<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY , 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
BYL BANCORP
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 6712 33-0755794
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
BANK OF YORBA LINDA
18206 IMPERIAL HIGHWAY
YORBA LINDA, CALIFORNIA 92886
(714) 996-1800
(Address, including zip code, and telephone number,
including area code, or registrant's principal executive offices)
--------------------------
MR. ROBERT UCCIFERRI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BANK OF YORBA LINDA
18206 IMPERIAL HIGHWAY
YORBA LINDA, CALIFORNIA 92886
(714) 996-1800
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------
WITH A COPY TO:
<TABLE>
<S> <C>
LOREN P. HANSEN, ESQ. WILLIAM JOHNSON, ESQ.
Knecht & Hansen Rothgerber, Appel, Powers & Johnson, LLP
1301 Dove Street, Suite 900 One Tabor Center
Newport Beach, California 92660 1200 17th Street, Suite 3000
(714) 851-8070 Denver, Colorado 80202
(303) 623-9000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable following the Effective Time of this Registration
Statement.
--------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(1)
<S> <C> <C> <C> <C>
Common Stock, no par value.......... 1,066,000 shares(2) $20.50 $21,853,000 $6,447
</TABLE>
(1) The proposed maximum offering price and proposed maximum aggregate offering
price reflect the value of the common stock of DNB Financial ("DNBF"), which
will be exchanged for shares of BYL Bancorp in connection with the
reorganization described in the Proxy Statement/Prospectus, calculated
pursuant to Section 6(b) of the Securities Act of 1933, as amended, and Rule
457(f)(2) under the Securities Act of 1933, as amended, based on the closing
price of BYL Common Stock on February 19, 1998.
(2) Based on approximate number of shares to be issued by BYL Bancorp in
exchange for the outstanding shares of DNBF in connection with the
reorganization described in the Proxy Statement/Prospectus. The proposed
maximum offering price and proposed maximum aggregate offering price are
estimated solely in order to determine the registration fee.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
BYL BANCORP
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM AND CAPTION OF FORM S-4
- ----------------------------------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Facing Page of Registration Statement; This Cross
Reference Sheet; Outside Front Cover Page of Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover Page of
Prospectus......................................... Inside Front and Outside Back Cover Page; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................. SUMMARY OF PROXY STATEMENT/ PROSPECTUS; RISK FACTORS;
THE COMPANIES; UNAUDITED PROFORMA COMBINED
CONDENSED FINANCIAL DATA
4. Terms of the Transaction............................. PROXY STATEMENT/PROSPECTUS COVER PAGE; SUMMARY OF
PROXY STATEMENT/PROSPECTUS; THE MERGER; THE MERGER
AGREEMENT; DESCRIPTION OF BANCORP CAPITAL STOCK AND
COMPARISON OF SHAREHOLDER RIGHTS
5. Pro Forma Financial Information...................... SUMMARY--PROFORMA FINANCIAL DATA; UNAUDITED PROFORMA
COMBINED CONDENSED FINANCIAL DATA
6. Material Contacts with the Company Being Acquired.... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters...... Not Applicable
8. Interests of Named Experts and Counsel............... EXPERTS; LEGAL MATTERS
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... COMMISSION'S POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants.......... Not Applicable
11. Incorporation of Certain Information by Reference.... Not Applicable
12. Information with Respect to S-2 or S-3 Registrant.... Not Applicable
13. Incorporation of Certain Information by Reference.... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM AND CAPTION OF FORM S-4
- ----------------------------------------------------------------
<C> <S> <C>
14. Information with Respect to Registrants Other than
S-3 or S-2 Registrants............................. SUMMARY OF PROXY STATEMENT/ PROSPECTUS; THE COMPANIES
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies............ Not Applicable
16. Information with Respect to S-2 or S-3 Companies..... Not Applicable
17. Information with Respect to Companies Other Than S-2
or S-3 Companies................................... SUMMARY OF PROXY STATEMENT/ PROSPECTUS; THE COMPANIES
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorization are
to be Solicited.................................... Proxy Statement/Prospectus Cover Page; SUMMARY OF
PROXY STATEMENT/ PROSPECTUS; THE MERGER, THE MERGER
AGREEMENT; THE MEETINGS; DISSENTING SHAREHOLDERS
RIGHTS; SECURITY OWNERSHIP OR MANAGEMENT; AVAILABLE
INFORMATION
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer.... Not Applicable
20. Indemnification of Directors and Officers............ PART II, INDEMNIFICATION OF DIRECTORS AND OFFICERS
21. Exhibits and Financial Statement Schedules........... PART II, EXHIBITS, FINANCIAL STATEMENT SCHEDULES
22. Undertakings......................................... PART II, UNDERTAKINGS
</TABLE>
<PAGE>
[DNBF LETTERHEAD]
, 1998
To Our Shareholders:
You are cordially invited to attend a Special Meeting (the "DNBF Special
Meeting") of Shareholders of DNB Financial, a California corporation ("DNBF"),
to be held on Wednesday, , 1998 at 5:30 p.m. at which you will be
asked to consider and vote on a proposal to approve the principal terms of a
proposed merger (the "Merger") of DNBF with and into BYL Bancorp, a California
corporation ("BYL"), pursuant to an Agreement and Plan of Reorganization (the
"Agreement"), dated as of January 29, 1998, by and between BYL, DNBF, Bank of
Yorba Linda ("BOYL") and De Anza National Bank ("DANB"). Upon the Merger
becoming effective, each share of common stock, no par value, of DNBF (the "DNBF
Common Stock") issued and outstanding at such time (other than shares which have
not been voted in favor of the approval of the principal terms of the Merger and
with respect to which dissenters' rights have been perfected in accordance with
the California General Corporation Law) will be converted into the right to
receive shares of common stock, no par value, of BYL. Simultaneously, DNBF's
subsidiary, DANB, shall be merged into BYL's subsidiary, BOYL. The enclosed
Proxy Statement/Prospectus more fully describes the proposed merger and related
transactions, including information about BYL and DNBF.
The Board of Directors of DNBF has carefully considered the terms and
conditions of the Agreement and the proposed merger with BYL. THE BOARD OF
DIRECTORS OF DNBF HAS CONCLUDED THAT THE MERGER IS IN THE BEST INTERESTS OF DNBF
AND HOLDERS OF DNBF COMMON STOCK (THE "DNBF SHAREHOLDERS"), AND UNANIMOUSLY
RECOMMENDS THAT THE DNBF SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE PRINCIPAL
TERMS OF THE MERGER. Hoefer & Arnett, DNBF's financial advisor, has delivered to
the Board of Directors of DNBF its opinion, dated the date hereof, that the
conversion of DNBF stock into BYL stock is fair, from a financial point of view,
to the DNBF Shareholders. A copy of this opinion is attached as Appendix D to
the Proxy Statement/Prospectus.
It is important that your shares be represented and voted at the DNBF
Special Meeting regardless of the number of shares you own and whether or not
you plan to attend the DNBF Special Meeting. The affirmative vote of the holders
of a majority of the DNBF Common Stock entitled to vote at the DNBF Special
Meeting is required for approval of the principal terms of the Merger. Your
failure to vote for approval of the principal terms of the Merger has the same
effect as a vote against the Merger. Therefore, we urge you to sign, date and
mail the enclosed proxy. If you decide to attend the DNBF Special Meeting and
wish to vote in person, you may withdraw your proxy at that time.
YOU SHOULD NOT SEND IN CERTIFICATES FOR DNBF COMMON STOCK AT THIS TIME. YOU
WILL RECEIVE INSTRUCTIONS AT A LATER DATE REGARDING THE EXCHANGE OF YOUR STOCK
CERTIFICATES REPRESENTING SHARES OF DNBF COMMON STOCK.
Sincerely,
--------------------------------------
Henry C. Cox II
CHAIRMAN OF THE BOARD
--------------------------------------
Neil Hatcher
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
DNB FINANCIAL
7710 LIMONITE AVENUE
RIVERSIDE, CALIFORNIA 92509
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
NOTICE IS HEREBY GIVEN that a Special Meeting ("DNBF Special Meeting") of
Shareholders of DNB Financial, a California corporation ("DNBF"), has been
called by the Board of Directors of DNBF and will be held at the head office of
De Anza National Bank, 7710 Limonite Avenue, Riverside, California at 5:30 p.m.,
local time, on Wednesday, , 1998 for the following purposes:
(1) APPROVAL OF MERGER AGREEMENT. To consider and vote on a proposal (the
"DNBF Proposal") to approve the principal terms of a proposed merger (the
"Merger") of DNBF with and into BYL Bancorp, a California corporation ("BYL"),
with BYL surviving the Merger (the "Surviving Corporation") and De Anza National
Bank ("DANB") will merge with and into Bank of Yorba Linda ("BOYL"), pursuant to
an Agreement and Plan of Reorganization, dated as of January 29, 1998 (as the
same may be amended, the "Agreement"), by and between BYL, DNBF, BOYL and DANB.
The Agreement provides, among other things, that each issued and outstanding
share of common stock, no par value, of DNBF ("DNBF Common Stock") (other than
shares which have not been voted in favor of the approval of the principal terms
of the Merger and with respect to which dissenters' rights have been perfected
in accordance with the California General Corporation Law) will be converted
into the right to receive shares of common stock, no par value, of BYL ("BYL
Common Stock") on, and subject to, the terms and conditions contained in the
Agreement, equal to the quotient (such quotient, the Exchange Ratio) of (a) the
DNBF Transaction Price Per Share divided by (b) the Stipulated BYL Share Value
($18.75) or if adjusted, by the Adjusted BYL Share Value (as defined below). In
the event that the Average Price of BYL Stock shall be more than $22.50 or less
than $15.00 (such values, the Threshold Values), the Stipulated BYL Share Value
shall be adjusted (such adjusted price, the Adjusted BYL Share Value), with such
adjustment equal to one half the difference between the Average Price of BYL
Stock and $18.75 per share. For example, if the Average Price of BYL Stock is
$23.50, then the Adjusted BYL Share Value would be $21.125, and if the Average
Price of BYL Stock is $14.00, then the Adjusted BYL Share Value would be
$16.375.
The DNBF Transaction Price Per Share is equal to the quotient of (A) the sum
of (i) 2.7 times the DNBF aggregate book value as of September 30, 1997 of
$6,911,426; (ii) the net proceeds received by DNBF from the exercise of up to
22,500 DNBF Options at the average weighted exercise price of $23.04 per share;
and (iii) 1.5 times the change in net retained earnings of DNBF, between
September 30, 1997 and the end of the month prior to the Effective Time, and (B)
the issued and outstanding shares of DNBF Stock on the Closing Date, up to a
maximum of 232,423 shares. A copy of the Agreement is included in the Joint
Proxy Statement/Prospectus as Appendix C.
(2) OTHER BUSINESS. To consider and act upon such other business as may
properly come before the DNBF Special Meeting or any adjournment or postponement
thereof.
The terms of the DNBF Proposal and the BYL Common Stock to be issued in
connection therewith are described in detail in the accompanying Joint Proxy
Statement/Prospectus. To ensure that your vote will be counted, please complete,
date and sign the enclosed proxy card and return it promptly in the enclosed
postage-paid envelope, whether or not you plan to attend the DNBF Special
Meeting. You may revoke your proxy in the manner described in the accompanying
Joint Proxy Statement/Prospectus at any time before it is voted at the DNBF
Special Meeting.
Only holders of DNBF Common Stock of record at the close of business on
, 1998 (the "DNBF Record Date"), will be entitled to notice of, and
to vote at, the DNBF Special Meeting or at any postponements or adjournments
thereof. The affirmative vote of a majority of the shares of DNBF Common Stock
outstanding as of the DNBF Record Date is required to approve the DNBF Proposal.
<PAGE>
Shareholders of DNBF may be entitled to exercise dissenters' rights and to
receive cash in an amount equal to the fair market value of their shares of DNBF
Common Stock as of January 28, 1998 in lieu of receiving the BYL Common Stock in
the Merger by complying with certain procedures specified by California law. See
"The Merger--Dissenters' Rights" in the accompanying Joint Proxy Statement/
Prospectus.
By Order of the Board of Directors,
[SIGNATURE]
--------------------------------------
John L. West
SECRETARY
Riverside, California
, 1998
YOUR VOTE IS VERY IMPORTANT. PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY
PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE DNBF SPECIAL MEETING. YOUR PROXY
WILL BE REVOCABLE, EITHER IN WRITING OR BY VOTING IN PERSON AT THE DNBF SPECIAL
MEETING, AT ANY TIME PRIOR TO ITS EXERCISE, BY FOLLOWING THE PROCEDURES
DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS. YOU SHOULD NOT
FORWARD STOCK CERTIFICATES AT THIS TIME.
<PAGE>
[BYL LETTERHEAD]
, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting (the "BYL
Meeting") of Shareholders of BYL Bancorp, a California corporation ("BYL"), to
be held on , , 1998, at 5:30 p.m., at which you will be
asked to consider and vote on a proposal to approve the principal terms of a
proposed merger (the "Merger") pursuant to an Agreement and Plan of
Reorganization, dated as of January 29, 1998 (as the same may be amended, the
"Agreement"), by and between BYL Bancorp ("BYL"), DNB Financial ("DNBF"), Bank
of Yorba Linda ("BOYL"), a California state-chartered bank and a wholly owned
subsidiary of BYL, and De Anza National Bank, a national banking association and
a wholly-owned subsidiary of DNBF ("DANB"). A copy of the Agreement is included
with this Joint Proxy Statement/Prospectus as Appendix C. The Agreement provides
for, among other things, the merger (the "Merger") of DNBF with and into BYL,
with BYL surviving the Merger (the "Surviving Corporation") and DANB to be
merged with and into BOYL with BOYL surviving the Bank Merger. Upon the Merger
becoming effective, each share of common stock, no par value, of DNBF ("DNBF
Common Stock") issued and outstanding at such time (other than shares which have
not been voted in favor of the approval of the principal terms of the Merger and
with respect to which dissenters' rights have been perfected in accordance with
the California General Corporation Law) will be converted automatically into the
right to receive shares of common stock, no par value, of BYL ("BYL Common
Stock"). Based on the number of shares of BYL Common Stock outstanding as of the
record date for the BYL Meeting, the shares of BYL Common Stock to be issued to
DNBF shareholders pursuant to the Agreement will represent approximately 40.69%
of the shares of BYL Common Stock outstanding following the Merger.
At the BYL Meeting, the shareholders of BYL will also be asked to consider
and vote upon the election as directors of the three (3) individuals nominated
by the Board of Directors as more fully set out herein.
More detailed information about the nominees, specified proposals and other
matters regarding the BYL Meeting is included in the attached Joint Proxy
Statement/Prospectus.
The Board of Directors of BYL has unanimously approved the Agreement and has
determined that the Merger is fair to, and in the best interests of, holders of
BYL Common Stock (the "BYL Shareholders"). In addition, Ryan, Beck & Co., as
financial advisor to BYL, has delivered its opinion, dated the date hereof, to
the Board of Directors of BYL that the Exchange Ratio is fair, from a financial
point of view, to the BYL Shareholders. Therefore, the Board of Directors of BYL
unanimously recommends that BYL Shareholders vote "FOR" the approval of the
principal terms of the Merger.
I urge you to consider carefully these important matters which are described
in the accompanying Joint Proxy Statement/Prospectus. In order to ensure that
your vote is represented at the BYL Meeting, please indicate your choice on the
enclosed proxy form, date, sign and return it in the enclosed envelope. A prompt
response will be appreciated. If you attend the BYL Meeting you may revoke your
proxy and vote in person if you wish.
Sincerely,
[SIGNATURE]
--------------------------------------
H. Rhoads Martin, Jr.
CHAIRMAN OF THE BOARD
<PAGE>
BYL BANCORP
18206 IMPERIAL HIGHWAY
YORBA LINDA, CALIFORNIA 92886
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting (the "BYL Meeting") of
Shareholders of BYL Bancorp, a California corporation ("BYL"), has been called
by the Board of Directors of BYL (the "BYL Board") and will be held at 18206
Imperial Highway, Yorba Linda, California at 5:30 p.m. local time on
, 1998 for the following purposes:
(1) APPROVAL OF MERGER AGREEMENT. To consider and vote on a proposal (the
"DNBF Proposal") to approve the principal terms of a proposed merger (the
"Merger") of DNBF with and into BYL Bancorp, a California corporation ("BYL"),
with BYL surviving the Merger (the "Surviving Corporation") and De Anza National
Bank ("DANB") will merge with and into Bank of Yorba Linda ("BOYL") with BOYL
surviving the Bank Merger, pursuant to an Agreement and Plan of Reorganization,
dated as of January 29, 1998 (as the same may be amended, the "Agreement"), by
and between BYL, DNBF, BOYL and DANB. The Agreement provides, among other
things, that each issued and outstanding share of common stock, no par value, of
DNBF ("DNBF Common Stock") (other than shares which have not been voted in favor
of the approval of the principal terms of the Merger and with respect to which
dissenters' rights have been perfected in accordance with the California General
Corporation Law) will be converted into the right to receive shares of common
stock, no par value, of BYL ("BYL Common Stock") on, and subject to, the terms
and conditions contained in the Agreement, equal to the quotient (such quotient,
the Exchange Ratio) of (a) the DNBF Transaction Price Per Share divided by (b)
the Stipulated BYL Share Value ($18.75) or if adjusted, by the Adjusted BYL
Share Value (as defined below). In the event that the Average Price of BYL Stock
shall be more than $22.50 or less than $15.00 (such values, the Threshold
Values), the Stipulated BYL Share Value shall be adjusted (such adjusted price,
the Adjusted BYL Share Value), with such adjustment equal to one half the
difference between the Average Price of BYL Stock and $18.75 per share. For
example, if the Average Price of BYL Stock is $23.50, then the Adjusted BYL
Share Value would be $21.125, and if the Average Price of BYL Stock is $14.00,
then the Adjusted BYL Share Value would be $16.375.
The DNBF Transaction Price Per Share is equal to the quotient of (A) the sum
of (i) 2.7 times the DNBF aggregate book value as of September 30, 1997 of
$6,911,426; (ii) the net proceeds received by DNBF from the exercise of up to
22,500 DNBF Options at the average weighted exercise price of $23.04 per share;
and (iii) 1.5 times the change in net retained earnings of DNBF, between
September 30, 1997 and the end of the month prior to the Effective Time, and (B)
the issued and outstanding shares of DNBF Stock on the Closing Date, up to a
maximum of 232,423 shares. A copy of the Agreement is included in the Joint
Proxy Statement/Prospectus as Appendix C.
(2) ELECTION OF DIRECTORS. To elect the following three (3) directors to
the Board of Directors to serve until the 2000 Annual Meeting of Shareholders
and until their successors are elected and have qualified. The Board of
Directors' nominees are the following persons:
Leonard O. Lindborg
Barry J. Moore
Brent W. Wahlberg
(3) OTHER BUSINESS. To consider and act upon such other business as may
properly come before the BYL Meeting or any adjournment or postponement thereof.
<PAGE>
The Bylaws of BYL Bancorp provide for the nomination of directors in the
following manner:
"Nominations for election of members of the board of directors may be made
by the board of directors or by any shareholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Notice of intention to make any nominations (other than for persons named in the
notice of the meeting at which such nomination is to be made) shall be made in
writing and shall be delivered or mailed to the president of the corporation by
the later of the close of business 21 days prior to any meeting of shareholders
called for the election of directors or 10 days after the date of mailing of
notice of the meeting to shareholders. Such notification shall contain the
following information to the extent known to the notifying shareholder: (a) the
name and address of each proposed nominee; (b) the principal occupation of each
proposed nominee; (c) the number of shares of capital stock of the corporation
owned by each proposed nominee; (d) the name and residence address of the
notifying shareholder; (e) the number of shares of capital stock of the
corporation owned by the notifying shareholder; (f) with the written consent of
the proposed nominee, a copy of which shall be furnished with the notification,
whether the proposed nominee has ever been convicted of or pleaded nolo
contendere to any criminal offense involving dishonesty or breach of trust,
filed a petition in bankruptcy, or been adjudged bankrupt. The notice shall be
signed by the nominating shareholder and by the nominee. Nominations not made in
accordance herewith shall be disregarded by the chairman of the meeting, and
upon his instructions, the inspectors of election shall disregard all votes cast
for each such nominee. The restrictions set forth in this paragraph shall not
apply to nomination of a person to replace a proposed nominee who has died or
otherwise become incapacitated to serve as a director between the last day for
giving notice hereunder and the date of election of directors if the procedure
called for in this paragraph was followed with respect to the nomination of the
proposed nominee."
The Joint Proxy Statement/Prospectus and the Appendices thereto (including
the Agreement attached as Appendix C thereto) form a part of this Notice.
Only holders of BYL Common Stock of record at the close of business on
, 1998, will be entitled to notice of, and to vote at, the BYL
Meeting or any adjournments or postponements thereof. Approval of the matters to
be voted upon in connection with the Merger requires the affirmative vote of a
majority of the outstanding shares of BYL Common Stock.
Shareholders of BYL may be entitled to exercise dissenters' rights and to
receive cash in an amount equal to the fair market value of their shares of BYL
Common Stock as of January 28, 1998, by complying with certain procedures
specified by California law. See "The Merger--Dissenters' Rights" in the
accompanying Joint Proxy Statement/Prospectus.
By Order of the Board of Directors,
[SIGNATURE]
--------------------------------------
H. Rhoads Martin, Jr.
CHAIRMAN OF THE BOARD
Yorba Linda, California
, 1998
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE BYL MEETING. YOUR PROXY WILL BE REVOCABLE, EITHER IN WRITING
OR BY VOTING IN PERSON AT THE BYL MEETING, AT ANY TIME PRIOR TO ITS EXERCISE, BY
FOLLOWING THE PROCEDURES DESCRIBED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS. THE BOARD OF DIRECTORS OF BYL UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE THE PRINCIPAL TERMS OF THE MERGER AND THE OTHER
MATTERS TO BE VOTED UPON AT THE BYL MEETING.
<PAGE>
BYL BANCORP/DNB FINANCIAL
JOINT PROXY STATEMENT
BYL BANCORP
PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to the shareholders
of BYL Bancorp, a California corporation ("BYL"), in connection with the
solicitation of proxies by the Board of Directors of BYL (the "BYL Board") from
holders of outstanding shares of common stock, no par value ("BYL Common
Stock"), of BYL for use at the Annual Meeting of shareholders of BYL ("BYL
Shareholders") to be held on , 1998 and at any adjournments and
postponements thereof (the "BYL Meeting"). This Joint Proxy Statement/Prospectus
is also being furnished to the shareholders of DNB Financial, a California
corporation ("DNBF" and together with BYL, the "Companies"), in connection with
the solicitation of proxies by the Board of Directors of DNBF (the "DNBF Board"
and together with the BYL Board, the "Boards") from holders of outstanding
shares of common stock, no par value ("DNBF Common Stock"), of DNBF, for use at
a Special Meeting of Shareholders of DNBF ("DNBF Shareholders" and together with
the BYL Shareholders, the "Shareholders") to be held on , 1998, and
at any adjournments or postponements thereof (the "DNBF Meeting" and, together
with the BYL Meeting, the "Meetings").
At the Meetings, the Shareholders will be asked to consider and vote on a
proposal (the "DNBF Proposal") to approve the principal terms of a proposed
merger (the "Merger") of DNBF with and into BYL, with BYL surviving the Merger
(the "Surviving Corporation") and De Anza National Bank ("DANB") will merge with
and into Bank of Yorba Linda ("BOYL"), pursuant to an Agreement and Plan of
Reorganization, dated as of January 29, 1998 (as the same may be amended, the
"Agreement"), by and between BYL, DNBF, BOYL and DANB. The Agreement provides,
among other things, that each issued and outstanding share, no par value, of
DNBF Common Stock (other than shares which have not been voted in favor of the
approval of the principal terms of the Merger and with respect to which
dissenters' rights have been perfected in accordance with the California General
Corporation Law) will be converted into the right to receive shares, no par
value, of BYL Common Stock on, and subject to, the terms and conditions
contained in the Agreement, equal to the quotient (such quotient, the Exchange
Ratio) of (a) the DNBF Transaction Price Per Share divided by (b) the Stipulated
BYL Share Value ($18.75) or if adjusted, by the Adjusted BYL Share Value (as
defined below). In the event that the Average Price of BYL Stock shall be more
than $22.50 or less than $15.00 (such values, the Threshold Values), the
Stipulated BYL Share Value shall be adjusted (such adjusted price, the Adjusted
BYL Share Value), with such adjustment equal to one half the difference between
the Average Price of BYL Stock and $18.75 per share. For example, if the Average
Price of BYL Stock is $23.50, then the Adjusted BYL Share Value would be
$21.125, and if the Average Price of BYL Stock is $14.00, then the Adjusted BYL
Share Value would be $16.375. The DNBF Transaction Price Per Share is equal to
the quotient of (A) the sum of (i) 2.7 times the DNBF aggregate book value as of
September 30, 1997 of $6,911,426; (ii) the net proceeds received by DNBF from
the exercise of up to 22,500 DNBF Options at the average weighted exercise price
of $23.04 per share; and (iii) 1.5 times the change in net retained earnings of
DNBF, between September 30, 1997 and the end of the month prior to the closing
date, and (B) the issued and outstanding shares of DNBF Stock on the Closing
Date, up to a maximum of 232,423 shares. A copy of the Agreement is included in
the Joint Proxy Statement/Prospectus as Appendix C.
Assuming (i) the estimated exchange ratio is 4.585, (ii) the Stipulated
Value of BYL Stock of $18.75 does not change, (iii) 232,423 shares of DNBF are
issued and outstanding at the Effective Time, (iv) no Dissenters' Rights are
perfected by DNBF Shareholders and (v) no cash is paid in lieu of fractional
shares, approximately 1,066,000 shares of BYL Common Stock would be issued in
the Merger. Based upon the 1,553,196 shares of BYL Common Stock outstanding on
the BYL Record Date (as defined herein) and the
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282,034 shares of BYL Common Stock reserved for issuance upon exercise of
employee stock options to acquire BYL Common Stock outstanding on the BYL Record
Date, and assuming no Dissenters' Rights are perfected by any Shareholders and
no cash is paid in lieu of fractional shares, shares held by the BYL and DNBF
Shareholders after consummation of the Merger are estimated to represent (i)
59.31 percent and 40.69 percent, respectively, of the Surviving Corporation, if
none of the shares of DNBF Common Stock or BYL Common Stock which were reserved
for issuance on the DNBF Record Date and the BYL Record Date, respectively, were
outstanding on the Effective Time, and (ii) 63.26 percent and 36.74 percent,
respectively, if all shares of DNBF Common Stock and BYL Common Stock which were
reserved for issuance on the DNBF Record Date and the BYL Record Date,
respectively, were issued by the Effective Time.
IN ORDER FOR ANY SHAREHOLDER TO EXERCISE DISSENTERS' RIGHTS, A NOTICE MUST BE
SENT BY SUCH SHAREHOLDER AND RECEIVED BY BYL OR DNBF, AS THE CASE MAY BE, ON OR
BEFORE , 1998, IN THE CASE OF BYL, OR ON OR BEFORE , 1998,
IN THE CASE OF DNBF, THE DATES OF THE MEETINGS, AND ANY SUCH SHAREHOLDER MUST
VOTE AGAINST THE APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER. SEE "THE
MERGER-- DISSENTERS' RIGHTS."
The BYL Common Stock is quoted on the Nasdaq National Market under the
symbol "BOYL."
SEE "RISK FACTORS" ON PAGE FOR A DISCUSSION OF CERTAIN CONSIDERATIONS THAT
SHAREHOLDERS SHOULD CONSIDER WITH RESPECT TO THE MERGER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS , 1998.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS JOINT PROXY
STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER, OR SOLICITATION OF
AN OFFER, OR PROXY SOLICITATION. NEITHER DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES BEING OFFERED
PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR THEREIN SINCE THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
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AVAILABLE INFORMATION
Effective October 23, 1997, BYL became subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
reports, proxy statements and other information filed by BYL with the Commission
may be inspected and copied at the public reference facilities of the Commission
located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at them
Commission's regional offices at 7 World Trade Center, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661, at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov. Shares of BYL
Common Stock are traded as "National Market Securities" on the Nasdaq National
Market under the symbol "BOYL". Material filed by BYL can be inspected at the
offices of the National Association of Securities Dealers, Inc., Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.
Effective June 14, 1996, the BOYL became subject to the information,
reporting and proxy solicitation requirements of the Exchange Act, and in
accordance therewith filed reports and other information with the Federal
Deposit Insurance Corporation (the "FDIC"). Following the Effective Time of the
organization of BYL as the holding company for BOYL on November 19, 1997, BOYL's
information, reporting and proxy solicitation requirements of the Exchange Act
was terminated. Such reports and other information can be inspected and copied
at the public reference facilities for the Registrations and Disclosure Division
maintained by the FDIC at 550 17th Street, Room F-643, Washington D.C. 20429,
telephone number (202) 393-8400, or by contacting Mr. Barry J. Moore, Senior
Executive Vice President of BOYL, at Bank of Yorba Linda, 18206 Imperial
Highway, Yorba Linda, California 92886, telephone number (714) 996-1800.
On May 6, 1987, DNBF filed a registration statement with the Commission on
Form S-4 in connection with the formation of DNBF as the bank holding company
for DANB. On May 16, 1988, DNBF filed a Form 15 with the Commission that
deregistered its shares pursuant to Section 15 of the Exchange Act, and DNBF is
exempt from filing reports, proxy statements and other information with the
Commission.
BYL has filed with the Commission a registration statement on Form S-4
(including exhibits thereto, the "Registration Statement") pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering the shares
of BYL Common Stock issuable in the Merger. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information may be obtained from the
Commission's principal office in Washington, D.C. Statements contained in this
Joint Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
This Joint Proxy Statement/Prospectus constitutes both the proxy statement
of BYL and DNBF relating to the solicitation of proxies for their use at their
respective Meetings and the Prospectus filed as part of the Registration
Statement. This Joint Proxy Statement/Prospectus and the related proxies and
other materials are first being provided to the shareholders of BYL and DNBF on
or about , 199 .
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Joint Proxy Statement/Prospectus incorporates by reference documents
not included herein. Documents relating to BYL, excluding exhibits unless
specifically incorporated herein, are available without charge upon request to
Barry J. Moore, Senior Executive Vice President, Chief Financial Officer and
Assistant Secretary, BYL Bancorp, 18206 Imperial Highway, Yorba Linda,
California 92886. Telephone requests may be directed to Barry J. Moore, at (714)
996-1800.
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The following documents filed with the Commission by BYL (file numbers
333-34995 and 000-23257) are incorporated herein by reference:
(a) BYL's Registration Statement on Form S-4 filed with the Commission on
September 5, 1997;
(b) BYL's Current Report 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;
(c) BYL's Registration Statement on Form 8-A filed with the Commission on
October 23, 1997;
(d) BYL's Current Report on Form 8-K, dated January 16, 1998 announcing year
end and quarterly earnings;
(e) BYL's Current Report on Form 8-K, dated January 29, 1998 announcing the
execution of the Agreement and Plan of Reorganization with DNBF;
(f) BYL's Quarterly Report on Form 10-QSB as of September 30, 1997, filed
November 15, 1997.
(g) BYL's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997.
Such incorporation by reference shall not be deemed to incorporate by
reference the information referred to in Item 402(a)(8) of Regulation S-K.
All documents and reports filed by BYL pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date hereof and prior to the
Meetings shall be deemed to be incorporated herein by reference and to be a part
hereof from the date of such filing and any statement contained herein or in a
document incorporated or deemed to be incorporated herein by reference shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein or in any other subsequently filed document which
also is, or is deemed to be, incorporated herein by reference, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part hereof, except as so modified or superseded.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION................................................................. 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..................................... 3
TABLE OF CONTENTS..................................................................... 5
SUMMARY............................................................................... 8
The Companies....................................................................... 8
The Meetings........................................................................ 8
The Merger.......................................................................... 10
The Merger Agreement................................................................ 13
Warrant Agreement................................................................... 14
Comparison of Shareholder Rights.................................................... 14
Risk Factors........................................................................ 14
Markets and Market Prices........................................................... 14
Summary Historical Financial Data................................................... 17
Summary Unaudited Pro Forma Combined Financial Data................................. 19
Selected Historical and Pro Forma Per Share Data.................................... 20
RISK FACTORS.......................................................................... 21
Competition......................................................................... 21
Ability to Integrate the Operations of BYL and DNBF................................. 21
General Business Risk............................................................... 22
Risks Associated with Mortgage Origination and Sale Activities...................... 22
Risks Associated with Small Business Administration Loans........................... 23
Dependence on Key Personnel......................................................... 23
Concentration of Operations; Recessionary Environments; Decline in Real Estate
Values............................................................................ 23
Interest Rate Risk.................................................................. 24
Shares Eligible for Future Sale; Dilution........................................... 25
Regulation.......................................................................... 25
Market Liquidity of BYL Common Stock................................................ 26
THE COMPANIES......................................................................... 27
BYL................................................................................. 27
DNBF................................................................................ 27
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA................................. 28
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA........................ 33
THE MEETINGS.......................................................................... 33
Date, Time and Place................................................................ 34
Matters to be Considered at the Meetings............................................ 34
Record Date; Stock Entitled to Vote................................................. 34
Votes Required; Quorum.............................................................. 35
Voting of Proxies................................................................... 35
Revocability of Proxies............................................................. 36
Solicitation of Proxies............................................................. 36
Security Ownership of Certain Beneficial Owners and Management...................... 36
THE MERGER............................................................................ 39
Background of the Merger............................................................ 39
Effect of Merger.................................................................... 41
Reasons for the Merger; Recommendations of the Boards of Directors.................. 42
Opinions of Financial Advisors...................................................... 44
Certain Federal Income Tax Consequences............................................. 52
Regulatory Approvals................................................................ 54
</TABLE>
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<TABLE>
<S> <C>
Resale of BYL Common Stock.......................................................... 56
Interests of Certain Persons in the Merger.......................................... 56
Dissenters' Rights.................................................................. 58
Accounting Treatment................................................................ 61
THE MERGER AGREEMENT.................................................................. 62
The Merger.......................................................................... 62
Conversion of DNBF Common Stock..................................................... 62
Effective Time...................................................................... 62
Exchange of Stock Certificates...................................................... 63
Conduct of the Business of DNBF and BYL Prior to the Merger......................... 63
Representations and Warranties...................................................... 64
Certain Covenants................................................................... 64
Conditions.......................................................................... 68
Waiver and Amendment................................................................ 69
Termination......................................................................... 70
THE WARRANT AGREEMENT................................................................. 70
General............................................................................. 70
The Warrant......................................................................... 71
Termination......................................................................... 71
THE DIRECTOR AGREEMENTS............................................................... 72
DNBF MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND FINANCIAL
CONDITION........................................................................... 73
COMPENSATION OF BYL EXECUTIVE OFFICERS................................................ 87
COMPENSATION OF DNBF EXECUTIVE OFFICERS............................................... 93
DESCRIPTION OF BYL CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS................. 95
INDEMNIFICATION OF DIRECTORS AND OFFICERS............................................. 100
VALIDITY OF BYL COMMON STOCK.......................................................... 101
EXPERTS............................................................................... 101
</TABLE>
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LIST OF APPENDICES
Appendix A--BYL's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997 (without exhibits)
Appendix B--DNBF's consolidated balance sheets as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for the years then ended.
Appendix C--Agreement and Plan of Reorganization, dated as of January 29, 1998,
and First Amendment dated February 25, 1998, by and between BYL, DNBF, BOYL and
DANB.
Appendix D--Fairness Opinion of Hoefer & Arnett.
Appendix E--Fairness Opinion of Ryan, Beck & Co.
Appendix F--Chapter 13 of the CGCL.
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SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ALL
RESPECTS BY THE MORE DETAILED INFORMATION INCLUDED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. THE SHAREHOLDERS ARE URGED TO READ CAREFULLY THIS JOINT
PROXY STATEMENT/PROSPECTUS, INCLUDING THE APPENDICES HERETO AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE, IN ITS ENTIRETY.
ALL INFORMATION CONCERNING BYL AND BANK OF YORBA LINDA (BOYL) INCLUDED IN
THIS JOINT PROXY STATEMENT/PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE, HAS BEEN FURNISHED BY BYL, AND ALL INFORMATION
CONCERNING DNBF AND DE ANZA NATIONAL BANK (DANB) INCLUDED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE, HAS BEEN FURNISHED BY DNBF. UNLESS THE CONTEXT OTHERWISE
REQUIRES, REFERENCES TO "BYL" HEREIN SHALL BE TO BYL AND BOYL, AND REFERENCES TO
"DNBF" HEREIN SHALL BE TO DNBF AND DANB.
THE COMPANIES
BYL
BYL is a bank holding company registered under the Bank Holding Company Act
of 1956, as amended (the "BHCA"), and its principal business is to serve as a
holding company for its banking subsidiary BOYL. BYL was organized on April 17,
1997 as a California corporation and commenced operation as a bank holding
company on November 19, 1997. BOYL provides banking and other financial services
primarily in Orange County. At December 31, 1997, BYL had consolidated total
assets, total deposits and shareholders' equity of $164,667,000, $142,836,000,
and $14,830,000, respectively. BYL's principal executive offices are located at
18206 Imperial Highway, Yorba Linda, California 92886, and its telephone number
is (714) 996-1800. See "The Companies--BYL."
DNBF
DNBF is a bank holding company registered under the BHCA, and its principal
business is to serve as a bank holding company for its banking subsidiary DANB.
DNBF was organized as a California corporation and commenced operation as a bank
holding company on September 23, 1987. DNBF conducts operations through its
sole, wholly-owned subsidiary, DANB, a national banking association. DANB
provides banking and other financial services primarily in Riverside County. At
December 31, 1997, DNBF had consolidated total assets, total deposits and
shareholders' equity of $73,419,000, $65,099,000 and $7,720,000, respectively.
DNBF's principal executive offices are located at 7710 Limonite Avenue,
Riverside, California 92509 and its telephone number is (909) 360-8065. See "The
Companies--DNBF."
THE MEETINGS
DATE, TIME AND PLACE
BYL. The BYL Annual Meeting is scheduled to be held at 18206 Imperial
Highway, Yorba Linda, California 92886 on , , 1998 at 5:30
p.m., local time.
DNBF. The DNBF Special Meeting is scheduled to be held at the head office
of De Anza National Bank, 7710 Limonite Avenue, Riverside, California on
, , 1998 at 5:30 p.m., local time.
See "The Meetings--Date, Time and Place."
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MATTERS TO BE CONSIDERED AT THE MEETINGS
BYL. The purpose of the BYL Annual Meeting is to (a) consider and vote upon
the approval of the principal terms of the Merger; (b) the election of three (3)
directors to serve until the 2000 Annual Meeting and until their successors are
elected and have qualified; and (c) consider and act upon such other business as
may properly come before the BYL Annual Meeting or any adjournments or
postponements thereof.
DNBF. The purpose of the DNBF Special Meeting is to (a) consider and vote
upon the approval of the principal terms of the Merger; and (b) consider and act
upon such other business as may properly come before the DNBF Special Meeting or
any adjournments or postponements thereof.
See "The Meetings--Matters to be Considered at the Meetings."
RECORD DATE; STOCK ENTITLED TO VOTE
BYL. Only holders of record of BYL Common Stock at the close of business on
, 1998 (the "BYL Record Date") will be entitled to receive notice of,
and to vote at, the BYL Annual Meeting and any postponements or adjournments
thereof.
DNBF. Only holders of record of DNBF Common Stock at the close of business
on , 1998 (the "DNBF Record Date") will be entitled to receive notice
of, and to vote at, the DNBF Special Meeting and any postponements or
adjournments thereof.
See "The Meetings--Record Date; Stock Entitled to Vote."
VOTES REQUIRED; QUORUM
BYL. The affirmative vote of the holders of at least a majority of the
total number of outstanding shares of BYL Common Stock entitled to vote at the
BYL Annual Meeting is required to approve the principal terms of the Merger. In
connection with the Election of Directors, the three (3) nominees receiving the
highest number of votes will be elected until the 2000 Annual Meeting and until
their successors are elected and have qualified. Each holder of shares of BYL
Common Stock outstanding on the BYL Record Date will be entitled to one vote for
each share held of record upon each matter properly submitted at the BYL Annual
Meeting and any postponement or adjournment thereof. A majority of all shares of
BYL Common Stock entitled to vote, represented in person or by proxy,
constitutes a quorum. Abstentions and broker non-votes are each included in the
determination of the number of shares present; however, they are not counted as
votes in favor of the principal terms of the Merger.
DNBF. The affirmative vote of the holders of at least a majority of the
total number of outstanding shares of DNBF Common Stock entitled to vote at the
DNBF Special Meeting is required to approve the principal terms of the Merger.
Each holder of shares of DNBF Common Stock outstanding on the DNBF Record Date
will be entitled to one vote for each share held of record upon each matter
properly submitted at the DNBF Special Meeting and any postponement or
adjournment thereof. A majority of all shares of DNBF Common Stock entitled to
vote, represented in person or by proxy, constitutes a quorum. Abstentions and
broker non-votes are each included in the determination of the number of shares
present; however, they are not counted as votes in favor of the principal terms
of the Merger.
See "The Meetings--Votes Required; Quorum."
REVOCABILITY OF PROXIES
The presence of a Shareholder at the relevant Meeting (or at any
postponement or adjournment thereof) will not automatically revoke such
Shareholder's proxy. However, a Shareholder may revoke a proxy at any time prior
to its exercise by (a) delivery to the Secretary of BYL or DNBF, as appropriate,
of a written notice of revocation prior to or at the relevant Meeting (or, if
such Meeting is adjourned or
9
<PAGE>
postponed, prior to or at the time the adjourned or postponed meeting is
actually held); (b) submission of a duly executed proxy bearing a later date; or
(c) attending the relevant Meeting (or, if such Meeting is adjourned or
postponed, by attending the adjourned or postponed meeting) and voting in person
thereat. In the case of BYL Shareholders, any written revocation of proxy or
other related communications should be addressed to John Myers, Secretary, BYL
Bancorp, 18206 Imperial Highway, Yorba Linda, California 92886. In the case of
DNBF Shareholders, any written revocation of proxy or other related
communications should be addressed to Gloria Van Kampen, Executive Vice
President and Chief Financial Officer, DNBF Financial, 7710 Limonite Avenue,
Riverside, California 92509.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BYL. As of the BYL Record Date, the directors and executive officers of BYL
beneficially held, in the aggregate, the ability to direct the voting with
respect to 183,647 shares of BYL Common Stock, comprising approximately 11.05
percent of the voting power of the BYL Common Stock outstanding. Such directors
and executive officers of BYL have informed BYL that they intend to vote their
shares of BYL Common Stock for the approval of the principal terms of the
Merger, and to elect the three nominees as Directors.
