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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ........... to ...........
COMMISSION FILE NUMBER: 000-23257
BYL BANCORP
CALIFORNIA 33-0755794
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
18206 IMPERIAL HIGHWAY, YORBA LINDA, CALIFORNIA 92686
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (714) 996-1800
SECURITIES REGISTERED UNDER SECTION 12(b) OF EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF EXCHANGE ACT:
Common Stock, no par value
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(Title of Class)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Securities Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's net revenues for its most recent fiscal year was $27,817,717.
The aggregate market value of voting stock held by non-affiliates of the issuer
as of February 15, 1997 was $27,310,000.
Number of registrant's shares of Common Stock outstanding as of February 15,
1997 was 1,546,530.
Documents incorporated by reference : The proxy statement for the Annual
Meeting of Shareholders of the registrant to be held in the second quarter of
1998. Certain information therein is incorporated by reference in Part III
hereof.
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BYL BANCORP
TABLE OF CONTENTS
PAGE
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Part I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . . . 19
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . 20
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 22
Item 8. Financial Statements and Supplementary Data . . . . . . . 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 68
Part III
Item 10. Directors and Executive Officers of the Registrant. . . . 68
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . 68
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . 68
Item 13. Certain Relationships and Related Transaction . . . . . . 68
Part IV
Item 14. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 69
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PART I
ITEM 1: BUSINESS
GENERAL
BYL Bancorp ("the Company") is a California corporation formed to act as the
holding company of Bank of Yorba Linda. Other than its investment in the Bank,
the Company currently conducts no other significant business activities,
although it is authorized to engage in a variety of activities which are deemed
closely related to the business of banking upon prior approval of the Board of
Governors, the Company's primary regulator. As of December 31, 1997, the
Company had total assets of approximately $165 million, total deposits of $143
million and total shareholders' equity of $14.8 million.
Bank of Yorba Linda (hereinafter the "Bank") was incorporated under the laws of
the State of California in 1979 and was licensed by the California State Banking
Department and commenced operations as a California state chartered bank on
March 3, 1980. The Bank's accounts are insured by the Federal Deposit Insurance
Corporation ("FDIC"), but like most banks of its size in California, is not a
member of the Federal Reserve Bank.
The Bank is a California commercial bank that operates from its main office in
Yorba Linda, California and full service branch offices located in Costa Mesa,
Huntington Beach and Westminster, California and a limited service branch office
in Laguna Hills, California. The Bank's principal office is located at 18206
Imperial Highway, Yorba Linda, California. The Bank's Mortgage Division is
currently located in Tustin, California. The Bank's SBA Loan Division is
currently located in Mission Viejo, California.
The primary focus of the Bank is to provide personalized quality banking
products and services to small- and medium-size businesses, including
professionals, to originate primarily nonconforming mortgages in California and
various other states and selling such loans in the secondary market, and to
originate and sell SBA guaranteed loans, with the objective of building a
balanced community loan and investment portfolio mix. Management believes that
a local market focus, accompanied by strategic placement of bank branches and
personnel, enables the Bank to attract and retain low cost core deposits which
provide substantially all of the Bank's funding requirements.
Historically, the Bank engaged in traditional community banking activities,
including originating commercial, consumer and real estate construction loans,
and gathering local deposits to fund these activities. With the employment of
Mr. Robert Ucciferri as the Bank's President and Chief Executive Officer in late
1990 and other senior officers in early 1991, the Bank's operating strategy
changed to emphasize the origination and sale of nonconforming residential
mortgage loans and SBA loans. In part, because of the portfolio turnover and
resultant gains on sales of such loans, such activities typically provide
greater returns than more traditional community bank activities.
The Bank's operating strategy emphasizes: (i) expansion of its programs for
originating and selling mortgage loans and SBA guaranteed loans; (ii) continued
focus upon providing personalized quality banking products to small- to
medium-size businesses, professionals, general retail customers and the local
community; and (iii) continued expansion of the Bank, primarily in Orange
County, California, through internal growth and, when favorable, through
selective acquisitions of, or mergers with, healthy, distressed or failed
institutions or the selective acquisition of branches of such institutions;
however, the Bank has no written or oral agreements regarding any such
activities at this time, except as discussed in "Proposed Acquisition of DNB
Financial".
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On February 9, 1997, the Board of Directors of the Bank established the Bank of
Yorba Linda 1997 Stock Option Plan, and the Bank's 1990 Stock Option Plan was
canceled. With 130,926 option shares outstanding under the 1990 Plan, the 1997
Plan contains 241,000 shares. The 1997 Plan includes the ability to grant
options to directors, officers and employees of the Bank, and that options can
be exercised with cash and/or the appreciated value of other options that are
not being exercised.
COMPLETION OF ACQUISITION OF BANK OF WESTMINSTER
Following the receipt of all necessary regulatory approvals, the Bank completed
the acquisition of Bank of Westminster ("BOW") on June 14, 1996 pursuant to the
terms of the Agreement and Plan of Reorganization dated January 12, 1996 in
which the Bank organized and established BYL Merger Corporation as a
wholly-owned subsidiary of the Bank for the sole purpose of facilitating the
merger of BOW with the Bank. BYL Merger Corporation was consolidated with BOW
under the name and charter of BOW (the "Consolidation"), and, immediately
thereafter, the consolidated corporation was merged with and into the Bank (the
"Merger").
The Bank acquired 100% of the outstanding common stock of Bank of Westminster
(BOW) for $6,174,000 in cash. BOW had total assets of approximately $54,923,000.
The acquisition was accounted for using the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16. "Business
Combinations". Under this method of accounting, the purchase price was allocated
to the assets acquired and deposits and liabilities assumed based on their fair
values as of the acquisition date. The financial statements include the
operations of BOW from the date of the acquisition. Goodwill arising from the
transaction totaled approximately $1,717,000 and is being amortized over fifteen
years on a straight-line basis.
SECONDARY STOCK OFFERING
During 1996, the Bank completed a secondary stock offering underwritten on a
firm commitment basis by Ryan, Beck & Co. In connection with this offering, the
Bank issued 805,000 shares of common stock generating $7.8 million in additional
capital (net of underwriting discounts and transaction costs of $1.1 million).
Proceeds from this offering were used, in part, to fund the acquisition of BOW.
PROPOSED ACQUISITION OF DNB FINANCIAL
On January 29, 1998, the Company entered into a definitive agreement to merge
with DNB Financial (DNBF), the parent company of De Anza National Bank. Under
the terms of the agreement, DNBF will be merged with and into the Company, and
De Anza National Bank will become an operating division of the Bank of Yorba
Linda. The transaction will be structured as a pooling of interests through a
tax-free exchange of Company's shares of common stock for all outstanding shares
of the DNBF's common stock.
The aggregate transaction value for DNBF will be subject to adjustment based
upon tangible book value at the date of closing. The aggregate transaction
value will be the sum of (a) $19,569,722, or approximately 2.53 times DNBF's
tangible book value at December 31, 1997 and (b) 1.5 times the change in
tangible book value between December 31, 1997 and the closing. The total number
of Company shares to be exchanged will be determined by dividing the aggregate
transaction value by the stipulated value of $18.75 per share. The stipulated
value per share will be adjusted if the average closing Company stock price
during the pricing determination period is greater than $22.50 or less than
$15.00 per share.
The Agreement has been approved by the boards of directors of both companies and
is subject to the approval of the shareholders of both DNBF and the Company and
appropriate regulatory agencies. The merger is expected to close by May 31,
1998.
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SUPERVISION AND REGULATION
Banks are extensively regulated under both federal and state law. The Bank, as
a California state chartered bank, is subject to primary supervision, periodic
examination and regulation by the Superintendent and the FDIC.
The Bank is insured by the FDIC, which currently insures deposits of each member
bank to a maximum of $100,000 per depositor. For this protection, the Bank, as
is the case with all insured banks, pays a semi-annual statutory assessment and
is subject to the rules and regulations of the FDIC. Although the Bank is not a
member of the Federal Reserve System, it is nevertheless subject to certain
regulations of the Federal Reserve Board.
Various requirements and restrictions under the laws of the State of California
and the United States affect the operations of the Bank. State and federal
statutes and regulations relate to many aspects of the Bank's operations,
including reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends and locations of
branch offices. Further, the Bank is required to maintain certain levels of
capital.
There are statutory and regulatory limitations on the amount of dividends which
may be paid to the stockholders by the Bank. California law restricts the
amount available for cash dividends by state-chartered banks to the lesser of
retained earnings or the bank's net income for its last three fiscal years (less
any distributions to stockholders made during such period). In the event a bank
has no retained earnings or net income for its last three fiscal years, cash
dividends may be paid in an amount not exceeding the net income for such bank's
last preceding fiscal year only after obtaining the prior approval of the
Superintendent.
The FDIC also has authority to prohibit the Bank from engaging in what, in the
FDIC's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice.
Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of its affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral for loans and
the purchase of assets of such affiliates. Such restrictions prevent affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank in any other affiliate is limited to 10% of the Bank's capital and
surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes
certain restrictions with respect to transactions involving other controlling
persons of the Bank. Additional restrictions on transactions with affiliates
may be imposed on the Bank under the prompt corrective action provisions of the
FDIC Improvement Act.
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POTENTIAL AND EXISTING ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Bank, may be subject to potential
enforcement actions by the FDIC and the Superintendent for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits, the imposition of
civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the prompt corrective action provisions of the
FDIC Improvement Act.
The capital stock of the Bank is subject to the registration requirements of the
Securities Act of 1933. The Bank is also subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, which include, but are not
limited to, the filing of annual, quarterly, and other reports with the FDIC.
The regulations of these various agencies govern most aspects of the Bank's
business, including required reserves on deposits, investments, loans, certain
of their check clearing activities, issuance of securities, payment of
dividends, opening of branches, and numerous other areas. As a consequence of
the extensive regulation of commercial banking activities in the United States,
the Bank's business is particularly susceptible to changes in California and the
Federal legislation and regulations which may have the effect of increasing the
cost of doing business, limiting permissible activities, or increasing
competition.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprise the major
portion of the Bank's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Bank. Accordingly the earnings and
growth of the Bank are subject to the influence of local, domestic and foreign
economic conditions, including recession, unemployment and inflation.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
intermediaries. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. For
example, legislation has been introduced in Congress that would repeal the
current statutory restrictions on affiliations between commercial banks and
securities firms. The likelihood of any major changes and the impact such
changes might have on the Bank are impossible to predict.
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FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the FDIC Improvement Act was enacted into law. Set forth
below is a brief discussion of certain portions of this law and implementing
regulations that have been adopted or proposed by the Federal Reserve Board, the
Comptroller of the Currency ("Comptroller"), the Office of Thrift Supervision
("OTS") and the FDIC (collectively, the "federal banking agencies").
STANDARDS FOR SAFETY AND SOUNDNESS
The FDIC Improvement Act requires the federal banking agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to internal controls, loan documentation,
credit underwriting, interest rate exposure and asset growth. Standards must
also be prescribed for classified loans, earnings and the ratio of market value
to book value for publicly traded shares. The FDIC Improvement Act also
requires the federal banking agencies to issue uniform regulations prescribing
standards for real estate lending that are to consider such factors as the risk
to the deposit insurance fund, the need for safe and sound operation of insured
depository institutions and the availability of credit. Further, the FDIC
Improvement Act requires the federal banking agencies to establish standards
prohibiting compensation, fees and benefit arrangements that are excessive or
could lead to financial loss.
In July 1992, the federal banking agencies issued a joint advance notice of
proposed rule making requesting public comment on the safety and soundness
standards required to be prescribed by the FDIC Improvement Act. The purpose of
the notice is to assist the federal banking agencies in the development of
proposed regulations. In accordance with the FDIC Improvement Act, final
regulations must become effective no later than December 1, 1993.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan-to-value limits that do
not exceed the supervisory limits prescribed by the regulations.
PROMPT CORRECTIVE REGULATORY ACTION
The FDIC Improvement Act requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions
that fall below one or more prescribed minimum capital ratios. The purpose of
this law is to resolve the problems of insured depository institutions at the
least possible long-term cost to the appropriate deposit insurance fund.
The law required each federal banking agency to promulgate regulations defining
the following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized
(significantly exceeding the required minimum capital requirements), adequately
capitalized (meeting the required capital requirements), undercapitalized
(failing to meet any one of the capital requirements), significantly
undercapitalized (significantly below any one capital requirement) and
critically undercapitalized (failing to meet all capital requirements).
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In September 1992, the federal banking agencies issued uniform final regulations
implementing the prompt corrective action provisions of the FDIC Improvement
Act. Under the regulations, an insured depository institution will be deemed to
be:
- - "well capitalized" if it (i) has total risk-based capital of 10% or
greater, Tier 1 risk-based capital of 6% or greater and a leverage capital
ratio of 5% or greater and (ii) is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet
and maintain a specific capital level for any capital measure;
- - "adequately capitalized" if it has total risk-based capital of 8% or
greater, Tier 1 risk-based capital of 4% or greater and a leverage capital
ratio of 4% or greater (or a leverage capital ratio of 3% or greater if the
institution is rated composite 1 under the applicable regulatory rating
system in its most recent report of examination);
- - "undercapitalized" if it has total risk-based capital that is less than 8%,
Tier 1 risk-based capital that is less than 4% or a leverage capital ratio
that is less than 4% (or a leverage capital ratio that is less than 3% if
the institution is rated composite 1 under the applicable regulatory rating
system in its most recent report of examination);
- - "significantly undercapitalized" if it has total risk-based capital that is
less than 6%, Tier 1 risk-based capital that is less than 3% or a leverage
capital ratio that is less than 3%; and
- - "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be reclassified to
the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding how to deal with it.
