| BAY VIEW CAPITAL CORP Item 1A Risk Factors In addition to the other information contained in this Annual Report on Form 10-K, you should carefully consider the following risk factors: Risks Specifically Related to the Merger GLB stockholders cannot be certain of the market value of the BVCC common stock that they will receive in the merger because the market price of BVCC common stock fluctuates |
| Upon completion of the merger, each share of GLB common stock will be converted into the right to receive 1dtta0873 shares of BVCC common stock |
| Any change in the price of BVCC common stock prior to the merger will affect the market value of the stock that a GLB stockholder will receive in the merger |
| Stock price changes may result from a variety of factors, including general market and economic conditions, changes in BVCC’s businesses, operations and prospects and regulatory considerations |
| The prices of BVCC common stock and GLB common stock at the closing of the merger may vary from their respective prices on the date the merger agreement was executed, on the date of this Annual Report on Form 10-K and on the date of GLB’s special meeting |
| Because the date the merger will be completed will be later than the date of GLB’s special meeting, at the time of GLB’s special meeting GLB stockholders will not know what the market value of BVCC’s common stock will be upon completion of the merger |
| The ability of each of GLB and BVCC to pursue alternatives to the merger is restricted by the merger agreement |
| The merger agreement contains provisions that, subject to limited exceptions, limit GLB’s and BVCC’s ability to discuss, facilitate or enter into agreements with third parties to acquire either BVCC or GLB In general, if either of BVCC or GLB avails itself of those limited exceptions, it will be obligated to pay the other party a break-up fee of dlra3dtta4 million plus expenses |
| From GLB’s perspective, these provisions could discourage a potential competing acquiror that might have an interest in acquiring GLB from proposing or considering an acquisition of GLB even if that potential acquiror were prepared to pay a higher price to GLB stockholders than the price BVCC proposes to pay under the merger agreement |
| From BVCC’s perspective, these provisions could preclude BVCC from entering into a business combination transaction that could offer greater benefits to BVCC and its stockholders than the merger with GLB GLB’s stockholders do not have the right to vote on important BVCC matters even though they will become stockholders of BVCC if the merger is consummated |
| Because GLB’s stockholders will not be stockholders of BVCC for purposes of the BVCC special meeting, GLB’s stockholders do not have the right to vote on BVCC’s proposal to sell BVAC, BVCC’s proposal to amend its certificate of incorporation to establish transfer restrictions or BVCC’s proposal to ratify an amendment to BVCC’s by-laws |
| GLB stockholders should carefully review these proposals before they decide how to vote on the proposal to approve the merger of GLB and BVCC The amount of capital BVCC brings to the merged company could be substantially reduced from the amount of BVCC’s capital at December 31, 2005 |
| As of December 31, 2005, BVCC had stockholders’ equity of dlra70dtta5 million |
| This amount will be reduced by BVCC’s remaining expenses of merging with GLB and selling BVAC, which BVCC currently estimates will be approximately dlra1dtta6 million |
| BVCC’s stockholders’ equity will also be adversely affected by the operating losses BVCC is incurring in connection with the completion of its plan of partial liquidation |
| 9 _________________________________________________________________ [75]Table of Contents Risks Related to Owning BVCC Common Stock The combined company will be dependent on the ability of its subsidiaries to pay dividends in order to meet its obligations |
| The combined company will be a holding company and conduct almost all of its operations through its subsidiaries |
| The combined company will not have any significant assets other than the stock of its subsidiaries, deferred tax assets and the net proceeds from the sale of BVAC if the BVAC sale is consummated |
| Accordingly, the combined company will depend on the payment of dividends by its subsidiaries to meet its obligations |
| The combined company’s right to participate in any distribution of earnings or assets of its subsidiaries is subject to the prior claims of creditors of such subsidiaries |
| Under federal and state law, GBSB is limited in the amount of dividends it may pay to its parent without prior regulatory approval |
| Also, bank regulators have the authority to prohibit GBSB from paying dividends if the bank regulators determine that GBSB is in an unsafe or unsound condition or that the payment would be an unsafe and unsound banking practice |
| Interest rate volatility could significantly harm the combined company’s business |
| The combined company’s results of operations will be affected by the monetary and fiscal policies of the federal government and the regulatory policies of governmental authorities |
| A significant component of the combined company’s earnings will consist of GBSB’s net interest income, which is the difference between its income from interest-earning assets, such as loans, and its expense of interest-bearing liabilities, such as deposits |
| A change in market interest rates could adversely affect GBSB’s earnings if market interest rates change such that the interest GBSB pays on deposits and borrowings increases faster than the interest it collects on loans and investments |
| Consequently, GBSB, along with other financial institutions generally, is sensitive to interest rate fluctuations |
| The combined company’s results of operations will be significantly affected if its borrowers are unable to pay their loans |