DNBF. As of the DNBF Record Date, the directors and executive officers of
DNBF beneficially held, in the aggregate, the ability to direct the voting with
respect to 139,972 shares of DNBF Common Stock, comprising approximately 60.22
percent of the voting power of the DNBF Common Stock outstanding. Such directors
and executive officers of DNBF have informed DNBF that they intend to vote their
shares of DNBF Common Stock for the approval of the principal terms of the
Merger.
See "The Meetings--Security Ownership of Certain Beneficial Owners and
Management."
THE MERGER
EFFECT OF MERGER
At the Effective Time, DNBF will merge with and into BYL, and BYL will be
the surviving corporation and will continue its corporate existence under
California law under the name "BYL Bancorp." The separate corporate existence of
DNBF will cease at the Effective Time.
Upon the Merger becoming effective, each share of DNBF Common Stock issued
and outstanding at the Effective Time (other than shares which have not been
voted in favor of the approval of the principal terms of the Merger and with
respect to which Dissenters' Rights shall have been perfected in accordance with
the CGCL) will be converted automatically into the right to receive shares of
BYL Common Stock as herein described.
Subject to, the terms and conditions contained in the Agreement, each share
of DNBF Common Stock will be converted into the right to receive shares of BYL
Common Stock equal to the quotient (such quotient, the Exchange Ratio) of (a)
the DNBF Transaction Price Per Share divided by (b) the Stipulated BYL Share
Value ($18.75) or if adjusted, by the Adjusted BYL Share Value (as defined
below). In the event that the Average Price of BYL Stock (the average of the
closing price of BYL Stock for the 20 consecutive trading days immediately
preceding three trading days prior to the Effective Time of the Merger) shall be
more than $22.50 or less than $15.00 (such values, the Threshold Values), the
Stipulated BYL Share Value shall be adjusted (such adjusted price, the Adjusted
BYL Share Value), with such adjustment equal to one half the difference between
the Average Price of BYL Stock and $18.75 per share. For example, if the Average
Price of BYL Stock is $23.50, then the Adjusted BYL Share Value would be
$21.125, and if the Average Price of BYL Stock is $14.00, then the Adjusted BYL
Share Value would be $16.375. The DNBF Transaction Price Per Share is equal to
the quotient of (A) the sum of (i) 2.7 times the DNBF aggregate book value as of
September 30, 1997 of $6,911,426; (ii) the net proceeds received by DNBF from
the exercise of up to 22,500 DNBF Options at the average weighted exercise price
of $23.04
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<PAGE>
per share; and (iii) 1.5 times the change in net retained earnings of DNBF,
between September 30, 1997 and the end of the month prior to the Effective Time,
and (B) the issued and outstanding shares of DNBF Stock on the Closing Date, up
to a maximum of 232,423 shares. A copy of the Agreement is included in the Joint
Proxy Statement/Prospectus as Appendix C.
As of the Effective Time, the Board of Directors of the Surviving
Corporation is expected to consist of 9 directors, including all of the current
directors of BYL and three current directors of DNBF appointed pursuant to the
Agreement. It is anticipated that the management and operation of BYL and DNBF
will be integrated after the Merger.
See "The Merger--Effect of Merger," "The Merger Agreement--The Merger" and
"The Merger Agreement--Effective Time."
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS
The Boards have each unanimously approved the Agreement and the transactions
contemplated thereby. THE MEMBERS OF EACH BOARD UNANIMOUSLY BELIEVE THAT THE
MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE AGREEMENT ARE FAIR TO, AND IN
THE BEST INTERESTS OF, THE SHAREHOLDERS AND UNANIMOUSLY RECOMMEND A VOTE "FOR"
APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER. THE CONCLUSIONS OF THE BOARDS
WITH RESPECT TO THE MERGER ARE BASED UPON A NUMBER OF FACTORS MORE FULLY
DESCRIBED HEREIN. IN ADDITION, THE BYL BOARD HAS ALSO, BY UNANIMOUS VOTE, HAS
NOMINATED AND RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS. See "The
Merger--Background of the Merger," "--Reasons for the Merger; Recommendations of
the Boards of Directors" and "--Opinions of Financial Advisors."
OPINIONS OF FINANCIAL ADVISORS
BYL. Ryan, Beck & Co. ("Ryan, Beck"), BYL's financial advisor, has rendered
its written opinion, dated as of , 1998, to the BYL Board to the
effect that, as of such date, the Exchange Ratio (as defined herein) was fair to
the BYL Shareholders from a financial point of view. The written opinion of
Ryan, Beck, dated as of , 1998 (the "Ryan, Beck Opinion"), is
attached to this Joint Proxy Statement/Prospectus as Appendix E and should be
read in its entirety.
DNBF. Hoefer & Arnett ("H&A"), DNBF's financial advisor, has rendered its
written opinion, dated January 27, 1998, to the DNBF Board to the effect that,
as of such date, the conversion of shares of DNBF Stock into shares of BYL Stock
was fair to the DNBF Shareholders from a financial point of view. The written
opinion of H&A, dated January 27, 1998, is attached to this Joint Proxy
Statement/Prospectus as Appendix D and should be read in its entirety.
See "The Merger--Opinions of Financial Advisors."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Vavrinek, Trine, Day & Co. LLP, certified public accountants for both BYL
and DNBF, has advised that the Merger and the Bank Merger will each constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that BYL and DNBF, and BOYL and DANB, will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code. See "The Merger--Certain Federal Income Tax Consequences."
Because of the complexity of the tax laws and the individual nature of
certain tax consequences of the Merger to each DNBF Shareholder, each DNBF
Shareholder should consult their own tax advisor concerning certain other
federal and all state, local and foreign tax consequences of the Merger that may
be applicable.
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REGULATORY APPROVALS
The Merger is subject to prior approval by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") under Section 3 of the
BHCA. The Bank Merger is subject to the prior approval of the Federal Deposit
Insurance Corporation (the "FDIC") and the Commissioner of Financial
Institutions (the "Commissioner") pursuant to Section 4880 ET SEQ. of the
California Financial Code. BYL submitted a letter seeking a waiver of the
approval requirements for the Merger and related matters to the Federal Reserve
Board on , 1998. BOYL and DANB submitted an application seeking
approval of the Bank Merger to the Commissioner on , 1998, and to
the FDIC on February 23, 1998, and such applications are pending. See "The
Merger--Regulatory Approvals" and "The Merger Agreement--Conditions."
DISSENTERS' RIGHTS
In connection with the Merger, the Shareholders may be entitled to
Dissenters' Rights under Chapter 13 of the CGCL, the text of which is attached
hereto as Appendix F. In order for any Shareholder to exercise Dissenters'
Rights, a notice must be sent by such Shareholder and received by BYL or DNBF,
as the case may be, on or before the date of the respective Meetings, and any
such Shareholder must vote against the approval of the principal terms of the
Merger. Failure to send such notice and vote against the Merger will result in a
waiver of such Shareholder's Dissenters' Rights. See "The Merger--Dissenters'
Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of management of each of BYL and DNBF and of their
respective Boards have certain interests in the transactions contemplated by the
Agreement that are in addition to the interests of Shareholders generally and
which may create potential conflicts of interest.
These interests include, among others, provisions in the Agreement relating
to directors' and officers' liability insurance, and benefit plans and
agreements. In addition, three members of the DNBF Board will be appointed to
the BYL Board immediately prior to the Effective Time. Each member of the DNBF
Board appointed to the BYL Board will receive Board of Director fees of $2,000
per month minus any payments for health insurance by BYL on behalf of such
director.
BOYL will also execute a three year employment agreement with Ms. Gloria Van
Kampen providing for a minimum base salary of $112,000 per year, and
participation in certain benefits available to employees and executive officers
of BOYL, including vacation, health and life insurance, and incentive and
deferred compensation benefits.
BYL will also execute five year consulting agreements with Messrs. Neil F.
Hatcher and John L. West in which they would provide specified consulting
services to BYL and BOYL for monthly payments of $8,333.33 and $4,333.33,
respectively.
See "The Merger--Interests of Certain Persons in the Merger" and "The Merger
Agreement-- Certain Covenants."
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, it is currently expected
that the Merger will be accounted for as a pooling-of-interests in accordance
with generally accepted accounting principles, and confirmation by the
independent accountant for the Companies of the ability to use such accounting
treatment is one of the conditions (the "Pooling Condition") to the consummation
of the Merger. In the event that the Pooling Condition is not satisfied BYL or
DNBF may either terminate the Agreement for failure of the Pooling Condition or
amend the Agreement in such a manner in order to preserve pooling-of-interests.
See "The Merger--Accounting Treatment" and "The Merger Agreement--Conditions."
12
<PAGE>
THE MERGER AGREEMENT
EFFECTIVE TIME
The Merger will become effective (the "Effective Time") on the date and at
the time that an agreement of merger and related documents are filed with the
California Secretary of State or such later date as may be specified in such
agreement of merger. Subject to conditions specified in the Agreement, the
parties expect the Merger to become effective in the second quarter of 1998,
although there can be no assurance as to whether or when the Merger will occur.
See "The Merger Agreement--Effective Time" and "--Conditions."
CONDITIONS TO THE MERGER
The obligations of the Companies to effect the Merger are subject to the
satisfaction or waiver prior to the Effective Time of various conditions,
including the following: obtaining requisite Shareholder approvals; obtaining
requisite approvals from the Federal Reserve Board, the Federal Deposit
Insurance Corporation and the California Commissioner of Financial Institutions
(the "Commissioner"); the effectiveness of the Registration Statement of which
this Joint Proxy Statement/Prospectus is a part; receipt of opinions of
accountants in respect of certain federal income tax consequences of the Merger;
receipt of opinions confirming the fairness of the terms of the Merger to the
Shareholders from a financial point of view; and receipt of accountants' letters
to the effect that the Merger qualifies for pooling-of-interests accounting
treatment. The obligation of DNBF to effect the Merger is also subject to the
satisfaction or waiver prior to the Effective Time of certain additional
conditions, including receipt of an opinion of counsel in respect of the shares
of BYL Common Stock issued upon consummation of the Merger. See "The Merger
Agreement--Conditions." One such condition to the obligation of BYL to effect
the Merger is that, unless waived prior to the Effective Time, the Shareholders
voting against the approval of the Agreement or giving notice in writing at or
before the applicable Meeting that such Shareholders dissent from the Agreement
in the aggregate hold not more than ten percent of the DNBF Common Stock or the
BYL Common Stock, as the case may be. In addition, another condition to the
obligation of BYL to effect the Merger is that, unless waived prior to the
Effective Time, the DNBF Shareholders voting against the approval of the
Agreement or giving notice in writing at or before the approval of the Agreement
that such DNBF Shareholders dissent from the Agreement, and actually perfect
such Dissenters' Rights, in the aggregate hold not more than five percent of
DNBF Common Stock (the "Dissenters' Rights Condition").
WAIVER AND AMENDMENT
Prior to the Effective Time, any provision of the Agreement may be waived by
the party benefited by the provision or by both parties, or amended or modified
at any time (including the structure of the transaction) by an agreement in
writing between the parties and approved by the Boards (or duly authorized
committee thereof). However, after the vote by the Shareholders of DNBF or BYL,
no principal term of the Merger may be amended or revised without the approval
of the Shareholders of DNBF or BYL, as the case may be. See "The Merger
Agreement--Waiver and Amendment."
TERMINATION
The Agreement may be terminated, and the Merger abandoned, prior to the
Effective Time, either before or after its approval by the Shareholders, upon
the occurrence of various events and under certain circumstances, including by
the mutual consent of the Companies; by either party in the event of the failure
of the relevant Shareholders to approve the principal terms of the Merger at the
relevant Meeting; by either party upon the failure to obtain any approval,
consent or waiver of a governmental authority
13
<PAGE>
required to permit consummation of the transactions contemplated by the
Agreement; by DNBF in the event that shares of BYL Common Stock trade above
certain price levels prior to the Effective Time; or by BYL in the event that
shares of BYL Common Stock trade below certain price levels prior to the
Effective Time. Under certain circumstances a termination fee equal to all costs
and expenses, plus 20% of such expenses, incurred by the other party in
connection with the Agreement may be payable by BYL or DNBF to the other party
upon termination of the Agreement. See "The Merger Agreement--Termination."
WARRANT AGREEMENT
As an inducement and condition to BYL's entering into the Agreement, BYL and
DNBF entered into a Warrant Agreement, dated as of January 29, 1998, between
DNBF as issuer and BYL as grantee (the "Warrant Agreement"), pursuant to which
DNBF has granted to BYL an irrevocable option (the "Warrant") to purchase up to
58,000 shares of DNBF Common Stock (or such number of shares of DNBF Common
Stock as shall constitute 19.9 percent of the then outstanding DNBF Common
Stock) at a price of $45.00 per share, subject to adjustment in certain
circumstances. The Warrant is exercisable only under certain limited and
specifically defined circumstances, which generally relate to an acquisition of
control of, or a significant equity interest in or significant assets of, DNBF
by a third party, or certain proposals or offers with respect thereto. To the
best of the Companies' knowledge, none of such events has occurred as of the
date hereof. The purchase of DNBF Common Stock pursuant to the Warrant Agreement
is subject to compliance with applicable law, including receipt of any necessary
approvals under the BHCA. See "The Warrant Agreement."
COMPARISON OF SHAREHOLDER RIGHTS
The rights of DNBF Shareholders currently are determined by reference to the
CGCL, DNBF's Articles of Incorporation and DNBF's Bylaws. At the Effective Time,
DNBF Shareholders will become shareholders of the Surviving Corporation. Their
rights as shareholders will then be determined by reference to the CGCL, BYL's
Articles of Incorporation and BYL's Bylaws. See "Description of BYL Capital
Stock and Comparison of Shareholder Rights."
RISK FACTORS
In deciding whether to vote for the approval of the principal terms of the
Merger, Shareholders should carefully evaluate the matters set forth under "Risk
Factors" herein in addition to the other matters described herein.
MARKETS AND MARKET PRICES
There were, as of the BYL Record Date, approximately 800 holders of record
of BYL Common Stock. No shares of BYL's serial preferred stock have been issued
or are outstanding. BYL Common Stock is designated for quotation on the Nasdaq
National Market under the symbol "BOYL."
As of the DNBF Record Date, there were approximately 150 holders of record
of DNBF Common Stock. DNBF Common Stock is not listed with any securities
exchange or quoted on any automated quotation system. Historically, little
trading has occurred in DNBF Common Stock.
The outstanding equity securities of BYL 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 Corporations Code. Prior to the reorganization of BYL as a holding
company for BOYL in November 1997, BOYL paid no dividends on common stock in
1996. During 1997, BOYL paid quarterly cash dividends of $0.05 per share, and
BYL has continued its policy of paying quarterly cash dividends. On June 30,
1997, BOYL completed a four-for-three stock split of the issued and outstanding
shares.
14
<PAGE>
Management of BYL is aware of five (5) securities dealers who maintain an
inventory and make a market in BYL Common Stock. The market makers are Ryan,
Beck & Co., Wedbush Morgan Securities, Inc., Sutro & Co., Sandler, O'Neill &
Partners, and Herzog, Heine & Geduld.
The information set forth in the table below summarizes for the periods
indicated, the bid and ask prices of BOYL and BYL Common Stock based upon
information provided by Nasdaq, which became the BOYL's market maker in the
second quarter of 1996 when the BOYL'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.
The following quotes have been adjusted for the four-for-three stock split
effective June 30, 1997. Additionally, there may have been transactions at
prices other than those shown below:
<TABLE>
<CAPTION>
BYL
COMMON STOCK(11)
--------------------
<S> <C> <C>
HIGH LOW
--------- ---------
1996
- -----------------------------------------------------------------------------
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>
- ------------------------
(11) Prior to June 13, 1996, there was a limited market for BYL Common Stock
and consequently no quotations are available. On June 13, 1996, BYL Common
Stock was designated for quotation on the Nasdaq National Market. The
prices listed above for periods subsequent to June 13, 1996 are as
reported by the Nasdaq National Market System. In addition, prior to
November 19, 1997, BYL Common Stock traded under BOYL's name. On November
19, 1997, BOYL completed the reorganization of BYL as its bank holding
company, and BYL's Common Stock began trading on that date.
No established public trading market for DNBF Common Stock presently exists.
Historically, little trading has occurred. Reliable information concerning the
prices at which DNBF Common Stock has traded in private, negotiated transactions
is not publicly available or generally known to DNBF. On occasion, DNBF has
become aware of the trading price of its stock in private transactions.
Information concerning these trading prices has been omitted on DNBF's belief
that such prices are not necessarily representative of the market price for DNBF
Common Stock during any particular period. The most recent privately negotiated
trade between individuals which is known to management occurred in May 1997 when
121 share were sold at $24.90 per share. In December 1997 DNBF repurchased 100
shares at $33.00 per share. No trades have occurred since execution of the
Agreement was announced.
The closing price of BYL Common Stock on the day prior to the announcement
of the Merger on January 28, 1998 of which BYL is aware was $19.75. The trading
price of BYL Common Stock, as reported by the Nasdaq National Market, on
, 1998, was $ . The estimated fair market value of DNBF
Common Stock on January 28, 1998, the last day before the announcement of the
execution of the Agreement, was $40.00 per share as determined by H & A.
Assuming (i) the estimated exchange ratio is 4.585, (ii) the Stipulated
Value of BYL Stock of $18.75 does not change, (iii) 232,423 shares of DNBF are
issued and outstanding at the Closing, (iv) no Dissenters' Rights are perfected
by DNBF Shareholders and (v) no cash is paid in lieu of fractional shares,
15
<PAGE>
approximately 1,066,000 shares of BYL Common Stock would be issued in the
Merger. Based upon the 1,553,196 shares of BYL Common Stock outstanding on the
BYL Record Date (as defined herein) and the 282,034 shares of BYL Common Stock
reserved for issuance upon exercise of employee stock options to acquire BYL
Common Stock outstanding on the BYL Record Date, and assuming no Dissenters'
Rights are perfected by any Shareholders and no cash is paid in lieu of
fractional shares, shares held by the BYL and DNBF Shareholders after
consummation of the Merger are estimated to represent (i) 59.31 percent and
40.69 percent, respectively, of the Surviving Corporation, if none of the shares
of DNBF Common Stock or BYL Common Stock which were reserved for issuance on the
DNBF Record Date and the BYL Record Date, respectively, were outstanding on the
Effective Time, and (ii) 63.26 percent and 36.74 percent, respectively, if all
shares of DNBF Common Stock and BYL Common Stock which were reserved for
issuance on the DNBF Record Date and the BYL Record Date, respectively, were
issued by the Effective Time.
Because the Stipulated BYL Share Value is fixed within certain limits
pursuant to the Agreement, a change in the trading price of BYL Common Stock
before the Effective Time will affect the implied market value of the BYL Common
Stock to be received in the Merger by DNBF Shareholders. THERE CAN BE NO
ASSURANCE AS TO THE MARKET PRICE OF BYL COMMON STOCK AT ANY TIME BEFORE, AT OR
AFTER THE EFFECTIVE TIME. SHAREHOLDERS OF BYL AND DNBF ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR BYL COMMON STOCK.
Upon consummation of the Merger, it is expected that there will be
approximately 950 holders of record of BYL Common Stock.
16
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
BYL
The following summarizes historical financial data for the five years ended
December 31, 1997. The data should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included or
incorporated by reference in this Joint Proxy Statement/Prospectus. All share
data has been adjusted to reflect the 4-for-3 Stock Split at BOYL effective June
30, 1997 (amounts in thousands, except per share data).
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996(1) 1995 1994 1993
--------- --------- --------- --------- ---------
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
Provisions 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 $ 8.43 $ 8.68 $ 6.70 $ 5.87
Tangible Book Value....................................... $ 8.57 $ 7.35 $ 8.68 $ 6.70 $ 5.87
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 47,865
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 1 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>
- ------------------------------
(1) Following the receipt of all necessary regulatory approvals, on June 14,
1996, BOYL acquired Bank of Westminster ("BOW"), pursuant to the terms of an
Agreement and Plan of Reorganization dated January 12, 1996. BOYL acquired
100% of the outstanding common stock of BOW for $6,174,000 in cash. BOW had
assets of approximately $54,923,000. At the time of such acquisition, BOYL
also raised approximately $7.8 million in additional equity in a firmly
underwritten offering by issuing 1,073,000 shares of BOYL Common Stock as
adjusted for the four for three stock split effective June 30, 1997. BOW's
results of operations are included only since the second quarter of fiscal
1996. Due to the relatively large size of this transaction, any comparison
of data as of and for the years ended December 31, 1996 and December 31,
1997 to data as of or for prior dates or periods may not be meaningful. On
November 19, 1997, BOYL completed the reorganization of BYL as its bank
holding company, and BYL's Common Stock began trading on that date.
17
<PAGE>
DNBF
SELECTED FINANCIAL DATA
The following table reflects selected consolidated financial data relating
to the operations in the past five years of DNBF and DANB, which should be read
in conjunction with the consolidated financial statements, and notes thereto,
for DNBF included in this Joint Proxy Statement/Prospectus (in thousands, except
for per share data):
<TABLE>
<CAPTION>
AS OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income.......................................... $ 5,439 $ 5,144 $ 5,267 $ 5,021 $ 5,206
Interest Expense......................................... 1,897 1,781 1,712 1,578 1,759
--------- --------- --------- --------- ---------
Net Interest Income...................................... 3,542 3,363 3,555 3,443 3,447
Provision for Loan Losses................................ 45 20 -- 191 242
--------- --------- --------- --------- ---------
Net Interest Income After Provision for Loan Losses...... 3,497 3,343 3,555 3,252 3,205
Noninterest Income....................................... 1,118 1,099 1,064 995 1,193
Noninterest Expense...................................... 3,510 3,383 4,116 3,697 3,498
--------- --------- --------- --------- ---------
Income Before Income Taxes............................... 1,105 1,059 503 550 900
Income Taxes............................................. 360 345 155 174 285
--------- --------- --------- --------- ---------
Net Income............................................... $ 745 $ 714 $ 348 $ 376 $ 615
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dividends Paid........................................... $ 210 $ 169 $ 89 $ 187 $ 186
PER SHARE DATA:
Net Income--Basic........................................ $ 3.55 $ 3.38 $ 1.57 $ 1.61 $ 2.64
Net Income--Diluted...................................... $ 3.44 $ 3.37 $ 1.57 $ 1.61 $ 2.64
Dividends................................................ $ 1.00 $ 0.80 $ 0.40 $ 0.80 $ 0.80
Book Value............................................... $ 33.22 $ 30.92 $ 28.92 $ 26.36 $ 26.74
STATEMENTS OF FINANCIAL CONDITION SUMMARY:
Total Assets............................................. $ 73,419 $ 67,288 $ 66,088 $ 63,946 $ 70,416
Total Deposits........................................... 65,099 59,690 59,270 55,614 52,275
Total Loans, net of deferred fees........................ 45,957 41,643 36,380 35,860 41,633
Allowance for Loan Losses................................ 402 406 467 424 820
Total Shareholders' Equity............................... 7,720 6,496 6,116 6,138 6,231
SELECTED RATIOS:
Return on Average Assets................................. 1.05% 1.08% 0.55% 0.56% 0.92%
Return on Average Equity................................. 10.96% 11.41% 5.68% 6.08% 10.18%
Average Loans as a Percent of Average Deposits........... 68.12% 65.16% 59.84% 72.12% 85.69%
Allowance for Loan Losses to Total Loans................. 0.87% 0.97% 1.28% 1.18% 1.97%
Average Capital to Average Assets........................ 9.62% 9.43% 9.72% 9.21% 9.00%
Tier I Capital to Risk-Weighted Assets--DANB............. 12.20% 12.50% 12.30% 12.60% 12.04%
Total Capital to Risk-Weighted Assets--DANB.............. 13.00% 13.40% 13.30% 13.60% 13.29%
</TABLE>
18
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth certain summary unaudited pro forma combined
financial data for BYL after giving effect to the Merger, as if it had occurred
as of the beginning of each of the periods presented and using the estimated
Conversion Number of 4.585 and accounting for the Merger as a pooling-of-
interests. See "The Merger--Accounting Treatment." This information should be
read in conjunction with the historical consolidated financial statements of BYL
and DNBF including the notes thereto, appearing elsewhere in this Joint Proxy
Statement/Prospectus or incorporated herein by reference. See "Unaudited Pro
Forma Combined Condensed Financial Information."
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
AS OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996(1) 1995
--------- --------- ---------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income................................................................ $ 18,455 $ 12,642 $ 9,746
Interest Expense............................................................... 6,057 3,841 2,757
--------- --------- ---------
Net Interest Income............................................................ 12,398 8,801 6,989
Provision for Loan Losses...................................................... 778 364 262
--------- --------- ---------
Net Interest Income After Provision for Loan Losses............................ 11,620 8,437 6,727
Noninterest Income............................................................. 15,919 8,752 6,726
Noninterest Expense............................................................ 22,716 14,044 11,211
--------- --------- ---------
Income Before Income Taxes..................................................... 4,823 3,145 2,242
Income Taxes................................................................... 1,969 1,229 872
--------- --------- ---------
Net Income..................................................................... $ 2,854 $ 1,916 $ 1,370
--------- --------- ---------
--------- --------- ---------
PER SHARE DATA:
Net Income--Basic.............................................................. $ 1.14 $ 0.94 $ 0.86
Net Income--Diluted............................................................ $ 1.08 $ 0.92 $ 0.78
</TABLE>
- ------------------------
(1) On June 14, 1996, BOYL acquired Bank of Westminster. At June 30, 1996, BOYL
had approximately $117.7 million in assets, $61.5 million in net loans and
$103.8 million in deposits. At the time of such acquisition, BOYL also
raised approximately $7.8 million in additional equity in an underwritten
public offering by issuing 1,073,000 shares of BOYL Common Stock, as
adjusted for the four-for-three stock split effective June 30, 1997. Bank of
Westminster's results of operations are included only since the fourth
quarter of fiscal 1996. Due to the relatively large size of this
transaction, any comparison of data as of and for the year ended December
31, 1996 and 1997 against data as of or for prior dates or periods may not
be meaningful. On November 19, 1997, BOYL completed the reorganization of
BYL as its bank holding company, and BYL's Common Stock began trading on
that date.
19
<PAGE>
SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA
The following table sets forth for BYL Common Stock and DNBF Common Stock
certain selected historical and unaudited pro forma equivalent per share data at
the end of and for each of the three years ended December 31, 1997, giving
effect to the Merger using the pooling-of-interests method of accounting. The
information is derived from the historical consolidated financial statements of
BYL and the historical financial statements of DNBF, including the related notes
thereto, and the pro forma combined financial information giving effect to the
Merger, including the related notes thereto, appearing elsewhere herein. The
information below should be read in conjunction with the historical and pro
forma combined financial information of BYL and DNBF, including the notes
thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus or
incorporated herein by reference. See "Unaudited Pro Forma Combined Condensed
Financial Information."
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Earning Per Share--Diluted(1)
BYL--Historical.................................................................... $ 1.28 $ 1.04 $ 1.39
DNBF--Historical................................................................... $ 3.44 $ 3.37 $ 1.57
BYL Combined Pro Forma............................................................. $ 1.08 $ 0.92 $ 0.78
DNBF Equivalent Pro Forma.......................................................... $ 4.95 $ 4.22 $ 3.58
Cash Dividends Per Share
BYL--Historical.................................................................... $ 0.20 $ -- $ --
DNBF--Historical................................................................... $ 1.00 $ 0.80 $ 0.40
Pro Forma Cash Dividends Per Share................................................. $ 0.21 $ 0.08 $ 0.06
Book Value Per Share(2)
BYL................................................................................ $ 9.59 $ 8.43 $ 8.68
DNBF............................................................................... $ 33.22 $ 30.92 $ 28.92
BYL Combined Pro Forma............................................................. $ 8.40 $ 7.78 $ 7.07
DNBF Equivalent Pro Forma.......................................................... $ 38.51 $ 35.67 $ 32.42
</TABLE>
- ------------------------
(1) The BYL combined pro forma diluted earnings per common share were calculated
by using aggregate historical income information for the Companies divided
by the average pro forma shares outstanding (including dilution) of the
combined entity. The pro forma shares of the combined entity were calculated
by combining the historical BYL shares with the historical DNBF shares
multiplied by the estimated exchange ratio of 4.585. See "The Merger
Agreement--Conversion of DNBF Common Stock." The DNBF equivalent proforma
earnings per share amounts were computed by multiplying the BYL combined pro
forma amounts by the estimated exchange ratio of 4.585.
(2) The BYL combined pro forma book value per share is based on the aggregate
historical common shareholders' equity of the Companies divided by the total
pro forma common shares of the combined entity based on the estimated
Exchange Ratio of 4.585. The DNBF equivalent pro forma book value per share
at period end represents the BYL pro forma amounts multiplied by the
estimated exchange ratio of 4.585. See "Merger Agreement--Conversion of DNBF
Common Stock."
20
<PAGE>
RISK FACTORS
IN ADDITION TO THE INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE, PROSPECTIVE INVESTORS
IN BYL, INCLUDING DNBF SHAREHOLDERS CONSIDERING THE PROPOSAL TO APPROVE THE
PRINCIPAL TERMS OF THE MERGER, AND THE BYL SHAREHOLDERS CONSIDERING THE PROPOSAL
TO APPROVE THE PRINCIPAL TERMS OF THE MERGER, SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS, AMONG OTHERS, BEFORE MAKING ANY FINAL DECISION.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT. ALTHOUGH EACH OF THE COMPANIES BELIEVES THAT ITS PLANS, INTENTIONS
AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE,
NEITHER CAN GIVE ANY ASSURANCE THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL
BE ACHIEVED. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANIES' FORWARD-LOOKING STATEMENTS ARE SET FORTH BELOW
AND ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. FURTHERMORE, THE
COMPANIES DO NOT INTEND TO UPDATE OR REVISE THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. THE SHAREHOLDERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON ANY OF THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN. ALL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANIES OR PERSONS ACTING ON
EITHER OF THEIR BEHALVES ARE QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS SET FORTH HEREIN.
COMPETITION
The banking business in California generally, and in the Companies' service
areas in particular, is highly competitive with respect to both loans and
deposits and is dominated by a relatively small number of major banks which have
many offices operating throughout wide geographic areas. In addition, there are
numerous other independent commercial banks within BYL's and DNBF's primary
service areas, many of which have greater resources. Certain of BYL's and DNBF's
competitors may be better able to respond to changing capital and other
regulatory requirements and better able to maintain or improve market share.
ABILITY TO INTEGRATE THE OPERATIONS OF BYL AND DNBF
Based on the unaudited pro forma financial information as of December 31,
1997 contained in this Proxy Statement/Prospectus, including the assumptions
under which such pro forma financial statements were prepared, following the
completion of the Merger, BYL would have had net loans held for investment of
$137.6 million, loans held for sale of $47.2 million, total investment
securities of $23.4 million, total assets of $238.0 million, total deposits of
$207.9 million, and total shareholders' equity of $22.0 million. The Merger will
add $73.3 million in assets to BYL and increase the number of full service
offices from five to eight. No assurance can be given that the pro forma
financial statements or the assumptions on which they are based, including
anticipated expense reductions, are accurate or will be realized.
Because the markets in which the Companies operate are highly competitive
and because of the inherent uncertainties associated with merging two companies,
there can be no assurance that the Surviving Corporation will be able to realize
fully the operating efficiencies BYL currently expects to realize as a result of
the Merger and the consolidation of the administrative operations of the
Companies or that such operating efficiencies will be realized in the time frame
currently anticipated. The assimilation of DNBF will place increased demands on
management of BYL. The significant increase in assets as a result of the Merger,
and BYL's ability to integrate DNBF and implement BYL's operating strategy
21
<PAGE>
increase the possible risks inherent in an investment in BYL. See "The
Merger--Background of the Merger" and "--Reasons for the Merger; Recommendations
of the Boards of Directors."
GENERAL BUSINESS RISK
The business of the Companies is subject to various business risks.
Historically, BOYL 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.
BOYL's current operating strategy emphasizes: (i) expanding its programs for
originating and selling nonconforming residential mortgage loans ("N/C
Mortgages") and SBA guaranteed loans; (ii) expanding its programs for
originating automobile installment loans; (iii) continued focus on providing
personalized, quality banking products to small-to-medium size businesses,
professionals, retail customers and to the local community; and (iv) continued
expansion of BOYL, primarily in Orange County, California, through internal
growth and through selective acquisitions of financial institutions or the
selective acquisition of branches of such institutions. Other than the Agreement
with DNBF, the BYL or BOYL has no other written or oral agreements for such
acquisitions.
The volume of loan originations is dependent upon demand for loans of the
type originated and serviced by the Companies. The level of consumer confidence,
fluctuations in real estate values, fluctuations in prevailing interest rates
and fluctuations in investment returns expected by the financial community could
combine to make loans of the type originated by the Companies less attractive.
In addition, the Companies may be adversely affected by other factors that could
(a) increase the cost to the borrower of loans originated by the Companies, (b)
create alternative lending sources for such borrowers, or (c) increase the cost
of funds of the Companies at a faster rate than any increase in interest income,
thereby narrowing their net interest rate margin. In recent months, the
continued recovery of the Southern California economy, particularly in Orange
County and Riverside County, has resulted in strong growth in deposits at both
BYL and DNBF. Although both the Companies have also seen continued improvement
in loan demand consistent with overall market growth during the continued
recovery of the Southern California economy, the increase in demand to date has
not been sufficient to permit DNBF to utilize fully new deposits to fund loans,
and accordingly DNBF has increased its relative holdings of securities
investments. Managements of both the Companies believe that loan demand will
continue to improve, but there can be no assurance that there will be sufficient
loan demand in the future to keep pace with increases in deposits such that
desirable levels of securities held relative to loans can be maintained.
Governmental interventions through elimination of tax benefits for home equity
loans, regulation of an increased scope of loans or introduction of additional
regulations aimed at mortgage and SBA loans could also adversely affect the
Companies' business.
RISKS ASSOCIATED WITH MORTGAGE ORIGINATION AND SALE ACTIVITIES
BYL has been actively involved in the origination and sale of N/C Mortgages
to various institutional investors. For the year ended December 31, 1997, the
BOYL originated $190 million of mortgage loans, sold $164 million of mortgage
loans in the secondary market, and generated $13 million of revenue from
interest earned and fees and premiums on sales of mortgage loans. At December
31, 1997, BYL held $42 million in mortgage loans that were designated for sale.
All of these loans were secured by one- to four-family residences. Such mortgage
origination activities generate income primarily from gain on sale of mortgage
loans and from the sale of servicing rights for loans sold on a
servicing-released basis. Generally,
22
<PAGE>
the profitability of mortgage origination and sale activities depends on
maintaining a sufficient volume of loan originations and the availability of
institutional investors to purchase the loans. Changes in the level of interest
rates and the local economy affect the amount of loans originated by BYL and,
thus, the amount of servicing rights generated as well as origination and loan
fees earned. Changes in purchasing policies of institutional investors or
increases in defaults after funding could substantially reduce the amount of
loans sold to such investors.
The BOYL has sought to address the foregoing risks by emphasizing N/C
Mortgages, which are loans with loan to value ratios that vary in accordance
with the risk involved in the credit, to owners of small- to medium-size
businesses and low-income individuals who do not normally qualify for
conventional mortgages at larger institutions, by employing experienced officers
that have successfully managed a mortgage banking department, by underwriting
such loans to meet the credit standards of investors in the secondary market,
and by selling such loans in the secondary market to a wide variety of
investors.
RISKS ASSOCIATED WITH SMALL BUSINESS ADMINISTRATION LOANS
BYL realized approximately $7 million in revenue during 1997 from interest
earned, fees and servicing income and premiums received on secondary market
sales of its SBA loans. BYL has generally sold the guaranteed portion and has
occasionally sold part of the unguaranteed portion in the secondary market.
There can be no assurance that BYL will be able to continue originating these
loans, or that a secondary market will exist for, or that BYL will continue to
realize premiums upon the sale of, the guaranteed and unguaranteed portions of
the SBA loans. The federal government presently guarantees 75% to 80% of the
principal amount of each qualifying SBA loan. There can be no assurance that the
federal government will maintain the SBA program, or if it does, that such
guaranteed portion will remain at its current funding level. Furthermore, there
can be no assurance that BYL will retain its preferred lender status, which,
subject to certain limitations, allows BYL to approve and fund SBA loans without
the necessity of having the loan approved in advance by the SBA, or that if it
does, that the federal government will not reduce the amount of such loans which
can be made by BYL. In addition, BYL relies on the expertise of a few key
officers in the SBA Loan Division. The retention of such officers is important
to the success of the Division and the amount of income BYL derives from the
Division. BYL believes that its SBA loan portfolio does not involve more than a
normal risk of collectability. BYL incurs the full credit risk on the
non-guaranteed portion of the SBA loans, which represents substantially all of
its SBA loan portfolio. In the event of default on an SBA loan, BYL's pursuit of
remedies against a borrower is subject to SBA approval, and where the SBA
establishes that its loss is attributable to deficiencies in the manner in which
the loan application has been prepared and submitted, the SBA may decline to
honor its guarantee with respect to the BYL's SBA loans or it may seek the
recovery of damages from BYL, although no assurance can be given that the SBA
would not attempt to do so in the future. The SBA has never declined to honor
its guarantees with respect to the BYL's SBA loans.
DEPENDENCE ON KEY PERSONNEL
BYL's success depends to a significant extent upon the performance of its
President and its executive officers, the loss of any one of these individuals
could have a materially adverse effect on BYL. Additionally, retention of the
officers in charge of the BYL's Mortgage Banking and SBA Loan Division is
critical to BYL's success. BYL believes that its success will depend, in large
part, upon its ability to retain such personnel. There can be no assurance that
BYL will be successful in retaining such personnel.
CONCENTRATION OF OPERATIONS; RECESSIONARY ENVIRONMENTS; DECLINE IN REAL ESTATE
VALUES
The Companies currently limit their business to Southern California, with
the majority of their business concentrated in Orange and Riverside counties,
and the business of the Surviving Corporation after the Merger is expected to
continue to be concentrated in Southern California for the foreseeable
23
<PAGE>
future. Although the Surviving Corporation intends to expand within Southern
California, there can be no assurance when or if such expansion will take place.
Consequently, the results of operations and financial condition of the Companies
are dependent upon general trends in the Southern California economies and
residential and commercial real estate markets. The risks to which the business
of the Companies is subject, and to which the business of the Surviving
Corporation will be subject, become more acute during an economic slow-down or
recession such as that experienced during the recent California recession.
During such periods, delinquencies and foreclosures generally increase and could
result in increased incidents of claims and legal actions and a decline in
demand for the services provided by the Companies. In addition, a significant
decline in market values of properties of the type which secure loans originated
by the Companies would reduce homeowners' equity in their homes and businesses'
equity in their properties, thereby reducing their borrowing power and also
weakening collateral coverage on loans made previously by the Companies. Such a
decline could also diminish the market for loans originated by the Companies.
Any of the foregoing could have a material adverse effect on the financial
position and results of operations of the Surviving Corporation, and could have
a greater adverse impact on the Surviving Corporation than on certain of its
competitors which may have greater resources and capital. In addition, the
concentration of the Surviving Corporation's operations in Orange and Riverside
counties exposes it to greater risk in the event of catastrophes, such as
earthquakes, fires and floods in this region, than other banking companies with
a wider geographic base. Although there are signs that the economic recession is
improving, in light of the economic recession and the impact it may continue to
have on the Southern California real estate market, this real estate dependence
increases the risk of additional nonperforming loans and the possibility of loss
in BYL's loan portfolio.
BYL believes that its allowance for loan losses is adequate since it
believes that the value of the collateral securing nonperforming loans reduced
the potential for losses on these loans. Although economic conditions in Orange
County are by several measures improving, any recurrence or worsening of the
recently experienced conditions is likely to have an adverse effect on BYL's
business, including the level of nonperforming loans, the cash flow of borrowers
and their ability to repay outstanding loans, the value of BYL's real estate
collateral, and the demand for new loan originations.
Industry experience indicates that a portion of a bank's loans will become
delinquent and a portion of the loans will require partial or entire charge off.
Regardless of the underwriting criteria utilized by BYL, losses may be
experienced as a result of various factors beyond BYL's control, including,
among others, changes in market conditions affecting the value of security and
problems affecting the credit of the borrower. There can be no assurance that
BYL will not experience significant losses in its loan portfolio which may
require significant additions to the loan loss reserves.
INTEREST RATE RISK
It is expected that the Surviving Corporation, through its subsidiaries,
will continue to realize income primarily from the differential or "spread"
between the interest earned on loans, securities and other interest-earning
assets, and interest paid on deposits, borrowings and other interest-bearing
liabilities. Net interest spreads are affected by the difference between the
maturities and repricing characteristics of interest-earning assets and
interest-bearing liabilities. In addition, loan volume and yields are affected
by market interest rates on loans, and rising interest rates generally are
associated with a lower volume of loan originations. There can be no assurance
that the Surviving Corporation's interest rate risk will be minimized or
eliminated. In addition, an increase in the general level of interest rates may
adversely affect the ability of certain borrowers to pay the interest on and
principal of their obligations. Accordingly, changes in levels of market
interest rates could materially adversely affect the Surviving Corporation's net
interest spread, asset quality, loan origination volume and overall results of
operation.
