.00
    %Range of projected cumulative credit losses
    
    
    1.71%-1.90
    %Prepayment speed
    
    1.6 ABS
 Changes in the above assumptions due to actual experiences or market
conditions could affect the value of our retained interests in securitizations. Income Taxes At June 30, 2004, we had deferred tax assets of $16.3 million, consisting
of net deferred tax assets of $37.8 million less a valuation allowance of $21.5
million. This valuation allowance was established in consideration of our
projected future net income available to realize the deferred tax assets under
the Amended Plan in years after 2003. Results of Operations As discussed above, we discontinued the use of the liquidation basis of
accounting and re-adopted the going concern basis of accounting effective
October 1, 2003. From September 30, 2002, we reported our results under the
liquidation basis of accounting under which we reported the value of, and the
changes in, net assets available for distribution to stockholders (net assets
in liquidation) instead of results from continuing operations. Accordingly,
our financial statements as of June 30, 2004 and December 31, 2003 and for the
three- and six-month periods ended June 30, 2004 have been prepared under the
going concern basis of accounting while our financial statements for the three-
and six-month periods ended June 30, 2003 have been prepared under the
liquidation basis of accounting. Going Concern Basis Results of Operations  Three- and Six-Month Periods ended June 30, 2004 Our net loss for the second quarter of 2004 was $121 thousand, or $0.02
per diluted share. Net loss for the first six months of 2004 was $964
thousand, or $0.15 per diluted share. Our net losses for the quarter and the
first six months of 2004 were comprised of net income from BVACs ongoing auto
finance business totaling $1.5 million and $2.2 million, respectively, offset
by net losses from the continued liquidation of the assets and liabilities we
assumed from the Bank of $1.6 million and $3.2 million, respectively. 17




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Our second quarter results improved, compared to the prior quarters net
loss of $843 thousand, primarily due to increased interest income, unrealized
gains in the Companys interest rate swap portfolio and decreased general and
administrative expenses. Interest income for the quarter was $5.2 million and
the average yield on interest-earning assets was 7.14% while interest expense
on our borrowings was $2.2 million and the average cost of borrowings was
4.19%. Interest income for the first six months of 2004 was $10.1 million and
the average yield on interest-earning assets was 7.27% while interest expense
on our borrowings was $4.1 million and the average cost of borrowings was
4.13%. The following tables illustrate average yields on our interest-earning
assets and average rates on our interest-bearing liabilities for the periods
indicated: AVERAGE BALANCES, YIELDS AND RATESFor the Three Months Ended June 30, 2004Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield/Rate(Dollars in thousands)AssetsInterest-earning assets:Loans held-for-sale
    
    $
    239,258
    
    
    $
    4,508
    
    
    
    7.57
    %Short-term investments
    
    
    25,449
    
    
    
    50
    
    
    
    0.81Mortgage-backed and other securities
    
    
    366
    
    
    
    2
    
    
    
    1.64Retained interests in securitizations
    
    
    27,988
    
    
    
    652
    
    
    
    9.31Total interest-earning assets
    
    
    293,061
    
    
    
    5,212
    
    
    
    7.14
    %Other assets
    
    
    85,270Total assets
    
    $
    378,331Liabilities and Stockholders EquityInterest-bearing liabilities:Warehouse line
    
    $
    172,131
    
    
    $
    1,530
    
    
    
    3.53
    %Other borrowings
    
    
    8,695
    
    
    
    28
    
    
    
    1.30Junior Subordinated Deferrable
Interest Debentures
    
    
    24,511
    
    
    
    605
    
    
    
    9.87Total interest-bearing liabilities
    
    
    205,337
    
    
    
    2,163
    
    
    
    4.19
    %Other liabilities
    
    
    25,501Total liabilities
    
    
    230,838Stockholders equity
    
    
    147,493Total liabilities and stockholders
equity
    
    $
    378,331Net interest income/net interest spread
    
    
    
    
    
    $
    3,049
    
    
    
    2.95
    %Net interest-earning assets
    
    $
    87,724Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.20
    %
 18




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AVERAGE BALANCES, YIELDS AND RATESFor the Six Months Ended June 30, 2004Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield/Rate(Dollars in thousands)AssetsInterest-earning assets:Loans held-for-sale
    
    $
    222,599
    
    
    $
    8,663
    
    
    