| However, borrowers do not always repay their loans |
| The risk of non-payment is affected by: • credit risks of a particular borrower; • changes in economic and industry conditions; • the duration of the loan; and • in the case of a collateralized loan, uncertainties as to the future value of the collateral |
| Generally, commercial/industrial, construction and commercial real estate loans present a greater risk of non-payment by a borrower than other types of loans |
| In addition, consumer loans typically have shorter terms and lower balances with higher yields compared to real estate mortgage loans, but generally carry higher risks of default |
| Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances |
| Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans |
| The combined company’s financial condition and results of operations would be adversely affected if GBSB’s allowance for loan losses is not sufficient to absorb actual losses |
| There is no precise method of predicting loan losses |
| Excess loan losses could have a material adverse effect on GBSB’s financial condition and results of operations |
| GBSB attempts to maintain an appropriate 10 _________________________________________________________________ [76]Table of Contents allowance for loan losses to provide for estimated losses in its loan portfolio |
| GBSB periodically determines the amount of its allowance for loan losses based upon consideration of several factors, including: • a regular review of the quality, mix and size of the overall loan portfolio; • historical loan loss experience; • evaluation of non-performing loans; • assessment of economic conditions and their effects on GBSB’s existing portfolio; and • the amount and quality of collateral, including guarantees, securing loans |
| The merged company’s financial condition may be adversely affected if GBSB is unable to attract sufficient deposits to fund its anticipated loan growth |
| GBSB funds its loan growth primarily through deposits |
| To the extent that GBSB is unable to attract and maintain sufficient levels of deposits to fund its loan growth, GBSB would be required to raise additional funds through public or private financings |
| The combined company could experience significant difficulties and complications in connection with its growth and acquisition strategy |
| GLB has grown significantly over the last few years and, following the merger, may seek to continue to grow by acquiring financial institutions and branches as well as non-depository entities engaged in permissible activities for its financial institution subsidiaries |
| However, the market for acquisitions is highly competitive |
| The combined company may not be successful in identifying financial institution and branch acquisition candidates, integrating acquired institutions or preventing deposit erosion at acquired institutions or branches |
| As part of this acquisition strategy, the merged company may acquire additional banks and non-bank entities that it believes provide a strategic fit with its business |
| The merged company may not be successful with this strategy, and may not be able to manage this growth adequately and profitably |
| For example, acquiring any bank or non-bank entity will involve risks commonly associated with acquisitions, including: • potential exposure to unknown or contingent liabilities of banks and non-bank entities the merged company acquires; • exposure to potential asset quality issues of acquired banks and non-bank entities; • potential disruption to the merged company’s business; • potential diversion of the time and attention of the merged company’s management; and • the possible loss of key employees and customers of the banks and other businesses the merged company acquires |
| In addition to acquisitions, GBSB intends to strengthen its position in its current markets by undertaking additional de novo branch openings |
| Based on its experience, GBSB believes that it generally takes up to three years for new banking facilities to achieve operational profitability due to the impact of organizational and overhead expenses and the start-up phase of generating loans and deposits |
| To the extent that GBSB undertakes additional de novo branch openings, GBSB is likely to continue to experience the effects of higher operating expenses relative to operating income from the new banking facilities, which may have an adverse effect on GBSB’s net income, earnings per share, return on average stockholders’ equity and return on average assets |
| The combined company may encounter unforeseen expenses, as well as difficulties and complications in integrating expanded operations and new employees without disruption to its overall operations |
| Following each acquisition, the combined company will have to expend substantial resources to integrate the entities |
| The integration of non-banking entities often involves combining different industry cultures and business methodologies |
| The failure to integrate successfully the entities the combined company may acquire into its existing operations may adversely affect its results of operations and financial condition |
| 11 _________________________________________________________________ [77]Table of Contents The combined company could be adversely affected by changes in the law, especially changes in the regulation of the banking industry |
| The combined company and its subsidiaries will operate in a highly regulated environment and will be subject to supervision and regulation by several governmental regulatory agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation, which we sometimes refer to as the FDIC and the New York State Banking Department, which we sometimes refer to as the Banking Department in this Annual Report on Form 10-K Regulations are generally intended to provide protection for depositors and customers rather than for investors |