The law prohibits insured depository institutions from paying management fees to
any controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines; of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
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An insured depository institution that is significantly undercapitalized, or is
undercapitalized and fails to submit, or in a material respect to implement, an
acceptable capital restoration plan, is subject to additional restrictions and
sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers, subject to certain grandfather provisions for those elected prior to
enactment of the FDIC Improvement Act; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
The FDIC has adopted risk-based minimum capital guidelines intended to provide a
measure of capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet as
assets and transactions, such as letters of credit and recourse arrangements,
which are recorded as off-balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off-balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
business loans.
In addition to the risk-based guidelines, the FDIC requires banks to maintain a
minimum amount of Tier 1 capital to total assets, referred to as the leverage
ratio. For a bank rated in the highest of the five categories used by the FDIC
to rate banks, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banks not rated in the highest category, the minimum leverage ratio
must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the FDIC has the discretion to set individual minimum
capital requirements for specific institutions at rates significantly above the
minimum guidelines and ratios.
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In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency. Because this proposal ha only recently been issued, the
Bank currently is unable to predict the impact of the proposal on the Bank if
the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule relating to
capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks, will be required to set aside capital
in excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
The benchmark set forth by such policy statement is the sum of (a) assets
classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of
assets classified substandard; and (d) estimated credit losses on other assets
over the upcoming 12 months.
OTHER ITEMS
The FDIC Improvement Act also, among other things, (i) limits the percentage of
interest paid on brokered deposits and limits the unrestricted use of such
deposits to only those institutions that are well capitalized; (ii) requires the
FDIC to charge insurance premiums based on the risk profile of each institution;
(iii) eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; (iv) prohibits insured state chartered
banks from engaging as principal in any type of activity that is not permissible
for a national bank unless the FDIC permits such activity and the bank meets all
of its regulatory capital requirements; (v) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital; and (vi) provides that, subject to
certain limitations, any federal savings association may acquire or be acquired
by any insured depository institution.
In addition, the FDIC has issued final and proposed regulations implementing
provisions of the FDIC Improvement Act relating to powers of insured state
banks. Final regulations issued in October 1992 prohibit insured state banks
from making equity investments of a type, or in an amount, that are not
permissible for national banks. In general, equity investments include equity
securities, partnership interests and equity interests in real estate. Under
the final regulations, non-permissible investments must be divested by no later
than December 19, 1996. The Bank has no such non-permissible investments.
Regulations issued in December 1993 prohibit insured state banks from engaging
as principal in any activity not permissible for a national bank, without FDIC
approval. The proposal also provides that subsidiaries of insured state banks
may not engage as principal in any activity that is not permissible for a
subsidiary of a national bank, without FDIC approval.
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The impact of the FDIC Improvement Act on the Bank is uncertain, especially
since many of the regulations promulgated thereunder have only been recently
adopted and certain of the law's provisions still need to be defined through
future regulatory action. Certain provisions, such as the recently adopted real
estate lending standards and the limitations on investments and powers of state
banks and the rules to be adopted governing compensation, fees and other
operating policies, may affect the way in which the Bank conducts its business,
and other provisions, such as those relating to the establishment of the
risk-based premium system, may adversely affect the Bank's results of
operations. Furthermore, the actual and potential restrictions and sanctions
that apply to or may be imposed on undercapitalized institutions under the
prompt corrective action and other provisions of the FDIC Improvement Act may
significantly adversely affect the operations and liquidity of the Bank, the
value of its Common Stock and its ability to raise funds in the financial
markets.
CAPITAL ADEQUACY GUIDELINES
The FDIC has issued guidelines to implement the risk-based capital requirements.
The guidelines are intended to establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet items into account
in assessing capital adequacy and minimizes disincentives to holding liquid,
low-risk assets. Under these guidelines, assets and credit equivalent amounts
of off-balance sheet items, such as letters of credit and outstanding loan
commitments, are assigned to one of several risk categories, which range from 0%
for risk-free assets, such as cash and certain U.S. Government securities, to
100% for relatively high-risk assets, such as loans and investments in fixed
assets, premises and other real estate owned. The aggregated dollar amount of
each category is then multiplied by the risk-weight associated with that
category. The resulting weighted values from each of the risk categories are
then added together to determine the total risk-weighted assets.
A banking organization's qualifying total capital consists of two components:
Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier
1 capital consists primarily of common stock, related surplus and retained
earnings, qualifying noncumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries. Intangibles,
such as goodwill, are generally deducted from Tier 1 capital; however, purchased
mortgage servicing rights and purchase credit card relationships may be
included, subject to certain limitations. At least 50% of the banking
organization's total regulatory capital must consist of Tier 1 capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25% of risk- weighted assets; (ii) perpetual
preferred stock, cumulative perpetual preferred stock and long-term preferred
stock and related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50% of Tier 1 capital. The
inclusion of the foregoing elements of Tier 2 capital are subject to certain
requirements and limitations of the federal banking agencies.
The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital to
average total assets of 3% for the highest rated banks. This leverage capital
ratio is only a minimum. Institutions experiencing or anticipating significant
growth or those with other than minimum risk profiles are expected to maintain
capital well above the minimum level. Furthermore, higher leverage capital
ratios are required to be considered well capitalized or adequately capitalized
under the prompt corrective action provisions of the FDIC Improvement Act.
11
<PAGE>
SAFETY AND SOUNDNESS STANDARDS
In February 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution
fails to comply with a safety and soundness standard, the appropriate federal
banking agency may require the institution to submit a compliance plan. Failure
to submit a compliance plan or to implement an accepted plan may result in
enforcement action.
In December 1992, the federal banking agency issued final regulations
prescribing uniform guidelines for real estate lending. The regulations require
insured depository institutions to adopt written policies establishing
standards, consistent with such guidelines, for extensions of credit secured by
real estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be conducted by
either state-certified or state-licensed appraisers for transactions in excess
of certain amounts. State-certified appraisers are required for all
transactions with a transaction value of $1,000,000 or more; for all
nonresidential transactions valued at $250,000 or more; and for "complex" 1-4
family residential properties of $250,000 or more. A state-licensed appraiser
is required for all other appraisals. However, appraisals performed in
connection with "federally related transactions" must now comply with the
agencies' appraisal standards. Federally related transactions include the sale,
lease, purchase, investment in, or exchange of, real property or interests in
real property, the financing of real property, and the use of real property or
interests in real property as security for a loan or investment, including
mortgage backed securities.
YEAR 2000 SAFETY & SOUNDNESS
Safety and soundness guidance on the risks posed to financial institutions by
the Year 2000 problem has been issued by the Federal Institutions Examination
Council. The guidance underscores that Year 2000 preparation is not only an
information systems issue, but also an enterprise-wide challenge that must be
addressed at the highest level of a financial institution.
The guidance sets out the responsibilities of senior management and boards of
directors in managing their Year 2000 projects. Among the responsibilities of
institution managers and directors is that of managing the internal and external
risks presented by providers of data-processing products and services, business
partners, counterparties and major loan customers.
Under the guidance, senior management must provide the board of directors with
status reports, at least quarterly, on efforts to reach Year 2000 goals both
internally and by the institution's major vendors. Senior managers and
directors must allocate sufficient resources to ensure that high priority is
given to seeing that remediation plans are fulfilled, and that the project
receives the quality personnel and timely support it requires.
The guidance does not require financial institutions to obtain Year 2000
certification from their vendors. Rather, an institution must implement its own
internal testing or verification processes for vendor products and services to
ensure that its different computer systems function properly together.
12
<PAGE>
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The FDIC also has authority to impose special assessments
against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were .023% of deposits. The FDIC, effective September 15, 1995, lowered
assessments from their rates of $.23 to $.31 per $100 of insured deposits to
rates of $.04 to $.31, depending on the condition of the bank, as a result of
the recapitalization of the BIF. On November 15, 1995, the FDIC voted to drop
its premiums for well capitalized banks to zero effective January 1, 1996.
Other banks will be charged risk-based premiums up to $.27 per $100 of deposits.
Governor Pete Wilson signed Assembly Bill 3351 (the "Banking Consolidation
Bill"), authored by Assemblyman Ted Weggeland and sponsored by the California
State Banking Department (the "Department"), effective July 1, 1997, which
creates the California Department of Financial Institutions ("DFI") to be headed
by a Commissioner of Financial Institutions out of the existing Department which
regulates state chartered commercial banks and trust companies in California.
The Banking Consolidation Bill, among other provisions, also (i) transfers
regulatory jurisdiction over state chartered savings and loan associations from
the Department of Savings and Loans ("DSL") to the newly created DFI and
abolishes the DSL; (ii) transfers regulatory jurisdiction over state chartered
industrial loan companies and credit unions from the Department of Corporations
to the newly-created DFI; and (iii) establishes within the DFI separate
divisions for credit unions, commercial banks, industrial loan companies and
savings and loans. As the Banking Consolidation Bill has only recently been
enacted, it is impossible to predict with any degree of certainty what impact it
will have on the banking industry in general and the Bank in particular.
In 1996, the President signed into law provisions to strengthen the Savings
Association Insurance Fund (the "SAIF") and to repay outstanding bonds that were
issued to recapitalize the SAIF's successor as result of payments made due to
insolvency of savings and loan associations and other federally insured savings
institutions in the late 1980's and early 1990's. The new law will require
savings and loan associations to bear the cost of recapitalizing the SAIF and,
after January 1, 1997, banks will contribute towards paying off the financing
bonds, including interest. In 2000, the banking industry will assume the bulk
of the payments. The new law also aims to merge the Bank Insurance Fund and
SAIF by 1999 but not until the bank and savings and loan charters are combined.
The Treasury Department has until March 31, 1997 to deliver to Congress on
combining the charters. Additionally, the new law also provides "regulatory
relief" for the banking industry by effecting approximately 30 laws and
regulations. The costs and benefits of the new law to the Bank can not
currently be accurately predicted.
13
<PAGE>
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed in law the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Under the
Interstate Act, beginning one year after the date of enactment, a bank holding
company that is adequately capitalized and managed may obtain regulatory
approval to acquire an existing bank located in another state without regard to
state law. A bank holding company would not be permitted to make such an
acquisition if, upon consummation, it would control (a) more than 10% of the
total amount of deposits of insured depository institutions in the United States
or (b) 30% or more of the deposits in the state in which the bank is located. A
state may limit the percentage of total deposits that may be held in that state
by any one bank or bank holding company if application of such limitation does
not discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum length
of time that may be prescribed by state law except that a state may not impose
more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction. Effective October 2, 1995, California adopted legislation which
"opts California into" the Interstate Act. However, the California Legislation
restricts out of state banks from purchasing branches or starting a de novo
branch to enter the California banking market. Such banks may proceed only by
way of purchases of whole banks.
On July 3, 1997, the President signed into law the Riegle Neal Amendments Act of
1997 providing that branches of state banks that operate in other states are to
be governed by the laws of their home (or chartering) states, not the laws of
the host states.
State banks will not receive any new powers under the legislation. If a host
state allows banks more powers than a bank's chartering state, the Bank is
restricted to the powers granted by its chartering state. However, states will
be prohibited from discriminating against branches of banks from other states by
the requirement that states must grant branches of out-of-state banks the same
privileges allowed to banks the states have chartered.
The Interstate Act is likely to increase competition in the Bank's market areas
especially from larger financial institutions and their holding companies. It
is difficult to asses the impact such likely increased competition will have on
the Bank' operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's law permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two states. The first state allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
"reciprocal" basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.
On September 28, 1995, Governor Wilson signed Assembly Bill No. 1482, the
Caldera, Weggeland, and Killea California Interstate Banking and Branching Act
of 1995 (the "1995 Act"). The 1995 Act, which was filed with the Secretary of
State as Chapter 480 of the Statutes of 1995, became operative on October 2,
1995.
14
<PAGE>
The 1995 Acts opts in early for interstate branching, allowing out-of-state
banks to enter California by merging or purchasing a California bank or
industrial loan company which is at least five years old. Also, the 1995 Act
repeals the California Interstate (National) Banking Act of 1986, which
regulated the acquisition of California banks by out-of-state bank holding
companies. In addition, the 1995 Act permits California state banks, with the
approval of the Superintendent of Banks, to establish agency relationships with
FDIC-insured banks and savings associations. Finally, the 1995 Act provides for
regulatory relief, including (i) authorization for the Superintendent to exempt
banks from the requirement of obtaining approval before establishing or
relocating a branch office or place of business, (ii) repeal of the requirement
of directors' oaths (Financial Code Section 682), and (iii) repeal of the
aggregate limit on real estate loans (Financial Code Section 1230).