    7.83
    %Short-term investments
    
    
    27,588
    
    
    
    113
    
    
    
    0.84Mortgage-backed and other securities
    
    
    1,433
    
    
    
    31
    
    
    
    4.40Retained interests in securitizations
    
    
    28,178
    
    
    
    1,317
    
    
    
    9.34Total interest-earning assets
    
    
    279,798
    
    
    
    10,124
    
    
    
    7.27
    %Other assets
    
    
    96,199Total assets
    
    $
    375,997Liabilities and Stockholders EquityInterest-bearing liabilities:Warehouse line
    
    $
    161,737
    
    
    $
    2,777
    
    
    
    3.41
    %Other borrowings
    
    
    11,341
    
    
    
    125
    
    
    
    2.21Junior Subordinated Deferrable
Interest Debentures
    
    
    24,647
    
    
    
    1,203
    
    
    
    9.77Total interest-bearing liabilities
    
    
    197,725
    
    
    
    4,105
    
    
    
    4.13
    %Other liabilities
    
    
    30,675Total liabilities
    
    
    228,400Stockholders equity
    
    
    147,597Total liabilities and stockholders
equity
    
    $
    375,997Net interest income/net interest spread
    
    
    
    
    
    $
    6,019
    
    
    
    3.14
    %Net interest-earning assets
    
    $
    82,073Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.35
    %
 For the quarter and six-month period ended June 30, 2004, our provision
for credit losses was $0.5 million. During the second quarter of 2004, BVAC
transferred auto contracts of $103.0 million from its held-for-sale portfolio
to its held-for-investment portfolio and, in connection with this transfer,
established an allowance for credit losses on these contracts through the $0.5
million provision for credit losses. For the quarter ended June 30, 2004, noninterest income was $6.3 million
and included leasing income of $3.6 million, loan servicing and other fee
income of $1.1 million, $2.8 million of unrealized gains in interest rate swaps
carried at fair value, $1.4 million of unrealized losses in auto contracts
carried at the lower of cost or estimated fair value, and $0.1 million of other
income. Noninterest expense was $9.0 million and included leasing expenses of
$2.8 million and operating expenses of $6.1 million. Year-to-date, noninterest income was $13.4 million and included leasing
income of $8.8 million, loan servicing and other fee income of $2.5 million,
$2.6 million of unrealized gains in interest rate swaps carried at fair value,
$1.6 million of unrealized losses in auto contracts carried at the lower of
cost or estimated fair value, and $1.1 million of other income. Noninterest
expense was $20.5 million and included leasing expenses of $7.5 million and
operating expenses of $13.0 million. Leasing Expenses Because our auto 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 and impairment charges. For the second quarter and the first half
of 2004, leasing expenses were $2.8 million and $7.5 million, respectively. We
ceased purchasing auto leases in June 2000 and since then, the balance of our lease
portfolio has continued to 19