24
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Shares of BYL Common Stock eligible for future sale could have a dilutive
effect on the market for BYL Common Stock and could adversely affect market
prices. As of the BYL Record Date, the Articles of Incorporation of BYL
authorize 50,000,000 shares of BYL Common Stock, of which 1,553,196 shares were
outstanding, and 25,000,000 shares of Preferred Stock, of which no shares were
outstanding, and 1,066,000 additional shares of BYL Common Stock are anticipated
to be issued in the Merger to DNBF Shareholders, assuming (i) no shares of DNBF
Common Stock reserved for issuance on the BYL Record Date are issued on or prior
to the Effective Time, (ii) the estimated exchange ratio is 4.585, (iii) the
Stipulated Value of BYL Stock of $18.75 does not change, (iv) no Dissenters'
Rights are perfected by DNBF Shareholders and (v) no cash is paid in lieu of
fractional shares. Pursuant to its stock option plans, BYL had outstanding
options to purchase an additional 288,700 shares of BYL Common Stock on the BYL
Record Date with exercise prices of between $4.875 and $12.75.
In addition, BYL's obligation to effect the Merger is subject to the
satisfaction or waiver prior to the Effective Time of the condition that DNBF
Shareholders or BYL Shareholders voting against approval of the Agreement or
giving notice in writing to DNBF or BYL, as the case may be, at or before the
applicable Meeting, that such shareholder dissents from the Agreement in the
aggregate hold not more than ten percent of the DNBF Common Stock or the BYL
Common Stock, as the case may be. See "The Merger Agreement--Conditions."
DNBF did not have any outstanding options to purchase shares of DNBF Common
Stock on the date of the Agreement. As of December 31, 1997, all DNBF optionees
exercised options totally 22,500 shares at an exercise price of $23.04. If the
Merger is consummated, any options and rights to purchase shares of DNBF Common
Stock outstanding immediately prior to the Effective Time will be cancelled. See
"The Merger Agreement--Conversion of DNBF Common Stock." Sales of substantial
amounts of BYL Common Stock in the public market following the Merger could
adversely affect the market price of BYL Common Stock. There are no restrictions
in the Agreement preventing BYL from issuing additional shares.
It is BYL's intention to pursue acquisitions of other financial institutions
from time to time where such acquisitions are believed by BYL to enhance
shareholder value or satisfy other strategic objectives, although there are no
specific pending or contemplated acquisitions at present. Such acquisitions, if
any, could be accomplished by the issuance of additional shares of BYL Common
Stock or other securities convertible into or exercisable for BYL Common Stock.
There can be no assurance as to the market value of BYL Common Stock after
the Merger, which market value may be affected by the dilutive effects of the
matters described above, if any, and other factors.
REGULATION
The operations of the Companies are subject to extensive regulation by
federal, state and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of their respective operations. Each of the
Companies believes that it is in substantial compliance in all material respects
with applicable federal, state and local laws, rules and regulations. Because
the business of each of the Companies is highly regulated, the laws, rules and
regulations applicable to the Companies are subject to regular modification and
change. Various laws, rules and regulations are currently under consideration
which, if adopted, would impact the Surviving Corporation. There can be no
assurance that these proposed laws, rules and regulations, or other such laws,
rules or regulations, will not be adopted in the future. Adoption of such laws,
rules or regulations could make compliance much more difficult or expensive,
restrict the Surviving Corporation's ability to originate, broker or sell loans,
further limit or restrict the amount of commissions, interest or other charges
25
<PAGE>
earned on loans originated or sold by the Surviving Corporation or otherwise
adversely affect the business or prospects of the Surviving Corporation.
MARKET LIQUIDITY OF BYL COMMON STOCK
BOYL Common Stock was designated for quotation on the Nasdaq National Market
on June 14, 1996, and such designation was continued on November 19, 1997 for
BYL Common Stock when the formation of BYL as a bank holding company for BOYL
was completed. There can be no assurance that an active trading market for BYL
Common Stock will continue, or that shareholders of the Surviving Corporation
will be able to resell their securities or otherwise liquidate their investment
without considerable delay, if at all, or considerable impact on the sales
price. See "Summary--Markets and Market Prices."
COMMON STOCK DIVIDEND POLICY
Until January 1997, BOYL had not paid a cash dividend on its Common Stock.
In January 1997, the Board of Directors adopted a policy of paying a quarterly
dividend, and the Board has approved quarterly dividends of $.05 per share in
January, April, July and October, 1997, and BYL approved a cash dividend of $.05
per share in January 1998. Declarations or payments of dividends by the Board of
Directors in the future will depend upon a number of factors, including capital
requirements, regulatory limitations, BYL's financial condition and results of
operations, tax considerations and general economic conditions. In order to pay
such cash dividends, however, BYL must have available cash from earnings on BYL
assets. There are certain limitations on the payment of dividends by BYL. No
assurances can be given that any dividends will be declared or, if declared,
what the amount of dividends will be or whether such dividends, once declared,
will continue.
26
<PAGE>
THE COMPANIES
BYL
BYL is a bank holding company registered under the BHCA, and its principal
business is to serve as a holding company for its banking subsidiary, BOYL. BYL
was organized as a California corporation on April 17, 1997 and commenced
operation as a bank holding company on November 19, 1997. Bank of Westminster
was acquired by BOYL on June 14, 1996.
BYL's principal executive offices are located at 18206 Imperial Highway,
Yorba Linda, California 92886, and its telephone number is (714) 996-1800. BOYL
has five (5) full service branches, and its primary market area is Orange
County, California, with its head office in Yorba Linda, California. BOYL's
Mortgage Division is currently located in Tustin, California. The Bank's SBA
Loan Division is currently located in Mission Viejo, California.
BOYL commenced operations on March 3, 1980. BOYL is not a member of the
Federal Reserve System, and its deposits are insured by the FDIC to the fullest
extent authorized by law. BOYL is subject to examination and comprehensive
regulation by the Commissioner and the FDIC.
The primary focus of BOYL is to provide personalized quality banking
products and services to small-and medium-size businesses, including
professionals, to originate primarily N/C Mortgages in California and various
other states and selling such loans in the secondary market, to originate and
sell SBA guaranteed loans, and to originate and sell automobile installment
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 BOYL to attract and
retain low cost core deposits which provide substantially all of BOYL's funding
requirements.
BOYL's operating strategy emphasizes: (i) expansion of its programs for
originating and selling mortgage loans, SBA guaranteed loans and automobile
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 BOYL 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, other than the Agreement with DNBF, BYL
and BOYL have no other written or oral agreements regarding any such activities.
BOYL has been profitable every year since 1987, and BOYL has improved its
year-to-year earnings since 1993. Management of BOYL believes it is well
positioned to expand prudently and build an independent financial institution in
the Orange County market. BOYL offers a broad range of banking products and
services, including many types of business and personal savings and checking
accounts and other consumer banking services. At December 31, 1997, BOYL had
total assets, total deposits and shareholders' equity of $164,667,000,
$142,836,000 and $14,830,000 respectively.
Additional information relating to BYL is included in documents incorporated
by reference into this Joint Proxy Statement-Prospectus. See "Available
Information" and "Incorporation of Certain Information by Reference."
QUARTERLY DIVIDEND
On January 30, 1997, the BYL Board approved the institution of a quarterly
dividend and thereafter declared a dividend of $0.05 per share of BYL Common
Stock payable on March 31, 1997 to BYL Shareholders of record on March 7, 1997.
DNBF
DNBF is a bank holding company registered under the BHCA and its principal
business is to serve as a holding company for its banking subsidiary, DANB. DNBF
was incorporated in California on March 23,
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<PAGE>
1987, and conducts operations through its wholly owned subsidiary, DANB, a
national banking association. DNBF's principal executive offices are located at
7710 Limonite Avenue, Riverside, California 92509 and its telephone number is
(909) 360-8065.
DANB was formed in 1982 and has three (3) full service branches located in
its primary market area of Riverside County, California. DANB provides general
commercial banking services to individuals and small- to medium-sized businesses
in its service area of Riverside County. At December 31, 1997, DNBF had
consolidated total assets, total deposits and shareholders' equity of
$73,419,000, $65,099,000 and $7,720,000 respectively.
DANB's primary credit focus is to serve professionals and middle-market
companies, including manufacturers and service providers. Current commercial
lending activities consist primarily of medium-term commercial real estate loans
secured by commercial properties, working capital loans, and accounts receivable
financing. DANB is also active in loan participation purchases and sales. Its
primary focus in this area is to manage potential credit risk by borrower,
industry and concentration. DANB's consumer products are tailored to serve the
financing needs of its retail customers and the executives and employees of its
business clients. Consumer loans consist primarily of home equity lines of
credit, personal lines of credit to high net worth individuals and vehicle
loans.
DANB accepts deposits mostly from small- to medium-sized businesses and
their employees, high net worth individuals, and other consumers. DANB's deposit
accounts are insured by the FDIC to the extent permitted by law. DANB's primary
federal regulator is the Office of the Comptroller of the Currency
("Comptroller").
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed data combines the
historical consolidated condensed financial statements of BYL, and the
historical consolidated condensed financial statements of DNBF, giving effect to
the Merger as if it had been effective on December 31, 1997, with respect to the
Pro Forma Combined Condensed Balance Sheets, and as of the beginning of the
periods indicated with respect to the Pro Forma Combined Condensed Statements of
Income. This information is presented under pooling-of-interests accounting.
This information should be read in conjunction with the historical consolidated
financial statements of the Companies, including their respective notes thereto,
which are included and incorporated by reference into this Joint Proxy
Statement/Prospectus, and in conjunction with the combined condensed historical
selected financial data and other pro forma combined financial information,
including the notes thereto, appearing elsewhere in this Joint Proxy
Statement/Prospectus. See "Incorporation of Certain Information by Reference."
The effect of estimated merger and reorganization costs expected to be incurred
in connection with the Merger has been reflected in the unaudited pro forma
combined condensed balance sheets; however, since the estimated costs are
nonrecurring, they have not been reflected in the unaudited pro forma combined
condensed statements of income. However, such costs will be charged to income in
the period in which the Merger is consummated. See Note 2 of the Unaudited Pro
Forma Combined Condensed Financial Information. THE UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION DOES NOT GIVE EFFECT TO ANY ANTICIPATED
OPERATING EFFICIENCIES IN CONJUNCTION WITH THE MERGER. The unaudited pro forma
combined condensed balance sheets are not necessarily indicative of the actual
financial position that would have existed had the Merger been consummated on
December 31, 1997, or that may exist in the future. The unaudited pro forma
financial statements of income are not necessarily indicative of the results
that would have occurred had the Merger been consummated on the dated indicated
or that may be achieved in the future. Assuming the consummation of the Merger,
the actual financial position and results of operations will differ, perhaps
significantly, from the pro forma amounts reflected herein because of a variety
of factors, including changes in value and changes in operating results between
the dates of the pro forma financial data and the date on which the Merger takes
place.
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
BYL DNBF PRO FORMA BYL
HISTORICAL HISTORICAL(1) ADJUSTMENTS(2) PRO FORMA
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and Due From Banks................................ $ 7,188 $ 4,706 $ -- $ 11,894
Interest-Bearing Deposits.............................. -- 3,419 -- 3,419
Investment Securities:
Available for Sale................................... 463 9,952 -- 10,415
Held to Maturity..................................... 5,007 7,943 -- 12,950
------------ ------------ ----- ------------
TOTAL INVESTMENT SECURITIES...................... 5,470 17,895 -- 23,365
Loans Held for Sale.................................... 47,150 -- -- 47,150
Net Loans Held for Investment.......................... 91,995 45,555 -- 137,550
Premises and Equipment--Note D......................... 4,402 803 -- 5,205
Other Real Estate Owned................................ 646 278 -- 924
Accrued Interest and Other Assets...................... 7,816 763 (100) 8,479
------------ ------------ ----- ------------
$ 164,667 $ 73,419 $ (100) $ 237,986
------------ ------------ ----- ------------
------------ ------------ ----- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-Bearing.................................. $ 40,537 $ 15,606 $ -- $ 56,143
Interest-Bearing..................................... 102,299 49,493 -- 151,792
------------ ------------ ----- ------------
TOTAL DEPOSITS................................... 142,836 65,099 -- 207,935
Borrowed Funds......................................... 4,000 465 -- 4,465
Accrued Interest and Other Liabilities................. 3,001 135 497 3,633
------------ ------------ ----- ------------
TOTAL LIABILITIES................................ 149,837 65,699 497 216,033
Shareholders' Equity
Common Shares........................................ 10,372 2,251 -- 12,623
Undivided Profits.................................... 4,458 5,497 (597) 9,358
Unrealized Gains on Investments Available for Sale... -- (28) -- (28)
------------ ------------ ----- ------------
TOTAL SHAREHOLDERS' EQUITY....................... 14,830 7,720 (597) 21,953
------------ ------------ ----- ------------
$ 164,667 $ 73,419 $ (100) $ 237,986
------------ ------------ ----- ------------
------------ ------------ ----- ------------
Number of Shares Outstanding........................... 1,546,530 232,423 2,612,189
Book Value Per Share................................... $9.59 $33.22 $8.40
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Data."
29
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR YEAR ENDED DECEMBER 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
BYL DNBF PRO FORMA BYL
HISTORICAL HISTORICAL(1) ADJUSTMENTS(2) PRO FORMA
----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................ $ 12,227 $ 4,072 $ 16,299
Interest on Investment Securities......................... 395 1,140 1,535
Other Interest Income..................................... 394 227 621
----------- ------ ------ -----------
TOTAL INTEREST INCOME................................... 13,016 5,439 -- 18,455
INTEREST EXPENSE
Interest on Money Market and NOW.......................... 728 593 1,321
Interest on Savings Deposits.............................. 814 106 920
Interest on Time Deposits................................. 2,604 1,137 3,741
Interest on Other Borrowings.............................. 14 61 75
----------- ------ ------ -----------
TOTAL INTEREST EXPENSE.................................. 4,160 1,897 -- 6,057
----------- ------ ------ -----------
NET INTEREST INCOME..................................... 8,856 3,542 -- 12,398
Provision for Credit Losses................................. 733 45 778
----------- ------ ------ -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES... 8,123 3,497 -- 11,620
NONINTEREST INCOME
Gains, Fees, and Servicing Income on Loans Sold........... 13,839 -- 13,839
Service Charges, Fees, and Other Income................... 962 1,118 2,080
----------- ------ ------ -----------
14,801 1,118 -- 15,919
NONINTEREST EXPENSE
Salaries and Employee Benefits............................ 12,415 1,658 14,073
Occupancy Expenses........................................ 913 429 1,342
Furniture and Equipment................................... 1,230 158 1,388
Other Expenses............................................ 4,648 1,265 5,913
----------- ------ ------ -----------
19,206 3,510 -- 22,716
----------- ------ ------ -----------
INCOME BEFORE INCOME TAXES.............................. 3,718 1,105 -- 4,823
Income Taxes................................................ 1,609 360 1,969
----------- ------ ------ -----------
NET INCOME.............................................. $ 2,109 $ 745 $ -- $ 2,854
----------- ------ ------ -----------
----------- ------ ------ -----------
Per Share Data
Net Income--Basic......................................... $ 1.37 $ 3.55 $ 1.14
Net Income--Diluted....................................... $ 1.28 $ 3.44 $ 1.08
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Data."
30
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR YEAR ENDED DECEMBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
BYL DNBF PRO FORMA BYL
HISTORICAL HISTORICAL(1) ADJUSTMENTS(2) PRO FORMA
----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................ $ 6,920 $ 3,743 $ 10,663
Interest on Investment Securities......................... 356 1,093 1,449
Other Interest Income..................................... 222 308 530
----------- ------ ------ -----------
TOTAL INTEREST INCOME................................... 7,498 5,144 -- 12,642
INTEREST EXPENSE
Interest on Money Market and NOW.......................... 576 640 1,216
Interest on Savings Deposits.............................. 512 136 648
Interest on Time Deposits................................. 972 893 1,865
Interest on Other Borrowings.............................. -- 112 112
----------- ------ ------ -----------
TOTAL INTEREST EXPENSE.................................. 2,060 1,781 -- 3,841
----------- ------ ------ -----------
NET INTEREST INCOME..................................... 3,438 3,363 -- 8,801
Provision for Credit Losses................................. 344 20 364
----------- ------ ------ -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES... 5,094 3,343 -- 8,437
NONINTEREST INCOME
Gains, Fees, and Servicing Income on Loans Sold........... 6,860 -- 6,860
Service Charges, Fees, and Other Income................... 793 1,099 1,892
----------- ------ ------ -----------
7,653 1,099 -- 8,752
NONINTEREST EXPENSE
Salaries and Employee Benefits............................ 6,158 1,523 7,681
Occupancy Expenses........................................ 717 435 1,152
Furniture and Equipment................................... 667 159 826
Other Expenses............................................ 3,119 1,266 4,385
----------- ------ ------ -----------
10,661 3,383 -- 14,044
----------- ------ ------ -----------
INCOME BEFORE INCOME TAXES.............................. 2,086 1,059 -- 3,145
Income Taxes................................................ 884 345 1,229
----------- ------ ------ -----------
NET INCOME.............................................. $ 1,202 $ 714 $ -- $ 1,916
----------- ------ ------ -----------
----------- ------ ------ -----------
Per Share Data
Net Income--Basic......................................... $ 1.12 $ 3.38 $ 0.94
Net Income--Diluted....................................... $ 1.04 $ 3.37 $ 0.92
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Data."
31
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR YEAR ENDED DECEMBER 31, 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
BYL DNBF PRO FORMA BYL
HISTORICAL HISTORICAL(1) ADJUSTMENTS(2) PRO FORMA
----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................ $ 4,120 $ 3,747 $ 7,867
Interest on Investment Securities......................... 219 1,233 1,452
Other Interest Income..................................... 140 287 427
----------- ------ ------ -----------
TOTAL INTEREST INCOME................................... 4,479 5,267 -- 9,746
INTEREST EXPENSE
Interest on Money Market and NOW.......................... 453 802 1,255
Interest on Savings Deposits.............................. 278 155 433
Interest on Time Deposits................................. 314 687 1,001
Interest on Other Borrowings.............................. -- 68 68
----------- ------ ------ -----------
TOTAL INTEREST EXPENSE.................................. 1,045 1,712 -- 2,757
----------- ------ ------ -----------
NET INTEREST INCOME..................................... 3,434 3,555 -- 6,989
Provision for Credit Losses................................. 262 -- 262
----------- ------ ------ -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES... 3,172 3,555 -- 6,727
NONINTEREST INCOME
Gains, Fees, and Servicing Income on Loans Sold........... 5,157 -- 5,157
Service Charges, Fees, and Other Income................... 505 1,064 1,569
----------- ------ ------ -----------
5,662 1,064 -- 6,726
NONINTEREST EXPENSE
Salaries and Employee Benefits............................ 4,399 1,566 5,965
Occupancy Expenses........................................ 538 461 999
Furniture and Equipment................................... 434 162 596
Other Expenses............................................ 1,724 1,927 3,651
----------- ------ ------ -----------
7,095 4,116 -- 11,211
----------- ------ ------ -----------
INCOME BEFORE INCOME TAXES.............................. 1,739 503 -- 2,242
Income Taxes................................................ 717 155 872
----------- ------ ------ -----------
NET INCOME.............................................. $ 1,022 $ 348 $ -- $ 1,370
----------- ------ ------ -----------
----------- ------ ------ -----------
Per Share Data
Net Income--Basic......................................... $ 1.98 $ 1.57 $ 0.86
Net Income--Diluted....................................... $ 1.39 $ 1.57 $ 0.78
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Data."
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
NOTE 1--BASIS OF PRESENTATION. Certain historical data of DNBF have been
reclassified on a pro forma basis to conform to BYL's classifications.
Transactions between the Companies are not material in relation to the pro forma
combined condensed financial statements, and have not been eliminated form the
pro forma combined amounts. The pro forma number of common shares outstanding,
common shareholders' equity per share, and income per share are based on the
share amounts for BYL plus the historical shares amounts for DNBF multiplied by
an estimated exchange ratio of 4.585.
NOTE 2--MERGER COSTS. The unaudited pro forma combined condensed financial
data reflects BYL management's current estimate, for purposes of pro forma
presentation of the aggregate estimated merger costs of $700,000 ($597,000 net
of taxes, computed using the combined federal and state tax rate of 41.0%)
expected to be incurred in connection with the Merger. While a portion of these
costs may be required to be recognized over time, the current estimate of these
costs has been recorded in the unaudited pro forma combined condensed balance
sheets in order to disclose the aggregate effect of these activities on BYL's
pro forma combined financial position. The estimated aggregate costs include the
following:
<TABLE>
<S> <C>
Severance Costs...................................................... $ 50
Write-Offs Capitalized Data Processing Costs......................... 100
Conversion Costs..................................................... 100
---------
250
Tax Benefit.......................................................... (103)
Investment Banking and Other Professional Fees....................... 450
---------
TOTAL ESTIMATED AGGREGATE COSTS.................................... $ 597
---------
---------
</TABLE>
Since these estimated costs are nonrecurring, they have not been reflected
in the unaudited pro forma combined condensed statements of income. However,
such costs will be charged to income in the period in which the Merger is
consummated. The unaudited pro forma combined condensed statements of income
also does not give effect to any anticipated operating efficiencies in
conjunction with the Merger.
BYL management's cost estimates are forward-looking. While the costs
represent BYL management's current estimate of merger costs that will be
incurred, the ultimate level and timing or recognition of such costs will be
based on the final merger and integration plan to be completed prior to
consummation of the Merger, which will soon be developed by the Companies.
Readers are cautioned that the completion of the Merger and integration plan and
the resulting management plans detailing actions to be undertaken to effect the
Merger will impact these estimates if future developments differ from the
underlying assumptions used by management in determining the current estimate of
these costs.
THE MEETINGS
DATE, TIME AND PLACE
BYL
The BYL Annual Meeting is scheduled to be held at 18206 Imperial Highway,
Yorba Linda, California 92886 on , , 1998 at 5:30 p.m.,
local time.
DNBF
The DNBF Special Meeting is scheduled to be held at the head office of De
Anza National Bank, 7710 Limonite, Riverside, California on Wednesday,
, 1998 at 5:30 p.m., local time.
33
<PAGE>
SHAREHOLDERS ARE REQUESTED TO PROMPTLY SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID PRE-ADDRESSED ENVELOPE.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE MEETING WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE PRINCIPAL TERMS OF THE MERGER AND
OTHER MATTERS TO BE VOTED UPON IN CONNECTION WITH THE MERGER.
MATTERS TO BE CONSIDERED AT THE MEETINGS
BYL
The purpose of the BYL Annual Meeting is to (a) consider and vote upon the
approval of the principal terms of the Merger; (b) elect (3) directors until the
2000 Annual Meeting, until their successors are elected and have qualified; and
(c) consider and act upon such other business as may properly come before the
BYL Annual Meeting or any adjournments or postponements thereof.
THE BYL BOARD HAS, BY UNANIMOUS VOTE, APPROVED THE AGREEMENT AND RECOMMENDS
A VOTE "FOR" APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER. THE BYL BOARD ALSO
RECOMMENDS A VOTE "FOR" THE ELECTION OF THE THREE (3) DIRECTORS UNTIL THE 2000
ANNUAL MEETING, UNTIL THEIR SUCCESSORS ARE ELECTED AND HAVE QUALIFIED.
DNBF
The purpose of the DNBF Special Meeting is to (a) consider and vote upon the
approval of the principal terms of the Merger; and (b) consider and act upon
such other business as may properly come before the DNBF Special Meeting or any
adjournments or postponements thereof.
THE DNBF BOARD HAS, BY UNANIMOUS VOTE, APPROVED THE AGREEMENT AND RECOMMENDS
A VOTE "FOR" APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER.
RECORD DATE; STOCK ENTITLED TO VOTE
BYL
Only holders of record of BYL Common Stock on the BYL Record Date will be
entitled to receive notice of, and to vote at, the BYL Annual Meeting and any
postponements or adjournments thereof.
DNBF
Only holders of record of DNBF Common Stock on the DNBF Record Date will be
entitled to receive notice of, and to vote at, the DNBF Special Meeting and any
postponements or adjournments thereof.
VOTES REQUIRED; QUORUM
BYL
The affirmative vote of the holders of at least a majority of the total
number of outstanding shares of BYL Common Stock entitled to vote at the BYL
Annual Meeting is required to approve the principal terms of the Merger. In the
Election of Directors, the three (3) nominees receiving the highest number of
votes will be elected until the 2000 Annual Meeting.
As of the BYL Record Date, there were 1,553,196 shares of BYL Common Stock
outstanding. Each holder of shares of BYL Common Stock outstanding on the BYL
Record Date will be entitled to one vote for each share held of record upon each
matter properly submitted at the BYL Annual Meeting and any postponement or
adjournment thereof.
34
<PAGE>
BYL will appoint one or three employees to function as inspectors of the
election in advance of the BYL Annual Meeting, to tabulate votes, to ascertain
whether a quorum is present and to determine the voting results on all matters
presented to the BYL Shareholders. A majority of all shares of BYL Common Stock
entitled to vote, represented in person or by proxy, constitutes a quorum.
Abstentions and broker non-votes are each included in the determination of the
number of shares present; however, they are not counted as votes in favor of the
principal terms of the Merger. THE FAILURE TO VOTE, AN ABSTENTION OR A BROKER
NON-VOTE THUS HAS THE SAME EFFECT AS A VOTE AGAINST THE PRINCIPAL TERMS OF THE
MERGER.
If a quorum is not obtained, or fewer shares of BYL Common Stock are voted
in favor of the principal terms of the Merger than the number required for
approval of the principal terms of the Merger, it is expected that the BYL
Annual Meeting will be postponed or adjourned for the purpose of allowing
additional time for obtaining additional proxies or votes, and at any subsequent
reconvening of the BYL Annual Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
BYL Annual Meeting (except for any proxies which have theretofore effectively
been revoked or withdrawn).
DNBF
The affirmative vote of the holders of at least a majority of the total
number of outstanding shares of DNBF Common Stock entitled to vote at the DNBF
Special Meeting is required to approve the principal terms of the Merger.
As of the DNBF Record Date, there were 232,423 shares of DNBF Common Stock
outstanding. Each holder of shares of DNBF Common Stock outstanding on the DNBF
Record Date will be entitled to one vote for each share held of record upon each
matter properly submitted at the DNBF Special Meeting and any postponement or
adjournment thereof.
DNBF will appoint an inspector of the election in advance of the DNBF
Special Meeting to tabulate votes, to ascertain whether a quorum is present and
to determine the voting results on the matter presented to the DNBF
Shareholders. A majority of all shares of DNBF Common Stock entitled to vote,
represented in person or by proxy, constitutes a quorum. Abstentions and broker
non-votes are each included in the determination of the number of shares
present; however, they are not counted as votes in favor of the principal terms
of the Merger. THE FAILURE TO VOTE, AN ABSTENTION OR A BROKER NON-VOTE THUS HAS
THE SAME EFFECT AS A VOTE AGAINST THE PRINCIPAL TERMS OF THE MERGER.
If a quorum is not obtained, or fewer shares of DNBF Common Stock are voted
in favor of the principal terms of the Merger than the number required for
approval of the principal terms of the Merger, it is expected that the DNBF
Special Meeting will be postponed or adjourned for the purpose of allowing
additional time for obtaining additional proxies or votes, and at any subsequent
reconvening of the DNBF Special Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
DNBF Special Meeting (except for any proxies which have theretofore effectively
been revoked or withdrawn).
VOTING OF PROXIES
Shares represented by proxies properly executed and received in time to be
voted at the Meetings will be voted in accordance with the instructions
indicated on the proxies. Proxies which do not contain voting instructions will
be voted "FOR" the proposal to approve the principal terms of the Merger and in
the case of BYL, "FOR" the election of directors. All proxies voted "FOR" such
matters, including proxies on which no instructions are indicated, may, at the
discretion of the proxy holder, be voted "FOR" a motion to adjourn or postpone
the Meetings to another time and/or place for the purpose of soliciting
additional proxies or otherwise; PROVIDED, HOWEVER, that no proxy which is voted
against approval of the
35
<PAGE>
principal terms of the Merger or on which the relevant shareholder specifically
abstains from voting with respect to such approval will be voted in favor of any
such adjournment or postponement.
It is not expected that any matter other than as described herein will be
brought before either of the Meetings. If, however, other matters are properly
brought before a Meeting, persons appointed as proxies will have discretion to
vote or act thereon in their best judgment.
REVOCABILITY OF PROXIES
The presence of a Shareholder at the relevant Meeting (or at any
postponement or adjournment thereof) will not automatically revoke such
shareholder's proxy. However, a shareholder may revoke a proxy at any time prior
to its exercise by (a) delivery to the Secretary of the relevant Company of a
written notice of revocation prior to or at the relevant Meeting (or, if such
Meeting is adjourned or postponed, prior to or at the time the adjourned or
postponed meeting is actually held); (b) submission of a duly executed proxy
bearing a later date; or (c) attending the relevant Meeting (or, if such Meeting
is adjourned or postponed, by attending the adjourned or postponed meeting) and
voting in person thereat. In the case of BYL Shareholders, any written
revocation of proxy or other related communications should be addressed to John
F. Myers, Secretary, BYL Bancorp, 18206 Imperial Highway, Yorba Linda,
California 92886. In the case of DNBF Shareholders, any written revocation of
proxy or other related communications should be addressed to Gloria Van Kampen,
Executive Vice President and Chief Financial Officer, DNB Financial, 7710
Limonite Avenue, Riverside, California 92509.
SOLICITATION OF PROXIES
Directors and officers of each Company and its subsidiaries may solicit
proxies from shareholders of such Company personally or by telephone or telegram
without additional remuneration therefor. Each of the Companies will also
provide persons, firms, banks and corporations holding shares in their names or
in the names of nominees, which in any case are beneficially owned by others,
with proxy materials for transmittal to such beneficial owners and will
reimburse such record owners for their expenses of doing so. Each of BYL and
DNBF will bear the cost of solicitation of proxies from its own shareholders.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BYL
As of the BYL Record Date, the directors and executive officers of BYL
beneficially held, in the aggregate, the ability to direct the voting with
respect to 183,647 shares of BYL Common Stock, comprising approximately 11.05
percent of the voting power of the BYL Common Stock outstanding. Such directors
and executive officers of BYL have informed BYL that they intend to vote their
shares of BYL Common Stock for the approval of the principal terms of the
Merger.
The following table sets forth information as of , 1998
pertaining to beneficial ownership of BYL's Common Stock by persons known to BYL
to own five percent (5%) or more of such stock, current directors and Executive
Officers of BYL, and all directors and Executive Officers of BYL as a group. The
information contained herein has been obtained from the BYL's records and from
information furnished directly by the individual or entity to BYL. All shares
are held with shared voting and investment power except as otherwise indicated.
All addresses of Directors and Executive Officers are in care of BYL at 18206
Imperial Highway, Yorba Linda, California.
The table should be read with the understanding that more than one (1)
person may be the beneficial owner or possess certain attributes of beneficial
ownership with respect to the same securities. In addition, shares of Common
Stock issuable pursuant to options which may be exercised within sixty (60) days
of
36
<PAGE>
, 1998 are deemed to be issued and outstanding and have been treated
as outstanding in calculating the percentage ownership of those individuals
possessing such interest.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP(1)
OF COMMON STOCK ON
NAME TITLE , 1998 PERCENT
- ---------------------------------------- -------------------------------------- ---------------------- -----------
<S> <C> <C> <C>
Basswood Partners....................... Shareholder 152,055 9.79%
Leonard O. Lindborg (2)................. Director 11,334 .73%
H. Rhoads Martin (3).................... Director 17,733 1.14%
Barry J. Moore (4)...................... Sr. Executive Vice President/ Chief
Operating Officer and Director 33,556 2.11%
Michael H. Mullarky (5)................. Executive Vice President and Credit
Administrator 27,221 1.74%
John F. Myers (6)....................... Director, Secretary 12,932 .83%
Robert Ucciferri (7).................... President, Chief Executive Officer and
Director 66,534 4.17%
Brent W. Wahlberg (8)................... Director 14,337 .92%
All Directors and Executive Officers as
a Group (7 in number)................. 183,647(9) 11.05%
</TABLE>
- ------------------------
(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship,
or otherwise has or shares: (a) voting power which includes the power to
vote, or to direct the voting of such security; and/or (b) investment power,
which includes the power to dispose, or to direct the disposition, of such
security. Beneficial owner also includes any person who has the right to
acquire beneficial ownership of such security as defined above within sixty
(60) days of , 1998.
(2) Includes 3,467 shares of Common Stock which may be acquired by Mr. Lindborg
upon exercise of stock options.
(3) Includes 5,733 shares of Common Stock which may be acquired by Mr. Martin
upon exercise of stock options.
(4) Includes 33,556 shares of Common Stock which may be acquired by Mr. Moore
upon exercise of stock options.
(5) Includes 4,167 shares held in the Joseph W. Mullarky Testamentary Trust
dated January 5, 1987, and Mr. Michael Mullarky acts as sole trustee.
Includes 12,223 shares of Common Stock which may be acquired by Mr. Mullarky
upon exercise of stock options
(6) Myers upon exercise of stock options
(7) Includes 42,222 shares of Common Stock which may be acquired by Mr.
Ucciferri upon exercise of stock options.
(8) Includes 5,733 shares of Common Stock which may be acquired by Mr. Wahlberg
upon exercise of stock options.
(9) Includes 108,667 shares of Common Stock which may be acquired upon exercise
of stock options.
DNBF
As of the DNBF Record Date, the directors and officers of DNBF beneficially
held, in the aggregate, the ability to direct the voting with respect to 139,972
shares of DNBF Common Stock, comprising approximately 60.22 percent of the
voting power of the DNBF Common Stock outstanding. Such directors
37
<PAGE>
and executive officers of DNBF have informed DNBF that they intend to vote their
shares of DNBF Common Stock for the approval of the principal terms of the
Merger.
The following table reflects, as of the DNBF Record Date, the beneficial
ownership of DNBF Common Stock by DNBF's directors, executive officers and
shareholders known to DNBF to be holding more than five percent of such stock,
and by DNBF's directors and executive officers as a group. The information
contained herein has been obtained from the DNBF's records and from information
furnished directly by the individual or entity to DNBF. All addresses of
directors and executive officers of DNBF are in care of DNBF at 7710 Limonite
Avenue, Riverside, California 92509.
The table should be read with the understanding that more than one (l)
person may be the beneficial owner or possess certain attributes of beneficial
ownership with respect to the same securities.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP(1)
OF COMMON STOCK ON
NAME TITLE , 1998 PERCENT
- ---------------------------------------- ---------------------------------------- ---------------------- -----------
<S> <C> <C> <C>
Richard T. Anderson..................... Director 7,279(2) 3.13%
Henry C. Cox, II........................ Director 28,379(3) 12.21%
James F. Davidson....................... Director 6,578(4) 2.83%
Eddie R. Fischer........................ Director 18,978(5) 8.17%
Donald D. Galleano...................... Director 8,829(6) 3.80%
Edward F. and Marjorie D. Gould......... Shareholder 26,000 11.19%
Neil F. Hatcher......................... President, Chief Executive Officer and
Director 26,378(7) 11.35%
Ralph R. Neilson........................ Director 3,091(8) 1.33%
Marjorie R. Steinbrinck................. Director 3,091(9) 1.33%
Gloria J. Van Kampen.................... Executive Vice President and Chief
Financial Officer 11,290(10) 4.86%
John L. West............................ Director 26,079(11) 11.22%
All Directors and Executive Officers as
a Group (10 in number)................ 139,972 60.22%
</TABLE>
- ------------------------
(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship,
or otherwise has or shares: (a) voting power which includes the power to
vote, or to direct the voting of such security; and/or (b) investment
power, which includes the power to dispose, or to direct the disposition,
of such security. Beneficial owner also includes any person who has the
right to acquire beneficial ownership of such security as defined above
within sixty (60) days of the DNBF Record Date. DNBF has represented to BYL
that all 22,500 option shares that were outstanding December 1, 1997 were
exercised as of December 31, 1997, and there are no other securities
outstanding, other than the Warrant Agreement, that would allow any person
the right to acquire beneficial ownership of such security.
(2) Held in trust of which Mr. Anderson is a trustee.
(3) Includes 21,504 share held jointly with his spouse and 6,875 shares held in
a pension plan of which Mr. Cox is a trustee.
(4) Held in a trust of which Mr. Davidson is the trustee.
(5) Held in a trust of which Mr. Fischer is the trustee.
(6) Includes 1,000 shares held jointly with his spouse, 3,488 shares held as
custodian for the benefit of a child, and 2,050 shares held by a
corporation of which Mr. Galleano is the sole shareholder.
(7) Includes 1,500 shares held jointly with his mother and 24,878 shares held
jointly with his spouse.
(8) Includes 2,611 shares held in a trust of which Mr. Neilson is the trustee
and 480 shares held in trust for family members.
(9) Held jointly with her spouse.
(10) Held jointly with her spouse.
(11) Includes 19,204 shares held jointly with his spouse and 6,875 shares held
in a pension plan of which Mr. West is a trustee.
38
<PAGE>
THE MERGER
THIS SECTION OF THE JOINT PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN
ASPECTS OF THE PROPOSED MERGER, AND SUCH INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, INCLUDING THE APPENDICES HERETO, AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. A COPY OF THE AGREEMENT IS SET FORTH AS
APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE TEXT THEREOF IS
INCORPORATED HEREIN BY REFERENCE, AND REFERENCE IS MADE THERETO FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGER. SHAREHOLDERS ARE URGED TO READ CAREFULLY
THE AGREEMENT AND EACH OF THE OTHER APPENDICES HERETO IN THEIR ENTIRETY.
BACKGROUND OF THE MERGER
BYL, principally through its wholly-owned subsidiary BOYL, conducts general
banking operations in Orange County, California, and DNBF, principally through
its wholly-owned subsidiary DANB, conducts general banking operations in
Riverside County, California. In serving individuals, small businesses and
mid-market corporations, each historically has focused on a community-based
approach to banking. The managements of the Companies have been cognizant of the
rapidly changing structure of the banking market in Southern California, in part
as a result of the severe problems associated with the savings and loan industry
and the problems experienced by other independent banks within Orange and
Riverside counties during the recent recession. As is the case throughout the
United States, the managements of the Companies believe that a process of
consolidation will continue to occur in the Southern California financial
services industry resulting in, among other things, a reduction in the number of
independent banks and bank holding companies.
In order to compete effectively with the larger financial institutions
resulting from the various consolidations and mergers in the industry locally,
the managements of the Companies saw the need to expand prudently. At the same
time, each recognized the opportunity to build a larger regional, independent
financial institution in the Orange and Riverside counties market as a result of
the reduced number of independent banks headquartered in those counties.
Accordingly, as part of their efforts to achieve long-term profitability, both
of the Companies sought a strong partner with which to join forces in order to
achieve greater market share in Southern California, as detailed below.
Throughout 1997, the principals at BYL and their representatives held
discussions with a number of Southern California-based institutions with respect
to potential business combinations. The institutions contacted were only those
institutions that focused on the community-based approach to banking and were
located in markets that would provide BYL with both strategic and synergistic
benefits. Specifically, BYL identified DNBF as a potential acquisition target
because of DNBF's proximity to the small business and mid-market corporations
located in Riverside County, its strong deposit and loan generating capabilities
and because of the potential operational costs savings that could be garnered
from merging the respective institution's duplicative operational functions.
During the course of such process, BYL confirmed that DNBF fit the acquisition
criteria described above; therefore, the Board of Directors of BYL decided to
proceed with the acquisition of DNBF. The details of the negotiation process is
described more fully below.
From time to time in 1996 and 1997, DNBF discussed prospective business
combinations with several financial institutions, including the possibilities of
an acquisition by DNBF, a sale of DNBF or a "merger of equals". One of these
meetings occurred in October 1997 between Neil Hatcher, CEO of DNBF, with Robert
Ucciferri, CEO of BYL, and David Dayton of Vavrinek, Trine, Day & Co., LLP the
independent accountant for both BYL and DNBF, to discuss the possible merger of
the Companies. Mr. Hatcher described this meeting to the DNBF Board on October
22, 1997. At meetings over the following seven weeks, Messrs. Hatcher and
Ucciferri and James Hill of Ryan, Beck, BYL's financial advisor, further
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discussed a proposed merger of the Companies. At the December 11, 1997 meeting
of the DNBF Board, Messrs. Ucifferri and Hill, together with Barry Moore,
SEVP/CFO of BYL, described the operations of BYL and BOYL, the proposed merger
terms and plans for DNBF's offices and staff following a proposed merger. The
DNBF Board considered this information and then authorized Mr. Hatcher to
proceed to negotiate a tentative merger agreement between DNBF and BYL. On
December 17, 1997 the DNBF Board authorized management to select appropriate
legal and financial counsel to advise it on the strategic alternatives available
to DNBF. Thereafter in December, DNBF retained Rothgerber, Appel, Powers &
Johnson LLP as its legal advisor and H&A as its financial advisor to issue a
fairness opinion in connection with DNBF's consideration of the merger proposal
from BYL.
A preliminary non-binding indication of interest was delivered by BYL to
DNBF on December 23, 1997, and circulated to all DNBF Board members containing
terms substantially similar to those in the definitive Agreement. Following
continued negotiations between management of DNBF and BYL, on January 28, 1998,
the DNBF Board deliberated at length about the proposed terms of the merger as
set forth in the Agreement and exhibits thereto, its strategic options, the
competitive banking environment in California, the prospects for DANB if it
remained independent and the results of the due diligence review of BYL and BOYL
performed by DNBF management and legal counsel in January. The DNBF Board also
reviewed H&A's written opinion dated January 27, 1998, and the related
documentation as to the fairness, from a financial point of view, to DNBF
Shareholders of the terms of the proposed merger. See "Opinions of Financial
Advisors--DNBF". Following such deliberations, the DNBF Board approved the
merger of DNBF with BYL and authorized management to execute a definitive
Agreement and Warrant Agreement. See "Reasons for the Merger; Recommendations of
the Boards of Directors--DNBF."