| The combined company will be subject to changes in federal and state law, regulations, governmental policies, income tax laws and accounting principles |
| Changes in regulation could adversely affect the banking industry as a whole and could limit the combined company’s growth and the return to investors by restricting such activities as: • the payment of dividends; • mergers with or acquisitions of other institutions; • investments; • loans and interest rates; • the provision of securities, insurance or trust services; and • the types of non-deposit activities in which the combined company’s financial institution subsidiaries may engage |
| In addition, legislation or agency rulemaking may change present capital requirements, which could restrict the combined company’s activities and require the combined company to maintain additional capital |
| The combined company’s results of operations could be adversely affected due to significant competition |
| The combined company may not be able to compete effectively in its markets, which could adversely affect its results of operations |
| The banking and financial service industry in GBSB’s market areas is highly competitive |
| The competitive environment is a result of: • changes in regulation; • prevailing economic conditions in the Greater Buffalo area; • changes in technology and product delivery systems; • declining population trends; and • the accelerated pace of consolidation among financial services providers |
| GBSB competes for loans, deposits and customers with various bank and non-bank financial service providers, many of which are larger in terms of total assets and capitalization, have greater access to the capital markets and offer a broader array of financial services than GBSB does |
| Competition with such institutions may cause GBSB to increase its deposit rates or decrease its interest rate spread on loans it originates |
| The combined company’s anticipated future growth may require it to raise additional capital in the future, but that capital may not be available when it is needed |
| GLB and GBSB are, and the combined company will be, required by federal and state regulatory authorities to maintain adequate levels of capital to support GBSB’s operations |
| GLB and BVCC anticipate that the combined company’s current capital resources will satisfy its and GBSB’s capital requirements for the foreseeable future |
| The combined company may at some point, however, need to raise additional capital to support continued growth, both internally and through acquisitions |
| 12 _________________________________________________________________ [78]Table of Contents The combined company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance |
| If the combined company cannot raise additional capital when needed, its ability to expand its operations through internal growth and acquisitions could be materially impaired |
| Adverse economic conditions in GBSB’s market areas may adversely impact its results of operations and financial condition |
| The majority of GBSB’s business is concentrated in western New York, which in recent years has been a slower growth market than many other areas of the United States |
| As a result, GBSB’s loan portfolio and results of operations may be adversely affected by factors that have a significant impact on the economic conditions in this market area |
| The local economies of this market area in recent years have been less robust than the economy of the nation as a whole and may not be subject to the same fluctuations as the national economy |
| Adverse economic conditions in GBSB’s market area, including the loss of certain significant employers, could reduce its growth rate, affect its borrowers’ ability to repay their loans and generally affect GBSB’s financial condition and results of operations |
| Furthermore, a downturn in real estate values in GBSB’s market area could cause many of its loans to become inadequately collateralized |
| Certain provisions of BVCC’s certificate of incorporation and by-laws after the merger may discourage takeovers |
| BVCC’s certificate of incorporation and by-laws after the merger contain certain anti-takeover provisions that may discourage or may make more difficult or expensive a tender offer, change in control or a takeover attempt that is opposed by BVCC’s board of directors |
| In particular, the certificate of incorporation and by-laws of BVCC following the merger: • classify its board of directors into three classes, so that stockholders elect only one-third of its board of directors each year; • permit stockholders to remove directors only for cause; • do not permit stockholders to take action except at an annual or special meeting of stockholders; • require stockholders to give advance notice to nominate candidates for election to the board of directors or to make stockholder proposals at a stockholders’ meeting; • permit the board of directors to issue, without stockholder approval unless otherwise required by law, preferred stock with such terms as its board of directors may determine; and • prohibit the acquisition of 5prca or more of BVCC’s common stock, without the prior approval of its board of directors |
| Section 203 of the DGCL generally provides that a publicly-held Delaware corporation, such as BVCC or GLB, that has not “opted out” of coverage by this section in the prescribed manner may not engage in any business combination with an interested stockholder for a period of three years following the date that the stockholders became an interested stockholder |
| BVCC has opted out of Section 203 and Section 203 is not applicable to BVCC GLB has not opted out of Section 203 and Section 203 is applicable to GLB These provisions of BVCC’s certificate of incorporation and by-laws after the merger and of Delaware law could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of the merged company’s stockholders may consider such proposals desirable |