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decline as leases have reached their end-of-term.
Our leasing expenses continue to decline in line with this reduction in the
balance of the remaining portfolio. At June 30, 2004, there were no vehicles in our automobile lease portfolio
that were considered impaired under Statement of Financial Accounting Standards
No. 144. Approximately 2% and 59% of the vehicles in our automobile lease
portfolio were considered impaired at December 31, 2003 and June 30, 2003,
respectively. We perform impairment testing on our auto lease portfolio on a
quarterly basis. Accordingly, the percentage of leases considered impaired is
a measure of the quarterly change (normally a decline) in residual values
versus our depreciation and writedown of the book value of our auto lease
portfolio since the prior quarterly valuation. This impairment is subject to a
number of significant assumptions that could change in the near term, and
adversely affect the valuation of the automobile lease portfolio. These
assumptions were previously described under Critical Accounting Policies,
Investment in Operating Lease Assets. Two of these assumptions, including the
residual values of individual leases that are projected by ALG and the relative
probabilities of the three alternatives for disposing of vehicles, are
particularly susceptible to changes in market conditions. As an illustration
of the sensitivity of these assumptions at June 30, 2004, if the market values
of the individual vehicles declined by $250, approximately 40 of the 3,043
vehicles in our automobile lease portfolio, or 1%, would be deemed to be
impaired and, therefore, potentially subject to an impairment charge. The
impairment charge could increase if the percentage of vehicles returned to us
is greater than the percentage that was projected at year-end, because the
proceeds realized when the Company must dispose of the vehicle are generally
less than if the lessee purchases the automobile prior to the end of the lease
term. Income Taxes We recorded tax benefits of $0.1 million and $0.6 million for the second
quarter and the first half of 2004, respectively. The effective tax rate used
in computing the tax benefit for the second quarter and the first half of 2004
was 39.2%. This expected 2004 effective tax rate is higher than the federal
statutory rate due primarily to state income and franchise taxes. For the second quarter and the first six months of 2003, we recorded tax
benefits of $0.8 million and $1.6 million, respectively. The effective tax rate
used in computing the tax benefit for the first six months of 2003 was 32.1%. Liquidation Basis Changes in Net Assets in Liquidation  Three- and Six-Month Periods Ended June
30, 2003 Our net assets in liquidation at June 30, 2003 totaled $409.9 million, or
$63.70 in net assets in liquidation per outstanding diluted share. The changes in net assets in liquidation during the second quarter
included dividends paid on the Capital Securities totaling $2.3 million. The
dividend payments were partially offset by second quarter net income from
operations of $0.6 million and proceeds from stock options and warrants
exercised during the quarter of $0.6 million. Net income for the second quarter consisted of $0.7 million of pre-tax
income from operations, $0.9 million of net charges for changes in estimated
values of assets and liabilities which were largely attributable to writedowns
on the auto lease and liquidating loan portfolios, and a tax benefit of $0.8
million. The dividends paid on our Capital Securities totaled $4.5 million for the
first six months of 2003. The distributions were partially offset by net
income from operations for the first six months of 2003 totaling $1.1 million
and proceeds from stock options and warrants exercised of $3.2 million. The net income from operations for the first six months of 2003 consisted
of $2.1 million of pre-tax income from operations, $2.6 million of net charges
for changes in estimated values of assets and liabilities, and a tax benefit of
$1.6 million. 20




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The net charges for changes in estimated values of assets and liabilities
consisted primarily of $4.8 million of additional mark-to-market writedowns on
the auto lease portfolio as the residual values on these autos declined on
continued weakness in used car resale values. This was partially offset by a
$1.3 million gain associated with the financing secured by our auto lease cash
flows resulting from favorable experience with the underlying cash flows, and a
$1.0 million reduction of an accrual related to the settlement of litigation
that was negotiated during the first quarter of 2003. The net assets in liquidation per outstanding diluted share at June 30,
2003 was unfavorably impacted by an increase of approximately 60,500 diluted
common shares, resulting from exercises of stock options and warrants during
the first six months of 2003. During the second quarter of 2003, BVAC completed a study of its loan
production and servicing operations, and identified a number of opportunities
to increase efficiencies without compromising existing underwriting and
servicing standards. To this end, the Chicago and Houston loan production
offices were consolidated into the Covina, California office. In addition,
BVAC reduced the size of its loan servicing and collections staff while
expanding its lending operations from five to seven days per week. Second
quarter results include a pre-tax charge of $675 thousand for the costs of this
restructuring. Leasing Expenses Leasing expenses were $8.0 million and $17.4 million for the second
quarter and the first six months of 2003, respectively. At June 30, 2003,
approximately 5,005 of the 8,469 vehicles in our automobile lease portfolio, or
59%, were considered impaired under Statement No. 144. If the market values of
the individual vehicles declined by $250, an additional 5% of the leases would
have been deemed to be impaired and, therefore, potentially subject to an
impairment charge. Income Taxes We recorded tax benefits of $0.8 million and $1.6 million for the second
quarter and the first six months of 2003, respectively. The effective tax rate
used in computing the tax benefit for the first six months of 2003 was 32.1%.
The income tax benefit includes the deduction of the dividends on Capital
Securities. This 2003 effective tax rate was lower than the federal statutory
rate primarily due to the tax benefits from state income and franchise taxes. Balance Sheet Analysis Our total assets were $387.9 million at June 30, 2004 compared to $364.1
million at December 31, 2003. The increase in total assets was primarily due
to $86.3 million of net growth in auto contracts offset, in part, by $39.6 million
of payoffs of auto leases. Cash and Cash Equivalents At June 30, 2004, our cash and cash equivalents totaled $5.8 million
of cash deposited at depository institutions. At December 31, 2003, our cash and cash
equivalents totaled $11.6 million and consisted of $11.5 million of cash
deposited at depository institutions and $0.1 million of money market funds. Restricted Cash Our restricted cash balances were $37.1 million and $32.2 million at June
30, 2004 and December 31, 2003, respectively. Restricted cash attributable to
BVACs auto finance business includes cash retained in reserve accounts
established by BVACs auto securitization trusts for purposes of providing
credit enhancement for asset-backed bond issuances, cash collateral provided to
counterparties to BVACs hedging contracts to meet margin requirements, and
cash collateral provided to cure potential borrowing base deficiencies on
BVACs warehouse 21