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting the
credit needs of their local community, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which change
the manner in which they measure a bank's compliance with its CRA obligations.
The final regulations adopt a performance-based evaluation system which bases
CRA ratings on an institutions' actual lending service and investment
performance rather than the extent to which the institution conducts needs
assessments, documents community outreach or complies with other procedural
requirements. In March 1994, the Federal Interagency Tax Force on Fair lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
In February 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are
expected to be issued in the near future.
15
<PAGE>
CHANGES IN ACCOUNTING PRONOUNCEMENTS
In March of 1995, the FASB issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The statement does not apply to financial instruments long-term
customer relationships of a financial institution (core deposits), mortgage and
other servicing rights, and tax deferred assets. SFAS 121 requires the review
of long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances include, for example, a significant
decrease in market value of an assets, a significant change in use of an asset,
or an adverse change in a legal factor that could affect the value of an asset.
If such an event occurs and it is determined that the carrying value of the
asset may not be recoverable, an impairment loss should be recognized as
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Fair value can be determined by a current transaction,
quoted market prices, or present value of estimated expected future cash flows
discounted at the appropriate rate. The statement is effective for fiscal years
beginning after December 15, 1995. The implementation of SFAS No. 121 did not
have a material impact on its results of operations or financial position.
In May of 1995, the FASB issued SFAS 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS. SFAS No. 122 eliminates distinctions between servicing rights that were
purchased and those that were retained upon the sale of loans. The statement
requires mortgage servicers to recognize as separate assets rights to service
loans, no matter how the rights were acquired. Institutions who sell loans and
retain the servicing rights will be required to allocate the total cost of the
loans to servicing rights and loans based on their relative fair values if the
value can be estimated. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. Further, SFAS No. 122 requires that all capitalized
mortgage servicing rights be periodically evaluated for impairment based upon
the current fair value of these rights. This Statement which is superseded by
SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, did not have a material effect on the Bank's
financial condition and results of operations.
In October of 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation pans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if this statement had been
adopted. The accounting requirements of this statement are effective for
transactions entered into in fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994. The Bank has elected
the proforma disclosure requirements as noted in the note to the Financial
Statements.
16
<PAGE>
In June of 1996, the FASB issued SFAS No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, and in
December, 1996 issued SFAS No. 127, DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN
PROVISIONS OF FASB STATEMENT NO. 125 (AN AMENDMENT OF FASB STATEMENT NO. 125)
establishing accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of the financial-components approach. This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets. Liabilities and derivatives
incurred or obtained by transferors in conjunction with the transfer of
financial assets are required to be measured at fair value, if practicable.
Servicing assets and other retained interests in transferred assets are required
to be measured by allocating the previous carrying amount between the assets
sold, if any, and the interest that is retained, if any, based on the relative
fair values of the assets on the date of the transfer. Servicing assets
retained are subsequently subject to amortization and assessment for impairment.
The implementation of SFAS 125 did not have a material impact on its results of
operations or financial position.
HAZARDOUS WASTE CLEAN-UP COSTS
Management is aware of recent legislation and cases relating to hazardous waste
clean-up costs and potential liability. Based on a general survey of the loan
portfolio of the Bank, conversations with local authorities and appraisers, and
the type of lending currently and historically done by the Bank (the Bank has
generally not made the types of loans generally associated with hazardous waste
contamination problems), management is not aware of any potential liability for
hazardous waste contamination.
OTHER REGULATIONS AND POLICIES
The federal regulatory agencies have adopted regulations that implement Section
304 of FDICIA which requires federal banking agencies to adopt uniform
regulations prescribing standards for real estate lending. Each insured
depository institution must adopt and maintain a comprehensive written real
estate lending policy, developed in conformance with prescribed guidelines, and
each agency has specified loan-to-value limits in guidelines concerning various
categories of real estate loans.
Various requirements and restrictions under the laws of the United States and
the State of California affect the operations of the Bank. Federal regulations
include requirements to maintain non-interest bearing reserves against deposits,
limitations on the nature and amount of loans which may be made, and
restrictions on payment of dividends. The California Superintendent of Banks
approves the number and locations of the branch offices of a bank. California
law exempts banks from the usury laws.
BUSINESS CONCENTRATIONS
As of December 31, 1997, the Company had approximately $165 million in assets
and $143 million in deposits. No individual or single group of related accounts
is considered material in relation to the Company's totals, or in relation to
its overall business.
[6~
17
<PAGE>
MONETARY POLICY
Banking is a business which depends on rate differentials. In general, the
difference between the interest paid by the Bank on its deposits and its other
borrowings and the interest rate received by the Bank on loans extended to its
customers and securities held in the Bank investment portfolios will comprise
the major portion of the Bank's earnings.
The earnings and growth of the Bank will be affected not only by general
economic conditions, both domestic and international, but also by the monetary
and fiscal policies of the United States and its agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement
national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in U.S. Government securities,
limitations upon savings and time deposit interest rates, and adjustments to the
discount rates applicable to borrowings by banks which are members of the
Federal Reserve System. The actions of the Federal Reserve Board influence the
growth of bank loans, investments and deposits and also affect interest rates
charged on loans and paid on deposits. The nature and impact that future
changes in fiscal or monetary policies or economic controls may have on the
Bank's businesses and earnings cannot be predicted.
COMPETITION
The banking business in California generally, and in the Bank's primary service
areas specifically, is highly competitive with respect to both loans and
deposits, and is dominated by a relatively small number of major banks with many
offices and operations over a wide geographic area. Among the advantages such
major banks have over the Bank are their ability to finance wide-ranging
advertising campaigns and to allocate their investment assets to regions of
higher yield and demand. Such banks offer certain services such as trust
services and international banking which are not offered directly by the Bank
(but which can be offered indirectly by the Bank through correspondent
institutions). In addition, by virtue of their greater total capitalization,
such banks have substantially higher lending limits than the Bank. (Legal
lending limits to an individual customer are based upon a percentage of a bank's
total capital accounts.) Other entities, both governmental and in private
industry, seeking to raise capital through the issuance and sale of debt or
equity securities also provide competition for the Bank in the acquisition of
deposits. Banks also compete with money market funds and other money market
instruments which are not subject to interest rate ceilings.
In order to compete with other competitors in their primary service areas, the
Bank attempts to use to the fullest extent the flexibility which their
independent status permits. This includes an emphasis on specialized services,
local promotional activity, and personal contacts by their respective officers,
directors and employees. In particular, each of the banks offers highly
personalized banking services.
EMPLOYEES
At December 31, 1997, the Bank had a total of 167 full-time equivalent
employees. The Bank believes that its employee relations are satisfactory.
18
<PAGE>
ITEM 2. PROPERTIES
The Bank's principal office is located in a free standing two story building in
the City of Yorba Linda. The building was constructed for the Bank on 55,000
square feet of land in a shopping center leased in 1981. The lease runs through
2002, with six five-year options to extend.
The Bank also entered into a lease in May of 1993 for approximately 4,742 square
feet of space to house its Costa Mesa office. These premises were already
improved to house a financial institution branch office. The lease has a term
of five years with two five-year options to extend.
The Bank owns its branch facility in Westminster. It is a free standing, two
story building of approximately 24,653 square feet constructed in 1979 on 53,317
square feet of land.
The Bank owns its branch facility in Huntington Beach. It is a free standing
building of approximately 8,962 square feet constructed in 1986 on 37,956 square
feet of land.
The Bank has also entered into a lease dated December 22, 1995 for approximately
3,330 square feet of space in Mission Viejo to house its SBA Lending Division.
The lease has a term of three years with a three-year option to extend.
The Bank has also entered into a lease dated June 28, 1996 for approximately
7,330 square feet in Tustin to house its Mortgage Loan Division. The lease has
a term of six years with two six-year options to extend.
The Bank has also entered into a lease dated March 18, 1997 for approximately
1869 square feet in Laguna Hills for a limited service branch. The lease has a
term of 3 years.
ITEM 3. LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no pending legal proceedings
to which the Company is a party and which may have a materially adverse effect
upon the Company's property or business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 29, 1997, a Special Meeting of Shareholders of the Bank was held to
vote upon the formation of BYL Bancorp and the establishment of the Bank as a
wholly-owned subsidiary of BYL Bancorp. The matter was approved by a majority
of the shareholders.
19
<PAGE>
PART II
ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The equity securities of BYL Bancorp consist of one class of common stock, of
which there were 1,546,530 shares outstanding, held by approximately 800
shareholders of record at year-end 1997. Holders of the common stock are
entitled to receive dividends, when, as and if declared by the Board of
Directors out of funds legally available therefor, as specified by the
California Financial Code. The Company paid no dividends on common stock in
1996. During 1997, the Company paid quarterly cash dividends of $0.05 per
share. On June 30, 1997, the Company completed a four-for-three stock split of
the issued and outstanding shares.
Management of the Company is aware of five (5) securities dealers who
maintain an inventory and make a market in its Common Stock. The market
makers are Ryan, Beck & Co., Wedbush Morgan Securities Inc., Herzog, Heine &
Geduld, Sutro & Co. and Sandler, O'Neill & Partners.
The information set forth in the table below summarizes, for the periods
indicated, the high and low prices since the Company's Common Stock became
listed in NASDAQ National Market. These quotes do not necessarily include
retail markups, markdowns, or commissions and may not necessarily represent
actual transactions. Additionally, there may have been transactions at prices
other than those shown below (these amounts have been adjusted to reflect the
four-for-three stock split effective June 30, 1997).
<TABLE>
<CAPTION>
1996 High Low
- ----------------- --------- ---------
<S> <C> <C>
Second Quarter 6 3/8 6 3/16
Third Quarter 6 3/8 5 7/16
Fourth Quarter 8 1/4 5 13/16
1997
- -----------------
First Quarter 15 2/3 10 3/8
Second Quarter 15 15/16 12 3/8
Third Quarter 16 1/2 16
Fourth Quarter 21 1/4 16
</TABLE>
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table reflects selected financial data relating to the past five
years of the Company's operations.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income $ 13,016 $ 7,498 $ 4,479 $ 4,127 $ 4,023
Interest Expense 4,160 2,060 1,045 1,005 1,039
---------- ---------- ---------- ---------- ----------
Net Interest Income 8,856 5,438 3,434 3,122 2,984
Provision for Loan Losses 733 344 262 423 819
---------- ---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 8,123 5,094 3,172 2,699 2,165
Noninterest Income 14,801 7,653 5,662 3,799 3,362
Noninterest Expense 19,206 10,661 7,095 5,687 5,336
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes 3,718 2,086 1,739 811 191
Income Taxes 1,609 884 717 335 71
---------- ---------- ---------- ---------- ----------
Net Income $ 2,109 $ 1,202 $ 1,022 $ 476 $ 120
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Dividends on Common Stock $ 292 $ - $ - $ - $ -
PER SHARE DATA:
Net Income - Basic $ 1.37 $ 1.12 $ 1.98 $ 0.83 $ 0.13
Net Income - Diluted $ 1.28 $ 1.04 $ 1.39 $ 0.62 $ 0.13
Dividends on Common Stock $ 0.20 $ - $ - $ - $ -
Book Value $ 9.59 $ 7.96 $ 8.43 $ 6.68 $ 6.70
Tangible Book Value $ 8.57 $ 7.35 $ 8.43 $ 6.68 $ 6.70
STATEMENTS OF FINANCIAL CONDITION SUMMARY:
Total Assets $ 164,667 $ 116,467 $ 59,784 $ 53,430 $ 52,230
Total Deposits 142,836 102,368 54,025 48,693 47,965
Loans Held for Sale 47,150 24,363 10,186 9,969 2,683
Total Loans 92,908 64,244 30,917 27,756 37,798
Allowance for Loan Losses 1,521 1,210 580 536 413
Total Shareholders' Equity 14,830 12,938 5,157 4,405 4,020
SELECTED RATIOS:
Return on Average Assets 1.43% 1.35% 1.88% 0.88% 0.22%
Return on Average Equity 15.19% 13.82% 21.37% 11.31% 3.13%
Average Loans as a Percent
of Average Deposits 86.65% 79.90% 82.03% 80.76% 82.55%
Allowance for Loan Losses to Total Loans 1.64% 1.87% 1.84% 1.90% 1.08%
Average Capital to Average Assets 9.43% 9.78% 8.78% 7.54% 6.38%
Tier I Capital to Risk-Weighted Assets 9.77% 11.77% 10.49% 10.71% 8.51%
Total Capital to Risk-Weighted Assets 10.95% 13.02% 11.74% 11.96% 9.75%
</TABLE>
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ORGANIZATION
BYL Bancorp ("the Company") is a California corporation formed to act as the
holding company of Bank of Yorba Linda ("the Bank"), a state-chartered bank
headquartered in Yorba Linda, California. Other than its investment in the
Bank, the Company currently conducts no other significant business activities,
although it is authorized to engage in a variety of activities which are deemed
closely related to the business of banking upon prior approval of the Board of
Governors, the Company's primary regulator.
The Bank engages in the general business of banking throughout its primary
market area of Yorba Linda, California and the surrounding area of Orange County
by offering a wide range of banking products and services, including (i)
originating and selling of Nonconforming Mortgages and SBA guaranteed loans;
(ii) providing many types of business and personal savings, money market and
demand accounts, and other consumer banking services; and (iii) originating
several other types of loans, and commercial and residential construction loans.