| Such provisions could also make it more difficult for third parties to remove and replace the members of the merged company’s board of directors |
| Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above then-current market price of the merged company’s common stock, and may also inhibit increases in the trading price of the merged company’s common stock that could result from takeover attempts |
| 13 _________________________________________________________________ [79]Table of Contents Loss of members of the combined company’s executive team could have a negative impact on its business |
| The combined company’s success is dependent, in part, on the continued service of its executive officers, including Barry M Snyder, Chairman of the Board of GLB and Andrew W Dorn, Jr, President and Chief Executive Officer of GLB The loss of the services of any of these key persons could have a negative impact on the combined company’s business because of their skills, relationships in the banking community and years of industry experience, and the difficulty of promptly finding qualified successors |
| If it should be ultimately determined that BVCC’s reserves for the contingent liabilities remaining from the dissolution of BVB are not adequate, it could have a material adverse effect on the combined company |
| As part of the solvent dissolution of BVB on September 30, 2003, BVCC assumed the assets and liabilities of BVB, including certain pending litigation and other contingent liabilities |
| BVCC has established reserves for those liabilities that have been sufficient to date |
| However, if BVCC’s remaining reserves were insufficient to discharge any future liabilities and contingent liabilities remaining from the dissolution of BVB, it could have a material adverse effect on the combined company |
| Risks Relating to BVAC The sale of BVAC may not occur notwithstanding the decision of BVCC’s board of directors that the sale of BVAC is in the best interests of BVCC and its stockholders |
| There are numerous conditions to the sale of BVAC, and BVCC and BVAC may not be able to satisfy these conditions |
| If this sale of BVAC does not occur, the merged company will continue to operate BVAC for at least the short-term future and will continue to be subject to the risks of BVAC’s business described in this section |
| The purchase agreement limits BVCC’s and BVAC’s ability to pursue alternatives to the sale of BVAC The purchase agreement contains provisions that, subject to limited exceptions, limit BVCC’s and BVAC’s ability to discuss, facilitate or enter into agreements with third parties to acquire BVAC In general, if BVCC or BVAC avail themselves of these limited exceptions, BVCC will be obligated to pay AFS a break-up fee of dlra2dtta5 million, plus certain expenses |
| These provisions could discourage a potential competing acquirer that might have an interest in acquiring BVAC from proposing or considering the acquisition of BVAC even if that potential acquirer were prepared to pay a higher price to BVCC than the price AFS proposes to pay under the purchase agreement |
| The purchase agreement restricts the activities in which BVAC may engage pending the merger |
| The purchase agreement contains provisions that, subject to limited exceptions, restrict the business activities BVAC may conduct until the sale of BVAC is completed or the purchase agreement is terminated |
| If BVAC were to breach any of these restrictions, it would provide AFS with the right to terminate the purchase agreement |
| In addition, these restrictions could prevent BVAC from engaging in business activities it might wish to pursue |
| Certain indemnification obligations of BVCC under the purchase agreement survive indefinitely and are not limited in amount which could adversely affect the financial condition of the merged company |
| Although the purchase agreement, in general, limits the indemnification obligations of BVCC to dlra3dtta2 million and provides that BVCC would not be liable for breaches of its representations and warranties in the purchase agreement after 18 months have elapsed from the date of the BVAC sale, certain of BVCC’s indemnification obligations under the purchase agreement are not limited as to amount or time |
| 14 _________________________________________________________________ [80]Table of Contents BVAC’s business is dependent upon general economic conditions |
| BVAC’s business can be adversely affected during periods of economic slowdown, when delinquencies, defaults, repossessions and losses generally increase |
| These periods may also be accompanied by decreased consumer demand for automobiles, and declining values of loans securing outstanding loans |
| In addition, during an economic slowdown or a recession, BVAC’s servicing and collection cost could increase without a corresponding increase in income |
| BVAC is also subject to litigation risks |
| BVAC is a consumer finance company and, as such, is subject to various consumer claims and litigation seeking damages and statutory penalties based upon the following: • usury laws; • inaccurate disclosures; • wrongful repossession; • violations of bankruptcy stay provisions; • certificate of title disputes; • fraud; • breach of contract; and • discriminatory treatment of credit applicants |
| Some litigation against BVAC could take the form of class action complaints by consumers |
| BVAC may also be named as a co-defendant in lawsuits brought primarily against automobile dealers |