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##### Table of Contents



credit facility. The remaining assets from the Bank
liquidation also include restricted cash that has been pledged for purposes of
securing a letter of credit, the financing secured by the auto lease portfolio
contractual cash flow, and other contractual obligations. Retained Interests in Securitizations The following table provides information, by securitization transaction,
on the balance of retained interests in securitizations of auto installment
contracts as of the dates indicated: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Available-for-saleTransaction:Bay View 2002-LJ-1 Owner Trust
    
    $
    17,764
    
    
    $
    18,744Bay View 2003-LJ-1 Owner Trust
    
    
    8,954
    
    
    
    9,846Total retained interests in securitizations
    
    $
    26,718
    
    
    $
    28,590
 Our retained interests are subordinate to investor interests. Their value
is subject to credit, prepayment, and interest rate risks on the transferred
auto installment contracts. At June 30, 2004, all retained interests in
securitizations were classified as available-for-sale and reported at fair
value. Unrealized gains of $0.5 million in these retained interests
available-for-sale were included in our stockholders equity (net of taxes) at
June 30, 2004. Mortgage-backed and Other Securities The following table provides information on the balance of mortgage-backed
and other securities as of the dates indicated: June 30,
    
    December 31,2004
    
    2003( Dollars in thousands)Available-for-saleMortgage-backed securities:GNMA, Fannie Mae and Freddie Mac
    
    $
    
    
    
    $
    5,335Collateralized mortgage obligations
    
    
    100
    
    
    
    558Total mortgage-backed securities
    
    
    100
    
    
    
    5,893Asset-backed securities
    
    
    101
    
    
    
    246Total mortgage-backed and other
securities available-for-sale
    
    $
    201
    
    
    $
    6,139
 At June 30, 2004, our securities were classified as available-for-sale.
We do not maintain a trading portfolio. Net unrealized gains and losses on our
securities available-for-sale are excluded from earnings and reported, net of
applicable income taxes, as a separate component of stockholders equity.
Gains and losses on sales of securities are recorded in earnings at the time of
sale. We sold $5.5 million of mortgage-backed securities during the first half
of 2004 and recognized losses of $11 thousand. There were no purchases of
mortgage-backed or other securities during this period. At June 30, 2004, our stockholders equity included $8 thousand of
unrealized losses, net of taxes, from mortgage-backed and other securities
available-for-sale. 22




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##### Table of Contents



Installment Contracts and Loans The following table illustrates our portfolio of installment contracts and
loans as of the dates indicated: June 30, 2004
    
    December 31, 2003(Dollars in thousands)Installment contracts and loans receivable:Auto
installment contracts (1)Installment contracts held-for-sale
    
    $
    142,247
    
    
    $
    161,578Installment contracts held-for-investment
    
    
    102,502
    
    
    
    Total auto installment contracts
    
    
    244,749
    
    
    
    161,578Other loans to be liquidated:Franchise loans
    
    
    4,856
    
    
    
    6,428Asset-based loans
    
    
    456
    
    
    
    844Business loans
    
    
    
    
    
    
    4,802Total other loans to be liquidated
    
    
    5,312
    
    
    
    12,074Installment contracts and loans before premiums,
discounts, deferred fees and costs, net
    
    
    250,061
    
    
    
    173,652Premiums, discounts, deferred fees and costs, net
    
    
    7,390
    
    
    
    4,296Installment
contracts and loans receivable (2)
    