The Bank maintains its main office in Yorba Linda, and presently operates three
(3) full service branches in Costa Mesa, Westminster, and Huntington Beach,
California, and a limited service branch office in Laguna Hills, California.
Each banking office concentrates on servicing the local community in which it is
located. The Bank also maintains a mortgage banking office in Tustin,
California and a SBA loan office in Mission Viejo, California.
The following sections set forth a discussion of the significant operating
changes, business trends, financial condition, earnings, capital position, and
liquidity that have occurred in the two-year period ended December 31, 1997,
together with an assessment, when considered appropriate, of external factors
that may affect the Company in the future. This discussion should be read in
conjunction with the Company's consolidated financial statements and notes
included herein.
22
<PAGE>
OVERVIEW
The Company's net income for 1997 was $2.1 million, a $900,000 or 75.5% increase
over the 1996 net income of $1.2 million. On a diluted per share basis, 1997
net income was $1.28 compared to $1.04 in 1996. The increase in net income in
1997 was due primarily to the growth in assets and the increased profitability
of its SBA and Mortgage Loan Divisions.
In 1996, net income was $1.2 million or $1.04 per share compared to $1.0 million
or $1.39 per share in 1995. The Company's 1996 net income increased by $179,000
compared to the 1995 net income. This increase was attributable primarily to
the acquisition of BOW and continuing profitability of its SBA and Mortgage Loan
Divisions.
Shareholders' equity increased $1.9 million or 14.6%, in 1997 to $14.8 million
at December 31, 1997 compared to $12.9 million at December 31, 1996. This
increase was from the retention of earnings. Shareholders' equity increased
$7.8 million in 1996, primarily from the public offering that raised $7.8
million. A portion of those funds were used to retire the outstanding Preferred
Stock.
During 1997, the Company paid its first ever dividends to common stockholders
totaling $292,000 or $0.20 per share.
The following table sets forth several key operating ratios for 1997, 1996 and
1995:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Return on Average Assets 1.43% 1.35% 1.88%
Return on Average Equity 15.19% 13.82% 21.37%
Average Shareholder's Equity to Average Total Assets 9.43% 9.78% 8.78%
</TABLE>
23
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY
The following table presents, for the years indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest-earning assets and the
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed both in dollars and in rates.
Nonaccrual loans are included in the calculation of the average balances of
loans, and interest not accrued is excluded (dollar amounts in thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------
Average Average Average
Interest Yield or Interest Yield or Interest Yield or
Average Earned Rate Average Earned Rate Average Earned Rate
Balance or Paid Paid Balance or Paid Paid Balance or Paid Paid
---------- --------- -------- ---------- ---------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities $ 6,390 $ 395 6.18% $ 6,229 $ 356 2.72% $ 4,163 $ 219 5.26%
Federal Funds Sold 7,329 394 5.38% 4,240 222 5.24% 2,402 138 5.75%
Other Earning Assets - - - - - - 23 2 8.70%
Loans 112,697 12,227 10.85% 64,155 6,920 10.79% 40,215 4,120 10.24%
---------- --------- ---------- ---------- ---------- ---------
Total Interest-Earning
Assets 126,416 13,016 10.30% 74,624 7,498 10.05% 46,803 4,479 9.57%
Cash and Due From
Banks 9,657 7,839 5,689
Premises and Equipment 4,132 2,363 665
Other Real Estate Owned 908 776 549
Accrued Interest and
Other Assets 7,325 4,314 1,357
Allowance for Loan
Losses (1,156) (985) (583)
---------- ---------- ----------
Total Assets $ 147,282 $ 88,931 $ 54,480
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Money Market and
NOW 26,913 728 2.71% 21,574 576 2.67% 16,732 453 2.71%
Savings 21,088 814 3.86% 14,329 512 3.57% 9,008 278 3.09%
Time Deposits under
$100,000 25,633 1,431 5.58% 9,233 496 5.37% 3,702 182 4.92%
Time Deposits of
$100,000 or More 20,093 1,173 5.84% 8,526 476 5.58% 2,418 132 5.46%
Other 205 14 6.83% - - - - - -
---------- --------- ---------- --------- ---------- ---------
Total Interest-Bearing
Liabilities 93,932 4,160 4.43% 53,662 2,060 3.84% 31,860 1,045 3.28%
Noninterest-Bearing
Liabilities:
Demand Deposits 36,338 25,400 17,163
Other Liabilities 3,130 1,169 675
Shareholders' Equity 13,882 8,700 4,782
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $ 147,282 $ 88,931 $ 54,480
---------- ---------- ----------
---------- ---------- ----------
Net Interest Income $ 8,856 $ 5,438 $ 3,434
--------- --------- ---------
--------- --------- ---------
Net Yield on Interest-Earning
Assets 7.01% 7.29% 7.34%
</TABLE>
24
<PAGE>
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income refers to the difference between the interest paid on
deposits and borrowings, and the interest earned on loans and investments. It
is the primary component of the earnings of a financial institution. The
primary factors that impact net interest income are the composition and volume
of interest-earning assets and interest-bearing liabilities, the amount of
noninterest-bearing liabilities and nonaccrual loans, and changes in market
interest rates.
Net interest income for 1997 was $8.9 million, an increase of 62.9% compared to
the $5.4 million reported in 1997. This increase was primarily due to the
significant increase in average interest-earning assets which increased $51.8
million or 69.4% to $126.4 million in 1997 compared to $74.6 million in 1996.
Interest income in 1997 was $13.0 million, a $5.5 million or a 73.6% increase
over the $7.5 million recorded in 1996. Increased loan totals accounted for 95%
of this increase as the average loans outstanding increased 75.6% to $112.7
million in 1997 compared to $64.2 million in 1996. The significant increase in
shareholders' equity in 1996 and 1997 has allowed the Company to aggressively
grow its loan portfolio and other interest-earning assets.
Interest expense also rose significantly in 1997 as the Company increased
deposits and other borrowings to fund the loan growth discussed above. Interest
expense was $4.2 million in 1997, double the $2.1 million reported in 1996.
Interest rates played a minor role in the changes in net interest income in
1997. The Company was able to increase its yield on interest-earning assets by
30 basis points, however, the rates paid on interest-bearing liabilities
increased 59 basis points. The net yield on interest-earning assets in 1997
declined 28 basis points to 7.01% compared to 7.29% in 1996.
Net interest income in 1996 was $5.4 million, an increase of $2 million or 58%
from $3.4 million in 1995. This increase was primarily attributable to the
substantial increase in total interest-earning assets which increased from $46.8
million in 1995 to $74.6 million in 1996. (Changing interest rates had a very
minor impact as the net yield on interest-earning assets decreased only 5 basis
points for 7.34% in 1995 to 7.29% in 1996.) The increase in total
interest-earning assets was a direct result of the acquisition of BOW.
Total interest income in 1996 was $7.5 million in 1996 compared to $4.5 million
in 1995. Increased loan volume, from the acquisition of BOW and the SBA and
Mortgage Loan Divisions, was accountable for 85% of the increase in total
interest income. The total yield on interest-earning assets also increased 48
basis points contributing $234,000 to the increase in interest income.
Total interest expense also increased dramatically in 1996, rising to $2.1
million from $1.0 million in 1995. Again this increase was primarily
attributable to increased volume in deposits (primarily acquired from BOW) which
accounted for $951,000 of the total increased. The average rate paid on
deposits also increased 56 basis points increasing interest expense by $64,000.
25
<PAGE>
NET INTEREST INCOME - CONTINUED
The following table sets forth changes in interest income and interest expense
for each major category of interest-earning asset and interest-bearing
liability, and the amount of change attributable to volume and rate changes for
the years indicated. Changes not solely attributable to rate or volume have
been allocated to volume and rate changes in proportion to the relationship of
the absolute dollar amounts of the changes in each (dollar amounts in
thousands).
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
versus versus
Year Ended December 31, 1996 Year Ended December 31, 1995
---------------------------- ----------------------------
Increase (Decrease) Due Increase (Decrease) Due
To Change in To Change in
---------------------------- -----------------------------
Volume Rate Total Volume Rate Total
--------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment Securities $ 9 $ 30 $ 39 $ 117 $ 20 $ 137
Federal Funds Sold 166 6 172 97 (13) 82
Other Earning Assets - - - (2) - (2)
Loans 5,267 40 5,307 2,571 229 2,800
--------- ---------- --------- --------- --------- ---------
TOTAL INTEREST INCOME 5,442 76 5,518 2,783 236 3,019
INTEREST-BEARING LIABILITIES:
Money Market and NOW 144 8 152 129 (6) 123
Savings 258 44 302 185 49 234
Time Deposits under
$100,000 915 20 935 296 18 314
Time Deposits $100,000
or More 674 23 697 341 3 344
Other 14 0 14 - - -
--------- ---------- --------- --------- --------- ---------
TOTAL INTEREST EXPENSE 2,005 95 2,100 951 64 1,015
--------- ---------- --------- --------- --------- ---------
NET INTEREST INCOME $ 3,437 $( 19) $ 3,418 $ 1,832 $ 172 $ 2,004
--------- ---------- --------- --------- --------- ---------
--------- ---------- --------- --------- --------- ---------
</TABLE>
NONINTEREST INCOME
The Bank receives noninterest income from three primary sources: service
charges and fees on accounts and banking services, fees and premiums generated
by the Mortgage Loan Division, and fees, premiums, and servicing income
generated by the SBA Loan Division.
In 1997, noninterest income was $14.8 million, an increase of $7.2 million or
93.4% compared to the 1996 amount of $7.6 million. The majority of this
increase ($7.0 million) was generated by the Company's SBA and Mortgage Loan
Divisions who continued to expand their operations in 1997. By the end of 1997,
these divisions had developed networks of referring brokers throughout most
Pacific Coast States.
26
<PAGE>
NONINTEREST INCOME - CONTINUED
During 1996, noninterest income increased $2 million to $7.7 million compared to
$5.7 million in 1995. The majority of this increase (1.7 million) was generated
by the Bank's SBA and Mortgage Loan Divisions. During 1996, the Mortgage Loan
Division's noninterest income has $4.5 million (representing 58% of the Bank's
total noninterest income), an increase of $1.2 million or 36% more than the 1995
total of $3.3 million. The SBA Loan Division also experienced a significant
increase in 1996 as total noninterest income from that division reached $2.4
million, a 26% increase over the 1995 total of $1.9 million. Service charges,
fees and other income also increased in 1996 due to the acquisition of BOW.
NONINTEREST EXPENSE
Noninterest expense reflects the costs of products and services related to
systems, facilities and personnel for the Company. The major components of
noninterest expense stated as a percentage of average assets are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Salaries and Employee Benefits 8.43% 6.92% 8.07%
Occupancy Expenses .62 .81 .99
Furniture and Equipment .84 .45 .80
Professional Fees and Outside Services .60 .77 .50
OREO Expenses .11 .36 .22
Commission and Loan Expenses .54 .50 .74
Office Expenses .77 .84 .98
Other 1.67 1.34 .72
--------- --------- --------
13.04% 11.99% 13.02%
--------- --------- --------
--------- --------- --------
</TABLE>
Noninterest expense was $19.2 million in 1997, an increase of $8.5 million or
80.2% over the $10.7 reported in 1996. The majority of this increase ($6.3
million) was created by increased salaries and benefits generated by the
acquisition of BOW and the SBA and Mortgage Loan Divisions. Compensation in
these divisions are primarily incentive-based, therefore, significant increases
in volume of loan originations, and resulting gains, result in significant
increases in salaries and incentive payments. Furniture and Equipment and
Office Expenses were also responsible for $942,000 of the increased noninterest
expenses in 1997. These categories increased primarily due to the cost of
converting to a new in-house data processing system in 1997.
Noninterest expenses in 1996 totaled $10.7 million, or approximately a 50%
increase over the 1995 amount of $7.1 million. The majority of this increase
($1.8 million) was created by increased salaries and employee benefits generated
by the acquisition of BOW and the Mortgage and the SBA Loan Divisions.
Increases in occupancy expenses and furniture and equipment were primarily
related to the acquisition of BOW. Other expenses increased $1.4 million,
primarily due to the acquisition of BOW, increases in OREO expenses and
contracted costs of loan packaging and processing related to the volume
increases in the SBA and Mortgage Loan Divisions.
INCOME TAXES
Income tax expense was $1,609,000, $884,000, and $717,000 for the years ended
December 31, 1997, December 31, 1996, and December 31, 1995, respectively.
These expenses resulted in an effective tax rate of 43.3% in 1997, 42.4% in 1996
and 41.2% in 1995.
27
<PAGE>
BALANCE SHEET ANALYSIS
Total assets of the Company at December 31, 1997 were $164.7 million, a $48.2
million or 41.4% increase from $116.5 million at December 31, 1996. Average
assets for 1997 were $143.2 million compared to $88.2 million for 1996. The
increases in shareholders' equity in 1996 and 1997 allowed the Company to
aggressively expand its asset base.