Following a review of the preliminary indication of interest submitted to
the DNBF Board by BYL, in December 1997, the BYL Board held a special meeting
and the proposed Merger was considered in detail with BYL's senior management
and Ryan, Beck. All members of the BYL Board were present at the Meeting. The
BYL Board approved the transaction in principle at such meeting and authorized
BYL's management and Ryan, Beck to proceed with continued discussions and
negotiations with DNBF
On January 20, 1998, following continuing negotiations with DNBF, the BYL
Board considered the proposed Merger between BYL and DNBF. At such meeting, the
BYL Board, in consultation with Ryan, Beck and BYL's legal counsel, deliberated
at length about the strategic alternatives available to BYL, the background of
the negotiations with DNBF and the provisions of the draft Agreement and Warrant
Agreement. In addition, Ryan, Beck rendered to the BYL Board an oral opinion,
which was later confirmed in a written opinion dated , 1998, that the
amount of shares of BYL Stock to be exchanged for shares of DNBF Stock to be
received in the proposed Merger was fair to the BYL Shareholders from a
financial point of view. See "--Opinions of Financial Advisors--BYL." Following
such deliberations, the BYL Board authorized management to complete the
negotiation of and enter into a definitive Agreement and Warrant Agreement.
On January 29, 1998, the Agreement and the Warrant Agreement were executed
and delivered. In addition, Richard T. Anderson, Henry C. Cox II, James F.
Davidson, Eddie R. Fischer, Donald D. Galleano, Neil F. Hatcher, Ralph R.
Neilson, Marjorie R. Steinbrinck and John L. West each entered into a Directors
Agreement with BYL, pursuant to which each committed to vote his or her
respective shares in favor of the Merger.
The managements of the Companies saw opportunities for increased operating
efficiencies. In particular, the managements believe that cost savings can be
achieved as a result of economies of scale, the elimination of redundant
executive management and central staff, the consolidation of data processing and
operations activities and the elimination of duplicative administrative
functions. As part of the examination of the books and records of DNBF, BYL
personnel and its advisors reviewed staffing levels and transaction volumes in
various areas and the details of other expenses. There can be no assurance that
BYL will be
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able to realize fully the increased operating efficiencies or that such
operating efficiencies will be realized in a timely manner.
Managements of the Companies believe that BYL and DNBF complement each other
both in their community-based approach to banking and in terms of geographic
service areas. Consequently, the Companies believe that by combining forces,
they will be able more effectively to compete and successfully to take advantage
of banking opportunities in the Southern California market.
EFFECT OF MERGER
At the Effective Time, DNBF will merge with and into BYL, and BYL will be
the surviving corporation and will continue its corporate existence under
California law under the name "BYL Bancorp." The separate corporate existence of
DNBF will cease at the Effective Time.
Upon the Merger becoming effective, each share of DNBF Common Stock issued
and outstanding at the Effective Time (other than shares which have not been
voted in favor of the approval of the principal terms of the Merger and with
respect to which Dissenters' Rights shall have been perfected in accordance with
the CGCL) will be converted automatically into the right to receive shares of
BYL Common Stock on, and subject to the terms and conditions of the Agreement,
equal to the quotient (such quotient, the Exchange Ratio) of (a) the DNBF
Transaction Price Per Share divided by (b) the Stipulated BYL Share Value
($18.75) or if adjusted, by the Adjusted BYL Share Value (as defined below). In
the event that the Average Price of BYL Stock shall be more than $22.50 or less
than $15.00 (such values, the Threshold Values), the Stipulated BYL Share Value
shall be adjusted (such adjusted price, the Adjusted BYL Share Value), with such
adjustment equal to one half the difference between the Average Price of BYL
Stock and $18.75 per share. For example, if the Average Price of BYL Stock is
$23.50, then the Adjusted BYL Share Value would be $21.125, and if the Average
Price of BYL Stock is $14.00, then the Adjusted BYL Share Value would be
$16.375.
The DNBF Transaction Price Per Share is equal to the quotient of (A) the sum
of (i) 2.7 times the DNBF aggregate book value as of September 30, 1997 of
$6,911,426; (ii) the net proceeds received by DNBF from the exercise of up to
22,500 DNBF Options at the average weighted exercise price of $23.04 per share;
and (iii) 1.5 times the change in net retained earnings of DNBF, between
September 30, 1997 and the end of the month prior to the closing date, and (B)
the issued and outstanding shares of DNBF Stock on the Effective Time, up to a
maximum of 232,423 shares. A copy of the Agreement is included in the Joint
Proxy Statement/Prospectus as Appendix C.
Once the Merger has been consummated, any trading DNBF Common Stock over the
counter will cease. It is anticipated that the management and operation of BYL
and DNBF will be integrated after the Merger. DNBF has agreed, subject to
certain conditions, at or before the Effective Time, to make such accounting
adjustments as BYL requests in order to implement its plans regarding DNBF and
to reflect merger-related expenses and costs incurred by DNBF. See "The Merger
Agreement--Certain Covenants."
Pursuant to the Agreement, the Board of Directors of the Surviving
Corporation and the Surviving Bank will include Henry C. Cox II, Eddie R.
Fischer and Neil F. Hatcher, each currently a director of DNBF. Immediately
prior to the Effective Time, the BYL Board and the BOYL Board will adopt
resolutions fixing the exact number of directors at 9 and appointing Messrs.
Cox, Fischer and Hatcher to fill the vacancies created thereby. All members of
the DNBF Board and all members of the board of directors of DANB will resign as
of the Effective Time. See "The Merger Agreement--Conditions."
After the Merger, the Surviving Corporation will be headquartered at 18206
Imperial Highway, Yorba Linda, California 92886. The telephone number at such
offices will be (714) 996-1800.
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REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
BYL
The BYL Board has unanimously approved the Agreement and has determined that
the Merger is fair to, and in the best interests of, the BYL Shareholders. The
BYL Board, therefore, unanimously recommends that the BYL Shareholders vote
"FOR" the approval of the principal terms of the Merger. The BYL Board believes
that the Merger will enable BYL to participate in opportunities for growth that
the Merger makes possible. See "--Background of the Merger" and "--Opinions of
Financial Advisors."
In reaching its determination that the Merger is fair to, and in the best
interests of, BYL Shareholders, the BYL Board considered a number of factors,
from both a short-term and long-term perspective, including, without limitation,
the following:
(a) The potential to leverage management, data processing and operations,
the expansion of BYL products throughout the DNBF branches, an increased
consolidated lending limit and additional customer convenience due to additional
branches, which BYL's management believes will enhance the potential for BYL's
business, financial condition, results of operations and prospects, including,
but not limited to, its potential growth, development, productivity and
profitability;
(b) The current and prospective environment in which BYL operates, including
national and local economic conditions, the competitive environment for banks
and other financial institutions generally, the increased regulatory burden on
financial institutions generally and the trend towards consolidation in the
financial services industry;
(c) Data processing systems, talented employees and financial results at
DNBF, which BYL's management believes, based on the due diligence review of
DNBF's business, financial condition and results of operations, will control
risks normally associated with a merger;
(d) The review by the BYL Board with its legal advisors and Ryan, Beck of
the provisions of the Agreement;
(e) The Ryan, Beck Opinion;
(f) The likelihood that the proposed transaction would be consummated;
(g) Improved customer relations and satisfaction through enhancement of the
employee base of BYL and an increase in point of service locations and products
from which to choose; and
(h) The compatibility of the respective businesses and management
philosophies of the Companies.
While each member of the BYL Board individually evaluated each of the
foregoing as well as other factors, the BYL Board collectively did not assign
any specific or relative weight to the factors under consideration and did not
make any determinations with respect to any individual factor. The BYL Board
collectively made its determination with respect to the Merger based on the
unanimous conclusion reached by its members that the Merger, in light of the
factors that each of them individually considered as appropriate, is fair and in
the best interests of the BYL Shareholders.
FOR THE REASONS SET FORTH ABOVE THE BYL BOARD HAS UNANIMOUSLY APPROVED THE
AGREEMENT AS IN THE BEST INTERESTS OF BYL AND ITS SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT BYL SHAREHOLDERS APPROVE THE PRINCIPAL TERMS OF THE MERGER.
DNBF
The DNBF Board has unanimously concluded that the Merger is in the best
interests of DNBF Shareholders and unanimously recommends that DNBF Shareholders
approve the principal terms of the Merger. In reaching its determination to
approve the principal terms of the Merger, the DNBF Board
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considered the following factors, which constitute all of the material factors
considered by the DNBF Board:
(a) Information concerning the financial performance and condition, business
operations, capital levels, asset quality and prospects of BYL and the due
diligence review of the loan portfolio, material contracts, contingent
liabilities of BYL and other offerors conducted by DNBF and its advisors;
(b) Information concerning the ability of BYL and DNBF to achieve operating
efficiencies;
(c) The current and prospective economic, regulatory and competitive
environment facing DNBF, including in particular the franchise value of DNBF due
to its branch locations in Riverside County, its high level of demand deposits
and lending focus, its leverage capital ratios and data processing systems;
(d) The unprecedented consolidation currently underway in the banking
industry and increased competition from larger independent banks in California;
(e) The business strategies and the strength and depth of management of BYL
and the other offerors and the extent of their interest in continuing DNBF's
significant business relationships in Riverside County;
(f) The geographic concentration of BYL in Southern California;
(g) The advantages of being part of a larger entity, including the potential
for operating efficiencies, a higher legal lending limit and the generally
higher trading multiples of larger financial institutions;
(h) The value of the consideration offered by BYL compared to the value of
the consideration offered in other acquisitions of financial institutions in
California during 1996 and 1997 and the prospects for enhanced value of the
combined entity in the future;
(i) The terms of the Agreement and the Warrant Agreement and its review of
those agreements with its financial and legal advisors;
(j) The financial and other presentations of H&A (including the assumptions
and methodologies underlying its analyses and presentations of pro forma
financial information with respect to both the Merger and the other offers), the
results of the contacts and discussions between DNBF, its advisors and various
third parties and the opinion of H&A that, as of the date of such opinion, and
based upon, and subject to, the matters stated in such opinion, the conversion
of DNBF Common Stock into BYL Common Stock under the terms of the Agreement is
fair, from a financial point of view, to DNBF Shareholders;
(k) The tax-free nature of the BYL offer;
(l) The BYL Common Stock is listed on the Nasdaq National Market and the
liquidity of the BYL Common Stock;
(m) The prospects and valuation of DNBF on a stand alone basis and on the
basis of alternative stand alone strategies, such as dividends, share
repurchases, restructurings and growth through acquisitions; and
(n) The willingness of BYL to provide DNBF Shareholders with certain
protections against fluctuations within certain ranges in the value of the
consideration offered by BYL.
The foregoing discussion of the information and factors considered by the
DNBF Board is not intended to be exhaustive, but constitutes the material
factors considered by the DNBF Board. In reaching its determination to approve
and recommend the principal terms of the Merger, the DNBF Board did not assign
relative or specific weights to the foregoing factors and individual directors
may have weighed such factors differently.
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FOR THE REASONS SET FORTH ABOVE, THE DNBF BOARD HAS UNANIMOUSLY APPROVED THE
AGREEMENT AS IN THE BEST INTERESTS OF DNBF AND ITS SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT DNBF SHAREHOLDERS APPROVE THE PRINCIPAL TERMS OF THE MERGER.
OPINIONS OF FINANCIAL ADVISORS
BYL
OPINION OF RYAN, BECK & CO.
On January 12, 1998 BYL formally retained Ryan, Beck to advise BYL on the
acquisition of DNBF. Prior to such time, Ryan Beck had provided BYL strategic
financial advisory services pursuant to an agreement entered into on January 3,
1997 (the "Advisory Agreement"). Ryan, Beck is regularly engaged in the
valuation of banks, bank holding companies, savings and loan associations and
savings and loan holding companies in connection with mergers, acquisitions and
other securities-related transactions. Ryan, Beck has knowledge of, and
experience with, the California banking market and banking organizations
operating in that market, and was selected by BYL because of Ryan, Beck's
knowledge of BYL due to having previously performed investment banking services
for BYL, and because of Ryan, Beck's experience with, and reputation in the
financial services industry.
In its capacity as BYL's financial advisor, Ryan, Beck participated in the
negotiations with respect to the pricing and other terms and conditions of the
Merger, but the decision as to whether to acquire DNBF and the final pricing of
the Merger was ultimately made by the Board of Directors of BYL. Ryan, Beck
rendered its oral opinion to the BYL Board on January 20, 1998, subsequently
confirmed by a formal written opinion (the "Opinion") dated as of the same date
and based on and subject to the assumptions, factors and limitations as set
forth in the opinion and as described below, that the Exchange Ratio is "fair"
to BYL's shareholders from a financial point of view. No limitations were
imposed by the BYL Board of Directors upon Ryan, Beck with respect to the
investigations made or procedures followed by it in arriving at its opinion.
THE FULL TEXT OF THE OPINION OF RYAN, BECK DATED AS OF , 1998, WHICH
SETS FORTH ASSUMPTIONS MADE AND MATTERS CONSIDERED, IS ATTACHED AS ANNEX E TO
THIS JOINT PROXY STATEMENT/PROSPECTUS. SHAREHOLDERS OF BYL ARE URGED TO READ
THIS OPINION IN ITS ENTIRETY. RYAN, BECK'S OPINION IS DIRECTED ONLY TO THE
EXCHANGE RATIO AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY BYL SHAREHOLDER
AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF
THE OPINION OF RYAN, BECK SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. RYAN,
BECK'S ORAL OPINION AS OF JANUARY 20, 1998 WAS TO THE SAME EFFECT AS SUCH
OPINION. RYAN, BECK DOES NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF
THE TERM "EXPERT" AS USED IN THE SECURITIES ACT AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER, OR THAT ITS OPINIONS CONSTITUTE A REPORT OR VALUATION
WITHIN THE MEANING OF SECTION 11 OF THE ACT AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER.
In connection with its analysis, Ryan, Beck: (i) reviewed the Merger
Agreement and related documents; (ii) reviewed drafts of this Joint Proxy
Statement / Prospectus; (iii) reviewed BYL's Annual Report to Shareholders and
Annual Report on Form 10-K for the year ended December 31, 1996, BYL's Quarterly
Reports on Form 10-Q for the periods ended March 31, June 30, and September 30,
1997, and BYL's preliminary financial statements for the fiscal year ended
December 31, 1997; (iv) reviewed DNBF's Annual Reports to Shareholders,
regulatory financial reports and audited financial statements for the years
ended December 31, 1994, 1995, and 1996, DNBF's quarterly financial statements
and regulatory financial reports for the periods ended March 31, June 30, and
September 30, 1997 and DNBF's preliminary financial statements for the fiscal
year ended December 31, 1997; (v) reviewed certain operating and financial
information provided to it by the managements of BYL and DNBF relating to their
business and prospects; (vi) reviewed the historical stock prices and trading
volume of BYL's Common Stock; (vii) as more particularly described below,
reviewed the publicly available financial data of commercial banking
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organizations which Ryan, Beck deemed generally comparable to BYL; (viii) as
more particularly described below, reviewed the publicly available financial
data of commercial banking organizations which Ryan, Beck deemed generally
comparable to DNBF; (ix) as more particularly described below, reviewed the
terms of recent acquisitions of commercial banking organizations which Ryan,
Beck deemed generally comparable to DNBF; and (x) conducted such other studies,
analyses, inquiries and examinations as Ryan, Beck deemed appropriate. Ryan,
Beck also reviewed certain financial projections provided by BYL and DNBF for
the year ending December 31, 1998 and met with certain members of BYL and DNBF's
senior managements to discuss BYL and DNBF's past and current business
operations, financial condition, strategic plan and future prospects, including
the prospects for the combined company and any potential operating efficiencies,
revenue enhancements and other synergies which may arise from the Merger.
In connection with its review, Ryan, Beck relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information regarding BYL and DNBF provided to Ryan, Beck by BYL and DNBF
and their representatives. Ryan, Beck is not an expert in the evaluation of
allowances for loan losses. Therefore, Ryan, Beck has not assumed any
responsibility for making an independent evaluation of the adequacy of the
allowances for loan losses as set forth on DNBF's and BYL's balance sheets at
December 31, 1997, and Ryan, Beck assumed such allowances were adequate and
complied fully with applicable law, regulatory policy and prudent banking
practice as of the date of such financial statements. Ryan, Beck has reviewed
certain historical financial data and financial projections (and the assumptions
and bases therefor) provided by BYL and DNBF. Ryan, Beck assumed that such
forecasts and projections reflected the best currently available estimates and
judgments of the respective managements. In certain instances, for the purposes
of its analyses, Ryan, Beck made adjustments to such financial and operating
forecasts which in Ryan, Beck's judgment were appropriate under the
circumstances. Ryan, Beck was not retained to nor did it make any independent
evaluation or appraisal of the assets or liabilities of BYL or DNBF. Ryan, Beck
also assumed that the Merger in all respects is, and will be, undertaken and
consummated in compliance with all laws and regulations that are applicable to
BYL and DNBF.
The preparation of a fairness opinion on a transaction such as the Merger
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances and, therefore, the Opinion is not readily susceptible to summary
description. In arriving at its opinion, Ryan, Beck performed a variety of
financial analyses. Ryan, Beck believes that its analyses must be considered as
a whole and the consideration of portions of such analyses and the factors
considered therein, without considering all factors and analyses, could create
an incomplete view of the analyses and the process underlying Ryan, Beck's
Opinion. No one of the analyses was assigned a greater significance than any
other.
The projections furnished to Ryan, Beck were prepared by the respective
managements of BYL and DNBF. BYL and DNBF do not publicly disclose internal
management projections of the type provided to Ryan, Beck in connection with the
review of the Merger. Such projections were not prepared with a view towards
public disclosure. The public disclosure of such projections could be misleading
since the projections were based on numerous variables and assumptions which are
inherently uncertain, including, without limitation, factors related to general
economic and competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such projections.
In its analyses, Ryan, Beck made numerous assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which are beyond the control of BYL or DNBF. Any estimates contained in Ryan,
Beck's analyses are not necessarily indicative of future results or values,
which may be significantly more or less favorable than such estimates. Estimates
of values of companies do not purport to be appraisals nor do they necessarily
reflect the prices at which companies or their securities may actually be sold.
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The following is a brief summary of the analyses and procedures performed by
Ryan, Beck in the course of arriving at its opinion.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES: Ryan, Beck compared DNBF's
financial data as of December 31, 1997 to the most recently available financial
data for a peer group of sixteen selected commercial banking organizations
located in the Southern part of California and traded on Nasdaq with assets
between $30 million and $150 million. Ryan, Beck deemed this group to be
generally comparable to DNBF. At or for the twelve months ended December 31,
1997, DNBF had tangible equity to tangible assets of 10.54%, a return on average
assets of 1.06%, a return on average equity of 10.33%, a net interest margin of
5.54%, a ratio of non-interest expenses to average assets of 5.06%, a ratio of
non-performing loans to total loans of 0.72%, a ratio of non-performing assets
to total assets of 0.83%, a ratio of loan loss reserves to non-performing loans
of 121.08%, and an efficiency ratio of 75.32%. These ratios were compared to the
median ratios of the sixteen selected commercial banking organizations, which
were, as calculated, a tangible equity to tangible assets ratio of 8.08%, a
return on average assets of 0.79% (including only those companies that had
positive results of operations, a total of twelve companies), a return on
average equity of 12.47% (including only those companies that had positive
results of operations, a total of twelve companies), a net interest margin of
6.10%, a ratio of non-interest expense to average assets of 6.15%, a ratio of
non-performing loans to total loans of 2.59%, a ratio of non-performing assets
to total assets of 3.47%, a ratio of loan loss reserves to non-performing loans
of 72.86%, and an efficiency ratio of 87.42%. Ryan, Beck noted that the
performance of DNBF as measured by a return on average assets and average equity
was at least comparable to that of the peer group. Although, DNBF's return on
average assets was higher than the median of that of the peer group, the
Company's return on average equity was lower than the median of that of the peer
group due to the fact that DNBF had a higher level of equity as compared to the
peer group. Ryan, Beck also noted that DNBF's efficiency ratio and non-interest
expenses to average assets were significantly lower than that of the peer group.
This is in part due to the fact that DNBF's salary expense as a percent of the
total revenue is significantly lower than the peer group median. DNBF's salary
expense as a percent of total revenues was 35.57% versus the peer group median
of 42.96%; Additionally, DNBF's non-interest income to average assets ratio of
1.61% is significantly higher than the peer group median of 1.10%. Ryan, Beck
also noted that DNBF's ratio of non-performing loans to total loans of 0.72% and
ratio of non-performing assets to total assets of 0.83% were significantly lower
the medians of the peer group of 2.59% and 3.47%, respectively, and that DNBF's
loan loss reserves to non-performing loans of 121.08% was significantly higher
than the median of the peer group of 72.86%.
Ryan, Beck also compared BYL's financial data as of September 30, 1997 to
the most recently available financial data of a group of ten selected commercial
banking organizations located in the Southern part of California and traded on
Nasdaq with assets between $100 million and $200 million. Ryan, Beck deemed this
group to be generally comparable to BYL. At or for the twelve months ending
September 30, 1997, BYL had tangible equity to tangible assets of 8.13%, a
return on average assets of 1.35%, a return on average equity of 13.61%, a
dividend yield of 1.06%, a net interest margin of 7.44%, an efficiency ratio of
81.88%, a ratio of non-performing loans to total loans of 0.62%, a ratio of non-
performing assets to total assets of 0.82% and a ratio of reserves to
non-performing loans of 293.10%. These ratios were compared to the median ratios
of the ten selected commercial banking organizations, which were, as calculated,
a tangible equity to tangible assets ratio of 6.90%, a return on average assets
ratio of 0.89% (including only those companies that had positive results of
operations, a total of eight companies), a return on average equity ratio of
10.29% (including only those companies that had positive results of operations,
a total of eight companies), a dividend yield of 0.00%, a net interest margin of
6.03%, an efficiency ratio of 87.27%, a ratio of non-performing loans to total
loans of 3.74%, a ratio of non-performing assets to total assets of 3.67% and a
ratio of loan loss reserves to non-performing loans of 70.64%. Using BYL's
January 13, 1998 Common Stock price of $18.875, its price to the latest twelve
month's earnings was 17.00 times, price to book value was 205.39% and price to
tangible book value was 231.03%. The peer group's median price to the latest
twelve month's earnings was 15.13 times, price to book value was 141.50% and
price to tangible book value was 145.24%.
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ANALYSIS OF SELECTED TRANSACTIONS: Ryan, Beck compared DNBF's financial
data at or for the twelve months ended December 31, 1997 with that of a group of
six selected commercial banking organizations being acquired in transactions
accounted for as a pooling-of-interest, announced since January 1, 1997,
representing either market expansion or partial market expansion and for which
pricing data pertaining to the transactions was publicly available (the
"Comparable Transactions"). The criteria for this group was commercial banks in
the Western region with assets between $30 million and $250 million and a return
on average assets of greater than 0.75%. Ryan, Beck deemed this group to be
generally comparable to DNBF. The median ratios for the Comparable Transactions,
as calculated, represented a 8.01% tangible equity to tangible assets ratio, a
non-performing assets to total assets ratio of 0.42%, an annualized year-to-date
return on average assets of 1.76% and an annualized year-to-date return on
average equity of 17.34%. These ratios were compared to DNBF's ratios, which
were, as calculated, a 10.54% tangible equity to tangible assets ratio, a
non-performing assets to total assets ratio of 0.83%, a return on average assets
of 1.06%, and a return on average equity of 10.33%.
Ryan, Beck also calculated certain ratios assuming $85.97 of BYL common
stock would be received for each share of DNBF (an exchange ratio of 4.585 BYL
shares of common stock for each share of DNBF common stock) based upon a pro
forma calculation of the estimated DNBF Transaction Price Per Share as of the
closing date and a Stipulated BYL Share Value of $18.75. This price represented
258.23% of DNBF's book value at December 31, 1997, 258.23% of tangible book
value at December 31, 1997, 24.99 times the latest twelve month earnings, and a
core deposit premium to tangible book value at December 31, 1997 of 18.81%. The
mean ratios for the Comparable Transactions, as calculated, represented a price
to book value of 260.08%, a price to tangible book value of 261.08%, a price to
latest twelve month earnings of 18.48 times and a core deposit premium to
tangible book value of 18.64%. The imputed value of DNBF based on the mean
multiples of the above mentioned Comparable Transactions was $86.58 based on
price to book value, $86.91 based on price to tangible book value, $63.57 based
on price to latest twelve month earnings and $85.51 based on the core deposit
premium to tangible book value.
No company or transaction used in the ANALYSIS OF SELECTED PUBLICLY TRADED
COMPANIES AND TRANSACTIONS sections is identical to DNBF, BYL or the Merger.
Accordingly, an analysis of the results of the foregoing is not mathematical;
rather it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies involved and other
factors that could affect the trading values of the securities of the company or
companies to which they are being compared.
IMPACT ANALYSIS: Ryan, Beck analyzed the Merger in terms of its effect on
BYL's projected earnings per share, current book value, tangible book value, and
capital ratios. Ryan, Beck based its analysis on BYL and DNBF's projected 1998
earnings, as provided by BYL and DNBF's managements, assumed to grow thereafter
at compound annual growth rate of 10%, and certain management assumptions with
respect to cost savings, revenue enhancements and other synergies and the amount
of the restructuring charge resulting from the Merger. Based upon the stand
alone earnings projections provided by BYL and DNBF and assuming $85.97 of BYL
common stock would be received for each share of DNBF based upon a pro forma
calculation of the estimated DNBF Transaction Price Per Share as of the closing
date and a Stipulated BYL Share Value of $18.75, the analysis showed that the
Merger would be accretive to BYL's estimated 1998 earnings per share by
approximately 9.23% and accretive to 1999 earnings per share by approximately
12.34%. Based upon BYL's and DNBF's December 31, 1997 financial data, the Merger
would be dilutive to BYL's fully diluted book value per share by approximately
8.29%, and dilutive to BYL's fully diluted tangible book value per share by
approximately 4.88%. Based upon December 31, 1997 financial data, BYL's pro
forma total equity to total assets will increase from 9.21% to 9.50%, its
tangible equity to tangible assets will increase from 8.35% to 8.91%, and its
intangible assets to total equity will be reduced from 10.17% to 6.83%. The
actual results achieved may vary from the projected results and the variations
may be material.
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DISCOUNTED DIVIDEND ANALYSIS: Using a discounted dividend analysis, Ryan,
Beck estimated the net present value of the future dividend streams that DNBF
could produce in perpetuity. Projection parameters for DNBF's five-year balance
sheet and income statement were provided by DNBF's management. Management's
projections were based upon various factors and assumptions, many of which are
beyond the control of DNBF. These projections are, by their nature,
forward-looking and may differ materially from the actual values or actual
future results which may be significantly more or less favorable than suggested
by such projections. In producing a range of per share DNBF values, Ryan, Beck
utilized the following assumptions: discount rates ranged from 15.0% to 17.0%,
terminal price/earnings multiples ranged from 12.0x to 14.0x (which when applied
to terminal year estimated earnings produces a value which approximates the net
present value of the dividends in perpetuity, given certain assumptions
regarding growth rates and discount rates) and earnings that include estimated
synergies (comprised of savings in DNBF's non-interest expenses and income
enhancements equal in 1998 to 46.44% of DNBF's 1997 non-interest expenses and in
1999 to 57.26% of DNBF's 1997 non-interest expenses), with an assumed 5% annual
growth in synergies in years thereafter. The discounted dividend analysis
produced a range of net present values per share of DNBF Common Stock from
$82.42 to $98.58. These analyses do not purport to be indicative of actual
values or expected values or an appraisal range of the shares of DNBF Common
Stock. Ryan, Beck noted that the discounted dividend analysis is a widely used
valuation methodology, but noted that it relies on numerous assumptions,
including expense savings levels, income enhancements, dividend payout rates,
terminal values and discount rates, the future values of which may be
significantly more or less than such alternatives.
In connection with its written Opinion dated as of , 1998, Ryan, Beck
confirmed the appropriateness of its reliance on the analyses used to render its
January 20, 1998 oral opinion by performing procedures to update certain of such
analyses and by reviewing the assumptions and conclusions contained in the
Opinion.
RYAN, BECK'S WRITTEN OPINION DATED , 1998 WAS BASED SOLELY UPON THE
INFORMATION AVAILABLE TO IT AND THE ECONOMIC, MARKET AND OTHER CIRCUMSTANCES AS
THEY EXISTED AS OF THE DATE OF SUCH OPINION. RYAN, BECK DID NOT EXPRESS ANY
OPINION AS TO THE PRICE OR RANGE OF PRICES AT WHICH BYL COMMON STOCK MIGHT TRADE
SUBSEQUENT TO THE MERGER. EVENTS OCCURRING AFTER SUCH DATE COULD MATERIALLY
AFFECT THE ASSUMPTIONS AND CONCLUSIONS CONTAINED IN SUCH OPINION. RYAN, BECK HAS
NOT UNDERTAKEN TO REAFFIRM OR REVISE ITS OPINION OR OTHERWISE COMMENT UPON ANY
EVENTS OCCURRING AFTER THE DATE OF ITS OPINION.
The opinion of Ryan, Beck that the Exchange Ratio is fair to BYL's
shareholders from a financial point of view does not include situations in which
DNBF elects to terminate the Merger Agreement as a result of an increase in the
Average Price of BYL Stock to $25.31 or more. Under such circumstances, BYL and
DNBF may, but are not obligated to, renegotiate the Exchange Ratio. Whether or
not BYL would agree to renegotiate the Exchange Ratio would have to be evaluated
by BYL's Board of Directors at the time of any such termination by DNBF based
upon the facts and circumstances existing at that time. In connection with any
such evaluation by BYL's Board of Directors, BYL intends to request Ryan, Beck
to reevaluate the transaction to determine whether the revised Exchange Ratio
was fair to BYL's shareholders from a financial point of view. Ryan, Beck has
been advised by BYL that it would be requested to update its opinion under such
circumstances and that, in the event that Ryan, Beck is unable to deliver an
opinion under such circumstances and BYL nonetheless elects to renegotiate the
Exchange Ratio in a manner satisfactory to DNBF and proceed with the Merger, BYL
would resolicit its shareholders to advise them of such facts.
The summary set forth above does not purport to be a complete description,
but is a brief summary of the material analyses and procedures performed by
Ryan, Beck in the course of arriving at its Opinion.
With regard to Ryan, Beck's services in connection with the Merger
Agreement, BYL has agreed to pay Ryan, Beck an advisory fee of $300,000 less
certain hourly fees paid to Ryan, Beck pursuant to the Advisory Agreement and
estimated to be not more than approximately $5,000. A portion of Ryan, Beck's
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advisory fee equal to $85,000 was paid upon execution of the Merger Agreement
and $50,000 was paid upon the delivery of the opinion, and the remainder will be
paid at the time of the closing of the Merger. In addition, BYL has agreed to
reimburse Ryan, Beck for its reasonable out-of-pocket expenses, which shall not
exceed $15,000 without the prior consent of BYL. BYL has also agreed to
indemnify Ryan, Beck and certain related persons against certain liabilities,
including liabilities under federal securities law, incurred in connection with
its services. The amounts of Ryan, Beck's fees were determined by negotiation
between BYL and Ryan, Beck.
Ryan, Beck has had an investment banking relationship with BYL since 1996.
Within the last two years Ryan, Beck has provided the following investment
banking services to BYL: in 1996 Ryan, Beck was a financial advisor for BYL's
initial public offering and the sole underwriter of a common stock offering
totaling $8.9 million (including the underwriter's overallotment option); in
1996 Ryan, Beck also acted as financial advisor with respect to BYL's
acquisition of Bank of Westminster which was consummated in June 14, 1996; and
Ryan, Beck has also acted as financial advisor to BYL with respect to various
other matters pursuant to the Advisory Agreement.
Ryan, Beck's research department actively follows BYL and regularly produces
earnings estimates on BYL. Ryan, Beck's trading department is a market maker in
BYL's common stock and, in such capacity, may from time to time own BYL
securities.
Ryan, Beck has had no prior relationship with DNB Financial Corporation.
Ryan, Beck's research department does not follow DNBF and Ryan, Beck is not a
market maker in DNBF stock.
As of , 1998, Ryan, Beck did not have a material position in either
BYL or DNBF common stock.
DNBF
OPINION OF DNBF'S FINANCIAL ADVISOR
DNBF's Board of Directors retained Hoefer & Arnett ("H&A") to render a
written opinion (the "H&A Fairness Opinion") as investment bankers as to the
fairness, from a financial point of view, to the DNBF Board and DNBF
Shareholders of the terms of the proposed merger of DNBF with and into BYL, as
defined in the Agreement. No limitations were imposed by the DNBF Board upon H&A
with respect to the investigations made or procedures followed in rendering the
Fairness Opinion.
A copy of the H&A Fairness Opinion, dated as of January 27, 1998, which sets
forth certain assumptions made, matters considered and limits on the review
undertaken by H&A, is attached as an Appendix D to this Joint Proxy
Statement/Prospectus. DNBF Shareholders are urged to read the H&A Fairness
Opinion in its entirety. The following summary of the procedures and analysis
performed, and assumptions used by H&A is qualified in its entirety by reference
to the text of such H&A Fairness Opinion. H&A's Fairness Opinion is directed to
the DNBF Board only and is directed only to the financial terms of the
transaction and does not constitute a recommendation to any DNBF Shareholder as
to how such shareholder should vote at the DNBF Special Meeting.
In arriving at its opinion, H&A reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) Annual Reports to Shareholders of BYL and
DNBF for the years ended December 31, 1995 and December 31, 1996; (iii)
Quarterly FDIC Call Reports for the quarters ended September 30, 1997, June 30,
1997, March 31, 1997 and December 31, 1996; (iv) certain other publicly
available financial and other information concerning BYL and DNBF; (v) the
historical market prices and trading activity for the common stock of BYL; and
(vi) publicly available information concerning other banks and holding
companies, the trading markets for their securities and the nature and terms of
certain other merger transactions we believe relevant to our inquiry. H&A held
discussions with senior management of BYL and DNBF concerning their past and
current operations, financial condition and prospects, as well as the results of
regulatory examinations.
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H&A reviewed with senior management of BYL earnings projections for 1998
through 2002 for BYL as a stand-alone entity, assuming the Merger does not
occur, prepared by BYL. H&A reviewed with senior management of DNBF earnings
projections for 1998 through 2002 as a stand-alone entity, assuming the merger
does not occur, as well as projected operating cost savings expected to be
achieved in each such years resulting from the Merger. Such projections were
prepared by DNBF senior management. Certain pro forma financial projections for
the years 1998 through 2002 for the combined entity were derived by H&A based
partially upon the projections discussed above, as well as H&A's own assessment
of general economic, market and financial conditions. In certain cases, such
combined pro forma financial projections included projected operating cost
savings derived by H&A partially based upon the projections discussed above to
be realizable in the Merger.
In conducting its review and in arriving at its opinion, H&A relied upon and
assumed the accuracy and completeness of the financial and other information
provided to it or publicly available, and did not attempt to independently
verify the same. H&A relied upon the managements of BYL and DNBF as to the
reasonableness of the financial and operating forecasts, projections and
projected operating cost savings and earnings enhancement opportunities (and the
assumptions and bases therefor) provided to it. H&A assumed that such forecasts,
projections and projected operating cost savings and earnings enhancement
opportunities reflect the best currently available estimates and judgments of
the applicable managements. H&A also assumed, without independent verification,
that the aggregate allowance for loan losses for BYL and DNBF are adequate to
cover such losses. H&A did not make or obtain any evaluations or appraisals of
the property of BYL or DNBF, nor did it examine any individual loan credit
files. For purposes of its opinion, H&A assumed that the Merger will have the
tax, accounting and legal effects described in the Agreement and relied, as to
legal matters, exclusively on counsel to DNBF, as to the accuracy of the
disclosures set forth in the Agreement. H&A's opinion is limited to the
fairness, from a financial point of view, to the holders of the DNBF Common
Stock of the terms of the proposed Merger of DNBF with and into BYL and does not
address DNBF's underlying business decision to proceed with the Merger.
As more fully discussed below, H&A considered such financial and other
factors as it deemed appropriate under the circumstances, including among others
the following: (i) the historical and current financial position and results of
operations of BYL and DNBF, including interest income, interest expense, net
interest income, net interest margin, provision for loan losses, non-interest
income, non-interest expense, earnings, dividends, internal capital generation,
book value, intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
BYL and DNBF; (ii) the assets and liabilities of BYL and DNBF, including the
loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (iii) the
nature and terms of certain other merger transactions involving banks and bank
holding companies. H&A also took into account its own assessment of general
economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuation and its
knowledge of the banking industry generally. H&A's opinion is based upon
conditions as they existed and could be evaluated on the date of its opinion and
the information made available to it through that date.
In connection with rendering its Fairness Opinion to the DNBF Board of
Directors, H&A performed certain financial analyses, which are summarized below
H&A believes that its analysis must be considered as a whole and that selecting
portions of such analysis and the factors considered therein, without
considering all factors and analysis, could create an incomplete view of the
analysis and the processes underlying H&A's Fairness Opinion. The preparation of
a fairness opinion is a complex process involving subjective judgments and is
not necessarily susceptible to partial analysis or summary description. In its
analyses, H&A made numerous assumptions with respect to industry performance,
business and economic conditions, and other matters, many of which are beyond
the control of DNBF and BYL. Any estimates contained in H&A's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates of values of companies do
not purport
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to be appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold. None of the financial analyses performed by H&A
was assigned a greater significance by H&A than any other.
The financial forecasts and projections of DNBF and BYL prepared by H&A were
based on projections provided by the respective companies as well as H&A's own
assessment of general economic, market and financial conditions. All such
information was reviewed with the management of DNBF. DNBF does not publicly
disclose internal management financial forecasts and projections of the type
provided to H&A in connection with its review of the proposed merger. Such
forecasts and projections were not prepared with a view towards public
disclosure. The forecasts, projections, and possible operating cost savings
prepared by H&A were based on numerous variables and assumptions, which are
inherently uncertain, including, without limitation, factors related to general
economic and market conditions. Accordingly, actual results could vary
significantly from those set forth in such forecasts and projections.
SUMMARY OF PROPOSAL. H&A reviewed the terms of the proposed transaction,
including the Exchange Ratio and the aggregate transaction value. A transaction
value of approximately $21.05 million, or $90.55 per share, represents a price
to stated book value at December 31, 1997 of 2.73, a price to 1997 earnings of
28.25 and a price to assets ratio of 28.98%. (Based on the issuance of 1,065,659
shares of BYL Common Stock and a market price of $19.75 per share for BYL Common
Stock, the closing price on January 27, 1998.)
COMPARABLE TRANSACTION ANALYSIS. H&A reviewed certain information relating
to the announced sale of 16 banking organizations in California in 1997 (the
"Comparable Transactions"). This data was obtained from Sheshunoff Information
Services, Inc.
On the basis of the Comparable Transactions, H&A calculated a range of
purchase prices as a multiple of stated book value for the Comparable
Transactions from a low of 1.22 to a high of 3.14, with an average of 1.97.
These transactions indicated a range of $40.53 per share to $104.31 per share,
with an average of $65.44 per share for DNBF (based on December 31, 1997
equity).
On the basis of the Comparable Transactions, H&A calculated a range of
purchase prices as a multiple of earnings for the Comparable Transactions from a
low of 8.12 to a high of 22.56, with an average of 17.63. These transactions
indicated a range of $26.07 per share to $72.42 per share, with an average of
$56.59 per share for DNBF (based on DNBF's 1997 earnings).
Finally, H&A calculated a range of purchase prices as a percentage of total
assets for the Comparable Transactions from a low of 9.40% to a high of 31.38%,
with an average of 17.14%. These transactions indicated a range of $29.38 per
share to $98.06 per share, with an average of $53.56 per share for DNBF (based
on December 31, 1997 total assets for DNBF).
The price to book value multiple, the price to earnings multiple and the
price to assets ratio resulting from the terms of the Agreement all compare
favorably with the prices paid in the Comparable Transactions.
Additionally, H&A reviewed pricing information on BYL's previous acquisition
of Bank of Westminster, Westminster, California, which was announced on January
12, 1996. Based on data obtained from Sheshunoff Information Services, Inc., BYL
paid 1.30 times book value, 13.41 times trailing 12 months earnings and 10.41%
of total assets. The multiples resulting from the terms of the Agreement in this
transaction all compare favorably with the prices paid in this previous
transaction by BYL.
PRESENT VALUE ANALYSIS. H&A calculated the present value of DNBF assuming
that DNBF remained independent. Based on projected earnings for DNBF for 1998
through 2002 and using a discount rate of 10%, an acceptable discount rate
considering the risk-return relationship most investors would demand for an
investment of this type as of the valuation date, the present value equaled
$41.22 per share, which is below the transaction value of $90.55.
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CONTRIBUTION ANALYSIS. H&A reviewed the relative contributions in terms of
various balance sheet items, net income and market capitalization to be made by
DNBF and BYL to the combined institution based on (i) balance sheet at December
31, 1997, and (ii) estimated 1998 earnings. The income statement and balance
sheet components analyzed included total assets, total loans (net), total
deposits, shareholders' equity and net income. This analysis showed that, while
DNBF Shareholders would own approximately 38.71% of the aggregate outstanding
shares of the combined institution (on a fully-diluted basis) based on the
issuance of 1,065,659 shares of BYL Common Stock, DNBF was contributing 30.61%
of total assets, 33.00% of total loans (net), 31.68% of total deposits, 34.24%
of shareholders' equity, and 26.10% of 1997 earnings.
PRO FORMA ANALYSIS. H&A compared the changes in the amount of earnings,
book value and dividends attributable to one share of DNBF Common Stock before
the Merger with the amounts attributable to the shares of BYL Common Stock for
which such shares of DNBF would be exchanged under the Agreement.
H&A's analysis utilized an exchange ratio of 4.585 and included pre-tax
merger savings and earnings enhancements of $600,000 in 1998 gradually
increasing to $1.5 million in 2002. On an earnings per share basis, DNBF
shareholders are projected to experience appreciation ranging from 68.23% to
107.30%. On a book value per share basis, DNBF Shareholders are projected to
experience appreciation ranging from 26.00% to 56.29%. Finally, on a dividend
per share basis, DNBF shareholders are projected to experience dilution of 8.22%
in the years 1998 through 2002.