    $
    257,451
    
    
    $
    177,948
  (1)
    Amounts exclude auto-related operating lease assets reported separately
from loans and leases totaling $27.0 million at
June 30, 2004 and $66.7 million at December 31, 2003.(1) (2)
    Includes allowances for mark-to-market valuation reserves and credit
losses of $2.5 million and $3.2 million at June 30, 2004
and December 31, 2003, respectively. The increase in loans receivable from December 31, 2003 to June 30, 2004
was attributable to BVACs purchases of auto contracts partially offset by loan
sales and repayments during the first six months of 2004. During the first six
months of 2004, we sold $15.6 million of auto contracts and $4.8 million of
business loans, and received $52.3 million of loan repayments. Other than
BVACs purchases, we ceased all other loan production activities during the
fourth quarter of 2002. Auto Installment Contracts During the second quarter of 2004, BVAC purchased $75.9 million of auto
contracts compared to $69.3 million for the first quarter of 2004 -
representing a 9% quarter-over-quarter increase in production. Second quarter
purchased contract rates averaged 7.86% and FICO scores averaged 734; compared
to first quarter purchased contract rates which averaged 7.90% and FICO scores
which averaged 734. At June 30, 2004, BVAC was servicing 29,057 auto contracts
representing $561.6 million compared to 30,808 auto contracts representing
$562.8 million at December 31, 2003. BVAC sold approximately $10.2 million and $15.6 million of auto contracts
during the second quarter and the first half of 2004, respectively. Repayments
of $27.3 million and $50.1 million were received during the second quarter and
the first six months of 2004, respectively. BVAC anticipates securitizing a portion of its auto contracts in an
asset-backed bond offering in the fourth quarter of 2004 or the first quarter
of 2005. Its previous securitizations were structured as sales transactions;
however, many banks and finance companies have recently elected to structure
such transactions as financings that preclude the use of gain-on-sale
accounting. BVAC anticipates structuring its future securitizations as
financings that will not qualify for gain-on-sale accounting. As a result of
this decision, and in anticipation of securitizing auto contracts and marketing
an asset-backed bond offering in the next two to three quarters, BVAC
transferred $103.0 million of auto contracts from its held-for-sale portfolio
to its held-for-investment portfolio during the second quarter of 2004. 23




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##### Table of Contents



Other Loans During the first six months of 2004, we sold $4.8 million of business
loans and received $2.2 million of asset-based and franchise loan repayments.
At June 30, 2004, the net carrying value of our remaining investment in loans
to be liquidated was $5.3 million compared to $12.1 million at December 31,
2003. Credit Quality We define nonperforming assets as nonaccrual loans, real estate owned and
other repossessed assets. We define nonaccrual loans as loans 90 days or more
delinquent as to principal and interest payments (unless the principal and
interest are well secured and in the process of collection) and loans less than
90 days delinquent when we determine that the full collection of principal
and/or interest is doubtful. We do not record interest on nonaccrual loans. The following table illustrates our nonperforming assets as of the dates
indicated: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Nonaccrual loans
    
    $
    1,298
    
    
    $
    1,924Real estate owned
    
    
    4,254
    
    
    
    4,955Other repossessed assets
    
    
    280
    
    
    
    254Nonperforming assets
    
    $
    5,832
    
    
    $
    7,133
 Our nonperforming assets included mark-to-market valuation reserves of
$0.8 million and $1.4 million at June 30, 2004 and December 31, 2003,
respectively. Nonperforming assets excluding franchise-related assets were
$0.8 million at June 30, 2004 compared to $1.4 million at December 31, 2003,
while non-franchise nonaccrual loans were $0.3 million at June 30, 2004
compared to $0.9 million at December 31, 2003. The following table illustrates nonperforming assets and nonperforming
assets as a percentage of consolidated total assets by their original loan and
lease type: Nonperforming Assetsas a Percentage of Consolidated Total AssetsJune 30, 2004
    
    December 31, 2003(Dollars in thousands)Auto installment contracts
    
    $
    161
    
    
    
    0.04
    %
    
    $
    338
    
    
    
    0.09
    %Commercial real estate loans
    
    
    170
    
    
    
    0.04
    
    
    
    181
    
    
    
    0.05Franchise loans
    
    
    5,045
    
    
    
    1.30
    
    
    
    5,757
    
    
    
    1.58Asset-based loans
    
    
    456
    
    
    
    0.12
    
    
    
    857
    
    
    
    0.24Total
    
    $
    5,832
    
    
    