During 1996, the Bank's total assets increased $56.7 million from $59.8 million
at December 31, 1995 to $116.5 million at December 31, 1996. This increase
resulted primarily from the acquisition of Bank of Westminster on June 13, 1996.
Bank of Westminster (BOW) had total assets of $54,923,000 when acquired by the
Bank. To fund this acquisition as well as redeem the outstanding preferred
stock, the Bank raised $7.8 million of additional capital in a supplemental
stock offering.
INVESTMENT PORTFOLIO
The following table summarizes the amounts and distribution of the Company's
investment securities held as of the dates indicated, and the weighted average
yields as of December 31, 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------
Weighted
Book Market Average Book Market
Value Value Yield Value Value
-------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------
FHLB STOCK
Within One Year $ 463 $ 463 n/a $ - $ -
-------- -------- --------- ---------
TOTAL AVAILABLE-FOR-SALE SECURITIES $ 463 $ 463 n/a $ - $ -
-------- -------- --------- ---------
-------- -------- --------- ---------
HELD-TO-MATURITY SECURITIES
---------------------------
U.S. TREASURIES:
Within One Year $ - $ - - $ 500 $ 504
One to Five Years 2,499 2,506 5.81% 799 802
-------- -------- --------- ---------
Total U.S. Treasuries Securities 2,499 2,506 5.81% 1,299 1,306
U.S. GOVERNMENT AND AGENCY SECURITIES:
Within One Year - - - 999 987
One to Five Years 1,968 1,988 6.53% 2,935 2,957
-------- -------- --------- ---------
Total U.S. Government and Agency Securities 1,968 1,988 6.53% 3,934 3,944
MUNICIPAL SECURITIES:
Within One Year 540 540 3.40% - -
One to Five Years - - - 541 533
-------- -------- --------- ---------
Total Municipal Securities 540 540 3.40% 541 533
-------- -------- --------- ---------
TOTAL HELD-TO-MATURITY SECURITIES $ 5,007 $ 5,034 5.83% $ 5,774 $ 5,783
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
28
<PAGE>
INVESTMENT PORTFOLIO - CONTINUED
Securities may be pledged to meet security requirements imposed as a condition
to receipt of deposits of public funds and other purposes. At December 31, 1997
and 1996, the carrying values of securities pledged to secure public deposits
and other purposes were $5,007,000 and $3,321,000, respectively.
LOANS HELD FOR SALE
The Company originates mortgage loans and SBA loans for sale to institutional
investors. Loans held for sale have increased from to $10.2 million at December
31, 1995, $24.4 million at December 31, 1996 and $47.2 million at December 31,
1997. Generally, the Company sells these loans within sixty (60) days of
origination, but may hold these loans for longer periods depending on market
conditions.
At December 31, 1997 and 1996, the Bank was servicing approximately $76.1
million and $44.2 million, respectively, in SBA loans previously sold. In
connection with a portion of these loans, the Company has capitalized
approximately $1.9 million and $1.2 million in servicing assets at December 31,
1997 and 1996, respectively. Servicing assets are amortized over the estimated
life of the serviced loan using a method that approximates the interest method.
The Company evaluates the carrying value of the excess servicing receivables by
estimating the excess future servicing income, based on management's best
estimate of the remaining loan lives.
When the Company sells the guaranteed portion of SBA loans, the cost allocated
to the portion of the loan retained is based on the relative fair value of all
components of the loan, including excess servicing receivables. The Company has
recorded discounts of approximately $2.8 million and $1.1 million at December
31, 1997 and 1996, respectively in connection with these loans. These discounts
are amortized over the estimated life of each loan using the interest method.
29
<PAGE>
LOAN PORTFOLIO
The following table sets forth the components of total net loans outstanding in
each category at the date indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
LOANS
Commercial $ 24,272 $ 13,577 $ 5,686
Real Estate - Construction 1,589 3,101 17
Real Estate - Other 54,203 44,218 24,129
Consumer 12,844 3,348 1,636
----------- ---------- ----------
Total Loans 92,908 64,244 31,468
Net Deferred Loan Costs 608 305 29
Allowance for Loan Losses (1,521) (1,210) (580)
----------- ---------- ----------
Net Loans $ 91,995 $ 63,339 $ 30,917
----------- ---------- ----------
----------- ---------- ----------
COMMITMENTS
Standby Letters of Credit $ 301 $ 96 $ 143
Undisbursed Loans and Commitments
to Grant Loans 14,523 11,356 6,016
----------- ---------- ----------
Total Commitments $ 14,824 $ 11,452 $ 6,159
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through lending
policies. Management strives to continue the historically low level of credit
losses by continuing its emphasis on credit quality in the loan approval
process, active credit administration and regular monitoring.
In extending credit and commitments to borrowers, The Company generally requires
collateral and/or guarantees as security. The repayment of such loans is
expected to come from cash flow or from proceeds from the sale of selected
assets of the borrower. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the credit worthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its interest in business assets, obtaining
deeds of trust, or outright possession among other means.
Management believes that its lending policies and underwriting standards will
tend to minimize losses in an economic downturn, however, there is no assurance
that losses will not occur under such circumstances.
30
<PAGE>
NONPERFORMING ASSETS
The following table provides information with respect to the components of the
Company's nonperforming assets at the dates indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Loans 90 Days Past Due and Still Accruing $ - $ 122 $ 149
Nonaccrual Loans 947 579 760
---------- ---------- ----------
Total Nonperforming Loans 947 701 909
Other Real Estate Owned 646 1,030 507
---------- ---------- ----------
Total Nonperforming Assets $ 1,593 $ 1,731 $ 1,416
---------- ---------- ----------
---------- ---------- ----------
Nonperforming Loans as a Percentage of Total Loans 1.02% 2.69% 2.88%
Allowance for Loan Loss as a Percentage of
Nonperforming Loans 160.61% 172.61% 63.81%
Nonperforming Assets as a Percentage of Total Assets 0.97% 1.49% 2.37%
</TABLE>
Nonaccrual loans are generally past due 90 days or are loans that management
believes the interest on which may not be collectible. Loans past due 90 days
will continue to accrue interest only when management believes the loan is both
well-secured and in the process of collection.
Other real estate owned is acquired through foreclosure or other means. These
properties are recorded on an individual asset basis at the estimated fair value
less selling expenses. Management believes these properties can be liquidated
at or near their current fair value.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that is considered
adequate to provide for the loan losses inherent in Company's loans. The
provision for loan losses was $733,000 in 1997 compared to $344,000 in 1996 and
$262,000 in 1995.
31
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES - CONTINUED
The following table summarizes, for the years indicated, changes in the
allowances for loan losses arising from loans charged-off, recoveries on loans
previously charged-off, and additions to the allowance which have been charged
to operating expenses and certain ratios relating to the allowance for loan
losses (dollar amounts in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OUTSTANDING LOANS:
Average for the Year $ 65,687 $ 49,017 $ 31,492
End of the Year $ 92,908 $ 64,244 $ 31,468
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of Year $ 1,210 $ 580 $ 536
Actual Charge-Offs:
Commercial 459 280 133
Consumer 26 16 23
Real Estate - 144 77
----------- ----------- -----------
Total Charge-Offs 485 440 233
Less Recoveries:
Commercial 33 15 10
Consumer 6 6 2
Real Estate 24 5 3
----------- ----------- -----------
Total Recoveries 63 26 15
----------- ----------- -----------
Net Loans Charged-Off 422 414 218
Provision for Loan Losses 733 344 262
Allowance on Loans Acquired from BOW - 700 -
----------- ----------- -----------
Balance at End of Year $ 1,521 $ 1,210 $ 580
----------- ----------- -----------
----------- ----------- -----------
RATIOS:
Net Loans Charged-Off to Average Loans 0.64% 0.84% 0.69%
Allowance for Loan Losses to Total Loans 1.64% 1.87% 1.84%
Net Loans Charged-Off to Beginning Allowance for
Loan Losses 34.88% 71.38% 40.67%
Net Loans Charged-Off to Provision for Loan Losses 57.57% 120.35% 83.21%
Allowance for Loan Losses to Nonperforming Loans 160.61% 172.61% 63.81%
</TABLE>
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans and leases,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, both Federal and state regulators, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses and may recommend additions based upon their evaluation of the portfolio
at the time of their examination.
32
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES - CONTINUED
The following table summarizes the allocation of the allowance for loan losses
by loan type for the years indicated and the percent of loans in each category
to total loans (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------------------------------
Percent of Percent of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Commercial $ 540 26.12% $ 659 21.13%
Real Estate - Construction 27 1.71% 56 4.83%
Real Estate 631 58.34% 378 68.83%
Consumer 124 13.82% 45 5.21%
Unallocated 199 n/a 72 n/a
----------- ------------ ----------- ------------
$ 1,521 100.00% $ 1,210 100.00%
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
FUNDING
Deposits are the Company's primary source of funds. At December 31, 1997, the
Company had a deposit mix of 53.0% in time and savings deposits, 18.6% in money
market and NOW deposits, and 28.4% in noninterest-bearing demand deposits. The
Company's net interest income is enhanced by its percentage of
noninterest-bearing deposits.
The following table summarizes the distribution of average deposits and the
average rates paid for the years indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996
------------------------- -------------------------
Average Average Average Average
Balance Rate Balance Rate
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
NOW Accounts $ 12,444 2.20% $ 11,679 1.95%
Savings Deposits 21,088 3.86% 14,329 3.57%
Money Market Accounts 14,469 3.14% 9,895 3.52%
TCD Less than $100,000 25,633 5.58% 9,233 5.37%
TCD $100,000 or More 20,093 5.84% 8,526 5.58%
----------- -----------
Total Interest-Bearing Deposits 93,727 4.42% 53,662 3.84%
Noninterest-Bearing Demand Deposits 36,338 n/a 25,400 n/a
----------- -----------
Total Average Deposits $ 130,065 3.19% $ 79,062 2.61%
----------- -----------
----------- -----------
</TABLE>
33
<PAGE>
FUNDING - CONTINUED
The scheduled maturity distribution of the Bank's time deposits of $100,000 or
greater, as of December 31, 1997, were as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Three Months or Less $ 12,077
Over Three Months to One Year 9,921
Over One Year to Five Years 1,329
------------
$ 23,327
------------
------------
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of the Company's asset/liability strategy is to manage liquidity
and interest rate risks to ensure the safety and soundness of the Bank and its
capital base, while maintaining adequate net interest margins and spreads to
provide an appropriate return to the Company's shareholders.
The Company manages its interest rate risk exposure by limiting the amount of
long-term fixed rate loans it holds for investment, by originating mortgage and
SBA loans for sale to the secondary market, increasing emphasis on shorter-term,
higher yield loans for portfolio, increasing or decreasing the relative amounts
of long-term and short-term borrowings and deposits and/or purchasing
commitments to sell loans.
34
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY - CONTINUED
The table below sets forth the interest rate sensitivity of the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
1997, using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within its contractual
terms, except for loans held for sale which the Company classifies as highly
liquid based on historical sale patterns (dollar amounts in thousands):
<TABLE>
<CAPTION>
After After One
Within Three Months Year But
Three But Within Within After
Months One Year Five Years Five Years Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal Funds Sold $ - $ - $ - $ - $ -
Investment Securities 463 540 4,467 - 5,470
Gross Loans 50,399 14,699 31,432 43,529 140,059
----------- ----------- ----------- ----------- -----------
Total $ 50,862 $ 15,239 $ 35,899 $ 43,529 $ 145,529
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
INTEREST-BEARING LAIABILITIES:
Money Market and NOW Deposits $ 26,597 $ - $ - $ - $ 26,597
Savings 21,724 - - - 21,724
Time Deposits 26,247 27,731 - - 53,978
Other 4,000 - - - 4,000
----------- ----------- ----------- ----------- -----------
$ 78,568 $ 27,731 $ - $ - $ 106,299
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Interest Rate Sensitivity Gap $ (27,706) $ (12,492) $ 35,899 $ 43,529 $ 39,230
Cumulative Interest Rate
Sensitivity Gap $ (27,706) $ (40,198) $ (4,299) $ 39,230
Ratios Based on Total Assets:
Interest Rate Sensitivity Gap (16.83%) (7.59%) 21.80% 26.43% 23.82%
Cumulative Interest Rate
Sensitivity Gap (16.83%) (24.41%) (2.61%) 23.82%
</TABLE>
Liquidity refers to the Company's ability to maintain a cash flow adequate to
fund both on-balance sheet and off-balance sheet requirements on a timely and
cost-effective basis. Potentially significant liquidity requirements include
funding of commitments to loan customers and withdrawals from deposit accounts.
35
<PAGE>
CAPITAL RESOURCES
Shareholders' equity at December 31, 1997 was $14.8, an increase of $1.9 million
or 14.6% over $12.9 million at December 31, 1996. Average shareholders' equity
for 1997 was $13.9 million compared to $8,700 million in 1996.
Shareholders' equity averaged $8.7 million in 1996, an increase of $3.9 million
or 82% compared to 1995. At December 31, 1996, shareholders' equity amounted to
$12.9 million, an increase of $7.7 million or 68% over the prior year.
During 1996, the Bank increased shareholders' equity by $7.8 million in a
supplemental stock offering and redeemed its outstanding preferred stock for
$1.0 million.