| The damages and penalties claimed by consumers could be substantial, and could have a material and adverse financial effect on BVAC BVAC is subject to significant government regulation, violations of which could have a material adverse effect on BVAC BVAC’s business is subject to significant government regulation, supervision and licensing under various federal, state and local laws governing, among other things: • licensing requirements; • record-keeping requirements; • payment of fees to certain states; • maximum interest rates that may be charged; • interest rates on loans to customers serving in the military; • debt collection practices; • disclosure to customers regarding financing terms; • the privacy of certain consumer information; and • collection of debt from loan customers who have filed bankruptcy |
| BVAC believes it maintains all material licenses and permits required for its current operations and that it is in substantial compliance with all material local, state and federal regulations |
| The failure of BVAC or of the automobile dealers who sell contracts to BVAC to maintain all requisite licenses, and to comply with applicable regulatory requirements, could allow consumers to assert rights of rescission and other remedies that could have a material adverse effect on BVAC 15 _________________________________________________________________ [81]Table of Contents Changes in law could adversely affect BVAC Any changes in the laws, rules and regulations that govern the operation of BVAC’s business could result in higher costs of compliance and otherwise adversely affect BVAC’s financial condition |
| BVAC is dependent upon its ability to effect securitizations periodically |
| BVAC typically finances the purchase of contracts from automobile dealers by draws against its warehouse line of credit |
| BVAC then periodically pools the contracts and sells interests in the pooled portfolio to a trust that sells asset-backed securities to investors |
| BVAC then uses the net proceeds of the sale to the securitization trust to repay amounts outstanding under the warehouse line of credit |
| BVAC’s financial condition would be materially and adversely affected if its warehouse lines of credit became unavailable or it was unable to continue similar transactions in the future |
| In addition, the purchase agreement limits the types of securitizations in which BVAC may engage prior to closing of its sale to AFS or the termination of the merger agreement |
| BVAC operates in a competitive market place |
| The indirect automobile finance industry is extremely competitive |
| Consumer credit for automobile purchases is available through banks, credit unions, other consumer finance companies and captive finance companies owned by automobile manufacturers and retailers |
| Many of these competitors are larger than BVAC and have substantially greater financial resources than BVAC Many of BVAC’s competitors provide financing on more favorable terms to automobile purchasers or dealers than BVAC does |
| Certain of BVAC’s competitors also offer financing to automobile dealers which BVAC does not provide |
| Providers of consumer credit for automobile purchases have traditionally competed on the basis of: • the maintenance of favorable relationships with automobile dealers; • interest rates charged; • the quality of credit accepted; • the flexibility of loan terms offered; and • the quality of service provided |
| BVAC may not be able to continue to compete effectively in this marketplace |
| Risks Relating to Tax Matters If the transfer restrictions are not effective in preventing an ownership change from occurring, the merged company’s ability to use BVCC’s net operating loss carryforwards could be severely limited |
| Although the transfer restrictions are valid under the DGCL, there is little judicial precedent regarding the enforcement of similar transfer restrictions |
| Thus, a transfer could occur that would violate the transfer restrictions, and the merged company may be unable to enforce the transfer restrictions |
| Even if a court were to enforce the transfer restrictions, the Internal Revenue Service, or IRS, could nevertheless disagree that the transfer restrictions provided a sufficient remedy with respect to an ownership change resulting from a prohibited transfer |
| The transfer restrictions may delay or prevent takeover bids by third parties and may delay or frustrate attempts by stockholders to replace management |
| The transfer restrictions on the common stock of the merged company are complex and are designed to preserve the value of its net operating loss carryforwards for the benefit of its stockholders |
| Any person who seeks to acquire a significant interest in the merged company will be required to negotiate with its board of directors |
| The transfer restrictions may also make it more difficult to effect a business combination transaction that stockholders may perceive to be favorable because of the need to negotiate with the merged company’s board of directors |
| The transfer restrictions could also make it more difficult for stockholders to replace 16 _________________________________________________________________ [82]Table of Contents current management because no single stockholder may cast votes for more than 5prca of the merged company’s outstanding common stock |
| The value of the net operating loss carryforwards is subject to challenge by the IRS Based on the current federal corporate income tax rate of 34prca, the net operating loss carryforwards could provide significant future tax savings to the merged company |
| However, the ability of the merged company to use these tax benefits will depend on a number of factors including: • the ability of the merged company to generate sufficient net income to utilize the net operating loss carryforwards; • the absence of a future ownership change of BVCC within the meaning of Section 382 of the Code; • the acceptance by the IRS of the positions taken on BVCC’s prior tax returns as to the amount and timing of its income and expenses; and • future changes in laws or regulations relating to the use of net operating loss carryforwards |