    1.50
    %
    
    $
    7,133
    
    
    
    1.96
    %
 Total loans delinquent 60 days or more were $1.8 million at June 30, 2004
compared to $748 thousand at December 31, 2003. Total loans delinquent 60 days
or more as a percentage of loans receivable was 0.70% at June 30, 2004 compared
to 0.42% at December 31, 2003. The increase in total loans delinquent 60 days
or more at June 30, 2004, compared to December 31, 2003, was primarily due to
an increase in delinquent franchise loans. 24




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##### Table of Contents



Borrowings Our borrowings totaled $227.1 million at June 30, 2004 compared to $179.1
million at December 31, 2003. Borrowings increased as BVAC utilized its
warehouse credit facility to fund purchases of auto contracts. These
borrowings were partially offset by the redemption of the Capital Securities at
the end of the second quarter and repayments of the financing secured by the
auto lease portfolio contractual cash flow. During the second quarter of 2004,
BVAC secured a $350.0 million warehouse credit facility to replace its existing
$250.0 million credit facility. The following table illustrates outstanding
borrowings as of the dates indicated: June 30, 2004
    
    December 31, 2003(Dollars in thousands)Warehouse credit facility
    
    $
    220,941
    
    
    $
    138,221Financing secured by the auto lease portfolio
contractual cash flow
    
    
    6,136
    
    
    
    16,055Junior Subordinated Deferrable Interest Debentures
    
    
    
    
    
    
    24,784Total
    
    $
    227,077
    
    
    $
    179,060
 Capital Securities During 2003, we adopted FASB Financial Interpretation No. 46,
Consolidation of Variable Interest Entities, and accordingly, deconsolidated
Bay View Capital I Trust. As a result, the 9.76% Cumulative Capital Securities
(the Capital Securities) of Bay View Capital I Trust are no longer reflected
on our Consolidated Statement of Financial Condition while the underlying 9.76%
Junior Subordinated Deferrable Interest Debentures, which were acquired by Bay
View Capital I Trust, are reflected as borrowings. On June 30, 2004, we redeemed the remaining $22.0 million of the Capital
Securities at a price equal to 100% of the $25.00 par value of each Capital
Security plus the quarterly dividend on the Capital Securities totaling $0.61
per Capital Security. Stockholders Equity On June 24, 2004, our stockholders approved a 1-for-10 reverse stock split
of the issued and outstanding shares of our common stock. The reverse stock
split was effected at 5:00 p.m., EDT, on June 30, 2004 and, as a result, our
issued common stock was reduced from 65,910,689 shares prior to the reverse
stock split to 6,590,461 shares following the reverse stock split, including an
adjustment for fractional shares. The reverse stock split did not impact the
par value of our common stock, which remains at $0.01 per share. Accordingly,
all shares outstanding and per share amounts are presented on a post-split
basis for all periods reported. 25




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##### Table of Contents



Liquidity and Capital Resources The objective of our liquidity management is currently threefold  to
ensure that funds are available to finance BVACs purchases, warehousing and
securitization/sale of installment contracts; to fund other working capital
needs; and to complete the liquidation of the assets and liabilities we
acquired from the Bank and distribute the proceeds from the remainder of the
liquidation to stockholders. At June 30, 2004, we had $5.8 million of cash and
cash equivalents and $129.1 million of available borrowing capacity on our
warehouse credit facility of which $6.0 million was immediately available based
upon the availability of BVAC-owned auto installment contracts eligible for
pledging. With our adoption of a plan of partial liquidation, BVAC is our primary
remaining subsidiary. With the exception of BVACs assets and liabilities and
our operating auto lease assets, we are proceeding with the remaining
liquidation and anticipate that this process will be substantially completed
during 2004. The liquidation of the auto leases, which will result from sales
of the leased vehicles as the lease contracts are repaid or expire, is
anticipated to be completed by the end of the third quarter of 2005, consistent
with the maturities of these leases. On December 30, 2003, we distributed $263.2 million, or $40.00 per share
in cash, to our common stockholders and, on December 31, 2003, redeemed $63.5
million, or approximately 74%, of the outstanding Capital Securities. During the first quarter of 2004, we paid the quarterly dividend due on
the remaining Capital Securities. On June 30, 2004, we redeemed the remaining $22.0 million of the Capital
Securities at the $25.00 par value of each Capital Security plus the quarterly
dividend on the Capital Securities. We also paid a cash distribution
of $16.5 million, or $2.50 per share, to our common stockholders on June 30, 2004. BVAC funds its purchases of installment contracts with its credit facility
and periodically securitizes or sells these contracts in order to provide it
with liquidity to continue its purchases. During the second quarter of 2004,
BVAC secured a $350.0 million warehouse credit facility to replace its existing
$250.0 million warehouse credit facility. The $100.0 million increase in
borrowing capacity has provided BVAC with additional liquidity, greater
flexibility to manage its warehouse inventory and allowed BVAC to maintain
additional auto contracts in its warehouse inventory and increase net interest
income. Stockholders equity totaled $139.3 million at June 30, 2004 compared to
$155.9 million at December 31, 2003. 26