In 1990, the banking industry began to phase in new regulatory capital adequacy
requirements based on risk-adjusted assets. These requirements take into
consideration the risk inherent in investments, loans, and other assets for both
on-balance sheet and off-balance sheet items. Under these requirements, the
regulatory agencies have set minimum thresholds for Tier 1 capital, total
capital and leverage ratios. At December 31, 1997, the Bank's capital exceeded
all minimum regulatory requirements and the Bank was considered to be "well
capitalized" as defined in the regulations issued by the FDIC. The Bank's
risk-based capital ratios, shown below as of December 31, 1997, have been
computed in accordance with regulatory accounting policies (The Company's
capital ratios are comparable to the Bank's).
<TABLE>
<CAPTION>
Minimum
Requirements Bank
-------------- -------
<S> <C> <C>
Tier 1 Capital 4.0% 9.77%
Total Capital 8.0% 10.95%
Leverage Ratio 4.0% 7.42%
</TABLE>
EFFECTS OF INFLATION
The financial statements and related financial information presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or same magnitude as the price of
goods and services.
36
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"REPORTING COMPREHENSIVE INCOME". This statement, which is effective for the
year ending December 31, 1998, establishes standards of disclosure and financial
statement display for reporting comprehensive income and its components.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." This
statement changes current practice under SFAS 14 by establishing a new framework
on which to base segment reporting (referred to as the management approach) and
also requires certain related disclosures about products and services,
geographic areas and major customers. The disclosures are required for the year
ending December 31, 1998.
YEAR 2000 ISSUES
The Bank has established a working committee of senior management and other
employees to plan and monitor the Bank's compliance with Year 2000 issues. This
committee has developed a policy setting forth priorities and a timetable for
the Bank to follow in this process. The FDIC in their most recent exam has
assessed the Bank's progress to date as satisfactory. Management currently
believes that the costs related to addressing all Year 2000 issues will not have
a material impact on future operations of the Bank and the Company.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report 39
Consolidated Balance Sheets at December 31, 1997 and 1996 40 and 41
Consolidated Statements of Income for each of the Years
in the Three-Year Period Ended December 31, 1997 42
Consolidated Statements of Shareholders' Equity for each
of the Years in the Three-Year Period Ended
December 31, 1997 43
Consolidated Statements of Cash Flows for each of the Years
in the Three-Year Period Ended December 31, 1997 44
Notes to Financial Statements 45 through 67
All supplemental schedules are omitted as inapplicable or because the required
information is included in the financial statements or notes hereto.
38
<PAGE>
To the Board of Directors and Shareholders
of BYL Bancorp and Subsidiary
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of BYL Bancorp and
Subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BYL Bancorp and Subsidiary as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
January 30, 1998
Laguna Hills, California
39
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 7,187,574 $ 11,760,461
Investment Securities - Note B:
Available for Sale 462,600 -
Held to Maturity 5,007,148 5,773,634
------------ ------------
TOTAL INVESTMENT SECURITIES 5,469,748 5,773,634
Federal Funds Sold - 500,000
Loans Held for Sale 47,150,365 24,363,386
Loans - Note C:
Commercial 24,271,627 13,577,349
Real Estate 55,792,373 47,318,946
Consumer 12,844,464 3,347,850
------------ ------------
TOTAL LOANS 92,908,464 64,244,145
Net Deferred Loan Costs 607,970 305,320
Allowance for Credit Losses ( 1,521,423) ( 1,210,000)
------------ ------------
NET LOANS 91,995,011 63,339,465
Premises and Equipment - Note D 4,402,240 3,706,933
Other Real Estate Owned 645,962 1,029,861
Cash Surrender Value of Life Insurance 905,612 861,956
Deferred Tax Assets - Note G 1,666,000 720,000
Goodwill - Note 0 1,545,395 1,659,868
Servicing Assets - Note C 1,919,804 936,758
Accrued Interest and Other Assets 1,778,998 1,814,690
------------ ------------
$164,666,709 $116,467,012
------------ ------------
------------ ------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits - Note E:
Noninterest-Bearing Demand $ 40,536,626 $ 31,964,976
Money Market and NOW 26,596,665 25,831,214
Savings 21,724,085 18,324,403
Time Deposits Under $100,000 30,651,668 11,912,358
Time Deposits $100,000 and Over 23,326,657 14,335,005
------------ ------------
TOTAL DEPOSITS 142,835,701 102,367,956
Federal Funds Purchased 1,000,000 -
Federal Home Loan Bank Advances 3,000,000 -
Accrued Interest and Other Liabilities 3,001,494 1,160,672
------------ ------------
TOTAL LIABILITIES 149,837,195 103,528,628
Commitments and Contingencies - Note I
Shareholders' Equity - Notes K, L and M:
Preferred Shares - Authorized 25,000,000
Shares; None Outstanding
Common Shares - Authorized 50,000,000
Shares; Issued and Outstanding 1,546,530
Shares in 1997 and 1,535,064 Shares in 1996 10,371,912 10,298,485
Undivided Profits, Including Transfer of
$735,006 from Common Shares on
December 31, 1988 4,457,602 2,639,899
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 14,829,514 12,938,384
------------ ------------
$164,666,709 $116,467,012
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $12,227,483 $ 6,919,824 4,120,407
Interest on Investment Securities 394,685 355,932 219,103
Other Interest Income 394,425 222,184 139,874
----------- ----------- -----------
TOTAL INTEREST INCOME 13,016,593 7,497,940 4,479,384
INTEREST EXPENSE
Interest on Money Market and NOW 728,420 576,264 453,625
Interest on Savings Deposits 814,341 511,854 278,445
Interest on Time Deposits 2,603,688 971,653 312,838
Interest on Other Borrowings 13,841 - -
----------- ----------- -----------
TOTAL INTEREST EXPENSE 4,160,290 2,059,771 1,044,908
----------- ----------- -----------
NET INTEREST INCOME 8,856,303 5,438,169 3,434,476
Provision for Credit Losses 733,000 344,500 262,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 8,123,303 5,093,669 3,172,476
NONINTEREST INCOME
Gains, Fees, and Servicing
Income on Loans Sold 13,838,625 6,859,948 5,157,436
Service Charges, Fees, and Other Income 962,499 793,183 504,431
----------- ----------- -----------
14,801,124 7,653,131 5,661,867
----------- ----------- -----------
22,924,427 12,746,800 8,834,343
NONINTEREST EXPENSE
Salaries and Employee Benefits 12,414,771 6,158,400 4,399,141
Occupancy Expenses 912,870 717,025 537,553
Furniture and Equipment 1,230,438 666,995 434,597
Other Expenses - Note F 4,648,235 3,118,798 1,723,725
----------- ----------- -----------
19,206,314 10,661,218 7,095,016
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,718,113 2,085,582 1,739,327
Income Taxes - Note G 1,608,750 884,000 717,000
----------- ----------- -----------
NET INCOME $ 2,109,363 $ 1,201,582 $ 1,022,327
----------- ----------- -----------
----------- ----------- -----------
Per Share Data - Note H
Net Income - Basic $ 1.37 $ 1.12 $ 1.98
Net Income - Diluted $ 1.28 $ 1.04 $ 1.39
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Common Shares
Serial ---------------------------
Preferred Number of Undivided
Stock Shares Amount Profits Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1995 $ 1,000,000 461,731 $ 2,539,630 $ 865,587 $ 4,405,217
Net Income 1,022,327 1,022,327
Preferred Dividends (270,281) (270,281)
------------ ------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1995 1,000,000 461,731 2,539,630 1,617,633 5,157,263
Net Income 1,201,582 1,201,582
Preferred Dividends (159,316) (159,316)
Redemption of
Preferred Stock (1,000,000) (20,000) (1,020,000)
Issuance of Common
Shares, Net of Expenses
of $1,096,145 1,073,333 7,758,855 7,758,855
------------ ------------ ------------ ------------ ------------
BALANCE AT
December 31, 1996 - 1,535,064 10,298,485 2,639,899 12,938,384
Net Income 2,109,363 2,109,363
Cash Dividends (291,660) (291,660)
Exercise of Stock Options 11,466 73,427 73,427
------------ ------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 1997 $ - 1,546,530 $ 10,371,912 $ 4,457,602 $ 14,829,514
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net Income $ 2,109,363 $ 1,201,582 $ 1,022,327
Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 890,669 405,351 256,637
Deferred Income Taxes (946,000) (234,000) (224,000)
Loans Originated for Sale (225,799,800) (114,259,811) (87,344,000)
Proceeds from Loan Sales 216,434,113 106,082,170 91,500,325
Gain on Sale of Loans (12,917,608) (5,866,204) (4,373,148)
Provision for Credit Losses 733,000 344,500 262,000
Other Real Estate Owned Losses 65,706 207,425 53,289
Other Items - Net 2,259,317 (20,944) (700,136)
------------ ------------ -----------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES (17,171,240) (12,139,931) 453,294
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits - - 99,000
Proceeds from Sales of Other Real Estate Owned 654,663 264,465 120,911
Purchases of Available-for-Sale Securities (454,300) (7,000,000) (5,000,000)
Purchases of Held-to-Maturity Securities (2,000,469) (994,283) (950,741)
Proceeds from Maturities of Available-for-Sale Securities - 10,000,000 3,995,333
Proceeds from Maturities of Held-to-Maturity Securities 2,800,000 3,250,000 1,250,000
Net Change in Loans (31,638,207) (204,137) (3,440,986)
Net Cash Received from Purchase of Bank of Westminster - 4,617,819 -
Purchases of Premises and Equipment (1,516,320) (570,511) (357,622)
Purchase of Life Insurance - - (818,300)
Proceeds from Sale of Premises and Equipment 3,474 34,563 69,900
------------ ------------ -----------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (32,151,159) (9,397,916) (5,032,505)
FINANCING ACTIVITIES
Net Change in Demand Deposits and Savings Accounts 12,736,783 (2,189,127) 176,192
Net Change in Time Deposits 27,730,962 811,195 5,155,957
Net Change Federal Funds Purchased 1,000,000 - -
Net Change Federal Home Loan Bank Advances 3,000,000 - -
Proceeds from Exercise of Stock Options 73,427 - -
Proceeds from Stock Offering - 7,758,855 -
Redemption of Preferred Stock - 1,020,000) -
Dividends Paid (291,660) (159,316) (270,281)
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 44,249,512 5,201,607 5,061,868
------------ ------------ -----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (5,072,887) 2,459,592 482,657
Cash and Cash Equivalents at Beginning of Year 12,260,461 9,800,869 9,318,212
------------ ------------ -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 7,187,574 $ 12,260,461 $ 9,800,869
------------ ------------ -----------
------------ ------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 4,019,640 $ 1,962,523 $ 979,102
Income Taxes Paid $ 2,046,689 $ 1,109,000 $ 976,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of BYL Bancorp and its subsidiary,
Bank of Yorba Linda ("the Bank"), collectively referred to herein as the
"Company".
NATURE OF OPERATIONS
The Bank operates five retail branches in Orange County, California. It also
operates a Small Business Administration (SBA) loan department and a mortgage
loan department. The Bank's primary source of revenue is providing loans to
customers for both retention in the Bank's loan portfolio as well as sales to
other institutional investors.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
For purposes of reporting cash flows, cash and due from banks includes cash on
hand and amounts due from banks. Cash flows from loans originated by the
Company, deposits and federal funds sold are reported net.
The Company maintains amounts due from banks which exceed federally insured
limits. The Company has not experienced any losses in such accounts.
CASH EQUIVALENTS
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the statements of financial
condition captions "Cash and Due from Banks" and "Federal Funds Sold".
SECURITIES HELD TO MATURITY
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity.
45
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
SECURITIES AVAILABLE FOR SALE
Available-for-sale securities consist of bonds, notes, debentures, and certain
equity securities not classified as trading securities nor as held-to-maturity
securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
LOANS HELD FOR SALE
Mortgage and SBA loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are recognized through a valuation allowance by charges to
income.
LOANS
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
For impairment recognized in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN (SFAS No. 114), amended by SFAS No. 118, the
entire change in the present value of expected cash flows is reported as either
provision for loan losses in the same manner in which impairment initially was
recognized, or as a reduction in the amount of provision for loan losses that
otherwise would be reported.
46
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost or fair value
minus estimated costs to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other expenses.
PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost less accumulated depreciation and amortization.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit, and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
EARNINGS PER SHARES (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
47
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"REPORTING COMPREHENSIVE INCOME". This statement, which is effective for the
year ending December 31, 1998, establishes standards of disclosure and financial
statement display for reporting comprehensive income and its components.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." This
statement changes current practice under SFAS 14 by establishing a new framework
on which to base segment reporting (referred to as the management approach) and
also requires certain related disclosures about products and services,
geographic areas and major customers. The disclosures are required for the year
ending December 31, 1998.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' presentations to conform to
the current year. These classifications are of a normal recurring nature.