STOCK TRADING HISTORY. H&A reviewed and analyzed the historical trading
prices and volumes for BYL Common Stock on a monthly basis from January 31, 1997
to December 31, 1997. The BYL Common Stock price has ranged from a low of $15.25
to a high of $19.50. The stock price to trailing 12 months earnings per share
has ranged from a low of 9.7 to a high of 17.7, with an average of 14.3. The
stock price to book value has ranged from a low of 1.40 to a high of 2.12, with
an average of 1.72. The volume of shares traded during a one month period has
ranged from 57,500 to 192,200 indicating a relatively active market for BYL
Common Stock.
OTHER ANALYSIS. H&A also reviewed selected investment research reports on
and earnings estimates for BYL. In addition, H&A prepared an overview of
historical financial performance of both DNBF and BYL.
The opinion expressed by H&A was based upon market, economic and other
relevant considerations as they existed and have been evaluated as of the date
of the opinion. Events occurring after the date of issuance of the opinion,
including but not limited to, changes affecting the securities markets, the
results of operations or material changes in the assets or liabilities of DNBF
could materially affect the assumptions used in preparing the opinion.
FINANCIAL ADVISORY FEES. Pursuant to an engagement letter dated January 8,
1998, DNBF engaged H&A to review the terms of the transaction and to render a
fairness opinion in connection with the Merger for $20,000 including
out-of-pocket expenses.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain material Federal income tax
consequences of the Merger applicable to holders of DNBF Common Stock who,
pursuant to the Merger, exchange their DNBF Common Stock solely for BYL Common
Stock and, in lieu of fractional shares, if any, cash. The discussion does not
address all aspects of Federal income taxation that may be important to
particular taxpayers in light of their personal investment circumstances or to
taxpayers subject to special treatment under the Federal income tax laws
(including, without limitation, certain financial institutions, insurance
companies, foreign persons, tax-exempt entities, dealers in securities, persons
who hold DNBF Common Stock as part of a straddle or hedging or conversion
transaction, and holders who acquired their DNBF Common Stock
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pursuant to the exercise of employee stock options or otherwise as
compensation). The discussion also assumes that the DNBF common stock will be
held as a capital asset at the Effective Time. Further, the following does not
discuss any aspects of state, local or foreign taxation. This discussion is
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change (possibly with retroactive effect) by legislation,
administrative action or judicial decision. No ruling has been or will be
requested from the Internal Revenue Service on any tax matter relating to the
Merger.
Vavrinek, Trine, Day & Co., LLP, certified public accountants and the
accountants to BYL and DNBF, have advised BYL and DNBF, respectively, that in
its opinion the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code and that BYL and DNBF will each be a party to that
reorganization within the meaning of Section 368(b) of the Code. The following
discussion assumes that the Merger will be treated in accordance with those
opinions. Accordingly, for U.S. Federal income tax purposes:
(a) no income, gain or loss will be recognized by any DNBF Shareholder upon
the exchange of shares of DNBF Common Stock solely for BYL Common Stock pursuant
to the Merger, except as discussed below with respect to cash received in lieu
of a fractional share interest in BYL Common Stock;
(b) the adjusted tax basis of the BYL Common Stock received by each DNBF
Shareholder pursuant to the Merger (less any basis allocable to fractional share
interests) will be equal to the adjusted tax basis of the shares of DNBF Common
Stock surrendered in exchange therefor; and
(c) the holding period of the BYL Common Stock received by each DNBF
Shareholder in the Merger (including any fractional share interest) will include
the period during which the shares of DNBF Common Stock surrendered in exchange
therefor were held.
A DNBF Shareholder who receives cash in the Merger in lieu of a fractional
share interest in BYL Common Stock generally will be treated for Federal income
tax purposes as having received the fractional share interest and then having
received cash in exchange for such interest. The DNBF Shareholder will recognize
gain or loss as of the Effective Time equal to the difference between the amount
of cash received and the portion of the DNBF Shareholder's adjusted tax basis in
the shares of DNBF Common Stock allocable to such fractional share interest. Any
gain or loss generally will be capital gain or loss if the DNBF Shareholder
holds the DNBF Common Stock as a capital asset at the Effective Time and will be
long-term capital gain or loss if the holding period (determined as described
above) for the fractional share interest deemed to be received and then
exchanged is more than one year. Under recently enacted legislation, in the case
of an individual, any such long-term capital gain will generally be subject to a
maximum tax rate of 28% if the holding period for the fractional share interest
is greater than one year. The maximum tax rate is reduced to 20% in the case of
an individual whose holding period is in excess of 18 months.
DNBF Shareholders and BYL Shareholders who exercise their Dissenters' Rights
and who receive cash in exchange for their respective shares will be treated as
having received such payment in exchange for such shares. In general, if such
shares are held as a capital asset at the Effective Time, the holder will
recognize capital gain or loss measured by the difference between the amount of
cash received and the holder's adjusted tax basis for the shares. If, however,
the holder owns, either actually or constructively, any DNBF Common Stock that
is exchanged in the Merger for BYL Common Stock or any BYL Common Stock, the
payment for dissenting shares to such holder could, in certain circumstances, be
treated as dividend income. In very general terms, under the constructive
ownership rules of the Code, a holder may be considered to own stock that is
owned, and in some cases constructively owned, by certain related individuals or
entities, as well as stock that the holder (or related individuals or entities)
has the right to acquire by exercising an option or converting a convertible
security. Each holder who contemplates exercising Dissenters' Rights should
consult such holder's own tax advisor as to the tax consequences of the receipt
of such payments including, without limitation, the possibility that any payment
to such holder may be treated as dividend income.
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A holder who receives cash pursuant to the Merger (as a result of exercising
Dissenters' Rights or in lieu of a fractional share interest in BYL Common
Stock) may be subject to information reporting and "backup withholding" at a
rate of 31 percent if the holder fails to provide its taxpayer identification
number on IRS Form W-9, fails to establish an exemption from backup withholding,
or is otherwise subject to backup withholding. Any amounts withheld under the
backup withholding rules may be allowed as a refund or a credit against such
holder's U.S. Federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
Consummation of the Merger is conditioned, among other things, on receipt by
BYL and by DNBF from Vavrinek, Trine, Day & Co., LLP, dated the Effective Time,
to the effect that (i) the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code, and (ii) BYL and DNBF will each be a
party to that reorganization within the meaning of Section 368(b) of the Code.
An opinion is not binding on the Internal Revenue Service, and there can be no
assurance that the Internal Revenue Service will not take a position contrary to
one or more of the positions reflected herein or that the positions herein will
be upheld by the courts if challenged by the Internal Revenue Service. The
opinion of Vavrinek, Trine, Day & Co., LLP described herein is or will be based,
among other things, on representations contained in certificates of BYL, DNBF
and others. The condition that Vavrinek, Trine, Day & Co., LLP issue the
above-described opinions is a principal term of the Merger, and as such the
condition may not be waived under California law by either BYL or DNBF after
their shareholders have approved the principal terms of the Merger. See "The
Merger Agreement--Waiver and Amendment."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING ON THE
PARTICULAR CIRCUMSTANCES OF EACH HOLDER OF BYL COMMON STOCK AND DNBF COMMON
STOCK AND OTHER FACTORS AND BECAUSE THE SUMMARY CONTAINED HEREIN IS NOT INTENDED
TO BE A COMPREHENSIVE DISCUSSION OF ALL POTENTIALLY RELEVANT TAX CONSEQUENCES,
EACH SUCH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER (INCLUDING THE
APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS).
REGULATORY APPROVALS
FEDERAL DEPOSIT INSURANCE CORPORATION
The Bank Merger is subject to prior approval by the Federal Deposit
Insurance Corporation (the "FDIC") under Section 18(c) of the Federal Deposit
Insurance Act ("FDIA"), which requires that the FDIC take into consideration,
among other things, competition, the financial and managerial resources and
future prospects of the banks concerned and the convenience and needs of the
communities to be served. The FDIA prohibits the FDIC from approving the Bank
Merger if (a) it would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any part of the United States; or (b) its effect in any section of
the country may be substantially to lessen competition or tend to create a
monopoly, or if it would in any other manner be in restraint of trade, unless
the FDIC finds that the anti-competitive effects of the Bank Merger are clearly
outweighed in the public interest by the probable effect of the transaction in
meeting the convenience and needs of the communities to be served. The FDIC has
the authority to deny an application if it concludes that the combined
organization would have an inadequate capital structure, taking into account,
among other factors, the nature of the business and operations and plans for
expansion. Furthermore, the FDIC must also assess the records of the depository
institutions under the Community Reinvestment Act of 1977, as amended (the
"CRA"). The CRA requires that the FDIC assess, when evaluating an application,
each depository institution's record of meeting the credit needs of its local
communities, including low- and moderate-income neighborhoods, consistent with
safe and sound operation and take such record into account when evaluating
certain regulatory applications. Both BOYL and DANB have "satisfactory" CRA
ratings.
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Under the FDIA, the Bank Merger may not be consummated until the fifteenth
day following the date of FDIC approval. If the United States Department of
Justice commenced an action challenging the Bank Merger on antitrust grounds
during such fifteen-day period, commencement of such action would stay the
effectiveness of the FDIC approval, unless a court specifically orders
otherwise.
BOYL and DANB submitted an application seeking approval of the Bank Merger
and related matters to the FDIC on February 23, 1998. Such approval was obtained
on , 1998.
FEDERAL RESERVE BOARD APPROVAL
The Merger is subject to prior approval by the Federal Reserve Board under
Section 3 of the BHCA, which requires that the Federal Reserve Board take into
consideration, among other things, competition, the financial and managerial
resources and future prospects of the holding companies and banks concerned and
the convenience and needs of the communities to be served. The BHCA prohibits
the Federal Reserve Board from approving the Merger if (a) it would result in a
monopoly or would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in any part of the
United States; or (b) its effect in any section of the country may be
substantially to lessen competition or tend to create a monopoly, or if it would
in any other manner be in restraint of trade, unless the Federal Reserve Board
finds that the anti-competitive effects of the Merger are clearly outweighed in
the public interest by the probable effect of the transaction in meeting the
convenience and needs of the communities to be served. The Federal Reserve Board
has the authority to deny an application if it concludes that the combined
organization would have an inadequate capital structure, taking into account,
among other factors, the nature of the business and operations and plans for
expansion. Furthermore, the Federal Reserve Board must also assess the records
of the depository institution subsidiaries of the Companies under the Community
Reinvestment Act of 1977, as amended (the "CRA"). The CRA requires that the
Federal Reserve Board assess, when evaluating an application, each depository
institution's record of meeting the credit needs of its local communities,
including low- and moderate-income neighborhoods, consistent with safe and sound
operation and take such record into account when evaluating certain regulatory
applications. Both BOYL and DANB have CRA ratings of "satisfactory."
Under the BHCA, the Merger may not be consummated until the fifteenth day
following the date of Federal Reserve Board approval. If the United States
Department of Justice commenced an action challenging the Merger on antitrust
grounds during such fifteen-day period, commencement of such action would stay
the effectiveness of the Federal Reserve Board approval, unless a court
specifically orders otherwise.
Pursuant to Section 225.12 of Federal Reserve Board Regulation Y, BYL
submitted an application seeking the waiver of the approval requirements of the
Federal Reserve Board of the Merger on , 1998. The Federal Reserve
Board issued the waiver on , 1998.
CALIFORNIA COMMISSIONER OF FINANCIAL INSTITUTIONS' APPROVAL
BOYL must obtain the approval of the Commissioner pursuant to Section 4880
ET SEQ. of the California Financial Code for the Bank Merger. BOYL submitted an
application seeking approval of the Bank Merger to the Commissioner on
, 1998. Such approval was obtained on , 1998.
OTHER REGULATORY APPROVALS
The Companies are not aware of any material governmental approvals or
actions that are required for consummation of the Merger or the Bank Merger,
except as described above. Should any such approval or action be required, it is
currently contemplated that such approval or action would be sought. The Merger
cannot proceed in the absence of the required regulatory approvals.
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RESALE OF BYL COMMON STOCK
All shares of BYL Common Stock received by DNBF Shareholders in the Merger
will be freely transferable, except that shares of BYL Common Stock received by
such shareholders who are deemed to be "affiliates" (as defined for purposes of
Rule 145 under the Securities Act) of DNBF as of the date of the DNBF Special
Meeting may be resold by them only pursuant to an effective registration
statement under the Securities Act covering resales of such shares or in
transactions permitted by the resale provisions of Rule 145 of the Securities
Act (or pursuant to Rule 144 under the Securities Act in the case of such
persons who become affiliates of BYL) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of the Companies
generally include individuals or entities that control, are controlled by, or
are under common control with, such entities and may include certain officers
and directors of such entities as well as principal shareholders of such
entities.
DNBF has agreed in the Agreement to use commercially reasonable efforts to
obtain a written agreement from each person who is identified as a possible
"affiliate" (as defined for purposes of Rule 145 under the Securities Act) of
DNBF providing that such person will not sell, pledge, transfer or otherwise
dispose of any shares of BYL Common Stock to be received by such person in the
Merger, except in compliance with the applicable provisions of the Securities
Act and until such time as financial results covering at least 30 days of
combined operations of BYL and DNBF have been published. In addition, each
person who is an affiliate of BYL or will become an affiliate of BYL on the
Effective Time will be required to execute a standstill letter with respect to
his or her ability to sell shares of BYL Common Stock acquired in the Merger
following consummation of the Merger. See "The Merger Agreement--Exchange of
Stock Certificates."
It is a condition to the consummation of the Merger that the Merger be
accounted for as a pooling-of-interests for accounting and financial reporting
purposes. Certain Commission guidelines indicate that the pooling-of-interests
method generally will not be challenged on the basis of selling of shares by
affiliates of the acquiring or the acquired company if such affiliates do not
dispose of any shares (other than a "DE MINIMIS" number of shares) of the stock
they received in connection with the Merger during the period beginning 30 days
before the Merger and ending when financial results covering at least 30 days of
post-merger operations of the combined enterprise have been published. See "The
Merger--Accounting Treatment."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL
In considering the recommendations of the Boards, the Shareholders should be
aware that certain members of management and the Boards of each of the Companies
have certain interests in the transactions contemplated by the Agreement that
are in addition to the interests of Shareholders generally and which may create
potential conflicts of interest. These interests include, among others,
provisions in the Agreement relating to the indemnification of DNBF and DANB
officers and directors; directors' and officers' liability insurance; the
appointment of three members of the DNBF Board to the BYL Board and the BOYL
Board immediately at the Effective Time; and certain employment and consulting
agreements and employee benefits discussed below.
DIRECTORS' AND OFFICERS' INSURANCE
The Agreement provides that from and after the Effective Time for a period
of 18 months after the Effective Time, DNBF at its expense shall maintain in
effect policies of directors and officers liability insurance with respect to
all matters arising from facts or events which occurred before the Effective
Time of the Merger for which DNBF would have an obligation to indemnify its
directors and officers. See "The Merger Agreement--Conditions."
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APPOINTMENT OF DIRECTORS
Pursuant to the Agreement, Henry C. Cox, II, Eddie R. Fischer and Neil F.
Hatcher, each currently a director of DNBF, will be appointed a member of the
BYL Board and the BOYL Board upon consummation of the Merger. Immediately prior
to the Effective Time, the BYL Board and the BOYL Board will adopt resolutions
fixing the exact number of directors at 9 and appointing Messrs. Cox, Fischer
and Hatcher to fill the vacancies created thereby.
Effective January 1, 1997, the Board of Directors of BOYL set the amount of
compensation for each director to $2,000 per month, minus the amount of medical
insurance premium payments paid on behalf of each director if a director elects
to be covered under BOYL's medical insurance plan, except Messrs. Ucciferri and
Moore receive $500 per month each as members of the Board of BOYL. The directors
receive no additional compensation as directors of BYL or as members of any
committees of BYL or BOYL. Effective January 1, 1998, the Board of Directors of
BOYL increased the amount of compensation of its Chairman of the Board of $2,500
per month.
EMPLOYMENT AND CONSULTING AGREEMENTS
Mr. Hatcher currently has a five-year employment agreement with DANB that
provides for an annual base salary of $150,000, increases at the discretion of
the Board, use of an automobile, medical, dental and life insurance benefits,
and vacation and sick time. DANB may terminate the agreement for cause if the
employee willfully breaches the agreement, or habitually neglects the duties
which he is required to perform, or for any reason is unable to perform the
employee's usual and normal duties for a period of 90 days. If the agreement is
terminated for other than cause, then the employee shall be entitled to receive
a lump sum payment equal to six months salary. Mr. Hatcher has agreed to cancel
his existing employment contract with DANB at the Effective Time of the Merger.
BOYL intends to enter into five-year consulting agreements and noncompete
agreements with Messrs. Hatcher and West at the Effective Time of the Merger in
which Messrs. Hatcher and West would perform services as requested by the
President and Chief Executive Officer of BOYL, including attendance at Board and
committee meetings, developing collection strategies, and customer retention and
customer development activities. Mr. Hatcher will receive $100,000 per year, and
Mr. West will receive $40,000 per year, for such services. Mr. Hatcher is a
founding director, long-time resident, member of the local business community
and President and Chief Executive Officer of DNBF and DANB. Mr. West is a
founding director, chairman of the DANB loan committee, a long-time resident and
member of the local business community. See "COMPENSATION OF DNBF EXECUTIVE
OFFICERS--DIRECTORS AND EXECUTIVE OFFICERS."
BOYL also intends to enter into a three-year employment agreement with Ms.
Gloria Van Kampen at the Effective Time of the Merger in which Ms. Van Kampen
will serve as an Executive Vice President of BOYL. Ms. Van Kampen shall receive
an annual base salary of $112,000 per year, a car for her use, ability to
participate in other benefit programs of BOYL, accrual of sick and vacation
time, and health, dental and insurance benefits. The employment agreement will
also provide that if Ms. Van Kampen is terminated without cause, she will
receive twelve (12) months salary, and if as a result of a merger, change of
control or other transaction Ms. Van Kampen is terminated within nine (9) months
of such event, then Ms. Van Kampen shall receive an amount equal to twenty-four
months salary and other benefits.
STOCK OPTIONS
The directors and executive officers of DNBF exercised all 22,500 options
that were outstanding in December 1997. The Agreement provides that BYL, as part
of the consideration, will increase the Aggregate Transaction Value equal to the
net proceeds received from the options. DNBF has covenanted
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that no additional options are outstanding or will be granted prior to the
Effective Time of the Merger. See "The Merger Agreement--Conversion of DNBF
Common Stock."
OTHER BENEFIT PLANS AND AGREEMENTS
The officers and employees of DNBF participate in a 401(k) plan and in
certain other DNBF employee benefit plans that are generally applicable to all
DNBF employees. DNBF has agreed to terminate such plan at the Effective Time
without any liability to BYL or DNBF. See "The Merger Agreement--Certain
Covenants--Employee Benefits."
RELATED TRANSACTIONS
DANB leases its branch office and administrative office located at 7710
Limonite Avenue, Riverside, from a partnership whose partners are Messrs. Cox,
Fischer, Neilson, and West, Directors of DANB and DNBF. In 1997, DANB paid a
monthly rental of $16,657 for 10,760 square feet for branch and administrative
uses. The leases expire in 2002, and July 1998, respectively, for the branch
office and the administrative office, with two ten-year renewal options under
each lease.
Other than the Agreement, the Warrant Agreement, the Director Agreements,
employment agreements and consulting and noncompete agreements, and the other
transactions contemplated by and described in this Joint Proxy
Statement/Prospectus, the Companies do not know of any past, present or proposed
material contracts, arrangements or understandings, other than banking
transactions in the ordinary course of business, between BYL or its affiliates
on the one hand and DNBF and its affiliates on the other hand.
DISSENTERS' RIGHTS
BYL. Because BYL Common Stock is traded on the Nasdaq, dissenters' rights
will be available to BYL Shareholders only if the holders of five percent (5%)
or more of BYL Stock make a written demand upon BYL for the purchase of
dissenting shares in accordance with Chapter 13 of the California Law. If this
condition is satisfied and the Merger is consummated, BYL Shareholders who
dissent from the Merger by complying with the procedures set forth in Chapter 13
would be entitled to receive an amount equal to the fair market value of their
shares as of January 28, 1998, the day before the public announcement of the
Merger. The high, low and closing sales prices for BYL Common Stock on January
28, 1998 were $20.50, $19.75 and $19.75, respectively. A copy of Chapter 13 of
the California Law is attached hereto as Appendix F and should be read for more
complete information concerning dissenters' rights. THE REQUIRED PROCEDURE SET
FORTH IN CHAPTER 13 OF THE CALIFORNIA LAW MUST BE FOLLOWED EXACTLY OR ANY
DISSENTERS' RIGHTS MAY BE LOST. The information set forth below is a general
summary of dissenters' rights as they apply to BYL Shareholders and is qualified
in its entirety by reference to Appendix F.
In order to be entitled to exercise dissenters' rights, a BYL Shareholder
must vote "Against" the Merger. Thus, any BYL Shareholder who wishes to dissent
and executes and returns a proxy in the accompanying form must specify that his
or her shares are to be voted "Against" the Merger. If the BYL Shareholder
returns a proxy without voting instructions or with instructions to vote "For"
the Merger, his or her shares will automatically be voted in favor of the Merger
and the BYL Shareholder will lose any dissenters' rights. In addition, if the
BYL Shareholder abstains from voting his or her shares, the BYL Shareholder will
lose his or her dissenters' rights.
Furthermore, in order to preserve his or her dissenters' rights, a BYL
Shareholder must make a written demand upon BYL for the purchase of dissenting
shares and payment to such BYL Shareholder of their fair market value,
specifying the number of shares held of record by such BYL Shareholder and a
statement of what the BYL Shareholder claims to be the fair market value of
those shares as of January 28, 1998. Such demand must be addressed to BYL, 18206
Imperial Highway, Yorba Linda, California 92886;
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Attention: Barry J. Moore, and must be received by BYL not later than the date
of the BYL Meeting. A vote "Against" the Merger does not constitute such written
demand.
If the holders of five percent (5%) or more of the outstanding shares of BYL
Stock have submitted a written demand for BYL to purchase their shares, these
demands are received by BYL on or before the date of the BYL Meeting and the
Merger is approved by the BYL Shareholders will have ten days after such
approval to send to those BYL Shareholders who have voted against the approval
of the Merger written notice of such approval accompanied by a copy of Chapter
13 of the California Law, a statement of the price determined by BYL to
represent the fair market value of the dissenting shares as of January 28, 1998,
and a brief description of the procedure to be followed if a BYL Shareholder
desires to exercise dissenters' rights. Within 30 days after the date on which
the notice of the approval of the Merger is mailed, the dissenting shareholder
must surrender to BYL, at the office designated in the notice of approval, the
certificates representing the dissenting shares to be stamped or endorsed with a
statement that they are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed. Any shares of BYL Stock that
are transferred prior to their submission for endorsement lose their status as
dissenting shares.
If BYL and the dissenting shareholder agree that the surrendered shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of the agreement. Payment of the fair
market value of the dissenting shares shall be made within 30 days after the
amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the Merger have been agreed upon or 30 days after any
statutory or contractual conditions to the Merger have been satisfied, whichever
is later, subject to the surrender of the certificates therefor, unless provided
otherwise by agreement.
If BYL denies that the shares surrendered are dissenting shares, or BYL and
the dissenting shareholder fail to agree upon a fair market value of such shares
of BYL Stock, then the dissenting shareholder of BYL must, within six months
after the notice of approval is mailed, file a complaint at the Superior Court
of the proper county requesting the court to make such determinations or
intervene in any pending action brought by any other dissenting shareholder. If
the complaint is not filed or intervention in a pending action is not made
within the specified six-month period, the dissenters' rights are lost. If the
fair market value of the dissenting shares, is at issue, the court will
determine, or will appoint one or more impartial appraisers to determine, such
fair market value.
A dissenting shareholder may not withdraw his or her dissent or demand for
payment unless BYL consents to such withdrawal.
DNBF. Each holder of shares of DNBF Stock which were outstanding as of the
Record Date and remain outstanding at the Effective Time who did not vote such
shares in favor of the proposal to approve the Merger by complying with the
procedures set forth in Chapter 13 of the California Law would be entitled to
receive an amount equal to the fair market value of his or her shares as of
January 28, 1998, the day before the public announcement of the Merger. H&A has
concluded that the fair market value for DNBF Stock on January 28, 1998 was
$40.00. A copy of Chapter 13 of the California Law is attached hereto as
Appendix F and should be read for more complete information concerning
dissenters' rights. THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA LAW MUST BE FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST.
The information set forth below is a general summary of dissenters' rights as
they apply to DNBF shareholders and is qualified in its entirety by reference to
Appendix F.
In order to be entitled to exercise dissenters' rights, a DNBF Shareholder
must not vote "For" the Merger. Thus, any DNBF Shareholder who wishes to dissent
and executes and returns a proxy in the accompanying form must specify that his
or her shares are to be either voted "Against" or "Abstain" on the Merger. If
the DNBF Shareholder returns a proxy without voting instructions or with
instructions to vote
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"For" the Merger, his or her shares will automatically be voted in favor of the
Merger and the DNBF Shareholder will lose his or her dissenters' rights.
If the Merger is approved by the DNBF Shareholders, DNBF will have ten days
after such approval to send to those DNBF Shareholders who did not vote in favor
of the Merger written notice of such approval accompanied by a copy of Chapter
13 of the California Law, a statement of the price determined by DNBF to
represent the fair market value of the dissenting shares as of January 28, 1998
and a brief description of the procedure to be followed if a DNBF Shareholder
desires to exercise dissenters' rights. Within 30 days after the date on which
the notice of the approval of the Merger is mailed, the dissenting shareholder
must make written demand upon DNBF for the purchase of dissenting shares and
payment to such DNBF Shareholder of their fair market value, specifying the
number of shares held of record by such shareholder and a statement of what the
DNBF Shareholder claims to be the fair market value of those shares as of
January 28, 1998, and must surrender to DNBF, at the office designated in the
notice of approval, the certificates representing the dissenting shares to be
stamped or endorsed with a statement that they are dissenting shares or to be
exchanged for certificates of appropriate denomination so stamped or endorsed.
Any shares of DNBF Common Stock that are transferred prior to their submission
for endorsement lose their status as dissenting shares.
If DNBF and the dissenting shareholder agree that the surrendered shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of the agreement. Subject to the
restrictions imposed under Chapter 13 of the California Law on the ability of
DNBF to purchase its outstanding shares, payment of the fair value of the
dissenting shares shall be made within 30 days after the amount thereof has been
agreed upon or 30 days after any statutory or contractual conditions to the
Merger have been satisfied, whichever is later, subject to the surrender of the
certificates therefor, unless provided otherwise by agreement.
If DNBF denies that the shares surrendered are dissenting shares or DNBF and
the dissenting shareholder fail to agree upon a fair market value of such shares
of DNBF Stock, then the dissenting shareholder of DNBF must, within six months
after the notice of approval is mailed, file a complaint at the Superior Court
of the proper county requesting the court to make such determinations or
intervene in any pending action brought by any other dissenting shareholder. If
the complaint is not filed or intervention in a pending action is not made
within the specified six-month period, the dissenter's rights are lost. If the
fair market value of the dissenting shares is at issue, the court will
determine, or will appoint one or more impartial appraisers to determine, such
fair market value.
A dissenting shareholder may not withdraw his or her dissent or demand for
payment unless DNBF consents to such withdrawal.
FAILURE TO TAKE ANY NECESSARY STEP WILL RESULT IN A TERMINATION OR WAIVER OF
THE RIGHTS OF THE HOLDER UNDER CHAPTER 13 OF THE CGCL. A PERSON HAVING A
BENEFICIAL INTEREST IN BYL COMMON STOCK OR DNBF COMMON STOCK THAT IS HELD OF
RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A TRUSTEE OR NOMINEE, MUST ACT
PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE REQUIREMENTS OF CHAPTER 13 OF
THE CGCL IN A TIMELY MANNER IF SUCH PERSON ELECTS TO DEMAND PAYMENT OF THE FAIR
MARKET VALUE OF SUCH SHARES.
It is a condition to BYL's obligation to consummate the Merger that
Dissenters' Rights have been exercised by no more than five percent of the
outstanding shares of DNBF Common Stock. In addition, it is a condition of both
parties obligation to consummate the Merger that Dissenters' Rights have been
exercised by no more than ten percent of the BYL Common Stock and DNBF Common
Stock, giving rise to Dissenters' Rights for the Shareholders who have perfected
such Dissenters' Rights, the Merger will not be consummated unless both parties
waive this Dissenters' Rights condition.
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ACCOUNTING TREATMENT
For accounting and financial reporting purposes, it is currently expected
that the Merger will be accounted for as a pooling-of-interests in accordance
with generally accepted accounting principles, and confirmation by Vavrinek,
Trine, Day & Co., LLP for BYL of the ability to use such accounting treatment is
one of the conditions to the consummation of the Merger. See "The Merger
Agreement--Conditions." Under this method of accounting, the previously recorded
assets and liabilities of BYL and DNBF would be carried forward to the Surviving
Corporation at their recorded amounts; income and expenses of the Surviving
Corporation would include income and expenses of the Companies for the entire
fiscal year in which the Merger occurs; and the reported results of the separate
corporations for prior periods would be combined and restated as the results of
the Surviving Corporation.
In the event that the Pooling Condition is not satisfied the Companies will
either terminate the Agreement for failure of the Pooling Condition or waive
such condition and resolicit the vote of the Shareholders to approve the
principal terms of the Merger with the Merger being accounted for using the
purchase method of accounting.
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THE MERGER AGREEMENT
SET FORTH BELOW IS A DESCRIPTION OF CERTAIN OF THE TERMS AND CONDITIONS OF
THE AGREEMENT AND RELATED MATTERS. THIS SUMMARY OF THE TERMS AND CONDITIONS OF
THE AGREEMENT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE AGREEMENT AS SET FORTH IN APPENDIX C
HERETO, AND THE TEXT THEREOF IS INCORPORATED BY REFERENCE HEREIN.
THE MERGER
The Agreement was entered into by and between the Companies on January 29,
1998. Pursuant to the Agreement, at the Effective Time DNBF will merge with and
into BYL, and BYL will be the Surviving Corporation in the Merger. The separate
corporate existence of DNBF will then cease. In addition, at the Effective Time
DANB will merge with and into BOYL, and BOYL will be the Surviving Bank in the
Bank Merger. The separate corporate existence of DANB will then cease.
CONVERSION OF DNBF COMMON STOCK
Under the terms of the Agreement, each share of DNBF Common Stock issued and
outstanding at the Effective Time (other than shares which have not been voted
in favor of the principal terms of the Merger and with respect to which
Dissenters' Rights shall have been perfected in accordance with the CGCL will be
converted into the right to receive shares of BYL Common Stock on, and subject
to, the terms and conditions contained in the Agreement, equal to the quotient
(such quotient, the Exchange Ratio) of (a) the DNBF Transaction Price Per Share
divided by (b) the Stipulated BYL Share Value ($18.75) or if adjusted, by the
Adjusted BYL Share Value (as defined below). In the event that the Average Price
of BYL Stock shall be more than $22.50 or less than $15.00 (such values, the
Threshold Values), the Stipulated BYL Share Value shall be adjusted (such
adjusted price, the Adjusted BYL Share Value), with such adjustment equal to one
half the difference between the Average Price of BYL Stock and $18.75 per share.
For example, if the Average Price of BYL Stock is $23.50, then the Adjusted BYL
Share Value would be $21.125, and if the Average Price of BYL Common Stock is
$14.00, then the Adjusted BYL Share Value would be $16.375.
The Average Price of BYL Common Stock means the average of the Closing price
of BYL Stock for the 20 consecutive trading days immediately preceding the three
trading days prior to the Effective Time of the Merger.
The DNBF Transaction Price Per Share is equal to the quotient of (A) the sum
of (i) 2.7 times the DNBF aggregate book value as of September 30, 1997 of
$6,911,426; (ii) the net proceeds received by DNBF from the exercise of up to
22,500 DNBF Options at the average weighted exercise price of $23.04 per share;
and (iii) 1.5 times the change in net retained earnings of DNBF, between
September 30, 1997 and the end of the month prior to the closing date, and (B)
the issued and outstanding shares of DNBF Comm Stock on the Effective Time, up
to a maximum of 232,423 shares.
See "The Meetings--Matters To Be Considered At the Meetings--DNBF" for
information concerning the number of shares of BYL to be outstanding upon
consummation of the Merger and related matters.
EFFECTIVE TIME
The Merger will become effective upon the filing of an agreement of merger
with the California Secretary of State in accordance with the provisions of the
CGCL. At the Effective Time, DNBF shall be merged with and into BYL. DNBF's
separate corporate existence will thereupon cease.
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The Bank Merger will become effective upon the filing of an agreement of
merger with the California Secretary of State in accordance with the provisions
of the CGCL. At the Effective Time, DANB shall be merged with and into BOYL.
DANB's separate corporate existence will thereupon cease.
EXCHANGE OF STOCK CERTIFICATES
As of the Effective Time, BYL will deposit, or will cause to be deposited,
with a bank or other company selected by BYL (the "Exchange Agent"),
certificates representing the shares of BYL Common Stock and cash in lieu of
fractional shares to be exchanged pursuant to the Agreement for DNBF Common
Stock (the "Exchange Ratio").
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to each DNBF Shareholder who holds of record immediately prior
to the Effective Time shares of DNBF Common Stock (excluding any shares canceled
pursuant to the Agreement or Dissenting DNBF Shares) a letter of transmittal
(the "Letter of Transmittal"), instructions for use in effecting the surrender
of the certificates representing shares of DNBF Common Stock (a "Certificate")
in exchange for the Exchange Ratio, and, in the case of holders of 5% or more of
DNBF Common Stock at the Effective Time, a letter relating to the ability of
certain "Affiliates" (as such term is used in paragraphs (c) and (d) of Rule 145
under the Securities Act) of DNBF to sell their shares.
Upon surrender of a Certificate or Certificates to the Exchange Agent,
together with a duly executed Letter of Transmittal, and such other documents
that BYL or the Exchange Agent shall reasonably request, the holder of such
Certificate(s) will be entitled to receive in exchange therefor a certificate (a
"BYL Certificate") representing that number of shares of BYL Common Stock into
which the shares represented by the Certificate(s) surrendered have been
converted pursuant to the Agreement and a check representing the amount of cash
in lieu of any fractional shares and unpaid dividends and distributions, if any,
which such holder has the right to receive in respect of the Certificate
surrendered pursuant to the Agreement. After the Effective Time and until
surrendered, each Certificate will be deemed to represent the right to vote the
number of whole shares of BYL Stock into which the respective number of shares
of DNBF Stock are converted, and receive the Exchange Ratio.
No dividends or other distributions declared after the Effective Time on BYL
Common Stock will be paid with respect to any shares of DNBF Common Stock
represented by a Certificate until such Certificate is surrendered. Following
surrender of any such Certificate, there will be paid to the holder of the BYL
Certificates issued in exchange therefor, without interest, the amount of
dividends or other distributions with a record date after the Effective Time
payable with respect to whole shares of BYL Common Stock and not paid, less the
amount of any withholding taxes which may be required, and, at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but before surrender and a payment date after surrender
payable with respect to whole shares of BYL Common Stock, less the amount of any
withholding taxes which may be required.
CONDUCT OF THE BUSINESS OF DNBF AND BYL PRIOR TO THE MERGER
Pursuant to the Agreement, each of the Companies agreed that, during the
period from the date of the Agreement until the Effective Time, except as
permitted by the Agreement, it and each of its subsidiaries will, among other
things, (a) conduct its business in the usual, regular and ordinary course,
consistent with past practice, in accordance with safe and sound practices, (b)
use their best efforts to preserve their business organization intact and retain
its present officers and employees, and preserve the goodwill of those having
business relations with either party, (c) take no action which would adversely
affect or delay the ability of the Companies to obtain any necessary approvals,
consents or waivers of any governmental authority required for the transactions
contemplated in the Agreement or to perform its covenants and agreements on a
timely basis under the Agreement, (d) promptly notify each other of any material
adverse change, (e) promptly notify each other of any fact or event that causes
or could
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reasonably be expected to cause the DNBF exhibits or the BYL exhibits to be
incorrect in any material respect as of the date of the Agreement or as of the
closing date, (f) use reasonable best efforts to obtain any requisite third
party consent with respect to any contract, agreement, lease, license,
amendment, permit or release that is material to the business of BYL on a
consolidated basis or that is contemplated or required to be obtained by BYL in
connection with the Merger, (g) allow continuing access to the business,
operations, properties, books files and records of the other party, (h) promptly
notify the other party of any breach or impending breach of the Agreement, (i)
promptly submit all regulatory applications for approval of the transaction, and
cooperate with the other party in preparing such applications, and (i) the 1997
financial statements shall be prepared in accordance with GAAP.
REPRESENTATIONS AND WARRANTIES
The Agreement contains customary representations and warranties from DNBF
relating to, among other things, (a) corporate organization and similar
corporate matters; (b) capital structure; (c) subsidiary ownership; (d)
financial statements; (e) books and records; (f) compliance with respect to
filing requirements of certain regulatory agencies; (g) authorization,
execution, delivery, performance and enforceability of the Agreement and related
matters; (h) insurance policies; (i) title to assets; (j) absence of material
litigation; (k) filing of tax returns and payment of taxes; (l) compliance with
applicable laws; (m) absence of regulatory action; (n) performance of
obligations under certain contracts, leases, indentures, and other agreements;
(o) certain contracts relating to certain employment, consulting and benefit
matters; (p) brokers and finders fees; (q) absence of material changes or events
since December 31, 1997; (r) compliance with environmental laws; (s) retirement
and other employee plans and matters relating to the Employee Retirement Income
Security Act of 1974, as amended; (t) the accuracy of information supplied in
connection with the Registration Statement and this Joint Proxy
Statement/Prospectus; (u) loans and the adequacy of the allowance for possible
loan losses; (v) compliance with the Community Reinvestment Act; (w) certain
bank regulatory matters; (x) trust administration; (y) absence of certain
derivative investments; (z) absence of undisclosed liabilities; and (aa) insider
loans and other transactions.
The Agreement contains customary representations and warranties from BYL
relating to, among other things, (a) corporate organization and similar
corporate matters; (b) capital structure; (c) subsidiary ownership; (d)
financial statements; (e) compliance with respect to filing requirements of
certain regulatory agencies; (f) authorization, execution, delivery, performance
and enforceability of the Agreement and related matters; (g) insurance policies;
(h) absence of material litigation; (i) compliance with applicable laws; (j)
absence of regulatory action; (k) performance of obligations under certain
contracts, leases, indentures, and other agreements; (l) brokers and finders
fees; (m) absence of material changes or events since December 31, 1997; (n) the
accuracy of information supplied in connection with the Registration Statement
and this Joint Proxy Statement/Prospectus; and (o) absence of undisclosed
liabilities.
CERTAIN COVENANTS
DNBF. DNBF has covenanted and agreed that, during the period from the date
of the Agreement to the Effective Time, DNBF will not without the prior written
consent of BYL (a) incur any indebtedness for borrowed money other than in the
ordinary course of business; (b) adjust, split, combine, reclassify or issue any
capital stock; (c) make, declare or pay any dividend (other than a cash dividend
of $0.25 per share of DNBF Common Stock in February 1998) or make any other
distribution on, or directly or indirectly redeem, purchase or otherwise
acquire, any shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock; (d) issue
any additional shares of capital stock; (e) sell, transfer, mortgage, encumber
or otherwise dispose of any of its material properties or assets and maintain
its assets and properties in good condition and repair; (f) cancel or accelerate
any material indebtedness of any person or any claims held by any person; (g)
except as permitted by the Agreement, make any investment either by purchase of
stock or securities, contributions to capital, property transfers, or purchase
of any property or assets of any other individual, corporation or other entity;
(h) enter into or
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terminate any material contract; (i) refrain from making any loan or other
extension of credit to any DNBF or DANB director, officer, employee or 5%
shareholder, except in accordance with existing practice or policy; (j) other
than in the ordinary course of business or as specifically contemplated by the
Agreement, increase in any manner the compensation or fringe benefits of any of
its employees or consultants; (k) sell any assets or properties, except in the
usual and ordinary course, consistent with past practice, and in accordance with
safe and sound practice; (m) amend its Articles of Incorporation or its Bylaws;
(n) refrain from making credit underwriting policies less stringent, or grant
any loan exceeding $300,000, or grant or renew any classified extension of
credit, or acquire any other real estate owned, without BYL's consent; (o) make
any capital expenditures, other than ordinary repairs or replacements, not
exceeding $5,000; (p) commencing any proceeding to merge, consolidate or
liquidate or dissolve, or obligating itself to do so; (q) making any special or
extraordinary material payments to any person or alter its method of
establishing interest rates for deposits; (r) committing any act which will
cause a breach of any agreement and which will have a material adverse effect on
DNBF's or DANB's business, financial condition or results of operations; (s)
instituting, settling or agreeing to any material claim, action or proceeding
unless not a material adverse change, except for instituting actions against
DANB borrowers; (t) make, solicit, encourage, initiate or enter into any
agreement in principle regarding the acquisition of DNBF or any of its business
or properties; or (u) agree to, or make any commitment to, take any of the
actions prohibited above.