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk Asset/Liability Management Interest rate risk, the fluctuation of market interest rates, impacts the
value of our fixed-rate auto installment contracts, which are held-for-sale.
It also impacts the net interest income component of our earnings because we
fund purchases of fixed-rate installment contracts with a floating-rate
warehouse credit facility. The rate on the warehouse facility, a revolving
purchase facility, is tied to the one-month Libor rate as well as commercial
paper rates and subject to frequent adjustments to reflect prevailing money
market rates. Fixed-rate Auto Installment Contracts The installment contracts we purchase are fixed-rate contracts. We
purchase these contracts with the intention of periodically selling the
contracts through asset-backed securitization transactions or sales of pools of
whole loans. Investors in these securitization or whole loan sale transactions
require a yield that is commensurate with prevailing market interest rates.
The prices offered by investors in these transactions reflect prevailing market
interest rates at the time of these transactions, which creates price risk for
the Company during the period it warehouses, or owns, these fixed-rate
contracts. Accordingly, our earnings are affected by changes in prevailing
market interest rates. Rising market interest rates generally reduce the value
of our fixed-rate installment contracts. Net Interest Income We fund purchases of fixed-rate installment contracts with our
floating-rate warehouse credit facility. While we own these contracts, we earn
net interest income, the amount by which interest income earned on the
contracts exceeds the interest paid on our warehouse credit facility. Changes
in prevailing market interest rates produce corresponding changes in the cost
of our floating-rate warehouse credit facility thereby creating interest rate
risk. Rising market interest rates generally increase the interest expense we
incur on our warehouse credit facility. To protect the Company from interest risk, we use various derivative
financial instruments including interest rate swap contracts to protect the
market value of our warehouse inventory of installment contracts and the net
interest income produced by our warehouse inventory. The market value of these
derivative instruments is designed to respond inversely to the market value of
our warehouse inventory resulting from changes in prevailing market interest
rates. These agreements are entered into as we purchase installment contracts;
the agreements are closed out at the time underlying installment contracts are
securitized or sold. Our policy is to maintain a substantially hedged position
on our warehouse inventory. At June 30, 2004, we had entered into swap contracts with a total notional
amount of $198.0 million under which we pay a fixed interest rate of 2.32% and
receive a floating interest rate of 1.36%. These contracts mature from
September 2004 to May 2007. At June 30, 2004, we had an unrealized gain of
$1.1 million in our swap contracts. At this date, we estimate that an increase
of 100 and 200 basis points would have resulted in an approximate unrealized
gain of $3.6 million and $6.1 million; respectively; while a decrease of 100
basis points would have resulted in an approximate unrealized loss of $1.6
million. We account for changes in the market value of derivative instruments as
prescribed by Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities. Our swap agreements are
not treated as hedge instruments under Statement No. 133 and are, accordingly,
carried at fair value, with changes in such fair value charged or credited to
earnings. Prior to our re-adoption of the going concern basis of accounting, we accounted
for changes in the market value of derivative instruments using the liquidation
basis of accounting. Changes in the market value of these derivative
instruments were reflected in our consolidated statements of net assets in
liquidation under pre-tax loss from operations, while offsetting changes in the
market value of underlying installment contracts were included in changes in
estimated values of assets and liabilities. 27




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##### Table of Contents



Item 4. Controls
and Procedures  (a)
    