48
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE B - INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Gross
Unrealized
Amortized Gains
Cost (Losses) Fair Value
---------- ---------- ----------
<S> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1997:
FHLB Stock $ 462,600 $ - $ 462,600
---------- ---------- ----------
---------- ---------- ----------
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1997:
U.S. Treasuries $2,499,099 $ 6,839 $2,505,938
U.S. Government and Agency Securities 1,967,677 18,573 1,986,250
Municipal Securities 540,372 (399) 539,973
---------- ---------- ----------
$5,007,148 $ 25,013 $5,032,161
---------- ---------- ----------
---------- ---------- ----------
DECEMBER 31, 1996:
U.S. Treasuries $1,298,644 $ 7,356 $1,306,000
U.S. Government and Agency Securities 3,933,500 10,500 3,944,000
Municipal Securities 541,490 (8,490) 533,000
---------- ---------- ----------
$5,773,634 $ 9,366 $5,783,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Bank did not sell any investment securities for the years ended December 31,
1997, 1996, and 1995.
Investment securities carried at approximately $5,007,000 and $3,321,000, at
December 31, 1997 and 1996, respectively, were pledged to secure public deposits
and other purposes as required by law.
49
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE B - INVESTMENT SECURITIES - CONTINUED
The scheduled maturities of securities available for sale and securities held to
maturity at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES HELD-TO-MATURITY SECURITIES
---------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Due In One Year or Less $ - $ - $ 540,372 $ 539,973
Due from One Year
to Five Years - - 4,466,776 4,492,188
FHLB Stock 462,600 462,600 - -
------------- ------------- ----------- -----------
$462,600 $462,600 $5,007,148 $5,032,161
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
</TABLE>
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within Orange
County in Southern California. Although the Bank seeks to avoid concentrations
of loans to a single industry or based upon a single class of collateral, real
estate and real estate associated businesses are among the principal industries
in the Bank's market area and, as a result, the Bank's loan and collateral
portfolios are, to some degree, concentrated in those industries.
The Bank also originated mortgage and SBA loans for sale to institutional
investors. A substantial portion of the Bank's revenues are from origination of
loans guaranteed by the Small Business Administration under its Section 7
program and sale of the guaranteed portions of those loans. Funding for the
Section 7 program depends on annual appropriations by the U.S. Congress.
At December 31, 1997 and 1996, the Bank was servicing approximately $76,085,000
and $44,194,000, respectively, in SBA loans previously sold.
When the Bank sells the guaranteed portion of SBA loans, the cost allocated to
the portion of the loan retained is based on the relative fair value of all
components of the loan, including servicing asset. The Bank has recorded
discounts of approximately $2,827,000 and $1,063,000 at December 31, 1997 and
1996, respectively in connection with these loans. These discounts are
amortized over the estimated life of each loan using the interest method.
50
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE C - LOANS - CONTINUED
A summary of the changes in the related servicing assets follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Balance at Beginning of Year $ 936,758 $ 473,723
Increase from Loan Sales 1,057,130 633,218
Amortization Charged to Income (74,084) (170,183)
----------- ----------
Balance at End of Year $ 1,919,804 $ 936,758
----------- ----------
----------- ----------
</TABLE>
The estimated fair value of the servicing assets was approximately $2,067,000 at
December 31, 1997. Fair value is estimated by discounting estimated future cash
flows from the servicing assets using discount rates that approximate current
market rates over the expected lives of the loans being serviced. For purposes
of measuring impairment, the Bank has identified each servicing asset with the
underlying loan being serviced. A direct write down is recorded where the fair
value is below the carrying amount of a specific servicing asset.
The Bank may also receive a portion of subsequent interest collections on loans
sold that exceed the contractual servicing fee. In that case the Bank records
in other assets an interest-only strip based on the relative fair market value
of it and the other components of the loan. At December 31, 1997, included in
other assets, were interest-only strips of $644,190 which approximates market
value.
A summary of the changes in the allowance for credit losses as of December 31
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Balance at Beginning of Year $1,210,000 $ 580,000 $ 536,000
Additions to the Allowance Charged to Expense 733,000 344,500 262,000
Recoveries on Loans Charged Off 62,962 25,500 15,000
Allowance on Loans Acquired from
Bank of Westminster - 700,000 -
---------- ----------- ----------
2,005,962 1,650,000 813,000
Less Loans Charged Off (484,539) (440,000) (233,000)
---------- ----------- ----------
$1,521,423 $ 1,210,000 $ 580,000
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
51
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE C - LOANS - CONTINUED
The following is a summary of the investment in impaired loans, the related
allowance for credit losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Recorded Investment in Impaired Loans $1,993,000 $ 1,991,000 $ 76,000
---------- ----------- ----------
---------- ----------- ----------
Related Allowance for Impaired Losses $ 258,000 $ 415,000 $ 163,000
---------- ----------- ----------
---------- ----------- ----------
Average Recorded Investment in Impaired Loans $1,888,000 $ 1,591,000 $ 847,000
---------- ----------- ----------
---------- ----------- ----------
Interest Income Recognized from Cash Payments $ 103,000 $ 19,000 None
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
Loans having carrying values of $336,471, $994,951 and $18,000 were transferred
to other real estate owned in 1997, 1996 and 1995, respectively.
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Land $ 821,188 $ 821,188
Buildings 1,849,605 1,826,737
Furniture, Fixtures, and Equipment 4,051,209 2,918,103
Leasehold Improvements 709,077 678,812
----------- ----------
7,431,079 6,244,840
Less Accumulated Depreciation
and Amortization (3,028,839) (2,537,907)
----------- ----------
$ 4,402,240 $3,706,933
----------- ----------
----------- ----------
</TABLE>
52
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE E - DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $50,651,038
1999 2,895,237
2000 through 2002 432,050
-----------
$53,978,325
-----------
-----------
</TABLE>
NOTE F - OTHER EXPENSES
A summary of other expenses for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Regulatory Assessments $ 42,605 $ 29,082 $ 81,854
Other Real Estate Owned 157,728 323,528 122,280
Commissions 278,319 199,585 124,280
Professional Fees and Outside Services 886,475 687,325 271,718
Loan Expenses 511,508 246,916 139,498
Office Expenses 1,126,866 748,199 533,278
Other 1,644,734 884,163 450,817
---------- ----------- ----------
$4,648,235 $3,118,798 $1,723,725
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
53
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE G - INCOME TAXES
The provisions for income taxes included in the statements of income consist of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 1,934,750 $ 806,000 $ 686,000
State 620,000 312,000 255,000
----------- ----------- -----------
2,554,750 1,118,000 941,000
Deferred (946,000) (234,000) (224,000)
----------- ----------- -----------
$ 1,608,750 $ 884,000 $ 717,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Deferred taxes are a result of differences between income tax accounting and
generally accepted accounting principles with respect to income and expense
recognition. The Company's principal differences are from loan loss provision
accounting, loan sales, and depreciation differences.
The following is a summary of the components of the deferred tax asset account
recognized in the accompanying consolidated balance sheets:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses $ 294,000 $ 260,000
Other Real Estate Writedowns 155,000 87,000
Gain on Sale of Loans 1,169,000 649,000
California Franchise Tax 211,000 106,000
Other Assets/Liabilities 243,000 96,000
---------- ----------
2,072,000 1,198,000
Deferred Tax Liabilities:
Premises and Equipment (406,000) (478,000)
---------- ----------
$1,666,000 $ 720,000
---------- ----------
---------- ----------
</TABLE>
54
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE G - INCOME TAXES - CONTINUED
A comparison of the federal statutory income tax rates to the Company's
effective income tax rates for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ----------------------- -----------------------
Amount Rate Amount Rate Amount Rate
---------- -------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal Tax Rate $1,264,000 34.0% $709,000 34.0% $591,000 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 275,000 7.4 159,000 7.6 132,000 7.6
Tax Savings from Exempt
Interest (5,000) (0.1) (5,000) ( 0.2) (15,000) ( 0.9)
Other Items - Net 74,750 2.0 21,000 1.0 9,000 0.5
---------- -------- -------- ------ -------- ------
Bank's Effective Rate $1,608,750 43.3% $884,000 42.4% $717,000 41.2%
---------- -------- -------- ------ -------- ------
---------- -------- -------- ------ -------- ------
</TABLE>
NOTE H - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of share used to compute EPS:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
Income Shares Income Shares Income Shares
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income as Reported $2,109,363 - $1,201,582 - $1,022,327 -
Current Period Preferred
Dividends - - (29,000) - (108,250) -
Weighted Average Shares
Outstanding During the Year - 1,538,425 - 1,049,747 - 461,731
---------- --------- ---------- --------- ---------- ---------
USED IN BASIC EPS 2,109,363 1,538,425 1,172,582 1,049,747 914,077 461,731
Dilutive Effect of
Outstanding Stock Options - 106,133 - 70,400 - -
Convertable Preferred Stock - - - - 108,250 275,398
---------- --------- ---------- --------- ---------- ---------
USED IN DILUTIVE EPS $2,109,363 1,644,558 $1,172,582 1,120,147 $1,022,327 737,129
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
55
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE I - COMMITMENTS AND CONTINGENCIES
The Bank has entered into various operating lease agreements, primarily covering
its branch locations. These agreements expire at various times through the year
2003.
The approximate future minimum annual payments for these leases by year are as
follows:
<TABLE>
<S> <C>
1998 $ 581,000
1999 548,000
2000 490,000
2001 465,000
2002 207,000
----------
$2,291,000
----------
----------
</TABLE>
The minimum rental payments shown above are given for the existing lease
obligations and are not a forecast of future rental expense.
Total rental expense included in occupancy expense and furniture and equipment
expense was approximately $433,000 in 1997, $445,000 in 1996 and $378,000 in
1995.
The Company is involved in various litigation which has arisen in the ordinary
course of its business. In the opinion of management, based upon representation
of legal counsel, the disposition of such pending litigation will not have a
material effect on the Bank's financial statements.
In the ordinary course of business, the Bank enters into financial commitments
to meet the financing needs of its customers. These financial commitments
include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk not recognized in the statement of financial position.
The Bank's exposure to loan loss in the event of nonperformance on commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments as it does for loans reflected in the financial statements.
56
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
As of December 31, 1997, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
<TABLE>
<CAPTION>
<S> <C>
Commitments to Extend Credit $ 14,523,000
Standby Letter of Credit 301,000
-----------
$ 14,824,000
-----------
-----------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Bank customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank, is based on
management's credit evaluation of the customer. The majority of the Bank's
commitments to extend credit and standby letters of credit are secured by real
estate.
NOTE J - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
officers and directors and the companies with which they are associated. In the
Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. The
balance of these loans outstanding at December 31, 1997 was approximately
$1,486,000 and approximately $1,367,000 at December 31, 1996.
NOTE K - PREFERRED STOCK
The Bank is authorized to issue 1,000,000 shares of its preferred stock in
series. The rights, preferences, privileges and restrictions of each series of
preferred stock are determined upon issuance.
On July 16, 1986, the Bank issued 10,000 shares of its Series A preferred stock
at a price of $100 per share for a total consideration of $1,000,000 to members
of the Board of Directors.
During 1996 the Bank redeemed all outstanding preferred stock for $1,020,000.
57
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE L - STOCK OPTION PLAN
At December 31, 1997, the Bank has an option plan which is described below. The
Bank applies APB Opinion 25 and related interpretations in accounting for its
plan. Accordingly, no compensation cost has been recognized for its fixed stock
option plan.
In 1997, the Company adopted an incentive stock option plan under which up to
460,519 shares of the Company's common shares may be issued to directors,
officers, and key employees at not less than 100% of the fair market value at
the date the options are granted.
A summary of the status of the Company's fixed stock option plan as of December
31, 1997, 1996, and 1995, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning
of Year 125,865 $ 4.88 130,397 $ 4.88 130,397 $ 4.88
Options Granted 179,368 12.70 - -
Options Exercised (11,466) 6.40 - -
Options Forfieted (5,067) 11.79 (4,532) 4.88 -
-------- -------- -------
Outstanding at
End of Year 288,700 $ 9.56 125,865 $ 4.88 130,397 $ 4.88
-------- -------- -------
-------- -------- -------
Options Exercisable at
at Year-End 171,783 $ 7.41 125,865 $ 4.88 129,542 $ 4.88
Weighted-Average
Fair Value of Options
Granted During the Year $ 3.87 $ - $ -
</TABLE>
58
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE L - STOCK OPTION PLAN - CONTINUED
The following table summarizes information about fixed options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- --------------- ----------- ----------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$4.88 116,132 4.8 Years $4.88 116,132 $4.88
$12.08-$12.75 172,568 8.9 Years 12.71 55,651 12.71
---------- ------------
$4.88 to $12.75 288,700 7.2 Years 9.56 171,783 7.41
---------- ------------
---------- ------------
</TABLE>
Had the Bank determined compensation cost based on the fair value at the grant
date for its stock options under No. 123, the Bank's net income would have been
reduced to the following pro forma amount:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Net Income:
As Reported $ 2,109,363 $1,201,582 $ 1,022,327
Pro Forma $ 1,893,974 $1,201,582 $ 1,022,327
Per Share Data:
Net Income - Basic
As Reported 1.37 1.12 1.98
Pro Forma 1.23 1.12 1.98
Net Income - Diluted
As Reported 1.28 1.04 1.39
Pro Forma 1.15 1.04 1.39
</TABLE>
NOTE M - QUASI REORGANIZATION
On December 31, 1988 the Bank effected a quasi reorganization whereby $735,006
was transferred from common shares to undivided profits to eliminate the
accumulated deficit. Subsequent to that date the Bank has transferred from
undivided profits to common shares $195,000 of benefits from net operating
losses and investment tax credits.