DNBF has also agreed that from the date of the Agreement until the Effective
Time, it will (a) use its best efforts to maintain intact the goodwill of its
depositors, customers and those having business relationships with it and
continue to develop such customer relationships; (b) maintain insurance and bond
coverage at least equal to that now in effect; (c) meet its material contractual
obligations, (d) observe and conform to lawful requirements applicable to its
business; (e) file all reports and returns required to be filed with any
governmental entity; (f) maintain its books of account and records in the
regular manner in accordance with all applicable statutory and regulatory
requirements; (g) promptly advise BYL of any event or other transaction whereby
any person acquires 5% or more of the outstanding shares of DNBF or DANB; (h)
charge-off all loans or other assets in accordance with generally accepted
accounting principles or regulatory accounting principles; (i) furnish certain
reports to BYL on a monthly basis; (j) notify BYL of the filing of any material
litigation; (j) conduct good faith settlement negotiations and settle when
deemed appropriate by the parties of all existing or threatened litigation; (k)
continuing access to the books and records of DNBF and DANB; (l) preparation and
contents of the 1997 financial statements of DNBF; (m) inform BYL concerning
certain classified credits; (n) inform BYL of any impending breach of the
agreement; (o) preparation, filing with regulatory agencies and obtaining all
necessary consent for soliciting shareholder approval of the transaction; (p)
terminate the Stock Option Plan and Agreements prior to the Effective Time; (q)
paying one-half the cost of terminating officers and employees of DNBF and DANB
which will be determined five days prior to the end of the month prior to the
Effective Time; (r) paying one-half of the cost of terminating certain contracts
that will be determined by a committee composed of officers from BYL and DNBF;
(s) terminating all employee and benefit programs of DNBF; (t) assisting in the
preparation of the Registration Statement on Form S-4 and this Joint Proxy
Statement/ Prospectus; (u) coordination and consulting regarding any press
releases or other publicity; (v) obtaining from DNBF affiliates acknowledgement
of restrictions concerning the sale or other disposition of BYL Stock; and (w)
maintain certain directors and officers liability insurance following the
Effective Time of the Merger.
BYL. BYL has also agreed that from the date of the Agreement until the
Effective Time, it will (a) use its best efforts to maintain intact the goodwill
of its depositors, customers and those having business relationships with it;
(b) comply with all rules applicable to its business; (c) file all reports and
returns required to be filed with any governmental entity; (d) maintain its
books of account and records in the regular manner in accordance with all
applicable statutory and regulatory requirements; (e) continuing access to the
books and records of BYL and BOYL; (f) preparation and contents of the 1997
financial statements of BYL; (g) inform DNBF of any impending breach of the
agreement; (h) preparation, filing
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with regulatory agencies and obtaining all necessary consent for soliciting
shareholder approval of the transaction; (i) paying one-half the cost of
terminating officers and employees of DNBF and DANB which will be determined
five days prior to the end of the month prior to the Closing Date; (j) paying
one-half of the cost of terminating certain contracts that will be determined by
a committee composed of officers from BYL and DNBF; (k) assisting in the
preparation of the Registration Statement on Form S-4 and this Joint Proxy
Statement/Prospectus; and (l) provide certain employee benefits to employees of
DNBF and DANB who remain employees of BYL or BOYL following the Closing Date.
SHAREHOLDER MEETINGS
The Companies have agreed to take all action necessary in accordance with
applicable law and their respective articles of incorporation and bylaws to
convene a meeting of shareholders to consider and vote upon the Agreement and
the transactions contemplated thereby. Except to the extent that to do so would
constitute a violation of their fiduciary duty, the boards of directors of the
Companies will recommend that their respective Shareholders approve the
Agreement and the transactions contemplated thereby and to use reasonable best
efforts to obtain the requisite vote of the Shareholders to approve the
Agreement and the transactions contemplated thereby.
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DIRECTOR AGREEMENTS
The directors of DNBF, in their capacity as shareholders, executed and
delivered to BYL shareholder agreements (the "Director Agreements") which commit
such persons, among other things, to vote their shares of DNBF Common Stock in
favor of the Agreement at the DNBF Special Meeting, to recommend that the DNBF
Shareholders vote their shares in favor of the Agreement, and to certain
representations concerning the ownership of DNBF Common Stock and BYL Common
Stock to be received in the Merger. See "The Director Agreements."
ATTENDANCE AT CERTAIN MEETINGS
DNBF has agreed to allow BYL the right to have one representative present at
meetings of the Board of Directors of DNBF. However, the attendance of such
representative shall not be permitted at any meeting for the sole purpose of
discussing the transactions contemplated by the Agreement on the obligations of
DNBF under the Agreement.
ALTERNATIVE TRANSACTIONS
DNBF has agreed that it, nor any of its respective officers, directors,
employees, agents, legal advisors, financial advisors or affiliates, will not
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal or offer (including, without limitation, any proposal or
offer to DNBF Shareholders) with respect to a merger, consolidation or similar
transaction, other than pursuant to the Agreement, or involving any purchase of
all or any significant portion of the assets or any equity securities of DNBF or
DANB, or a tender offer or exchange offer for at least 10% of the outstanding
shares of DNBF (any such proposal or offer being an "Alternative Transaction")
or, except to the extent legally required for the discharge by the DNBF Board of
its fiduciary duties as advised by such Board's outside legal counsel, engage in
any negotiations concerning, or provide any confidential information or data to,
or have any discussions with, any person relating to an Alternative Transaction,
or otherwise facilitate any effort or attempt to make or implement an
Alternative Transaction.
DIRECTORS AND OFFICERS INSURANCE
DNBF has agreed, at its expense, to maintain in effect policies of directors
and officers liability insurance for a period of 18 months with respect to all
matters arising from facts or events which occurred before the Effective Time of
the Merger for which DNBF would have had an obligation to indemnify its
directors and officers.
CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS
Pursuant to the Agreement, BYL, DNBF, BYL and DANB will (a) as soon as
practicable make any filings and applications required to be filed in order to
obtain all requisite approvals, consents and waivers of governmental agencies or
regulatory authorities necessary or appropriate for the consummation of the
transactions contemplated by the Agreement, and (b) cooperate with one another
(i) in promptly determining what filings are required to be made or approvals,
consents or waivers are required to be obtained under any relevant federal,
state or foreign law or regulation, (ii) in providing the other a reasonable
opportunity to review and comment upon the publicly available portions of such
filings, and (iii) in making promptly any such filings, furnishing information
required in connection therewith and seeking timely to obtain any such
approvals, consents or waivers.
ACCESS TO INFORMATION
Upon reasonable notice, each of the parties to the Agreement has agreed to
afford to the other party and its representatives access during normal business
hours throughout the period prior to the Effective Time to the books, records,
properties, personnel and to such other information as any party may
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reasonably request. Subject to the requirements of law, each such party has
agreed to keep confidential, and has agreed to cause its representatives to keep
confidential, all information and documents obtained pursuant to such access.
ALLOCATION OF MERGER RELATED COSTS
As a condition to the Merger, DNBF and BYL have agreed to each pay one-half
the amounts required for terminating certain contracts relating to the future
purchase of materials, supplies, services, merchandise or equipment. Such
amounts will be charged against net income of DNBF and BYL, as appropriate,
prior to the Effective Time.
DIRECTOR RESIGNATIONS
Immediately prior to the Effective Time, BYL has agreed to elect to the BYL
and BOYL Boards of Directors Henry C. Cox II, Eddie R. Fischer and Neil F.
Hatcher, each of whom currently serves as a director of DNBF and DANB. DNBF has
agreed to deliver to BYL at the Effective Time the resignations of all of the
directors of DNBF and DANB, to be effective at the Effective Time.
SECURITIES ACT
With respect to all persons who DNBF believes to be "affiliates" (as that
term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act) of
DNBF (the "Affiliates"), DNBF has agreed to use its reasonable best efforts to
obtain from each Affiliate a written agreement providing that each such person
will agree not to sell, pledge, transfer or otherwise dispose of the shares of
BYL Common Stock to be received by such person in the Merger except in
compliance with the applicable provisions of the Securities Act and until such
time as financial results covering at least thirty days of combined operations
of the Companies shall have been published. Prior to the Effective Time, each of
DNBF and BYL has agreed to amend and supplement such letter and use reasonable
best efforts to cause each additional person who is identified as an Affiliate
to execute a written agreement as required under the Agreement. See "--COMBINED
FINANCIAL RESULTS."
EMPLOYEE BENEFITS
The Companies have agreed that the DNBF stock option plan and employee
benefit plans in effect at the date of the Agreement will be terminated at the
Effective Time. BYL or BOYL, as appropriate, will take such steps as are
required so that the Continuing Employees (as defined in the Agreement)
thereafter become participants in the BYL Employee Plans (as defined in the
Agreement). All of the Continuing Employees will be credited for eligibility for
participation and vesting purposes with all of their years of past service with
DNBF or DANB as though they had been employees of BYL or BOYL under all BYL and
BOYL employee benefit plans in which the Continuing Employees participate
following the Effective Time. BYL and DNBF have also agreed that all Continuing
Employees shall be entitled to participate in stock plans, bonus plans and other
such incentive plans of BYL and its subsidiaries on the same basis as other
similarly situated employees of such companies.
REORGANIZATION TREATMENT; POOLING
BYL and DNBF have agreed not to take or cause to be taken any action,
whether before or after the Effective Time, which would disqualify the Merger as
a "reorganization" within the meaning of Section 368 of the Code or as a
pooling-of-interests for accounting purposes.
CONDITIONS
The obligation of the Companies to effect the Merger is subject to the
satisfaction or waiver prior to the Effective Time of certain conditions,
including (a) each of the representations, warranties and
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covenants of BYL and DNBF, as the case may be, contained in the Agreement being,
true at the Effective Time as if made on such date (or on the date when made in
the case of any representation or warranty which specifically relates to an
earlier date); (b) the performance, in all material respects, by BYL and DNBF,
as the case may be, of each of their respective covenants and agreements
contained in the Agreement; (c) the approval of the Agreement and the
transactions contemplated thereby by the requisite vote of the BYL Shareholders
and DNBF Shareholders, as the case may be, in accordance with applicable law;
(d) receipt of the approvals, consents and waivers required by law in connection
with the Agreement and the transactions contemplated thereby, including approval
by the Federal Reserve Board, the FDIC and the State Commissioner pursuant to
federal and California law without the inclusion of any condition or requirement
that would be materially burdensome on BYL, and all applicable statutory waiting
periods having expired; (e) the absence of any litigation or proceedings pending
against any party to the Agreement or their subsidiaries brought by any
governmental agency seeking to prevent consummation of the transactions
contemplated by the Agreement, the absence of any order, decree or injunction
being enacted, entered, promulgated or enforced by any governmental authority
which enjoins or prohibits the consummation of the Merger or the transactions
contemplated in the Agreement and the absence of any statute, rule, regulation,
order, injunction or decree being in effect and prohibiting or restricting or
making illegal the consummation of the Merger or any other transaction
contemplated by the Agreement; (f) the Registration Statement having become
effective; (g) receipt of an opinion of counsel by each of DNBF and BYL
concerning several matters, including organization, authorization, capital
structure, conflicts, receipt of necessary third party approvals and consents,
and lack of certain litigation; (h) receipt of opinions confirming the fairness
of the terms of the Merger to the Shareholders from a financial point of view;
(j) Vavrinek, Trine, Day & Co., LLP shall have confirmed in writing that the
Merger and the Bank Merger qualify for pooling of interests accounting
treatment; (k) Vavrinek, Trine, Day & Co., LLP shall have issued an opinion that
the Merger and the Bank Merger will not result in the recognition of gain or
loss for federal income tax purposes to DNBF, DANB, BYL or BOYL, nor will the
issuance of BYL Stock result in the recognition of gain or loss by the holders
of DNBF Stock who receive such stock in connection with the Merger; (l) the sum
of Dissenters Rights exercised by shareholders of DNBF and BYL shall not exceed
10% of the aggregate number of issued and outstanding shares of DNBF Stock and
BYL Stock; and (m) no material adverse change to either DNBF or BYL.
The obligation of BYL to effect the Merger is also subject to the
satisfaction or waiver prior to the Effective Time of certain additional
conditions, including (a) DNBF Shareholders voting against the approval of the
Agreement or giving notice in writing to DNBF, at or before the DNBF Special
Meeting, that such shareholder dissents from the Agreement, and such shares
become Perfected Dissenting Shares, in the aggregate hold not more than five
percent of the DNBF Common Stock or the BYL Common Stock, as the case may be
(the "Dissenters' Rights Condition"), (b) the termination of the DNBF Stock
Option Plan and any outstanding option agreements, and (c) the termination of
certain contracts in accordance with the terms of the Agreement.
The obligation of DNBF to effect the Merger is also subject to the condition
that Messrs. Cox, Hatcher and Fischer are appointed to serve as directors of the
Surviving Bank and the Surviving Corporation from the Effective Time of the
Merger and the Bank Merger.
WAIVER AND AMENDMENT
Prior to the Effective Time, any provision of the Agreement may be waived by
the party benefited by the provision or by both parties, or amended or modified
at any time (including the structure of the transaction) by an agreement in
writing between the parties and approved by the Boards. However, after the vote
by the Shareholders, no principal term of the Merger may be amended or revised
without the approval of the Shareholders.
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TERMINATION
TERMINATION EVENTS
The Agreement may be terminated, and the Merger abandoned, prior to the
Effective Time, either before or after its approval by the Shareholders (a) by
the mutual consent of the Companies, if the board of directors of each so
determines; (b) by the Companies, by written notice to the other party if its
board so determines by vote of a majority of the entire board, in the event of
(i) the failure of the DNBF Shareholders to approve the Agreement at the DNBF
Special Meeting, (ii) the failure of the BYL Shareholders to approve the
Agreement at the BYL Annual Meeting, or (iii) a material breach by the other
party of any representation, warranty, covenant or agreement contained in the
Agreement which is not cured within thirty days after written notice of such
breach is given to the party committing such breach by the other party; (c) by
BYL, if the DNBF Board fails to recommend the approval of the Agreement at the
DNBF Special Meeting; (d) by BYL or DNBF, by written notice to the other party,
if any of the conditions have not been met by the appropriate party; (e) by BYL
or DNBF, in the event that the Merger is not consummated by September 30, 1998;
(f) by DNBF if the Average Price of BYL Stock exceeds 135% of the Stipulated BYL
Share Value, or $25.31; (g) by BYL, if the Average Price of BYL Stock is less
than 65% of the Stipulated BYL Share Value, or $12.19; (h) by BYL or DNBF, if
(w) DNBF approves a transaction pursuant to which any person acquires 10% or
more of DNBF Stock, (x) any person seeks to acquire 10% or more of DNBF Stock
and the DNBF Board does not advise its Shareholders that it does not support
such tender offer or acquisition and that it supports the Merger, (y) by BYL if
DNBF fails to notify BYL of a material adverse change, or (z) by BYL if DNBF
fails to notify BYL if any person acquires 5% or more of the outstanding shares
of DNBF Stock.
EFFECT OF TERMINATION
The Companies have agreed and acknowledged that it is impractical to
ascertain the precise amount of damage to the Companies as a result of a failure
to consummate the Merger and the transactions contemplated in the Agreement due
to a termination of the Agreement by DNBF or BYL, as the case may be, pursuant
to a material breach by the other party of any representation, warranty,
covenant or agreement contained in the Agreement, which is not cured within 30
days after written notice of such breach is given to such party by the
non-breaching party. Accordingly, in the event of such termination by DNBF, BYL
has agreed to pay to DNBF all direct expenses incurred by DNBF, plus 20% of such
expenses, in connection with the Agreement. In the event of such termination by
BYL, or a termination by DNBF if (w) DNBF approves a transaction pursuant to
which any person acquires 10% or more of DNBF Stock, (x) any person seeks to
acquire 10% or more of DNBF Stock and the DNBF Board does not advise its
Shareholders that it does not support such tender offer or acquisition and that
it supports the Merger, (y) by BYL if DNBF fails to notify BYL of a material
adverse change, or (z) by BYL if DNBF fails to notify BYL if any person acquires
5% or more of the outstanding shares of DNBF Stock, DNBF has agreed to pay to
BYL all direct expenses incurred by BYL in connection with the Agreement.
THE BYL WARRANT AGREEMENT
GENERAL
As an inducement and condition to BYL entering into the Agreement, DNBF
entered into the Warrant Agreement (the "Warrant Agreement") with BYL. Pursuant
to the Warrant Agreement, DNBF granted to BYL an unconditional, irrevocable
option, exercisable only under certain limited and specifically defined
circumstances, none of which, to the best of DNBF's and BYL's knowledge, has
occurred as of the date hereof, to purchase up to 58,000 authorized but
theretofore unissued shares of DNBF Common Stock (representing 19.9 percent of
the shares of DNBF Common Stock outstanding on the date of exercise), for a
purchase price of $45.00 per share, subject to adjustment in certain
circumstances. The
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purchase of DNBF Common Stock pursuant to the Warrant Agreement is subject to
compliance with applicable law, including receipt of any necessary approvals
under the BHCA.
The Warrant Agreement and the Warrant are intended to increase the
likelihood that the Merger will be consummated according to the terms set forth
in the Agreement, and may be expected to discourage offers by third parties to
acquire DNBF prior to the Merger.
THE WARRANT
BYL may exercise the Option, in whole or part, at any time and from time to
time following the occurrence of certain events (each an "Acquisition Event"),
including:
(i) any person (other than BYL or an Affiliate of BYL) shall have commenced
(as such term is defined in Rule 14d-2 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or shall have filed a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to, a tender offer or exchange offer to purchase any shares of DNBF
Common Stock such that, upon consummation of such offer, such person would own
or control 25% or more of the then outstanding DNBF Common Stock, and such
person shall have consummated such tender offer or exchange offer;
(ii) DNBF or DANB, without having received BYL's prior written consent or
except as permitted by the Agreement, shall have authorized, recommended,
proposed or publicly announced an intention to authorize, recommend or propose,
or entered into, an agreement with any person (other than BYL or any Affiliate
of BYL to (A) effect a merger, consolidation or similar transaction involving
DNBF or DANB, (B) sell, lease or otherwise dispose of assets of DNBF or DANB
representing 10% or more of the consolidated assets of DNBF or DANB, or (C)
issue, sell or otherwise dispose of (including by way of merger, consolidation,
share exchange or any similar transaction) securities representing 10% or more
of the voting power of DNBF or DANB (any of the foregoing an "Acquisition
Transaction").
(iii) any person (other than DNBF, DANB, BYL or BOYL in a fiduciary capacity)
shall have acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership of, or any
"group" (as such term is defined in the Exchange Act) shall have been formed
which beneficially owns or has the right to acquire beneficial ownership of, 25%
or more of the then outstanding DNBF Common Stock; or
(iv) b]the holders of DNBF Common Stock shall not have approved the
Agreement at the Special Meeting of such DNBF Stockholders held for the purpose
of voting on the Agreement, such meeting shall not have been held or shall have
been canceled prior to termination of the Agreement and DNBF's Board of
Directors shall have withdrawn or modified in a manner adverse to BYL the
recommendation of DNBF's Board of Directors with respect to the Agreement, in
each case after any person (other than BYL) shall have (A) publicly announced a
proposal, or publicly disclosed an intention to make a proposal, to engage in an
Acquisition Transaction or (B) filed an application (or given a notice), whether
in draft or final form, under the BHC Act or the Change in Bank Control Act for
approval to engage in an Acquisition Transaction.
The Warrant Agreement also provides for certain adjustments intended to
protect BYL against dilution of its rights to acquire DNBF Common Stock. The
Warrant Agreement grants certain registration rights ("Registration Rights") to
BYL with respect to the shares issuable upon exercise of the Warrant.
TERMINATION
The Warrant will terminate and be of no further force and effect upon: (a)
the Effective Time of the Merger; (b) at the termination of the Agreement prior
to the occurrence of an Acquisition Event; or (c) two years after the occurrence
of an Acquisition Event.
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THE DIRECTOR AGREEMENTS
BYL has entered into Director Agreements with Richard T. Anderson, Esq,
Henry C. Cox II, James F. Davidson, Eddie R. Fischer, Donald D. Galleano, Neil
F. Hatcher, Ralph R. Neilson, Marjorie R. Steinbrinck, and John L. West (the
"DNBF Directors"), each an DNBF Shareholder and a director of DNBF. The DNBF
Directors, holding in the aggregate shares representing approximately 55 percent
of the total voting power of DNBF Common Stock as of the DNBF Record Date, each
agreed, in consideration of the substantial expenses incurred by BYL in
connection with the Agreement and as a condition to BYL entering into the
Agreement, subject to their fiduciary responsibilities, (a) to vote or to cause
to be voted all of such DNBF's Directors shares of DNBF Common Stock in favor of
adoption and approval of the Agreement and the Merger at any meeting of
shareholders of DNBF or in connection with any solicitation of the written
consent of shareholders, and (b) to recommend to such shareholders that they
vote in favor of, and approve the principal terms of the Agreement.
Each DNBF Director has also agreed to cooperate fully with BYL in connection
with the acquisition of DNBF. Each DNBF Director also agreed that he or she will
not, directly or indirectly, solicit any inquiries or proposals from, or enter
into, or continue any discussions, negotiations or agreements relating to, or
vote in favor of any proposal or transaction for disposition of the business or
assets of DNBF or any subsidiary thereof, or the acquisition of DNBF's or any
subsidiary of DNBF's voting securities or any business combination with, any
person entity other than BYL.
The Director Agreements will terminate upon the earlier to occur of the
Effective Time or the date on which the Agreement is terminated in accordance
with its terms.
The Director Agreements bind the actions of the signatories thereto only in
their capacity as DNBF Shareholders. Those directors of DNBF who signed Director
Agreements are not and could not be contractually bound to abrogate their
fiduciary duties as directors of DNBF. Accordingly, while such
shareholders/directors are, under the Director Agreements executed by them,
contractually bound to vote as a DNBF Shareholder in favor of the Merger and
against other Alternative Transactions (should one be presented), their
fiduciary duties as DNBF Directors nevertheless required them to act in their
capacity as directors in the best interest of DNBF when they decided to approve
the Merger. In addition, such shareholders/directors will continue to be bound
by their fiduciary duties as DNBF Directors with respect to any decisions they
may take in connection with the Merger or otherwise.
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DNBF MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
BUSINESS ORGANIZATION
DNBF is a California corporation formed to act as the holding company of
DANB, a national-chartered bank headquartered in Riverside, California. As of
December 31, 1997 DANB operated three full-service branches in Riverside County,
California. Other than its investment in DANB and investing excess funds, DNBF
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, DNBF's
primary regulator.
DANB offers a full range of traditional commercial banking products and
services to individuals, merchants, small and medium-sized businesses and
professionals in Riverside County, its primary service area.
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 DNBF in the future. This discussion should be read in
conjunction with DNBF's consolidated financial statements and notes attached
hereto as Appendix B.
OVERVIEW
DNBF earned net income of $745,000 for the year ended December 31, 1997,
representing an increase of $31,000 or 4.3% over 1996 net income of $714,000.
Net income reported for 1996 represented an increase of $366,000 over 1995 net
income of $348,000. On a diluted per common share basis, net income for 1997 was
$3.44 compared to $3.37 and $1.57 per share for the preceding two years. The
improvement in net income in 1997 and 1996 was primarily due to growth in net
interest income and noninterest income that outpaced increases in operating
expenses. Net income in 1996 benefited from lower losses on securities compared
with 1995. These and other factors are discussed in more detail later in this
analysis.
Common shareholders' equity increased by $1,224,000 or 18.8% during 1997
from $6,496,000 at December 31, 1996 to $7,720,000 at December 31, 1997, through
the retention of earnings and as the result of stock option exercises and
related tax benefits. In 1996, common shareholders' equity increased by $280,000
or 4.6% from $6,116,000 at December 31, 1995 primarily through retention of
earnings. It is the objective of management to maintain adequate capital for
future growth through retention of earnings. In 1997, DNBF paid four quarterly
cash dividends of $0.25. In 1996, DNBF paid four quarterly cash dividends of
$0.20.
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............................................ 1.05% 1.08% 0.55%
Return on Average Equity............................................ 10.96% 11.41% 5.68%
Average Shareholder's Equity to Average Total Assets................ 9.62% 9.43% 9.72%
</TABLE>
73
<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
------------------------------------- ------------------------------------- ---------
INTEREST INTEREST
AVERAGE EARNED OR AVERAGE YIELD AVERAGE EARNED OR AVERAGE YIELD AVERAGE
BALANCE PAID OR RATE PAID BALANCE PAID OR RATE PAID BALANCE
--------- ----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities................... $ 18,720 $ 1,140 6.09% $ 18,279 $ 1,093 5.98% $ 19,525
Federal Funds Sold...................... -- -- 99 6 6.06% 1,946
Interest-Bearing Deposits............... 3,882 227 5.85% 5,087 302 5.94% 2,899
Loans................................... 42,891 4,072 9.49% 37,990 3,743 9.85% 33,497
--------- ----------- --------- ----------- ---------
Total Interest-Earning Assets............. 65,493 5,439 8.30% 61,455 5,144 8.37% 57,867
Cash and Due from Banks................... 3,677 3,271 3,339
Premises and Equipment.................... 698 604 660
Accrued Interest and Other Assets......... 1,171 1,461 1,606
Allowance for Loan Losses................. (396) (441) (434)
--------- --------- ---------
Total Assets.............................. $ 70,643 $ 66,350 $ 63,038
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Money Market and NOW.................... $ 21,501 593 2.76% $ 22,022 640 2.91% $ 25,377
Savings................................. 5,076 106 2.09% 5,598 136 2.43% 5,489
Time Deposits under $100,000............ 12,233 649 5.31% 11,357 577 5.08% 8,953
Time Deposits of $100,000 or More....... 8,830 488 5.53% 4,917 316 6.43% 3,324
Other................................... 703 61 8.68% 1,576 112 7.11% 834
--------- ----------- --------- ----------- ---------
Total Interest-Bearing Liabilities........ 48,343 1,897 3.92% 45,470 1,781 3.92% 43,977
Noninterest-Bearing Liabilities:
Demand Deposits......................... 15,326 14,413 12,837
Other Liabilities....................... 176 212 97
Shareholders' Equity.................... 6,798 6,255 6,127
--------- --------- ---------
Total Liabilities and Shareholders'
Equity.................................. $ 70,643 $ 66,350 $ 63,038
--------- --------- ---------
--------- --------- ---------
Net Interest Income....................... $ 3,542 $ 3,363
----------- -----------
----------- -----------
Net Yield on Interest-Earning Assets...... 5.41% 5.47%
<CAPTION>
INTEREST AVERAGE
EARNED OR YIELD OR
PAID RATE PAID
----------- -----------
<S> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities................... $ 1,233 6.31%
Federal Funds Sold...................... 111 5.70%
Interest-Bearing Deposits............... 176 6.07%
Loans................................... 3,747 11.19%
-----------
Total Interest-Earning Assets............. 5,267 9.10%
Cash and Due from Banks...................
Premises and Equipment....................
Accrued Interest and Other Assets.........
Allowance for Loan Losses.................
Total Assets..............................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Money Market and NOW.................... 802 3.16%
Savings................................. 155 2.82%
Time Deposits under $100,000............ 465 5.19%
Time Deposits of $100,000 or More....... 222 6.68%
Other................................... 68 8.15%
-----------
Total Interest-Bearing Liabilities........ 1,712 3.89%
Noninterest-Bearing Liabilities:
Demand Deposits.........................
Other Liabilities.......................
Shareholders' Equity....................
Total Liabilities and Shareholders'
Equity..................................
Net Interest Income....................... $ 3,555
-----------
-----------
Net Yield on Interest-Earning Assets...... 6.14%
</TABLE>
74
<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 $3.5 million or 5.41% of interest-earning
assets compared to $3.4 million and 5.47% of interest-earning assets in 1996 Net
interest income in 1995 was $3.6 million or 6.14% of interest-earning assets.
The increase in 1997 compared to 1996 is primarily attributable to increases in
the amounts of interest-earning assets as the net yield did not materially
change. The decrease in 1996 compared to 1995 was the net result of the negative
impact of a declining net yield on interest-earning assets offset partially by
an increase in the amounts of interest-earning assets.
Interest income for 1997 was $5.4 million compared to $5.1 million and $5.3
million for 1996 and 1995, respectively. The increase in 1997 from 1996 is
primarily due to overall growth in interest-earning assets as the yield on
interest-earning assets was relatively unchanged between the years. The decline
in interest income in 1996 compared to 1995 was due to a combination of
declining rates, especially in the average rates of loans which went from 11.19%
in 1995 to 9.85% in 1996, offset partially by overall increases in
interest-earning assets, especially in loans which grew from an average of $33.5
million in 1995 to $38.0 million in 1996. The decline in rates on loans was
caused primarily by decreases in the national prime rate on which the majority
of DANB's loan rates are indexed.
Interest expense has remained fairly stable in both amount and rate over the
last three years. Total interest expense was $1.9 million, $1.8 million, and
$1.7 million for 1997, 1996 and 1995, respectively. The overall rate paid on
interest-bearing liabilities was 3.92%, for both 1997 and 1996, and 3.89% for
1995.
75
<PAGE>
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 YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
VERSUS VERSUS
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 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...................................... $ 27 $ 20 $ 47 $ (77) $ (63) $ (140)
Federal Funds Sold......................................... (6) -- (6) (112) 7 (105)
Other Earning Assets....................................... (70) (5) (75) 130 (4) 126
Loans...................................................... 469 (140) 329 471 (475) (4)
----- --------- --------- ----- --------- ---------
Total Interest Income.................................... 420 (125) 295 412 (535) (123)
INTEREST-BEARING LIABILITIES:
Money Market and NOW....................................... (15) (32) (47) (101) (61) (162)
Savings.................................................... (12) (18) (30) 3 (22) (19)
Time Deposits under $100,000............................... 46 26 72 122 (10) 112
Time Deposits $100,000 or More............................. 221 (49) 172 102 (8) 94
Other Liabilities.......................................... (72) 21 (51) 54 (10) 44
----- --------- --------- ----- --------- ---------
Total Interest Expense................................... 168 (52) 116 180 (111) 69
----- --------- --------- ----- --------- ---------
Net Interest Income...................................... $ 252 $ (73) $ 179 $ 232 $ (424) $ (192)
----- --------- --------- ----- --------- ---------
----- --------- --------- ----- --------- ---------
</TABLE>
NONINTEREST INCOME
DNBF's noninterest income is primarily derived from fees and service charges
earned by DANB for deposit-related customer services. Total noninterest income
was relatively unchanged for 1997, 1996 and 1995 at approximately $1.1 million
for each year.
76
<PAGE>
NONINTEREST EXPENSE
Noninterest expense reflects the costs of products and services related to
systems, facilities and personnel for DNBF. 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......................................... 2.35% 2.30% 2.48%
Occupancy Expenses..................................................... .61 .66 .73
Furniture and Equipment................................................ .23 .24 .26
Loss on Sale of Securities............................................. -- -- .77
Data Processing........................................................ .57 .62 .66
Professional Fees...................................................... .16 .15 .20
OREO Expenses.......................................................... .03 .08 .21
Promotional Expenses................................................... .20 .17 .22
Office Expenses........................................................ .25 .24 .25
Other.................................................................. .57 .64 .75
--- --- ---
4.97% 5.11% 6.53%
--- --- ---
--- --- ---
</TABLE>
Noninterest expense for 1997 was $3.5 million, a net increase of $100,000 or
2.9% from the $3.4 million reported in 1996. The most significant component of
this increase was salaries and employee benefits which increased $134,000,
primarily from increased staffing levels.
Noninterest expense in 1996 decreased $700,000 or 17.1% compared to the $4.1
million reported in 1995. The decrease was due primarily to the $488,000 loss on
securities incurred in 1995 and higher OREO expenses and regulatory assessments
for that year.
INCOME TAXES
DNBF's income tax provisions were $360,000, $345,000 and $155,000 for 1997,
1996 and 1995, respectively. The effective tax rate was 32.6% for 1997 and 1996
and 30.8% for 1995. The effective rate varies from the "expected" federal tax
rate of 34% due primarily to California franchise taxes and the federal benefit
of tax exempt interest income.
BALANCE SHEET ANALYSIS
Total assets of DNBF at December 31, 1997 were $73.4 million compared to
$67.3 million in 1996 and $66.1 million in 1995, representing increases of 9.1%
and 1.8%, respectively. Based on average balances, total assets of $70.6 million
in 1997 represent a 6.5% increase over $66.4 million for 1996. Average total
assets in 1996 represent an increase of 5.2% over $63.0 million in 1995.
77
<PAGE>
INVESTMENT PORTFOLIO
The following table summarizes the amounts and distribution of DNBF'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
U.S. GOVERNMENT AND AGENCY SECURITIES:
One to Five Years............................................. $ 1,022 $ 1,025 7.50% $ 638 $ 635
Five to Ten Years............................................. $ 233 $ 232 6.50% $ 3,081 $ 3,071
After Ten Years............................................... 1,297 1,307 7.36% 1,678 1,665
--------- --------- --------- ---------
Total U.S. Government and Agency Securities................. 2,552 2,564 7.34% 5,397 5,371
MUNICIPAL SECURITIES:
Five to Ten Years............................................. 1,019 1,032 4.74% -- --
--------- --------- --------- ---------
Total Municipal Securities.................................. 1,019 1,032 4.74% -- --
MUTUAL FUNDS.................................................... 6,058 6,017 6.91% 3,622 3,524
OTHER........................................................... 339 339 6.22% 324 324
--------- --------- --------- ---------
TOTAL AVAILABLE-FOR-SALE SECURITIES....................... $ 9,968 $ 9,952 6.77% $ 9,343 $ 9,219
--------- --------- --------- ---------
--------- --------- --------- ---------
HELD-TO-MATURITY SECURITIES
U.S. TREASURIES:
One to Five Years............................................. $ 1,999 $ 1,998 5.13% $ 1,998 $ 1,987
--------- --------- --------- ---------
Total U.S. Treasuries Securities............................ 2,000 1,998 5.13% 1,998 1,987
U.S. GOVERNMENT AND AGENCY SECURITIES:
One to Five Years............................................. 998 999 6.32% -- --
Five to Ten Years............................................. 2,000 2,003 6.92% 4,197 4,191
After Ten Years............................................... 1,500 1,503 7.18% -- --
--------- --------- --------- ---------
Total U.S. Government and Agency Securities................. 4,498 4,505 6.87% 4,197 4,191
MUNICIPAL SECURITIES:
One to Five Years............................................. 534 539 4.47% 303 303
Five to Ten Years............................................. 852 867 5.13% 1,088 1,089
--------- --------- --------- ---------
Total Municipal Securities.................................. 1,386 1,406 4.88% 1,391 1,392
MORTGAGE-BACKED SECURITIES...................................... 59 56 6.14% 62 59
--------- --------- --------- ---------
TOTAL HELD-TO-MATURITY SECURITIES......................... $ 7,943 $ 7,965 6.08% $ 7,648 $ 7,629
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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 $1,999,000 and $2,895,000, respectively.
78
<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................................................. $ 10,067 $ 8,404 $ 5,971
Real Estate--Construction.................................. 1,278 1,048 3,461
Real Estate--Other......................................... 30,589 27,581 22,756
Consumer................................................... 2,139 2,211 2,274
Lease Financing............................................ 2,020 2,531 2,049
--------- --------- ---------
Total Loans.............................................. 46,093 41,775 36,511
Net Deferred Loan Costs.................................... (136) (132) (131)
Allowance for Loan Losses.................................. (402) (406) (467)
--------- --------- ---------
Net Loans................................................ $ 45,555 $ 41,237 $ 35,913
--------- --------- ---------
--------- --------- ---------
COMMITMENTS
Standby Letters of Credit.................................. $ 70 $ 107 $ 255
Undisbursed Loans and Commitments to Grant Loans........... $ 3,998 3,487 3,998
--------- --------- ---------
Total Commitments........................................ $ 4,068 $ 3,594 $ 4,253
--------- --------- ---------
--------- --------- ---------
</TABLE>
Average loans in 1997 were $42.9 million representing an increase of 12.9%
over 1996. Average loans of $38.0 million in 1996 represented an increase of
13.4% from $33.5 million in 1995. Average loans comprised 65.5% of average
earning assets in 1997 compared to 61.8% and 57.9% in 1996 and 1995,
respectively.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases and working capital, and various other business loan
products. At December 31, 1997, DNBF had commercial loans outstanding
representing 21.8% of total loans compared to 20.1% and 16.4% at December 31,
1996 and 1995, respectively.
Construction loans expressed as a percentage of total loans were 2.8%, 2.5%
and 9.5% at December 31, 1997, 1996 and 1995, respectively. The construction
loans outstanding at December 31, 1997 are generally composed of commitments to
customers within DNBF's service area for construction of custom and semi-custom
single family residences.
Other real estate loans consist primarily of loans to DANB's depositors
secured by first trust deeds on commercial and residential properties typically
with short-term maturities and original loan to value ratios not exceeding 75%.
Other real estate loans increased 10.9% to $30.6 million at December 31, 1997
compared to $27.6 million on December 31, 1996 and increased 21.1% in 1996 from
December 31, 1995.
Consumer loans include a range of traditional consumer loan products offered
by DNBF such as home equity and personal lines of credit and loans to finance
purchases of autos, boats, recreational vehicles, mobile homes and various other
consumer items. At December 31, 1997, consumer loans outstanding were $2.1
million representing 4.6% of total loans. This compares to consumer loans of
$2.2 million and $2.3 million representing 5.3% and 6.2% of total loans at
December 31, 1996 and 1995, respectively.
Lease financing is primarily short-term equipment leases to school districts
and other local municipalities.
79
<PAGE>
RISK ELEMENTS
DNBF 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, DNBF 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. DNBF'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. DNBF 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.
NONPERFORMING ASSETS
Management generally places loans on nonaccrual status when they become 90
days past due, unless the loan is well secured and in the process of collection.
Loans are charged off when, in management's opinion, collection appears
unlikely. The following table provides information with respect to the
components of DNBF'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...................... $ -- $ -- $ --
Nonaccrual Loans............................................... 332 517 435
Restructured Loans............................................. -- -- 6
--------- --------- ---------
Total Nonperforming Loans.................................... 332 517 441
Other Real Estate Owned........................................ 278 631 423
--------- --------- ---------
Total Nonperforming Assets................................... $ 610 $ 1,148 $ 864
--------- --------- ---------
--------- --------- ---------
Nonperforming Loans as a Percentage of Total Loans............. 0.72% 1.24% 1.21%
Allowance for Loan Loss as a Percentage of Nonperforming
Loans........................................................ 121.08% 78.53% 105.90%
Nonperforming Assets as a Percentage of Total Assets........... 0.83% 1.71% 1.31%
</TABLE>
Interest due but excluded from interest income in nonaccrual loans was
approximately $41,000 in 1997, $44,000 in 1996 and $63,000 in 1995. No payments
received on nonaccrual loans were included in interest income in 1997, 1996 and
1995.
At December 31, 1997, the recorded investment in loans that are considered
impaired under SFAS No. 114 was $332,000 which are included as nonaccrual loans
above. Such impaired loans had a valuation allowance of $83,000. The average
recorded investment in impaired loans during 1997 was $436,000. DNBF recognized
no interest on impaired loans in 1997.
Other real estate owned is acquired through foreclosure or other means.
These properties are recorded on an individual basis at the estimated fair value
less selling expenses. At December 31, 1997, other real estate owned was
comprised of two single family residences and one commercial building.
80
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSS
The allowance for loan losses is maintained at a level that is considered
adequate to provide for the loan losses inherent in DNBF's loans. The provision
for loans losses was $45,000 in 1997 and $20,000 in 1996. DNBF had no provision
in 1995.
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...................................... $ 42,891 $ 37,990 $ 33,497
End of the Year........................................... $ 46,093 $ 41,775 $ 36,511
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of Year................................ $ 406 $ 467 $ 424
Actual Charge-Offs:
Commercial................................................ 27 38 --
Consumer.................................................. 3 5 1
Real Estate............................................... 20 48 85
--------- --------- ---------
Total Charge-Offs........................................... 50 91 86
Less Recoveries:
Commercial................................................ -- 4 8
Consumer.................................................. 1 5 1
Real Estate............................................... -- 1 120
--------- --------- ---------
Total Recoveries............................................ 1 10 129
--------- --------- ---------
Net Loans Charged-Off (Recovered)........................... 49 81 (43)
Provision for Loan Losses................................... 45 20 --
--------- --------- ---------
Balance at End of Year...................................... $ 402 $ 406 $ 467
--------- --------- ---------
--------- --------- ---------
RATIOS:
Net Loans Charged-Off to Average Loans.................... 0.11% 0.21% (0.13%)
Allowance for Loan Losses to Total Loans.................. 0.87% 0.97% 1.28%
Net Loans Charged-Off to Beginning Allowance for Loan
Losses.................................................. 12.07% 17.34% (10.14%)
Net Loans Charged-Off to Provision for Loan Losses........ 108.89% 405.00% N/A
Allowance for Loan Losses to Nonperforming Loans.......... 77.76% 78.53% 105.90%
</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 DANB's allowance for loan
losses and may recommend additions based upon their evaluation of the portfolio
at the time of their examination.
81
<PAGE>
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.................................................. $ 107 21.84% $ 134 20.12%
Real Estate--Construction................................... 6 2.77% 9 2.51%
Real Estate................................................. 242 66.36% 191 66.02%
Consumer.................................................... 15 4.64% 5 5.29%
Lease Financing............................................. 10 4.38% 13 6.06%
Unallocated................................................. 22 n/a 54 n/a
----- ------ ----- ------
$ 402 100.00% $ 406 100.00%
----- ------ ----- ------
----- ------ ----- ------
</TABLE>
FUNDING
Deposits are DNBF's primary source of funds. At December 31, 1997, DNBF had
a deposit mix of 42.9% in time and savings deposits, 33.2% in money market and
NOW deposits, and 23.9% in noninterest-bearing demand deposits. DNBF'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>
Money Market and NOW Accounts..................... $21,501 2.76% $22,022 2.91%
Savings Deposits.................................. 5,076 2.09% 5,598 2.43%
TCD Less than $100,000............................ 11,233 5.31% 11,357 5.08%
TCD $1,000 or More................................ 8,830 5.53% 4,917 6.43%
------- -------
Total Interest-Bearing Deposits................... 47,640 3.85% 43,894 3.80%
Noninterest-Bearing Demand Deposits............... 15,326 14,413
------- -------
Total Average Deposits............................ $62,966 2.92% $58,307 2.86%
------- -------
------- -------
</TABLE>
The scheduled maturity distribution of DNBF's time deposits of $100,000 or
greater, as of December 31, 1997, were as follows (dollar amounts in thousands):
<TABLE>
<S> <C>
Three Months or Less $ 5,504
Over Three Months to One Year...................................... 4,239
Over One Year to Five Years........................................ 651
---------
$ 10,394
---------
---------
</TABLE>
82
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY
Liquidity management refers to DNBF's ability to provide funds on an ongoing
basis to meet fluctuations in deposit levels as well as the credit needs and
requirements of its clients. Both assets and liabilities contribute to DNBF's
liquidity position. Federal fund lines, short-term investments and securities,
and loan repayments contribute to liquidity, along with deposit increases, while
loan funding and deposit withdrawals decrease liquidity. DANB assesses the
likelihood of projected funding requirements by reviewing historical funding
patterns, current and forecasted economic conditions and individual client
funding needs. Commitments to fund loans and outstanding standby letters of
credit at December 31, 1997, December 31, 1996 and December 31, 1995 totaled
approximately $4.1 million, $3.6 million and $4.3 million, respectively. Such
loans relate primarily to revolving lines of credit and other commercial loans.