    Evaluation of Disclosure Controls and Procedures As
we have previously reported, on July 22, 2004, Deloitte
& Touche LLP advised our Audit Committee and our management of a
reportable condition that Deloitte & Touche LLP
considers a material weakness in our internal control relating to financial reporting.
The condition related to our incorrect amortization of premiums paid, origination fees
and direct costs of auto installment contracts held for sale, which, under FASB Statement
No. 91, should be deferred until the contracts are sold. We
were amortizing such deferred amount resulting in material
misstatements in our consolidated financial statements as of and for the three months ended
December 31, 2003 and condensed consolidated financial statements as of and for the
three months ended March 31, 2004.
Deloitte & Touche LLP attributed this misstatement to
insufficient qualified accounting personnel to identify and resolve
complex accounting issues on a timely basis and lack of appropriate
resources resulting in insufficient supervision and review of the
financial reporting process. We have corrected our accounting for the aforementioned premiums paid, origination fees
and direct costs, and restated our
consolidated financial statements as of and for the three months ended
December 31, 2003 and condensed consolidated financial statements as of and for the
three months ended March 31, 2004 (the Restatement). As of the end of the period covered by this Form 10-Q, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, pursuant to Rule 13a-15
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act),
of the effectiveness of the design and operation of our disclosure controls and
procedures. In making the evaluation described above, we have considered
matters relating to the Restatement including the above described
reportable condition. Based upon this evaluation, our principal executive officer and principal
financial officer concluded that, except for the material weakness
described above, our  disclosure controls and procedures are effective to ensure that information required to be disclosed in
our periodic reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management, including our
principal executive officer and our principal financial officer, to allow
timely decisions regarding required disclosure.  (b)
    
    Changes in Internal Control Over Financial Reporting There have been no changes in the Companys internal controls as part of
the ongoing evaluation of the reportable condition discussed above.
Our principal executive officer and principal financial officer,
under the oversight of our Audit Committee, are developing a plan to
correct the material weakness in internal control. 28




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##### Table of Contents



PART II. OTHER INFORMATION 
  Item 1. Legal ProceedingsWe are involved as plaintiff or defendant in various 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 statements of financial condition,
results of operations or cash flows.Item 2. Changes in Securities None.  Item 3. Defaults Upon Senior Securities None. 
  Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of our stockholders, held April 29, 2004, the
stockholders considered the following proposals: I. The election of two directors of Bay View Capital
Corporation: The following were re-elected: Robert B.
Goldstein

Joel E. Hyman The vote on the election of the directors at the annual meeting
was as follows: For
    
    WithheldRobert B. Goldstein
    
    
    50,471,452
    
    
    
    7,090,163Joel E. Hyman
    
    
    54,135,155
    
    
    
    3,426,460
 At a special meeting of our stockholders, held June 24, 2004, the
stockholders considered and voted on the following proposal: I. Amend the Restated Certificate of Incorporation of Bay View Capital
Corporation to effect
a 1-for-10 reverse stock split of the Companys issued and
outstanding shares of common stock: For
    
    Against57,479,284
    
    
    4,648,945
  Item 5. Other Information None.  Item 6. Exhibits and Reports on
Form 8-K a(i)
    
    Exhibit 3
    
    Articles of IncorporationExhibit 31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14 and
15d-14, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14 and
15d-14, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002Exhibit 32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
 29




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##### Table of Contents



During the three months ended June 30, 2004, we filed the following reports on
Form 8-K: b(i)
    
    A report on Form 8-K dated April 28, 2004 that included as
Exhibit 99.1 a copy of its earnings release for the quarter ended
March 31, 2004.b(ii)
    
    A report on Form 8-K dated May 6, 2004 reporting that the
Board of Directors established June 24, 2004 as the date of a Special
Meeting of Stockholders to be held for the purpose of voting on a
proposal to effect a reverse stock split.b(iii)
    
    A report on Form 8-K dated June 25, 2004 including a press release dated
June 24, 2004, in which the Registrant announced that the proposal to effect a
1-for-10 reverse stock split was approved and adopted at a special meeting of
stockholders held on the same day.
 30




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##### Table of Contents



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: August 13, 2004
    BY:
    /s/  John OkuboJohn OkuboExecutive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 31




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    DescriptionExhibit 3
    
    Articles of IncorporationExhibit 31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14 and
15d-14, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14 and
15d-14, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002Exhibit 32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002