59
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the
realization of the unrealized gains and losses can have a potential effect on
fair value estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash, short term investments, due from customers on
acceptances, and Bank acceptances outstanding are considered to approximate fair
value. Short term investments include federal funds sold, securities purchased
under agreements to resell, and interest bearing deposits with Banks. The fair
values of investment securities, including available-for-sale, are generally
based on quoted market prices. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand, commercial paper,
and other borrowed funds are considered to approximate fair value. For fixed
maturity deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities. The fair value of long term debt is based on rates currently
available to the Bank for debt with similar terms and remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements.
The fair value of these financial instruments is not material.
60
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair value of financial instruments at December 31, 1997 and 1996
is summarized as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997 1996
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and Due From Banks $ 7,188 $ 7,188 $ 11,760 $ 11,760
Federal Funds Sold $ - $ - $ 500 $ 500
Investment Securities $ 5,470 $ 5,495 $ 5,774 $ 5,783
Loans Held for Sale $ 47,150 $ 49,290 $ 24,363 $ 25,410
Loans $ 91,995 $ 91,393 $ 63,339 $ 62,858
Cash Surrender Value - Life Insurance $ 906 $ 906 $ 862 $ 862
FINANCIAL USABILITIES:
Deposits $142,836 $142,842 $102,368 $102,343
Federal Funds Purchased $ 1,000 $ 1,000 $ - $ -
Federal Home Loan Bank Advances $ 3,000 $ 3,000 $ - $ -
</TABLE>
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
61
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE O - REGULATORY MATTERS - CONTINUED
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action (there are no conditions or
events since that notification that management believes have changed the Bank's
category). To be categorized as well-capitalized, the Bank must maintain
minimum ratios as set forth in the table below.
<TABLE>
<CAPTION>
Required Capital
-----------------------------------------------
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets) $14,161 10.95% $10,348 8.0% $12,935 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $12,639 9.77% $ 5,174 4.0% $ 7,761 6.0%
Tier 1 Capital (to Average Assets) $12,639 7.42% $ 6,817 4.0% $ 8,522 5.0%
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets) $11,882 13.0% $ 7,303 8.0% $ 9,128 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $10,741 11.8% $ 3,651 4.0% $ 5,477 6.0%
Tier 1 Capital (to Average Assets) $10,741 9.2% $ 4,648 4.0% $ 5,810 5.0%
</TABLE>
At December 31, 1997 and 1996 Tier 1 Capital was comprised of stockholders
equity less goodwill and other intangibles of $2,190,000 and $1,660,000,
respectively, and other regulatory adjustments of $538,000 for 1996. Tier 1
Capital at December 31, 1995 was stockholders equity less regulatory adjustments
of $434,000.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit at the Federal Reserve Bank. At
December 31, 1997, required reserves were approximately $1,191,000.
62
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE P - MERGERS AND ACQUISITIONS
On November 19, 1997, BYL Bancorp acquired Bank of Yorba Linda by issuing
1,546,530 shares of Bancorp common stock in exchange for the surrender of all
outstanding shares of the Bank's common stock. There was no cash involved in
this transaction. The acquisition was accounted for as a pooling of interest
and the consolidated financial statements contained herein have been restated to
give full affect to this transaction.
Prior to this acquisition, the Bank acquired Bank of Westminster by cash
payment. Details regarding this acquisition can be found below.
On June 13, 1996, the Bank acquired 100% of the outstanding common stock of Bank
of Westminster (BOW) for $6,174,000 in cash. BOW had total assets of
approximately $54,923,000. The acquisition was accounted for using the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16. "Business Combinations". Under this method of accounting, the purchase
price was allocated to the assets acquired and deposits and liabilities assumed
based on their fair values as of the acquisition date. The financial statements
include the operations of BOW from the date of the acquisition. Goodwill
arising from the transaction totaled approximately $1,717,000 and is being
amortized over fifteen years on a straight-line basis.
The following table sets forth selected unaudited pro forma combined financial
information of the Bank and BOW for the years ended December 31, 1996 and 1995.
The pro forma operating data reflects the effect of the acquisition of BOW as if
it was consummated at the beginning of each year presented. The pro forma
results are not necessarily indicative of the results that would have occurred
had the acquisition been in effect for the full years presented, nor are they
necessarily indicative of the results of future operations (amounts in
thousands, except per share data).
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Interest and Noninterest Income $ 17,560 $ 15,761
Net Income $ 1,068 $ 1,160
Per Share Date:
Net Income - Basic $ 0.68 $ 0.69
Net Income - Diluted $ 0.65 $ 0.64
</TABLE>
These proforma disclosures include adjustment to interest income from the
payment of the purchase price in cash, goodwill amortization and adjustments to
net income per share to reflect the issuance of common stock to affect the
purchase. No adjustments have been reflected in these amounts for the expected
cost savings to be derived from this merger.
63
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
BYL Bancorp operates Bank of Yorba Linda. BYL Bancorp commenced operations
during 1997. The earnings of the subsidiary are recognized on the equity method
of accounting. Condensed financial statements of the parent company only are
presented below:
<TABLE>
<CAPTION>
December 31,
-------------
1997
<S> <C>
ASSETS:
Cash $ 32,630
Investment in Bank of Yorba Linda 14,796,884
-------------
$ 14,829,514
-------------
-------------
SHAREHOLDERS' EQUITY $ 14,829,514
-------------
-------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997
-------------
<S> <C>
INCOME:
Cash Dividends from Subsidiary $ 177,327
-------------
TOTAL INCOME 177,327
EXPENSES:
Other 67,370
-------------
TOTAL EXPENSES 67,370
-------------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY 109,957
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 1,999,406
-------------
NET INCOME $ 2,109,363
-------------
-------------
</TABLE>
64
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997
-------------
<S> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income $ 2,109,363
Noncash Items Included in Net Income:
Equity in Income of Subsidiary (2,176,733)
-------------
NET CASH USED
IN OPERATING ACTIVITIES (67,370)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Dividends Received from Subsidiary 177,327
-------------
NET CASH PROVIDED
BY INVESTING ACTIVITIES 177,327
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Short-Term Debt 100,000
Repayments of Short-Term Debt (100,000)
Dividends Paid (77,327)
-------------
NET CASH USED
IN FINANCING ACTIVITIES (77,327)
-------------
NET INCREASE IN
CASH AND CASH EQUIVALENTS 32,630
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF YEAR -
-------------
CASH AND CASH EQUIVALENTS
AT ENDING OF YEAR $ 32,630
-------------
-------------
</TABLE>
65
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE R - MERGER WITH DNB FINANCIAL
On January 29, 1998, the Company announced the signing of a definitive agreement
to acquire DNB Financial, parent company of De Anza National Bank (DNB). The
transaction is structured as a merger under which the Company will issue common
shares in exchange for the common shares of DNB Financial. It is expected that
the acquisition will be accounted for as a pooling of interest.
The aggregate transaction value for the Company will be subject to adjustment
based upon tangible book value of DNB at the date of closing. The aggregate
transaction value will be the sum of (a) $19,569,722, or approximately 2.53
times tangible book value of DNB at December 31, 1997 and (b) 1.5 times the
change in tangible book value between December 31, 1997 and the closing. The
total number of shares to be exchanged will be determined by dividing the
aggregate transaction value by the stipulated value of $18.75 per BYL share.
The stipulated value per BYL Bancorp (BYL) share will be adjusted if the average
closing BYL stock price during the pricing determination period is greater than
$22.50 or less than $15.00 per share.
The Agreement has been approved by the boards of directors of both companies and
is subject to the approval of the shareholders of both DNB and the Company and
appropriate regulatory agencies. The merger is expected to close by May 31,
1998.
The following table sets forth selected pro forma income information as if the
merger had been consummated at the beginning of the period presented:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest and Noninterest Income:
BYL Bancorp $ 27,817,717 $ 15,151,071 $ 10,141,251
DNB Financial 6,557,312 6,243,085 6,331,174
------------ ------------ ------------
$ 34,375,029 $ 21,394,156 $ 16,472,425
------------ ------------ ------------
------------ ------------ ------------
Net Income:
BYL Bancorp $ 2,109,363 $ 1,201,582 $ 1,022,327
DNB Financial 745,228 714,133 347,970
------------ ------------ ------------
$ 2,854,591 $ 1,915,715 $ 1,370,297
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
66
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE R - SUBSEQUENT EVENTS - CONTINUED
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Pro Forma Per Share Data
Net Income - Basic $ 1.14 $ .94 $ .86
Net Income - Diluted $ 1.08 $ .92 $ .78
</TABLE>
The pro forma per share data is based on the sum of the historical income and
shares, as reported by BYL Bancorp, and the historical income and shares of DNB
Financial converted to BYL Bancorp shares at the estimated exchange ratio of
4.585 shares of BYL Bancorp for each share of DNB Financial.
67
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item is incorporated by reference from the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held in
the second quarter, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held in
the second quarter, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held in
the second quarter, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held in
the second quarter, 1998.
68
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
EXHIBIT NO.
2.1 Plan of Reorganization and Merger Agreement - Annex I of Proxy
Statement/Prospectus incorporated by reference (A)
3.1 Articles of Incorporation of the Registrant (A)
3.2 Amendment to Articles of Incorporation of Registrant (A)
3.3 Bylaws of the Registrant (A)
4.1 Specimen Certificate evidencing shares of Registrant's Common
Stock (A)
4.2 Stockholder Agreement Covering Issuance and Compulsory Repurchase
of Organizing Shares of Registrant - Annex II of Proxy
Statement/Prospectus incorporated by reference (A)
10.1 Form of Indemnification Agreement (A)
10.2 BYL Bancorp 1997 Stock Option Plan and form of Stock Option
Agreement (A)
10.3 Form of Proxy (A)
10.4 Employment Agreement - Mr. Robert Ucciferri (A)
10.5 Employment Agreement - Mr. Barry J. Moore (A)
10.6 Employment Agreement - Mr. Michael Mullarky (A)
10.7 Salary Continuation Agreement - Mr. Robert Ucciferri (A)
10.8 Salary Continuation Agreement - Mr. Barry J. Moore (A)
10.9 Agreement and Plan of Reorganization with DNB Financial (B)
21.1 Subsidiary of BYL Bancorp (A)
23.1 Consent of Vavrinek, Trine, Day & Co.
- ---------------------------------
(A) Filed as an Exhibit to the Registrants Registration Statement (File No.
333-34995) filed on September 5, 1997, which exhibit is incorporated herein
by this reference.
(B) Filed as an Exhibit to Form 8-K filed on January 29, 1998, which exhibit is
incorporated herein by this reference.
69
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K - CONTINUED
b) REPORTS ON FORM 8-K
1) BYL's Registration Statement on Form 8-K, dated November 19,
1997, announcing the completion of the formation of BYL as a
bank holding company for Bank of Yorba Linda;
2) BYL's Current Report on Form 8-K, dated January 16, 1998
announcing year end and quarterly earnings;
3) BYL's Current Report on Form 8-K, dated January 29, 1998
announcing the execution of the Agreement and Plan of
Reorganization with DNBF
70
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BYL BANCORP
By: /s/ Robert Ucciferri
----------------------------------------
Robert Ucciferri
President and Chief Executive Officer
In accordance with the Securities Exchange Act, this report has been signed by
the following persons on behalf of the registrant and in the capacities on the
dates indicated:
Signature Title Date
- --------- ----- -----
/s/ Barry J. Moore Senior Vice President February 26, 1998
- --------------------------- and Chief Financial Officer
Barry J. Moore
Director February ___, 1998
- ---------------------------
Leonard O. Lindborg
/s/ H. Rhoads Martin, Jr. Chairman of the Board, February 26, 1998
- --------------------------- Director
H. Rhoads Martin, Jr.
/s/ John F. Myers Director February 26, 1998
- ---------------------------
John F. Myers
/s/ Brent W. Walberg Director February 26, 1998
- ---------------------------
Brent W. Walberg
-71-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our Independent Auditor's Report dated
January 30, 1998 regarding the consolidated balance sheets of BYL Bancorp and
Subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997 in the Form 10-KSB
filed with the Securities and Exchange Commission.
VAVRINEK, TRINE, DAY & CO., LLP
February 25, 1998
Laguna Hills, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,188
<SECURITIES> 5,470
<RECEIVABLES> 140,668
<ALLOWANCES> 1,521
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 7,431
<DEPRECIATION> 3,029
<TOTAL-ASSETS> 164,667
<CURRENT-LIABILITIES> 149,837
<BONDS> 0
0
0
<COMMON> 10,372
<OTHER-SE> 4,458
<TOTAL-LIABILITY-AND-EQUITY> 164,667
<SALES> 0
<TOTAL-REVENUES> 27,818
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,206
<LOSS-PROVISION> 733
<INTEREST-EXPENSE> 4,160
<INCOME-PRETAX> 3,718
<INCOME-TAX> 1,609
<INCOME-CONTINUING> 2,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,109
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.28
</TABLE>