DNBF's sources of liquidity consist of its deposits with other banks,
overnight funds sold to correspondent banks and unpledged short-term, marketable
investments. On December 31, 1997, liquid assets totaled $24.0 million or 32.7%
of total assets as compared to $21.2 million or 31.5% of total consolidated
assets on December 31, 1996 and $26.4 million or 39.9% of total assets on
December 31, 1995. In addition to liquid assets, DANB maintains lines of credit
with correspondent banks available on a short-term basis. Informal agreements
are also in place with various other banks to purchase participations in loans,
if necessary.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure to fluctuations in
DANB's future earnings caused by fluctuation in interest rates. Such
fluctuations result from the mismatch in repricing characteristics of assets and
liabilities at a specific point in time. This mismatch, or interest rate
sensitivity gap, represents the potential mismatch in the change in the rate of
accrual of interest revenue and interest expense from a change in market
interest rates. Mismatches in interest rate repricing among assets and
liabilities arise primarily from the interaction of various customer businesses
(i.e. types of loans versus the types of deposits maintained) and from
management's discretionary investment and funds gathering activities. DNBF
attempts to manage its exposure to interest rate sensitivity, but due to its
size and direct competition from the major banks, it must offer products which
are competitive in the market place, even if less than optimum with respect to
its interest rate exposure.
The table below sets forth the interest rate sensitivity of DNBF's
interest-earning assets and interest-bearing liabilities as of December 31,
1997, using the interest rate sensitivity gap ratio. For purposes of the
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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
(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-Bearing Assets:
Interest-Bearing Deposits............. $ 3,419 $-- $ -- $ -- $ 3,419
Investment Securities................. 9,354 368 2,557 5,616 17,895
Gross Loans........................... 22,158 3,798 16,768 3,370 46,094
------- ------------ ---------- ---------- -------
Total............................... $34,931 $ 4,166 $19,325 $ 8,986 $67,408
------- ------------ ---------- ---------- -------
------- ------------ ---------- ---------- -------
Interst-Bearing Liabilities:
Money Market and NOW
Deposits............................ $21,578 $-- $ -- $ -- $21,578
Savings............................... 5,679 -- -- -- 5,679
Time Deposits......................... 10,206 10,331 1,700 -- 22,237
------- ------------ ---------- ---------- -------
Total............................... $37,463 $10,331 $ 1,700 $ -- $49,494
------- ------------ ---------- ---------- -------
------- ------------ ---------- ---------- -------
Interest Rate Sensitivity Gap......... $(2,532) $(6,165) $17,625 $ 8,986
Cumulative Interest Rate
Sensitivity Gap..................... $(2,532) $(8,697) $ 8,928 $17,914
Ratios:
Interest Rate Sensitivity Gap......... (3.45)% (8.40)% 24.01% 12.24%
Cumulative Interest Rate
Sensitivity Gap..................... (3.45)% (11.85)% 12.16% 24.40%
</TABLE>
CAPITAL RESOURCES
DNBF's total shareholders' equity was $7.7 million at December 31, 1997
compared to $6.5 million as of December 31, 1996 and $6.1 million as of December
31, 1995.
DNBF and DANB are subject to regulations issued by the Board of Governors,
the OCC and the FDIC which require maintenance of a certain level of capital.
These regulations impose two capital standards: a risk-based capital standard
and a leverage capital standard.
Under the Board of Governor's risk-based capital guidelines, assets reported
on an institution's balance sheet and certain off-balance items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 Capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 Capital defined to include
limited life (and in the case of banks, cumulative) preferred stock, mandatory
convertible securities, subordinated debt and a limited amount of reserves for
loan and lease losses. Each institution is required to maintain a risk-based
capital ratio (including Tier 1 and Tier 2 capital) of 8%, of which at least
half must be Tier 1 capital.
Under the Board of Governor's leverage capital standard an institution is
required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. A minimum
leverage ratio of 3% is required for institutions which have been determined to
be in the highest of five categories used by regulators to rate financial
institutions and which are not experiencing or anticipating significant growth.
All other
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organizations are required to maintain leverage ratios of at least 100 to 200
basis points above the 3% minimum.
The table below represents the capital and leverage ratios of DANB (capital
ratios of DNBF are comparable) as of December 31, 1997:
<TABLE>
<CAPTION>
MINIMUM
REQUIREMENTS DANB
--------------- ---------
<S> <C> <C>
Tier 1 Capital........................................................ 8.0% 12.2%
Total Capital......................................................... 4.0% 13.0%
Leverage Ratio........................................................ 4.0% 8.6%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
substantially revises banking regulation and establishes a framework for
determination of capital adequacy of financial institutions. Under the FDICIA,
financial institutions are placed into one of five capital adequacy categories
as follows: (1) "well capitalized" consisting of institutions with a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of
6% or greater and a leverage ratio of 5% or greater, and the institution is not
subject to an order, written agreement, capital directive or prompt corrective
action directive; (2) "adequately capitalized" consisting of institutions with a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage ratio of 4% or greater, and the
institution does not meet the definition of a "well-capitalized" institution;
(3) "under capitalized" consisting of institutions with a total risk-based
capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%,
or a leverage ratio of less than 4%; (4) "significantly undercapitalized"
consisting of institutions with a total risk-based capital ratio of less than
6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of
less than 3%; and (5) "critically undercapitalized" consisting of an institution
with a ratio of tangible equity to total assets that is equal to or less than
2%.
Financial institutions classified as undercapitalized or below are subject
to various limitations including, among other matters. Certain supervisory
actions by bank regulatory authorities and restrictions relating to (i) growth
of assets, (ii) payment of interest on subordinated indebtedness, (iii) payment
of dividends or other capital distributions, and (vi) payment of management fees
to a parent holding company. The FDICIA requires DANB regulatory authorities to
initiate corrective action regarding financial institutions which fail to meet
minimum capital requirements. Such actions may, among other matters, require
that the financial institution augment capital and reduce total assets.
Critically undercapitalized financial institutions may also be subject to
appointment of a receiver or conservator unless the financial institution
submits an adequate capitalization plan.
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.
YEAR 2000 ISSUES
DANB has established a working committee of senior management and other
employees to plan and monitor DANB's compliance with Year 2000 issues. This
committee has developed a policy setting forth priorities and a timetable for
DANB to follow in this process. The OCC in their most recent exam has
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assessed DANB'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 DANB and DNBF.
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.
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<PAGE>
COMPENSATION OF BYL EXECUTIVE OFFICERS
Executive officers receive no compensation for their services on behalf of
BYL. The following summary compensation table sets forth, for the last three (3)
completed fiscal years, the cash and certain other compensation paid by BOYL to
BOYL's President and Chief Executive Officer and the other Executive Officers of
BOYL whose total annual salary and bonus for the fiscal year ended December 31,
1997 exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------------------ AWARDS ALL OTHER
(E) STOCK COMPENSATION
(A) (B) (C) (D) OTHER ANNUAL OPTIONS ------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION (#) ($)
- ---------------------------------------- ----------- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Ucciferri........................ 1997 $ 149,000 $441,100 $-0- 13,333 $54,338(15)
1996 $ 128,000 $ 95,785 $-0- -0- $19,076(16)
1995 $ 120,000 $201,016 $-0- -0- $10,478(17)
</TABLE>
- ------------------------
(C) Total base salary paid for fiscal years 1997, 1996 and 1995 for BOYL.
(D) The initial portion of Mr. Ucciferri's 1995 bonus ($76,160) was accrued and
paid in 1995, and the remainder of Mr. Ucciferri's 1995 bonus ($124,856) was
accrued in 1995 and paid in 1996. The initial portion of Mr. Moore's 1995
bonus ($38,060) was accrued and paid in 1995, and the remainder of Mr.
Moore's 1995 bonus ($67,448) was accrued in 1995 and paid in 1996. The
initial portion of Mr. Mullarky's 1995 bonus ($38,060) was accrued and paid
in 1995, and the remainder of Mr. Mullarky's 1995 bonus ($67,448) was
accrued in 1995 and paid in 1996. The chart also reflects the following
bonuses earned in 1996 and paid in 1997: Mr. Ucciferri ($95,785), Mr. Moore
($43,825) and Mr. Mullarky ($40,715). The chart also reflects the following
bonuses earned in 1997 and paid in 1998: Mr. Ucciferri ($441,100), Mr. Moore
($221,100), and Mr. Mullarky ($170,900).
(E) Represents the dollar value of other annual compensation not properly
categorized as salary or bonus; including (i) perquisites and other personal
benefits, securities or property unless the aggregate amount of such
compensation is the lesser of either $50,000 or 10% of the total annual
salary and bonus reported for the named executive officer in columns (C) and
(D); (ii) above-market or preferential earnings on restricted stock,
options, stock appreciation rights ("SARs") or deferred compensation paid
during the fiscal year or payable during that period but deferred at the
election of the named executive officer; (iii) earnings on long-term
incentive plan ("LTIP") compensation paid during the fiscal year or payable
during that period but deferred at the election of the named executive
officer; (iv) amounts reimbursed during the fiscal year for the payment of
taxes; and (v) the dollar value of the difference between the price paid by
a named executive officer for any security of BOYL purchased from BOYL
(through deferral of salary or bonus, or otherwise), and the fair market
value of such security at the date of purchase, unless that discount is
available generally, either to all security holders or to all salaried
employees of the registrant. None of the named officers had other annual
compensation in excess of 10% of the total annual salary and bonus reported
for any of the last three fiscal years.
(15) Includes $6,000 received from the Bank as director's fees, $39,661 Salary
Continuation Agreement accruals, and $8,6770 in health and life insurance
premiums.
(16) Includes $2400 received from the Bank as Director's fees, $8,668 Salary
Continuation Agreement accruals, and $8,008 in health and life insurance
premiums.
(17) Includes $2400 received from the Bank as director's fees and $8,078 in
health and life insurance premiums.
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<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------------------ AWARDS ALL OTHER
(E) STOCK COMPENSATION
(A) (B) (C) (D) OTHER ANNUAL OPTIONS ------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION (#) ($)
- ---------------------------------------- ----------- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Barry J. Moore.......................... 1997 $ 110,000 $221,100 $-0- 25,334 $24,420(18)
Senior EVP and CFO 1996 $ 97,000 $ 43,825 $-0- -0- $20,134(19)
1995 $ 85,000 $105,508 $-0- -0- $ 9,212(20)
Michael H. Mullarky..................... 1997 $ 85,000 $170,900 $-0- $3,334 $10,150(21)
EVP and Credit Administrator 1996 $ 85,000 $ 40,715 $-0- -0- $ 9,445(22)
1995 $ 85,000 $105,508 $-0- -0- $ 9,560(23)
</TABLE>
- ------------------------
(18) Includes $6,000 received from BOYL as Director Fees, $8,668 Salary
Continuation Agreement accruals, and $9,752 in health and life insurance
premiums.
(19) Includes $2400 received from BOYL as Director's fees, $8,668 Salary
Continuation Agreement accruals, and $9,066 in health and life insurance
premiums.
(20) Includes $9,212 in health and life insurance premiums.
(21) Includes $10,150 in health and life insurance premiums.
(22) Includes $9,445 in health and life insurance premiums.
(23) Includes $9,560 in health and life insurance premiums.
EMPLOYMENT AGREEMENTS
On November 28, 1995, BOYL and Mr. Ucciferri executed a five (5) year
employment agreement commencing January 1, 1996 at a base salary of $120,000 per
annum, which will be reviewed annually by the Board. Mr. Ucciferri's base salary
for 1997 is $149,000. Mr. Ucciferri is also entitled to the use of a car, and
Mr. Ucciferri may also participate in any bonus, pension or profit sharing plan
or other employee benefit plan that is or may be adopted by BOYL. Mr. Ucciferri
is also entitled to five (5) weeks vacation per year and appropriate medical and
dental insurance. If Mr. Ucciferri is terminated without cause, he will be
entitled to twelve (12) months severance pay, and if Mr. Ucciferri is terminated
within nine (9) months of a merger, or change of control of more than 25% of the
issued and outstanding stock of BOYL, Mr. Ucciferri will be entitled to
twenty-four (24) months severance pay. The Agreement also contains provisions
regarding disability and dispute resolution procedures.
On November 28, 1995, BOYL and Mr. Moore executed a five (5) year employment
agreement commencing January 1, 1996 at a base salary of $85,000 per annum,
which will be reviewed annually by the Board. Mr. Moore's base salary for 1997
is $110,000. Mr. Moore is also entitled to the use of a car, and Mr. Moore may
also participate in any bonus, pension or profit sharing plan or other employee
benefit plan that is or may be adopted by BOYL. Mr. Moore is also entitled to
five (5) weeks vacation per year and appropriate medical and dental insurance.
If Mr. Moore is terminated without cause, he will be entitled to twelve (12)
months severance pay, and if Mr. Moore is terminated within nine (9) months of a
merger, or change of control of more than 25% of the issued and outstanding
stock of BOYL, Mr. Moore will be entitled to twenty-four (24) months severance
pay. The Agreement also contains provisions regarding disability and dispute
resolution procedures.
On November 28, 1995, BOYL and Mr. Mullarky executed a five (5) year
employment agreement commencing January 1, 1996 at a base salary of $85,000 per
annum, which will be reviewed annually by the Board. Mr. Mullarky's base salary
for 1997 is $85,000. Mr. Mullarky is also entitled to the use of a car, and
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Mr. Mullarky may also participate in any bonus, pension or profit sharing plan
or other employee benefit plan that is or may be adopted by BOYL. Mr. Mullarky
is also entitled to five (5) weeks vacation per year and appropriate medical and
dental insurance. If Mr. Mullarky is terminated without cause, he will be
entitled to twelve (12) months severance pay, and if Mr. Mullarky is terminated
within nine (9) months of a merger, or change of control of more than 25% of the
issued and outstanding stock of BOYL, Mr. Mullarky will be entitled to
twenty-four (24) months severance pay. The Agreement also contains provisions
regarding disability and dispute resolution procedures.
SALARY CONTINUATION AGREEMENTS
On November 28, 1995, BOYL approved a Salary Continuation Agreement for Mr.
Ucciferri effective January 1, 1996 that would provide an annual sum of $64,700
in equal monthly installments over a ten (10) year period upon his retirement at
age 67. BOYL has purchased single premium life insurance to cover the retirement
benefits. BOYL must accrue increasing amounts every year in order to fund
various provisions of the Agreement, including provisions regarding death after
retirement, death prior to retirement, and disability prior to retirement
provisions. In 1997, BOYL accrued $39,661 for Mr. Ucciferri's benefit, and BOYL
has accrued a total of $79,322 through December 31, 1997 for Mr. Ucciferri's
benefit. If Mr. Ucciferri voluntarily terminates his employment, he will receive
the accrued amount under the Agreement within two (2) years of the termination.
If Mr. Ucciferri is terminated without cause, Mr. Ucciferri will begin receiving
the amount accrued in the year of termination at age sixty-seven (67) in equal
monthly installments spread over ten (10) years. Mr. Ucciferri will receive no
benefits under the Agreement if Mr. Ucciferri's employment is terminated for
cause.
On November 28, 1995, BOYL approved a Salary Continuation Agreement for Mr.
Moore effective January 1, 1996 that would provide an annual sum of $64,800 in
equal monthly installments over a ten (10) year period upon his retirement at
age sixty-five (65). BOYL has purchased single premium life insurance to cover
the retirement benefits. BOYL must accrue increasing amounts every year in order
to fund various provisions of the Agreement, including provisions regarding
death after retirement, death prior to retirement, and disability prior to
retirement provisions. In 1997, BOYL accrued $8,668 for Mr. Moore's benefit, and
BOYL has accrued a total of $17,336 through December 31, 1996 for Mr. Moore's
benefit. If Mr. Moore voluntarily terminates his employment, he will receive the
accrued amount under the Agreement within two (2) years of the termination. If
Mr. Moore is terminated without cause, Mr. Moore will begin receiving the amount
accrued in the year of termination at age sixty-five (65) in equal monthly
installments spread over ten (10) years. Mr. Moore will receive no benefits
under the Agreement if Mr. Moore's employment is terminated for cause.
BOYL has recently agreed to extend similar salary continuation benefits to
Mr. Mullarky, which, when established, will commence in 1998 under terms and
conditions to be determined.
BANK BONUS POOL
In December 1991, the Board of Directors established a Bonus Pool which
takes effect only if certain threshold tests are met. The Bonus Pool is
calculated based on BOYL's return on equity, loan losses and income after taxes.
In 1994, the 1991 Bonus Pool called for payment of $170,982 although actual
payment was only $28,020 of which $20,000 was paid to the three Executive
Officers and $8,020 was distributed among 42 staff members. The $142,962
difference between the calculated and actual bonus was not accepted by executive
management in order to maintain an adequate Tier 1 capital ratio. In 1995, the
1991 Bonus Pool accrued a total of $448,092; $177,370 was paid in 1995 and the
balance of $270,722 was paid in February 1996. Of the $448,092 total, $412,032
was paid to the three Executive Officers and $36,090 was distributed among 42
employees.
In April 1996, the Board of Directors adopted the 1996 Executive Incentive
Plan for the top three executive officers of BOYL. The performance criteria
includes return on average shareholders equity,
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<PAGE>
average loan loss and the short-term objective of limiting depository runoff
following the acquisition of Bank of Westminster, which was completed on June
14, 1996. In order to be eligible for incentive payout, BOYL must be
satisfactorily rated by its regulatory agencies. In 1997, the 1996 Executive
Incentive Plan accrued a total of $860,000. The sum of $836,100 was paid January
15, 1998 to the top three executive officers of BOYL.
401(k) PLAN
Effective February 1, 1992, BOYL adopted a 401(k) Plan that allows eligible
employees to contribute, as deferred compensation, between one percent (1%) and
fifteen percent (15%) of their salary to a trust established pursuant to the
401(k) Plan. BOYL may match contributions up to a given percentage of each
participant's compensation. In addition, BOYL may make additional contributions
on a discretionary basis as a profit sharing contribution. Contributions by BOYL
vest immediately. In 1997, BOYL matched $.50 for each dollar contributed up to a
maximum of 4% of an individual's salary.
BOYL'S 1990 STOCK OPTION PLAN
In 1990, BOYL's Board of Directors adopted the 1990 Stock Option Plan (the
"1990 Plan"), which was approved by the shareholders of BOYL at the 1991 Annual
Meeting of Shareholders. The purpose of the 1990 Plan was to secure for BOYL and
its shareholders benefits of the incentives inherent in the ownership of Common
Stock by those directors and key full-time officers and employees of BOYL who
will share responsibility with the management of BOYL for its future growth and
success. The 1990 Plan authorized the granting of (i) options which qualify as
"incentive stock options" under the Code, and (ii) nonstatutory stock options.
The 1990 Plan provided that incentive stock options and nonstatutory stock
options representing a total of up to 103,926 shares of Common Stock, will be
available for grant to directors and full-time salaried officers and employees
of BOYL.
During 1991, stock options to purchase a total of 102,300 shares were
granted under the 1990 Plan. During 1992, the Board of Directors voted to cancel
the existing stock options and grant new options at $6.50 per share. There are
currently 87,500 option shares that are outstanding under the 1990 Stock Option
Plan.
With the adoption of the BOYL's 1997 Stock Option Plan by the Board of
Directors and approved by the shareholders, the 1990 Plan was cancelled on May
21, 1997. With the completion of the organization of BYL as BYL for BOYL, all
options granted under BOYL's 1990 Stock Option Plan are now exercisable in BYL
stock.
BOYL'S 1997 STOCK OPTION PLAN
At BOYL's 1997 Annual Meeting of Shareholders on May 21, 1997, shareholders
of BOYL approved the Bank of Yorba Linda 1997 Stock Option Plan ("BOYL's 1997
Plan"), which was adopted by the Board of Directors of BOYL on February 19,
1997, subject to the approval of the holders of a majority of the issued and
outstanding shares of BOYL. The purpose of BOYL's 1997 Plan was to strengthen
BOYL by providing an additional means of attracting and retaining competent
managerial personnel and by providing to participating officers, key employees
and directors, added incentive for high levels of performance and for unusual
efforts to increase the earnings of BOYL. The BOYL's 1997 Plan seeks to
accomplish these purposes and achieve these results by providing a means whereby
such officers, key employees and directors, purchase shares of the BOYL's Common
Stock pursuant to options granted in accordance with the BOYL's 1997 Plan.
The Board of Directors intended to grant approximately 60% of the options
available for grant under BOYL's 1997 Plan to the management personnel in BOYL's
Mortgage and SBA Departments. The Board
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<PAGE>
of Directors has granted under BOYL's 1997 Plan a total of 125,000 stock options
or 166,667 shares following BOYL's four-for-three stock split effective June 30,
1997. With the completion of the organization of BYL as the bank holding company
for BOYL, all options granted under BOYL's 1997 Stock Option Plan are now
exercisable in BYL stock.
BYL 1997 STOCK OPTION PLAN
Shareholders of BOYL, as prospective shareholders of BYL, approved in
October 1997 the BYL Bancorp 1997 Stock Option Plan (the "1997 Plan"), which was
adopted by the Board of Directors of BYL on April 23, 1996, subsequently amended
on July 23, 1997 and February 18, 1998. The purpose of the 1997 Plan is to
strengthen the BYL and BOYL by providing an additional means of attracting and
retaining competent managerial personnel and by providing to participating
officers, key employees, directors and consultants added incentive for high
levels of performance and for unusual efforts to increase the earnings of BYL
and BOYL. The 1997 Plan seeks to accomplish these purposes and achieve these
results by providing a means whereby such officers, key employees, directors and
consultants may purchase shares of BYL Common Stock pursuant to options granted
in accordance with the 1997 Plan.
460,519 unissued shares of BYL, or approximately 30% of the issued and
outstanding shares of BYL, minus outstanding options granted under BOYL's Stock
Option Plan, are reserved for issuance to directors, officers, employees, and
consultants ("Eligible Participants"). Options granted pursuant to the 1997 Plan
may be non-qualified options or incentive stock options within the meaning of
Section 422A of the Internal Revenue Code.
The 1997 Plan will be administered by the Board of Directors of BYL or by a
committee appointed from time to time by the BYL Board. The BYL Board of
Directors or the committee will determine with respect to the Eligible
Participants in the 1997 Plan and the extent of their participation.
The purchase price of stock subject to each option shall be not less than
one hundred (100%) of the fair market value of such stock at the time such
option is granted. An Eligible Participant owning more than ten percent (10%) of
the total combined voting power of all classes of stock of BYL may only be
granted an option with an exercise price at least 110% of the fair value of BYL
Common Stock at the date of grant. The purchase price of any shares exercised
shall be paid in full in cash or, with the prior written approval of the
committee, in shares of BYL or on a deferred basis evidenced by a promissory
note. In addition, the optionee shall have the right upon exercise of an option
to surrender for cancellation a portion of the option for the number of shares
exercised. Options may be granted pursuant to the 1997 Plan for a term of up to
ten (10) years. Each option shall be exercisable according to the determination
of the BYL Board or committee, except that options granted to employees that are
not directors or officers shall be exercisable at a minimum of 20% per year over
a five year period.
Options granted under the 1997 Plan shall not be transferable by the
optionee during the optionee's lifetime. In the event of termination of
employment as a result of the optionee's disability or in the event of an
employee's death during the exercise period, to the extent the option is
exercisable on the date employment terminates or the date the employee dies, the
option shall remain exercisable for up to one (1) year (but not beyond the end
of the original option term) by the disabled optionee or, in the event of death
of the optionee, a non-qualified option shall be exercisable by the person or
persons to whom rights under the option shall have passed by will or the laws of
descent and distribution.
If an optionee's employment is terminated, unless termination was by reason
of disability or death, the optionee shall have the right, for a 3-month period
after termination, to exercise that portion of the option which was exercisable
immediately prior to such termination. If an optionee's employment is terminated
for cause, except for options granted to consultants and business advisors, the
optionee shall have the right for a 30 day period after termination, to exercise
that portion of the option which was exercisable immediately prior to such
termination. In no event may the option be exercised after the end of the
original option term.
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In the event of certain changes in the outstanding BYL Common Stock without
receipt of consideration by BYL, such as stock dividends, stock splits,
recapitalization, reclassification, reorganization, merger, stock consolidation,
or otherwise, appropriate and proportionate adjustments shall be made in the
number, kind and exercise price of shares covered by any unexercised or
partially unexercised options which were already granted. Optionees will receive
prior notice of any pending dissolution or liquidation of BYL, or
reorganization, merger or dissolution or liquidations of BYL, or reorganization,
merger or consolidation where BYL is not the surviving corporation or sale of
substantially all the assets of BYL or other form of corporate reorganization in
which BYL is not a surviving entity, or the acquisition of stock representing
more than 50% of the voting power of the stock of BYL then outstanding
("Terminating Event"). Optionees have thirty (30) days from the date of mailing
of such notices to exercise any option in full. After such thirty (30) days, any
option not exercised shall terminate and upon the occurrence of the Terminating
Event, the 1997 Plan shall terminate, unless some other provision is made in
connection with the Terminating Event.
The Board reserves the right to suspend, amend, or terminate the 1997 Plan,
and, with the consent of the optionee, make such modifications, of the terms and
conditions of his or her option as it deems advisable, such as changing the
number of shares or the period such shares are vested, except that the Board may
not, without further approval of a majority of the shares, increase the maximum
number of shares covered by the 1997 Plan, change the minimum option price,
increase the maximum term of options under the 1997 Plan or permit options to be
granted to any one other than an officer, employee, director, or consultant of
BYL.
Unless previously terminated by the Board of Directors, the 1997 Plan shall
terminate ten years from the date the 1997 Plan was adopted by the Board of
Directors of BYL, or April 23, 2007.
Shares of BYL's Common Stock to be issued upon exercise of stock options
need not be registered with the SEC. However, BYL has received for a permit from
the California Commissioner of Corporations and BYL intends to register the
Common Stock reserved for issuance under the 1997 Plan with the SEC prior to
issuing any of its Common Stock upon exercise thereof.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END (#) AT FY-END (#)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE(24)
- --------------------------------------------- ------------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
Robert Ucciferri............................. -0- N/A 37,778/8,888 $ 517,499/60,014
Barry J. Moore............................... -0- N/A 25,111/16,890 $ 301,339/115,181
Michael H. Mullarky.......................... -0- N/A 17,778/2,223 $ 251,401/15,299
</TABLE>
- ------------------------
(24) As a result of trades on December 31, 1997 at $19.50 per share.
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COMPENSATION OF DNBF EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
Following are descriptions, including ages and business experience in the
past five years, of the directors and executive officers of DNBF who will serve
as directors or executive officers of the Surviving Corporation following the
Merger:
NEIL F. HATCHER (60) has served as President, Chief Executive Officer and a
director of DANB since July 1982 and as President, Chief Executive Officer and a
director of DNBF since DNBF's formation in 1987.
HENRY C. COX II (59) has served as Chairman of the DANB Board since July
1982 and as Chairman of the DNBF Board since 1987. He is the President of Jurupa
Western, Inc., a real estate development company, and an owner of the Indian
Hills Country Club located in Riverside, California.
EDDIE R. FISCHER (62) has served as Vice Chairman of the DANB Board since
July 1982 and as Vice Chairman of the DNBF Board since 1987. In addition to
participating in real estate developments, Mr. Fischer is the owner of Vista
Paint Company, Le Baron Investments, Autocar Leasing and Executive RV Center,
all located in Fullerton, California.
GLORIA J. VAN KAMPEN (50) has served as Executive Vice President of DANB and
DNBF since June 1994. Prior to that time she served as Senior Vice President of
DANB and DNBF from June 1988 until June 1994 and as Assistant Vice President of
DANB from June 1982 until June 1984, and as Vice President from July 1984 until
1988. Ms. Van Kampen has served as Chief Financial Officer since June 1984.
EXECUTIVE COMPENSATION
Executive officers receive no compensation for their services on behalf of
DNBF. The following table sets forth information concerning all compensation
received for services rendered in all capacities to DNBF and DANB for the three
years ended December 31, 1997, by Neil Hatcher, DNBF's President and Chief
Executive Officer, and Gloria Van Kampen, DNBF's Executive Vice President and
Chief Financial Officer. DNBF has no other executive officers. No restricted
stock awards or stock appreciation rights ("SARs") were granted to Mr. Hatcher
or Ms. Van Kampen in such years.
<TABLE>
<CAPTION>
OTHER ANNUAL SHARES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMP. OPTIONS GRANTED
- -------------------------------------------------- --------- ---------- ------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Neil F. Hatcher, ................................. 1997 $ 150,000 0 $ 25,200(1) 0
President and CEO 1996 $ 153,461 0 $ 25,408(1) 0
1995 $ 143,231 0 $ 24,794(1) 0
Gloria J. Van Kampen, ............................ 1997 $ 108,446 0 $ 12,303(2) 0
Executive Vice President and CFO 1996 $ 99,000 0 $ 11,736(2) 0
1995 $ 94,123 0 $ 11,443(2) 0
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMP.
- -------------------------------------------------- ------
<S> <C>
Neil F. Hatcher, ................................. 0
President and CEO 0
0
Gloria J. Van Kampen, ............................ 0
Executive Vice President and CFO 0
0
</TABLE>
- ------------------------
(1) Includes directors fees, use of a company car and matching contributions to
Mr. Hatcher's 401(k) plan account.
(2) Includes use of a company car and matching contributions to Ms. Van Kampen's
401(k) plan account.
EMPLOYMENT AGREEMENT
DANB entered into a five-year employment agreement with Mr. Hatcher in March
1996 pursuant to which Mr. Hatcher is guaranteed an annual base salary of
$150,000. Additional benefits are also provided
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to Mr. Hatcher, such as use of a company car, medical and dental coverage,
maintenance of a life insurance policy, termination payments and other
perquisites. Mr. Hatcher has agreed to terminate the employment agreement upon
the Effective Time of the Merger.
401(k) PLAN
As part of its effort to attract and maintain high quality staff, DANB
adopted a 401(k) Plan in January 1, 1991, pursuant to which eligible employees
may contribute up to a maximum of 15 percent of their monthly salary. In 1997
DANB fully matched each participating employee's contribution up to a maximum of
6 percent of the employee's salary. All monies withheld from employees and
DANB's matching contributions are paid to a trustee who invests for the benefit
of members of the 401(k) Plan. DANB has agreed to terminate the 401(k) Plan upon
the Effective Time of the Merger.
STOCK OPTION PLAN
In April 1990 DNBF adopted the Non-Statutory Non-Qualified Stock Option Plan
(the "NQ Plan"). The purpose of the NQ Plan is to permit certain individuals who
are responsible for charting the future growth and development of DANB the
opportunity to acquire a proprietary interest in DNBF. Pursuant to the NQ Plan,
100,000 shares of DNBF Common Stock were reserved for issuance to those
individuals who actively contribute to the growth and development of DNBF's or
DANB's business and policies. All options granted under the NQ Plan are
non-qualified stock options within the meaning of Section 422A of the Internal
Revenue Code of 1986. As of the DNBF Record Date, all options previously granted
for DNBF Common Stock had been exercised. DNBF has agreed to terminate the NQ
Plan upon the Effective Time of the Merger.
No stock options were granted under the NQ Plan to the named executives in
1997. The following table sets forth certain information with respect to the
exercise of options to purchase DNBF Common Stock in 1997. No unexercised stock
options were held by the named executive officers at December 31, 1997.
AGGREGATED OPTION EXERCISES IN 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
ACQUIRED ON REALIZED
NAME EXERCISE ($)(1)
- ----------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
Neil F. Hatcher........................................................ 4,500 $ 44,820
Gloria J. Van Kampen................................................... 10,000 $ 99,600
</TABLE>
- ------------------------
(1) Represents the estimated fair market value of DNBF Common Stock on December
31, 1997 ($33.00 per share), less the option exercise price ($23.04 per
share).
DIRECTOR COMPENSATION
All directors received a fee of $500 per DANB Board meeting and $100 per
DNBF Board meeting attended in 1997. In addition, directors who are not salaried
officers or employees of DNBF or DANB received a fee of $250 per committee
meeting attended in 1997.
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DESCRIPTION OF BYL COMMON STOCK AND
COMPARISON OF SHAREHOLDER RIGHTS
COMPARISON OF CORPORATE STRUCTURE
DNBF is a California corporation organized under the laws of the State of
California, and the rights of DNBF Shareholders are governed by the California
Corporations Code (the "Corporations Code"), the DNBF Articles of Incorporation
(the "DNBF Articles"), and the bylaws of DNBF, as amended (the "DNBF Bylaws").
Upon consummation of the Agreement, the DNBF Shareholders will become
shareholders of BYL ("BYL Shareholders"). As BYL Shareholders, the rights of the
then former DNBF Shareholders will be governed by Division 1, Chapters 1-23 of
the Corporations Code, other applicable California statutes, the Articles of
Incorporation of BYL (the "BYL Articles"), and the bylaws of BYL (the "BYL
Bylaws").
DNBF COMMON STOCK
DNBF is authorized by the DNBF Articles, as amended, to issue 10,000,000
shares of DNBF Common Stock, without par value. At the DNBF Record Date, 232,423
shares of DNBF Common Stock were issued and outstanding. Holders of DNBF Common
Stock are entitled to one vote, in person or by proxy, for each share of DNBF
Common Stock held of record in the shareholder's name on the books of DNBF as of
the record date on any matter submitted to the vote of the shareholders. Each
share of DNBF Common Stock has the same rights, privileges and preferences as
every other share and will share equally in DNBF's net assets upon liquidation
or dissolution. DNBF Common Stock has no conversion or redemption rights or
sinking fund provisions. Holders of DNBF Common Stock have the preemptive right
to subscribe to additional stock issued by DNBF. Shareholders are entitled to
dividends when, as and if declared by DNBF's Board of Directors out of funds
legally available therefor (and after satisfaction of the prior rights of
holders of outstanding preferred stock, if any) subject to certain restrictions
on payment of dividends imposed by the California Corporations Code and other
applicable regulatory limitations. The transfer agent and registrar for DNBF
Common Stock is De Anza National Bank.
BYL COMMON STOCK
BYL is authorized by the BYL Articles to issue 50,000,000 shares of BYL
Common Stock, without par value, and 25,000,000 shares of BYL Preferred Stock,
without par value. As of the date hereof, 1,553,196 shares of BYL Common Stock
were issued and outstanding. Holders of BYL Common Stock are entitled to one
vote, in person or by proxy, for each share of BYL Common Stock held of record
in the shareholder's name on the books of BYL as of the record date on any
matter submitted to the vote of the shareholders, The BYL Articles also provide
there will be no cumulative voting for the election of directors if and when BYL
becomes a "listed corporation" (i.e., outstanding shares listed on the New York
or American Stock Exchange or outstanding securities designated as qualified for
trading as a national market security on the National Association of Securities
Dealers Automatic Quotation System and has at least 800 holders of its equity
securities; BYL currently has approximately 800 holders of its securities). BYL
is currently a "listed corporation".
The BYL Articles provide that the Board of Directors will be divided into
two classes, with any class having a term of two years. The Board of Directors
of BYL is divided into two classes, each of which contains approximately
one-half of the whole number of the members of the Board. The members of each
class shall be elected for a term of two years, with the terms of office of all
members of one class expiring each year so that approximately one-half of the
total number of directors are elected each year. The BYL Articles also provide
that any vacancy occurring in the Board, including a vacancy created by an
increase in the number of directors, shall be filled by a vote of two-thirds of
the directors then in office and any director so chosen shall hold office for a
term expiring at the annual meeting of stockholders at which the term of the
class to which the director has been chosen expires. The classified Board is
intended to provide
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for continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to fully use its voting power to gain control
of the Board of Directors without consent of the incumbent Board of Directors of
BYL.
The BYL Articles also require the approval of the holders of at least
66 2/3% of BYL's outstanding shares of voting stock to approve certain "Business
Combinations" (as defined therein) involving a "Related Person" (as defined
therein) except in cases where the proposed transaction has been approved in
advance by a majority of those members of BYL's Board of Directors who are
unaffiliated with the Related Person and were directors prior to the time when
the Related Person became a Related Person. The term "Related Person" is defined
to include any individual, corporation, partnership or other entity (other than
BYL or BOYL or its subsidiary) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of BYL or an
affiliate of such person or entity. This provision of the BYL Articles applies
to any "Business Combination," which is defined to include: (i) any merger or
consolidation of BYL with or into any Related Person; (ii) any sale, lease,
exchange, mortgage, transfer, or other disposition of 25% or more of the assets
of BYL or combined assets of BYL and its subsidiaries to a Related Person; (iii)
any merger or consolidation of a Related Person with or into BYL or a subsidiary
of BYL; (iv) any sale, lease, exchange, transfer, or other disposition of 25% or
more of the assets of a Related Person to BYL or a subsidiary of BYL; (v) the
issuance of any securities of BYL or a subsidiary of BYL to a Related Person;
(vi) the acquisition by BYL or a subsidiary of BYL of any securities of a
Related Person; (vii) any reclassification of common stock of BYL or any
recapitalization involving the common stock of BYL; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Under California law, absent this provision, business combinations,
including mergers, consolidations and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of BYL and
any other affected class of stock. The increased stockholder vote required to
approve a business combination may have the effect of foreclosing mergers and
other business combinations which a majority of stockholders deem desirable and
place the power to prevent such a merger or combination in the hands of a
minority of stockholders.
Each share of BYL Stock has the same rights, privileges and preferences as
every other share and will share equally in BYL's net assets upon liquidation of
dissolution. BYL Common Stock has no preemptive, conversion or redemption rights
or sinking fund provisions and all of the issued and outstanding shares of BYL
Common Stock, when issued, will be fully paid and nonassessable. The BYL
Articles also provide that amendments to the BYL Articles must be approved by a
majority vote of its Board of Directors and also by a majority of the
outstanding shares of its voting stock, provided, however, that an affirmative
vote of at least 66 2/3% of the outstanding voting stock entitled to vote (after
giving effect to the provision limiting voting rights) is required to amend or
repeal certain provisions of the Articles of Incorporation, including the
provision limiting voting rights, the provisions relating to approval of certain
business combinations, the number and classification of directors, director and
officer indemnification by BYL and amendment of BYL Bylaws and the BYL. The BYL
Bylaws may be amended by its Board of Directors, or by a vote of 66 2/3% of the
total votes eligible to be voted at a duly constituted meeting of stockholders.
BYL Shareholders are entitled to dividends when, as and if declared by BYL's
Board of Directors out of funds legally available therefor (and after
satisfaction of the prior rights of holders of outstanding preferred stock, if
any (subject to certain restrictions on payment of dividends imposed by the
General Corporation Law of California).
NUMBER OF DIRECTORS
Although the Corporations Code does not require BYL or BOYL to maintain any
specific range of number of directors, the number of directors of BYL and BOYL
may not be less than a stated minimum nor more than a stated maximum (which in
no case shall be greater than two times the stated minimum
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<PAGE>
minus one) with the exact number of directors to be fixed, within the limits
specified. The BOYL Bylaws currently provide that the number of directors on
BOYL Board of Directors may not be fewer than five nor more than nine, and the
current number of members on BOYL's Board of Directors has been fixed at six.
The BYL Bylaws currently provide that the number of directors on BYL Board of
Directors may not be fewer than six nor more than eleven, and the current number
of members on BYL's Board of Directors has been fixed at six at the present
time. At the Effective Time of the Merger, the number of directors for both BYL
and BOYL will be increased to nine (9) in order to appoint the three DNBF Board
members proposed to be appointed to the BYL and BOYL Board of Directors.
DIVIDEND RESTRICTIONS
The ability of BYL and of DNBF to pay cash dividends is limited by the
provisions of Section 500 of the California Corporations Code, which prohibits
the payment of dividends unless (i) the retained earnings of the corporation
immediately prior to the distribution exceeds the amount of the distribution;
(ii) the assets of the corporation exceed 1 1/4 times its liabilities; or (iii)
the current assets of the corporation exceed its current liabilities, but if the
average pre-tax earnings of the corporation before interest expense for the two
years preceding the distribution was less than the average interest expense of
the corporation for those years, the current assets of the corporation must
exceed 1 1/4 times its current liabilities.
DISSENTERS' RIGHTS
Pursuant to the General Corporation Law of California, holders of BYL Common
Stock and DNBF Common Stock would be entitled, subject to the provisions of
Chapter 13, to dissenters' rights in connection with any transaction which
constitutes a reorganization (as defined in Section 181 of the California
Corporations Code). See "The Merger--Dissenters' Rights."
RESTRICTIONS ON ACQUISITION OF BYL
The following discussion is a summary of certain provisions of California
and Federal law and regulations and California corporate law, as well as the
Articles of Incorporation and Bylaws of BYL, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Articles of Incorporation and Bylaws of BYL. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
CALIFORNIA AND FEDERAL BANKING LAW
The Federal Change in Bank Control Act of 1978 prohibits a person or group
of persons "acting in concert" from acquiring "control" of a bank holding
company unless the Federal Reserve Bank (the "FRB") has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the FRB has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to the expiration of the
disapproval period if the FRB issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the FRB,
the acquisition of more than 10% of a class of voting stock of a bank with a
class of securities registered under Section 12 of the Securities Exchange Act
of 1934, as amended (such as the BYL Common Stock), would, under the
circumstances set forth in the presumption, constitute the acquisition of
control.
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Commissioner has approved such acquisition of control. A
person would be deemed to have acquired control of BYL under this state law if
such person, directly or indirectly, has the power (i) to vote 25% or more of
the voting power of BYL or (ii) to direct or cause the direction of the
management and policies of BYL. For purposes of this law, a
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<PAGE>
person who directly or indirectly owns or controls 10% or more of the BYL Common
Stock would be presumed to control BYL.
In addition, any "company" would be required to obtain the approval of the
FRB under the Bank Holding Company Act of 1956, as amended (the "BHC Act"),
before acquiring 25% (5% in the case of an acquiror that is, or is deemed to be,
a bank holding company) or more of the outstanding BYL Common Stock of, or such
lesser number of shares as constitute control over, BYL.
ANTI-TAKEOVER PROVISIONS IN BYL'S ARTICLES OF INCORPORATION
BYL's Articles of Incorporation contain certain provisions that deal with
matters of corporate governance and certain rights of shareholders. The
following discussion is a general summary of BYL's Articles of Incorporation and
regulatory provisions relating to stock ownership and transfer, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These proposed provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual BYL stockholders may deem to be in their best
interest or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, BYL Shareholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of incumbent Board of Directors
or management of BYL more difficult. Any provision requiring more than a
majority vote by BYL's stockholders may only be effective for a two year period
from its effective time, unless renewed by the BYL Board of Directors and the
stockholders. The following description of certain of the amendments to the
Articles of Incorporation of BYL is necessarily general, and reference should be
made in each case to such Articles of Incorporation, which is contained as an
exhibit to BYL's registration statement on Form S-4 dated September 5, 1997. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
BOARD OF DIRECTORS
The Board of Directors of BYL is divided into two classes, each of which
contain approximately one-half of the whole number of the members of the Board.
The members of each class shall be elected for a term of two years, with the
terms of office of all members of one class expiring each year so that
approximately one-half of the total number of directors are elected each year.
The classified Board is intended to provide for continuity of the BYL Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without consent of the incumbent Board of Directors of BYL.
CUMULATIVE VOTING AND SPECIAL MEETINGS
The BYL Articles do not provide for cumulative voting for any purpose, as
described in "DESCRIPTION OF BYL COMMON STOCK AND COMPARISON OF SHAREHOLDER
RIGHTS."
AUTHORIZED SHARES
The BYL Articles authorize the issuance of 50,000,000 shares of common stock
and 25,000,000 shares of preferred stock. The shares of common stock and
preferred stock were authorized in an amount greater than that to be issued to
provide BYL's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and the exercise of employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with its
fiduciary duty to deter future attempts to gain control of BYL. The Board of
Directors also has sole authority to determine the terms of any one or more
series of preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of preferred stock, the Board has the power, to the extent consistent
with its fiduciary
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duties to issue a series of preferred stock to persons friendly to management in
order to attempt to block a tender offer, merger or other transaction by which a
third party seeks control of BYL, and thereby assist members of management to
retain their positions. BYL's Board has no present plans for the issuance of
additional shares, other than the issuance of shares of BYL Common Stock upon
exercise of stock options and in the Merger.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATION WITH PRINCIPAL
STOCKHOLDERS
The BYL Articles of Incorporation require the approval of the holders of at
least 66 2/3% of BYL's outstanding shares of voting stock to approve certain
"Business Combinations" (as defined in therein) involving a "Related Person" (as
defined therein) except in cases where the proposed transaction has been
approved in advance by a majority of those members of BYL's Board of Directors
who are unaffiliated with the Related Person and were directors prior to the
time when the Related Person became a Related Person, as described more fully in
"COMPARISON OF THE RIGHTS OF HOLDERS OF BYL COMMON STOCK AND DNBF COMMON STOCK."
Under California law, absent this provision, business combinations,
including mergers, consolidations and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of BYL and
any other affected class of stock. The increased stockholder vote required to
approve a business combination may have the effect of foreclosing mergers and
other business combinations which a majority of stockholders deem desirable and
place the power to prevent such a merger or combination in the hands of a
minority of stockholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Amendments to the BYL Articles must be approved by a majority vote of its
Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of at least 66 2/3% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Articles of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, the number and classification of directors, director and officer
indemnification by BYL and amendment of BYL's Bylaws and Articles of
Incorporation, as described in "DESCRIPTION OF BYL COMMON STOCK AND COMPARISON
OF SHAREHOLDER RIGHTS." The BYL Bylaws may be amended by its Board of Directors,
or by a vote of 66 2/3% of the total votes eligible to be voted at a duly
constituted meeting of stockholders.
STOCKHOLDER NOMINATIONS AND PROPOSALS
The Bylaws of BYL require a stockholder who intends to nominate a candidate
for election to the Board of Directors to give not less than 10 days' advance
notice to the Secretary of BYL. The Articles of Incorporation provide that a
stockholder who desires to raise new business to provide certain information to
BYL concerning the nature of the new business, the stockholder and the
stockholder's interest in the business matter. Similarly, a stockholder wishing
to nominate any person for election as a director must provide BYL with certain
information concerning the nominee and the proposing stockholder.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF BYL'S ARTICLES OF INCORPORATION
The Board of Directors of BYL believes that the provisions described above
are prudent and will reduce BYL's vulnerability to takeover attempts and certain
other transactions which have not been negotiated with and approved by its Board
of Directors. The Board of Directors believes these provisions are in the best
interest of BYL and its stockholders. In the judgment of the Board of Directors,
BYL's Board will be in the best position to determine the true value of BYL and
to negotiate more effectively for
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what may be in the best interest of its stockholders. Accordingly, the Board of
Directors believes that it is in the best interest of BYL and its stockholders
to encourage potential acquirors to negotiate directly with the Board of
Directors of BYL and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price reflective of the true value of BYL and
which is in the best interest of all stockholders.
Attempts to acquire control of financial institutions have recently become
increasingly common. Takeover attempts which have not been negotiated with and
approved by the Board of Directors present to stockholders the risks of a
takeover on terms which may be less favorable than might otherwise be available.
A transaction which is negotiated and approved by the Board of Directors, on the
other hand, can be carefully planned and undertaken at an opportune time in
order to obtain maximum value of BYL and its stockholders, with due
consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of BYL's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to incur great expense. Although a
tender offer or other takeover attempt may be made at a price substantially
above the current market prices, such offers are sometimes made for less than
all of the outstanding shares of a target company. As a result, stockholders may
be presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive BYL's
remaining stockholders of benefits of certain protective provisions of the
Exchange Act, if the number of beneficial owners became less than the 300
thereby allowing for Exchange Act deregistration.
Despite the belief of BYL as to the benefits to stockholders of these
provisions of BYL's Articles of Incorporation, these provisions may also have
the effect of discouraging a future takeover attempt which would not be approved
by BYL's Board, but pursuant to which stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
any opportunity to do so. Such provisions will also render the removal of BYL's
Board of Directors and of management more difficult. The Board of Directors of
BYL, however, has concluded that the potential benefits outweigh the possible
disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders, BYL may adopt additional charter provisions regarding the
acquisition of its equity securities that would be permitted for a California
business corporation. BYL does not presently intend to propose the adoption of
further restrictions on the acquisition of BYL's equity securities.
The cumulative effect of the restriction on acquisition of BYL contained in
the Articles of Incorporation and Bylaws, federal law and California law may be
to discourage potential takeover attempts and perpetuate incumbent management,
even though certain stockholders of BYL may deem a potential acquisition to be
in their best interest, or deem existing management not to be acting in their
best interests.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the CGCL authorizes a court to award, or a corporation's
Board of Directors to grant, indemnity to directors, officers and employees in
terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. Articles Five and Six of BYL's Restated
Articles of Incorporation and Article VI of BYL's Bylaws provide for
indemnification of its directors, officers, employees and other agents to the
fullest extent permitted by the CGCL. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of BYL pursuant to the foregoing
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provisions, or otherwise, BYL has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
VALIDITY OF BYL COMMON STOCK
The validity of the shares of BYL Common Stock to be issued in the Merger
has been passed upon by Knecht & Hansen, Newport Beach, California, counsel for
BYL.
EXPERTS
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
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, and attached to this Joint Proxy Statement/
Prospectus have been audited by Vavrinek, Trine, Day & Co., LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated balance sheets of DNB Financial 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 years in the
two-year period ended December 31, 1997, and attached to this Joint Proxy
Statement/ Prospectus have been audited by Vavrinek, Trine, Day & Co., LLP,
independent certified public accountants, incorporated by reference herein, upon
the authority of said firm as experts in accounting and auditing.
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APPENDIX A
BYL'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
<PAGE>
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
--------------------------
(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
----
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
2
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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.
4
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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.
5
<PAGE>
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.
6
<PAGE>
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).
7
<PAGE>
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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<PAGE>
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.
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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.
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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.
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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.
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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.
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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.
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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~
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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.
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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.
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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>
APPENDIX B
DNBF'S CONSOLIDATED BALANCE SHEETS FOR YEARS ENDED DECEMBER
31, 1997 AND 1996 AND RELATED CONSOLIDATED STATEMENTS
OF INCOME, CHANGES IN SHAREHOLDERS' EQUITY AND CASH
FLOWS FOR THE YEARS THEN ENDED
<PAGE>
Board of Directors
DNB Financial and Subsidiary
Riverside, California
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of DNB Financial
and Subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
years then ended. 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 DNB Financial and Subsidiary as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
VAVRINEK, TRINE DAY & CO., LLP
January 8, 1998, except for Note O
as to which the date is January 29, 1998.
Laguna Hills, California
1
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 4,705,849 $ 3,089,761
Interest-Bearing Deposits 3,419,000 4,104,000
Investment Securities - Note B:
Available-for-Sale 9,951,764 9,219,418
Held-to-Maturity 7,942,834 7,648,238
------------ ------------
TOTAL INVESTMENT SECURITIES 17,894,598 16,867,656
Loans - Note C:
Commercial 10,067,170 8,404,225
Real Estate - Construction 1,278,377 1,048,484
Real Estate - Other 30,588,656 27,580,936
Consumer 2,139,105 2,210,823
Lease Financing 2,020,056 2,530,285
------------ ------------
TOTAL LOANS 46,093,364 41,774,753
Net Deferred Loan Fees (136,696) (132,112)
Allowance for Loan Losses (402,000) (406,000)
------------ ------------
NET LOANS 45,554,668 41,236,641
Premises and Equipment - Note D: 802,916 555,878
Other Real Estate Owned (OREO) 278,469 630,723
Accrued Interest and Other Assets 763,529 803,333
------------ ------------
$ 73,419,029 $ 67,287,992
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits - Note E:
Noninterest-Bearing Demand $ 15,606,043 $ 15,962,542
Money Market and NOW 21,577,779 20,202,396
Savings 5,678,590 4,866,705
Time Deposits Under $100,000 11,842,629 13,481,727
Time Deposits $100,000 and Over 10,393,982 5,176,238
------------ ------------
TOTAL DEPOSITS 65,099,023 59,689,608
Federal Funds Purchased - 500,000
Accrued Interest and Other Liabilities 134,925 79,687
Long-Term Debt - Note J 464,607 522,683
------------ ------------
TOTAL LIABILITIES 65,698,555 60,791,978
Commitments - Note H:
Shareholders' Equity - Note I:
Common Stock - Authorized 10,000,000 shares; Issued
and Outstanding, 232,423 in 1997, 210,123 in 1996 2,250,708 1,647,081
Retained Earnings 5,497,074 4,961,869
Net Unrealized Appreciation
(Depreciation) on Available-for-Sale
Securities Net of Tax Liability of
$10,681 in 1997 and Tax Benefit of $10,681 in 1996 (27,308) (112,936)
------------ ------------
SHAREHOLDERS' EQUITY 7,720,474 6,496,014
------------ ------------
$ 73,419,029 $ 67,287,992
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 4,071,376 $ 3,743,001
Interest on Investment Securities 1,140,250 1,093,089
Other Interest Income 227,243 308,361
------------ ------------
TOTAL INTEREST INCOME 5,438,869 5,144,451
INTEREST EXPENSE
Interest on Money Market and NOW 593,029 639,514
Interest on Savings Deposits 106,079 136,592
Interest on Time Deposits 1,136,850 892,870
Other Interest Expense 60,965 111,538
------------ ------------
TOTAL INTEREST EXPENSE 1,896,923 1,780,514
------------ ------------
NET INTEREST INCOME 3,541,946 3,363,937
Provision for Loan Losses 45,000 20,000
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,496,946 3,343,937
NONINTEREST INCOME
Service Charges, Fees and Other Income 1,116,099 1,063,084
Gain on Sale of Securities 2,344 35,550
------------ ------------
1,118,443 1,098,634
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,657,821 1,523,543
Occupancy Expenses 429,393 435,266
Furniture and Equipment 157,978 158,775
Other Expenses - Note F 1,265,169 1,265,654
------------ ------------
3,510,361 3,383,238
------------ ------------
INCOME BEFORE INCOME TAXES 1,105,028 1,059,333
Income Taxes - Note G 359,800 345,200
------------ ------------
NET INCOME $ 745,228 $ 714,133
------------ ------------
------------ ------------
Per Share Data - Note K:
Net Income - Basic $ 3.55 $ 3.38
Net Income - Diluted $ 3.44 $ 3.37
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
Common Stock (Depreciation)
-------------------------- on Available
Number of Retained for-Sale
Shares Amount Earnings Securities Total
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1996 211,448 $ 1,679,330 $ 4,416,679 $ 19,623 $ 6,115,632
Dividends Paid ( 168,943) ( 168,943)
Common Stock Retired ( 2,325) ( 55,289) ( 55,289)
Stock Options Exercised 1,000 23,040 23,040
Net Income 714,133 714,133
Net Unrealized Depreciation
on Available-for-Sale Securities
After Taxes of $24,318 ( 132,559) ( 132,559)
----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 1996 210,123 1,647,081 4,961,869 ( 112,936) 6,496,014
Dividends Paid ( 210,023) ( 210,023)
Common Stock Retired ( 200) ( 5,773) ( 5,773)
Stock Options Exercised, Including
Tax Benefits of $91,000 22,500 609,400 609,400
Net Income 745,228 745,228
Net Unrealized Appreciation
on Available-for-Sale Securities
After Taxes of $21,362 85,628 85,628
----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 1997 $ 232,423 $ 2,250,708 $ 5,497,074 $( 27,308) $ 7,720,474
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 745,228 $ 714,133
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation and Amortization 121,915 111,596
Deferred Income Taxes 35,000 ( 3,000)
Net Loss/(Gain) on Other Real Estate Owned ( 13,159) 13,476
Net Realized Gain on Available-for-Sale Securities ( 2,344) ( 35,550)
Provision for Loan Losses 45,000 20,000
Other Items-Net 129,681 329,265
------------- -------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 1,061,321 1,149,920
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits 685,000 1,769,000
Proceeds from Sales of Other Real Estate Owned 230,413 56,524
Purchases of Available-for-Sale Securities ( 5,409,811) (19,313,460)
Maturities and Sales of Available-for-Sale Securities 4,786,798 19,399,538
Purchases of Held-to-Maturity Securities ( 5,901,094) ( 2,397,438)
Proceeds from Maturities of Held-to-Maturity Securities 5,606,498 3,397,492
Net Change in Loans ( 4,228,027) ( 5,674,594)
Net Purchases of Premises and Equipment ( 368,953) ( 7,948)
------------- -------------
NET CASH USED
BY INVESTING ACTIVITIES ( 4,599,176) ( 2,770,886)
FINANCING ACTIVITES
Increase in Fed Funds Purchased ( 500,000) 500,000
Net Change in Demand Deposits and Savings Accounts 1,830,769 ( 4,151,130)
Net Change in Time Deposits 3,578,646 4,571,158
Payments to Retire Long Term Debt ( 58,076) ( 58,075)
Payment to Retire Common Stock ( 5,773) ( 55,289)
Payments for Dividends ( 210,023) ( 168,943)
Proceeds from Exercise of Stock Options 518,400 23,040
------------- -------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 5,153,943 660,761
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS 1,616,088 ( 960,205)
Cash and Cash Equivalents at Beginning of Year 3,089,761 4,049,966
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,705,849 $ 3,089,761
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 1,874,543 $ 1,786,056
Income Taxes Paid $ 305,000 $ 458,256
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of DNB Financial (the "Company")
and De Anza National Bank (the "Bank").
NATURE OF OPERATIONS
The Bank operates three branches in Riverside County, California. The Bank's
primary source of revenue is providing loans to clients, who are predominately
small and middle-market businesses and individuals.
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
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.
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 capital 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.
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.
7
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - CONTINUED
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) as amended by SFAS 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.
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan 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.
8
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - CONTINUED
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit, 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.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' presentations to conform to
the current year. These classifications are of a normal recurring nature.
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.
In December 1996, the FASB issued SFAS No. 126, "EXEMPTION FROM CERTAIN REQUIRED
DISCLOSURES ABOUT FINANCIAL INSTRUMENTS FOR CERTAIN NONPUBLIC ENTITIES," an
amendment of FASB Statement No. 107, SFAS No. 126 is effective for fiscal years
ending after December 15, 1996. In accordance with SFAS No. 126, the Bank is
exempt from the disclosure requirements of SFAS No. 107 and has therefore
elected not to disclose fair value information for financial instruments.
9
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR SALE SECURITIES:
DECEMBER 31, 1997:
U.S. Government and
Agency Securities $ 2,551,757 $ 14,568 $( 2,108) $ 2,564,217
Municipal Securities 1,018,606 13,590 - 1,032,196
Investment in Mutual Funds 6,058,679 - ( 42,678) 6,016,001
Other 339,350 - - 339,350
------------- ------------- ------------- -------------
$ 9,968,392 $ 28,158 $( 44,786) $ 9,951,764
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
DECEMBER 31,1996:
U.S. Government and
Agency Securities $ 5,397,348 $ 3,794 $( 29,846) $ 5,371,296
Investment in Mutual Funds 3,621,337 - ( 97,565) 3,523,772
Other 324,350 - - 324,350
------------- ------------- ------------- -------------
$ 9,343,035 $ 3,794 $( 127,411) $ 9,219,418
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
10
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE B - INVESTMENT SECURITIES - CONTINUED
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1997:
U.S. Treasury $ 1,999,483 $ - $( 1,983) $ 1,997,500
U.S. Government and
Agency Securities 4,497,911 7,688 ( 750) 4,504,849
Municipal Securities 1,386,028 19,684 - 1,405,712
Mortgage-Backed Securities 59,412 - ( 3,775) 55,637
------------- ------------- ------------- -------------
$ 7,942,834 $ 27,372 $( 6,508) $ 7,963,698
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
DECEMBER 31, 1996:
U.S. Treasury $ 1,998,398 $ - $( 11,057) $ 1,987,341
U.S. Government and
Agency Securities 4,196,607 3,416 ( 9,375) 4,190,648
Municipal Securities 1,390,573 1,351 ( 183) 1,391,741
Mortgage-Backed Securities 62,660 - ( 3,628) 59,032
------------- ------------- ------------- -------------
$ 7,648,238 $ 4,767 $( 24,243) $ 7,628,762
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Investment securities carried at approximately $1,999,000 and $2,895,000, at
December 31, 1997 and 1996, respectively, were pledged to secure public deposits
and other purposes as required by law.
11
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE B - INVESTMENT SECURITIES - CONTINUED
The scheduled maturities of securities held to maturity and securities available
for sale at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Available-for-Sale Securities: Held-to-Maturity Securities:
------------------------------ ----------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 6,058,679 $ 6,016,001 $ 1,999,483 $ l,997,500
Due from One Year to Five Years 1,022,295 1,025,072 1,531,913 1,537,701
Due from Five to Ten Years 1,018,606 1,032,195 4,352,026 4,372,860
Due after Ten Years 1,529,462 1,539,146 - -
Mortgage-Backed Securities - - 59,412 55,637
Other 339,350 339,350 - -
------------- ------------- ------------- ------------
$ 9,968,392 $ 9,951,764 $ 7,942,834 $ 7,963,698
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within the
Riverside and San Bernardino areas of 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.
A summary of the changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Balance at Beginning of Year $ 406,000 $ 467,000
Additions to the Allowance Charged to Expense 45,000 20,000
Recoveries 1,000 10,000
------------ ------------
452,000 497,000
Less Loans Charged Off (50,000) (91,000)
------------ ------------
Balance at End of Year $ 402,000 $ 406,000
------------ ------------
------------ ------------
</TABLE>
12
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE C - LOANS - CONTINUED
The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon for the periods
indicated:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Recorded Investment of Impaired Loans $ 331,503 $ 516,821
Related Allowance for Loan Losses $ 82,876 $ 122,663
Average Recorded Investment in Impaired Loans $ 436,000 $ 448,000
Interest Income Recognized for Cash Payments None None
</TABLE>
During 1997, the Company originated $135,000 in loans to facilitate the sale of
OREO. During 1996, the Bank transferred $330,935 in loans to OREO.
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $ 122,000 $ 122,000
Building 218,421 218,421
LeasehoId Improvements 420,720 419,812
Furniture, Fixtures and Equipment 1,162,683 911,389
------------ ------------
1,923,824 1,671,622
Less Accumulated Depreciation and Amortization (1,120,908) (1,115,744)
------------ ------------
$ 802,916 $ 555,878
------------ ------------
------------ ------------
</TABLE>
13
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE D - PREMISES AND EQUIPMENT - CONTINUED
The Bank leases its Limonite facility from a partnership comprised of several of
its directors. The initial term of the lease started in 1982 and expires in
2002, with two successive ten year options. Monthly rental expense, currently
at $16,657, is adjusted for cost of living increases every three years. The
Bank also pays its pro-rata share of taxes and common operating expenses.
The Bank leases its Spruce facility for $10,625 per month, plus increases in its
pro-rata share of taxes and common operating expenses. This lease expires in
1999 and includes two five year options to renew.
Total rental expense included in occupancy expense and furniture and equipment
expense was approximately $335,500 in 1997, of which $195,750 was paid to
related parties, and $327,000 in 1996, of which $191,610 was paid to related
parties.
NOTE E - DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
<S> <C>
Less than One Year $20,536,362
More than One Year but Less than Five Years 1,700,249
------------
$22,236,611
------------
------------
</TABLE>
NOTE F - OTHER EXPENSES
A summary of other expenses for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Data Processing $ 404,045 $ 414,134
Professional Fees 115,814 97,209
Other Real Estate Owned 27,010 50,853
Regulatory Assessments 36,070 30,313
Promotional 140,489 111,282
Office Expenses 175,956 161,605
Other 365,785 400,258
---------- ----------
$1,265,169 $1,265,654
---------- ----------
---------- ----------
</TABLE>
14
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE G - INCOME TAXES
The provisions for income taxes included in the consolidated statements of
income consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current:
Federal $ 241,000 $ 266,200
State 83,800 82,000
---------- ----------
324,800 348,200
Deferred 35,000 (3,000)
---------- ----------
$ 359,800 $ 345.200
---------- ----------
---------- ----------
</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 Bank's principal timing differences are from loan loss
provision accounting, investment securities, and depreciation differences.
The following is a summary of the components of the net deferred tax asset
recognized in accrued interest and other assets in the accompanying consolidated
balance sheets:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses Due to Tan Limitations $ 101,000 $ 107,000
Net Unrealized Depreciation on Available-for-Sale Securities 7,000 11,000
Other Assets/Liabilities 21,000 42,000
---------- ----------
129,000 160,000
Deferred Tax Liability:
Premises and Equipment Due to Depreciation Difference ( 33,000) ( 29,000)
---------- ----------
Net Deferred Taxes $ 96,000 $ 131,000
---------- ----------
---------- ----------
</TABLE>
15
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE G - INCOME TAXES - CONTINUED
A comparison of the federal statutory income tax rates to the Company's
effective income tax rates follow:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ------------------------
Amount Rate Amount Rate
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal Tax Rate $ 376,000 34.0% $ 360,000 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 55,000 5.0% 63,000 5.9%
Tax Savings from Exempt
Loan and Investment
Interest (74,000) (7.3)% (88,000) (8.3)%
Other Items - Net 2,800 0.2% 10,200 0.9%
--------- --------- ---------- ----------
Company's Effective Rate $ 359,800 31.9% $ 345,200 32.6%
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
NOTE H - COMMITMENTS
The Bank is involved in various litigation which has arisen in the ordinary
course of its business. In the opinion of management, 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 Company's consolidated financial statements.
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.
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 $ 3,998,000
Standby Letters of Credit 70,000
----------
$ 4,068,000
----------
----------
</TABLE>
16
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE H - COMMITMENTS - CONTINUED
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 client 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
client'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 I - STOCK OPTION PLAN
At December 31, 1997, the Company had one fixed stock option plan, which is
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. There were no options granted
during 1997 or 1996.
The Company has a non-qualified stock option plan. Under the plan, the Company
may grant options to its and the Bank's directors and employees for up to
100,000 shares of common stock. Options may be granted only at a price of not
less than 100% of the fair market value of the stock on the date the options are
granted.
A summary of the status of the Company's fixed stock option plan as of December
31, 1997 and 1996, respectively and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- ---------------------------------------
Number of Shares Number of Shares
--------------------------- Weighted ------------------------- Weighted
Available Average Available Average
For Exercise For Exercise
Granting Outstanding Price Granting Outstanding Price
---------- ----------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of Year 74,300 22,500 $ 23.04 74,300 23,500 $ 23.04
Exercised - (22,500) $ 23.04 - (1,000) $ 23.04
-------- -------- --------- ---------
Outstanding at
End of Year 74,300 None 74,300 22,500 $ 23.04
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
17
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE J - LONG-TERM DEBT
During 1995, the Company repurchased 21,375 shares of its common stock from a
shareholder. As consideration for the repurchase, the Company issued a
promissory note for $580,758. The note calls for semi-annual interest payments
at 10% beginning December 1, 1995, and annual principal payments of $58,076
beginning June 1, 1996. The balance of the note was paid off in 1998.
NOTE K - 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
-------------------------- ------------------------
Income Shares Income Shares
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net Income as Reported $ 745,228 - $ 714,133 -
Shares Outstanding at Year End 232,423 210,123
Impact of Weighting Shares
Purchased and Retired
During the Year - (22,343) - 932
-------- --------- --------- ---------
USED IN BASIC EPS 745,228 210,080 714,133 211,055
Dilutive Effect of Stock Options - 6,791 - 900
-------- --------- --------- ---------
USED IN DILUTIVE EPS 745,228 216,871 $ 714,133 211,955
-------- --------- --------- ---------
-------- --------- --------- ---------
</TABLE>
NOTE L - 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 of comparable transactions with other persons. The
balance of these loans outstanding at December 31, 1997 and 1996 was
approximately $1,299,000 and $931,000, respectively.
18
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE M - 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
on the following page) 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.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency 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. The following table also sets
forth the Bank's actual capital amounts and ratios (dollar amounts in
thousands):
<TABLE>
<CAPTION>
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) $6,650 13.0% $4,127 8.0% $5,159 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $6,248 12.2% $2,064 4.0% $3,095 6.0%
Tier 1 Capital (to Average Assets) $6,248 8.6% $2,910 4.0% $3,638 5.0%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk-Weighted Assets) $6,080 13.4% $3,638 8.0% $4,547 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $5,673 12.5% $1,819 4.0% $2,728 6.0%
Tier 1 Capital (to Average Assets) $5,673 8.6% $2,629 4.0% $3,287 5.0%
</TABLE>
19
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE M - REGULATORY MATTERS - CONTINUED
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank. At
December 31, 1997, required reserves averaged approximately $449,000.
The Bank is restricted as to the amount of dividends which can be paid.
Dividends declared by national banks that exceed the net income (as defined) for
the current year plus retained net income for the preceding two years must be
approved by the OCC. The Bank may not pay dividends that would result in its
capital levels being reduced below the minimum requirements shown above.
NOTE N - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
DNB Financial operates De Anza National Bank. 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 1996
------------- -------------
<S> <C> <C>
ASSETS:
Cash $ 16,848 $ 6,685
Investment Securities 1,105,682 521,492
Investment in De Anza National Bank 6,294,830 5,685,382
Loans 554,913 686,010
Other Assets 216,754 126,567
----------- -----------
$ 8,189,027 $ 7,026,136
----------- -----------
----------- -----------
LIABILITIES:
Long-Term Debt $ 464,607 $ 522,683
Other Liabilities 3,946 7,439
----------- -----------
TOTAL LIABILITIES 468,553 530,122
SHAREHOLDER'S EQUITY 7,720,474 6,496,014
----------- -----------
$ 8,189,027 $ 7,026,136
----------- -----------
----------- -----------
</TABLE>
20
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE N - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
INCOME:
Cash Dividends from Subsidiary $212,000 $460,000
Loan Income 72,055 69,604
Investment Income 24,431 25,141
-------- --------
TOTAL INCOME 308,486 554,745
EXPENSES:
Interest on Long-Term Liabilities 48,863 54,750
Other 38,217 33,276
-------- --------
TOTAL EXPENSES 87,080 88,026
-------- --------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY 221,406 466,719
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 523,822 247,414
-------- --------
NET INCOME $745,228 $714,133
-------- --------
-------- --------
</TABLE>
21
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE N - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income $ 745,228 $ 714,133
Noncash Items Included in Net Income:
Equity in Income of Subsidiary (735,822) (707,414)
Change in Other Assets and Liabilities (93,678) (403)
--------- ----------
NET CASH (PROVIDED) USED
IN OPERATING ACTIVITIES (84,272) 6,316
CASH FLOWS FROM
INVESTING ACTIVITIES:
Dividends Received from Subsidiary 212,000 460,000
Change in Investments (584,190) 297,093
Change in Loans 131,097 (509,272)
--------- ----------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (241,093) 247,821
CASH FLOWS FROM
FINANCING ACTIVITIES:
Options Exercised and Shares Retired 603,627 (32,249)
Repayments of Long-Term Debt (58,076) (58,076)
Dividends Paid (210,023) (168,943)
NET CASH PROVIDED (USED)
IN FINANCING ACTIVITIES 335,528 (259,268)
--------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 10,163 (5,131)
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF YEAR 6,685 11,816
--------- ----------
CASH AND CASH EQUIVALENTS
AT ENDING OF YEAR $ 16,848 $ 6,685
--------- ----------
--------- ----------
INTEREST PAID $ 49,416 $ 55,183
</TABLE>
22
<PAGE>
DNB FINANCIAL AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE O - SUBSEQUENT EVENT
On January 29, 1998, the Company entered into a definitive agreement to merge
with BYL Bancorp (BYL), the parent company of Bank of Yorba Linda. Under the
terms of the agreement, the Company will be merged with and into BYL, 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 BYL shares of common stock for all outstanding shares of the
Company's common stock.
The aggregate transaction value for the Company 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 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 BYL 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 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 BYL and the Company and
appropriate regulatory agencies. The merger is expected to close by May 31,
1998.
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APPENDIX C
AGREEMENT AND PLAN OF REORGAINZATION DATED JANUARY 29, 1998
AND FIRST AMENDMENT DATED FEBRUARY 25, 1998
BETWEEN BYL, BOYL, DNBF AND DANB
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (hereinafter referred to as
the "Agreement") is made and entered into as of January 29, 1998, by and between
DNB FINANCIAL ("DNBF"), a California corporation, DE ANZA NATIONAL BANK
("DANB"), a national banking association and a wholly-owned subsidiary of DNBF,
BYL BANCORP ("BYL"), a California corporation, and BANK OF YORBA LINDA ("BOYL"),
a California banking corporation and wholly-owned subsidiary of BYL.
R E C I T A L S
A. DNBF is a bank holding company duly organized and existing under
the laws of the State of California with its principal office in the City of
Riverside, County of Riverside, State of California. DANB is a national banking
association, a wholly-owned subsidiary of DNBF, and duly organized and existing
under the laws of the United States with its principal office in the City of
Riverside, County of Riverside, State of California. BYL is a bank holding
company duly organized and existing under the laws of the State of California
with its principal office in the City of Yorba Linda, County of Orange, State of
California. BOYL is a state-chartered California banking corporation, a
wholly-owned subsidiary of BYL, and duly organized and existing under the laws
of the State of California with its principal office in the City of Yorba Linda,
County of Orange, State of California.
B. The parties desire to provide for the exchange of BYL Stock (as
defined below) for all of the outstanding shares of DNBF Stock (as defined
below) pursuant to the Merger (as defined below), subject to the terms and
conditions specified herein, in which DNBF and BYL will enter into an Agreement
of Merger (as defined below) providing for the merger of DNBF with and into BYL;
C. The respective Boards of Directors of DNBF and BYL believe that
the proposed Merger, on the terms and conditions set forth herein, is in the
best interests of their respective corporations and shareholders;
D. As a condition and inducement to BYL's willingness to enter into
this Agreement, DNBF and BYL are entering into, immediately after the execution
and delivery hereof, a Warrant Agreement (the "BYL Warrant Agreement") dated as
of the date hereof and attached hereto as EXHIBIT"C", pursuant to which DNBF
shall grant to BYL an option to purchase 58,000 newly-issued shares of the
common stock of DNBF representing 19.9% of DNBF shares to be outstanding after
giving pro forma effect to the issuance of such shares at a price of $45.00 per
DNBF share;
D. The Merger requires certain shareholder and regulatory approvals
and may be effected only after the necessary approvals have been obtained;
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E. For federal income tax purposes, it is intended that the Merger
shall qualify as a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code");
F. The parties desire to make certain representations, warranties
and agreements in connection with the Merger, and also to prescribe certain
conditions to the Merger; and
G. Subject to any specific provisions of this Agreement, it is the
intent of the parties that BYL by reason of this Agreement shall not (until
consummation of the Merger) control, and shall not be deemed to control DNBF or
any of its subsidiaries, directly or indirectly, and shall not exercise or be
deemed to exercise, directly or indirectly, a controlling influence over the
management or policies of DNBF or any of its subsidiaries;
Accordingly, to consummate the transactions set forth above and in
consideration of the mutual covenants, agreements, representations and
warranties contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used in this Agreement shall
have the meanings set forth below unless the context otherwise requires:
"Adjusted BYL Share Value" shall have the meaning given such term in
Section 2.1.
"Affiliate" means any Person (as defined below) that directly, or
through one or more intermediaries controls, or is controlled by, or is under
common control with, the Person specified.
"Agreement of Merger" shall mean the Agreement of Merger to be entered
into by and between DNBF and BYL substantially in the Form of EXHIBIT "A"
hereto, but subject to any changes that may be necessary to conform to any
requirements of any Governmental Entity having authority over the Merger.
"Alternative Transaction" shall have the meaning given such term in
Section 6.5.
"Average Price of BYL Stock" shall mean the average of the Closing
Price of BYL Stock (as defined below) for the 20 consecutive trading days
immediately preceding the three trading days prior to the Effective Time of the
Merger (subject to adjustment as provided below). The term "trading day" shall
mean a day on which trading generally takes place on Nasdaq and on which trading
in BYL Stock has occurred and has not been halted or suspended. In the event
BYL pays, declare or otherwise effects a stock split, reverse stock split,
reclassification or stock dividend or distribution with respect to the BYL Stock
between the date of this Agreement and
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the Effective Time of the Merger, appropriate adjustments will be made to the
Average Price of BYL Stock.
"Bank Merger" shall have the meaning given such term in Section 2.6.
"BHC Act" shall mean the Bank Holding Company Act of 1956, as amended.
"BOYL" shall mean Bank of Yorba Linda.
"Business Day" shall mean any day other than a Saturday, Sunday or day
on which commercial banks in California are authorized or required to be closed.
"BYL" shall mean BYL Bancorp.
"BYL Stock Option Plan" shall mean the BYL Bancorp 1997 Stock Option
Plan.
"BYL Financial Statements" shall have the meaning given such term in
Section 5.4.
"BYL Stock" shall mean the common stock, no par value, of BYL.
"BYL Warrant" shall mean the warrant issued to BYL pursuant to the BYL
Warrant Agreement.
"BYL Warrant Agreement" shall mean the Warrant Agreement entered into
between BYL and DNBF and attached hereto as EXHIBIT "C", pursuant to which the
BYL Warrant is issued.
"Charter Documents" shall mean, with respect to any business
organization, any certificate or articles of incorporation or association,
any bylaws, any partnership agreement and any other similar documents that
regulate the basic organization of the business organization and its internal
relations.
"Closing" shall mean the consummation of the transactions contemplated
by this Agreement on the Closing Date (as defined below) at the head office of
BYL, 18206 Imperial Highway, Yorba Linda, California, or at such other place as
the Parties (as defined below) may agree upon.
"Closing Date" shall mean, unless the Parties (as defined below) agree
on another date, the first Friday as soon as possible following the
Determination Date, and in no case more than 30 days following the receipt of
the approvals and consents and expiration of the waiting periods specified in
Section 9.1 have occurred and/or have been obtained, satisfaction of the
remaining conditions to the transaction as contemplated by this Agreement, or at
such other time as shall be determined in good faith by BYL in order to assure
an orderly transition process. The
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parties shall make a good faith effort to close the transaction within five (5)
Business Days of the Determination Date.
"Closing Price of BYL Stock" means the closing price of BYL Stock as
reported on Nasdaq and reprinted in the Western Edition of the Wall Street
Journal.
"Code" shall mean the United States Internal Revenue Code of 1986, as
amended, and all regulations thereunder.
"Commissioner" shall mean the California Commissioner of Financial
Institutions.
"Comptroller" shall mean the Comptroller of the Currency.
"Confidential Information" shall mean all information heretofore or
hereafter provided by DNBF or DANB to BYL or BOYL, obtained from DNBF or DANB by
BYL or BOYL, provided by BYL or BOYL to DNBF or DANB, or obtained from BYL or
BOYL by DNBF or DANB, which is information related to the business, financial
position or operations of DNBF, DANB, BYL and BOYL (such information to include,
by way of example only and not of limitation, client lists, pricing information,
company manuals, internal memoranda, strategic plans, budgets, forecasts,
projections, computer models and marketing plans). Notwithstanding the
foregoing, "Confidential Information" shall not include any information that (i)
at the time of disclosure or thereafter is generally available to and known by
the public (other than as a result of an improper disclosure directly or
indirectly by BYL, BOYL, DNBF or DANB, as appropriate, or any of their officers,
directors, employees, financial advisors or other representatives), (ii) was
available to BYL, BOYL, DNBF or DANB, as appropriate, on a non-confidential
basis from a source other than from BYL, BOYL, DNBF or DANB, as appropriate,
provided that such source learned the information independently and is not and
was not bound by a confidentiality agreement with respect to the information, or
the Board of Directors of BYL, BOYL, DNBF or DANB, as appropriate, is advised in
writing by outside legal counsel that in the exercise of the fiduciary
obligations of the Board of Directors such information is required to be
disclosed, or (iii) has been independently acquired or developed by BYL, BOYL,
DNBF or DANB, as appropriate, without violating any obligations under this
Agreement.
"Consents" shall mean every consent, approval, absence of disapproval,
waiver or authorization from, or notice to, or registration or filing with, any
Person (as defined below).
"CRA" shall mean the Community Reinvestment Act.
"DANB" shall mean De Anza National Bank.
"Dayton" shall mean Dayton & Associates, the predecessor firm of
Vavrinek.
"Deposit" shall mean any deposit as defined in Section 3(l) of the
Federal Deposit Insurance Act, as amended, to the date of this Agreement (12
U.S.C. Section 1813(l)).
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"Determination Date" shall mean the last day of the month preceding
the Effective Time of the Merger (as defined below), unless the Parties as
defined below mutually agree to another day.
"Directors' Agreement" shall mean an agreement, substantially in the
form of EXHIBIT "B" hereto, pursuant to which each signatory shall agree to vote
or cause to be voted all shares of DNBF Stock with respect to which such Person
has voting power on the date hereof or hereafter acquires to approve the
Agreement and the transactions contemplated hereby and all requisite matters
related thereto.
"Dissenting Shares" shall mean any shares of BYL Stock or DNBF Stock
(as defined herein) that are (i) issued and outstanding immediately prior to the
Effective Time of the Merger and (ii) "dissenting shares" as that term is
defined in Section 1300.
"DNBF Aggregate Book Value" shall mean shareholders equity of DNBF as
of September 30, 1997 as determined in accordance with GAAP and RAP consistently
applied, equal to $6,911,426, and adjusted to insure that the reserve for loan
losses of DANB and DNBF is at a level which is adequate to provide for all known
and reasonably expected losses on assets of DANB and DNBF outstanding in
accordance with GAAP and RAP, and for any increase recommended or requested by
(i) the Comptroller in any examination of DANB or (ii) the FRB in any inspection
of DNBF.
"DNBF Aggregate Transaction Value" shall have the meaning set forth in
Section 2.4.
"DNBF Aggregate Transaction Value Certificate" shall mean a
certificate, executed by the Chief Executive Officer and Chief Financial Officer
of DNBF and dated as of the Determination Date (as defined below), setting forth
the calculation of the DNBF Aggregate Transaction Value and DNBF Transaction
Price Per Share (as defined below), including the Stockholders' Equity and each
specific item of adjustment.
"DNBF Filings" shall have the meaning given such term in Section 4.18.
"DNBF Financial Statements" shall have the meaning given such term in
Section 4.4.
"DNBF Options" shall mean options to purchase DNBF Stock (as defined
below) pursuant to the DNBF Stock Option Plan (as defined below).
"DNBF Transaction Price Per Share" shall have the meaning set forth
in Section 2.4.
"DNBF Stock" shall mean the common stock of DNBF.
"DNBF Stock Option Plan" shall mean the DNB Financial Non-statutory
Non-qualified Stock Option Plan.
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"DPC Property" shall mean voting securities, other personal property
and real property acquired by foreclosure or otherwise, in the ordinary course
of collecting a debt previously contracted in good faith, retained with the
object of sale for a period not longer than one year, or any applicable
statutory holding period, and recorded in the holder's business records as such.
"Effective Time of the Merger" shall mean the date and time of the
filing of the Agreement of Merger with the Secretary of State (as defined
below).
"Employment Agreements" shall mean any employment agreement, severance
agreement, "golden parachute" agreement or any other agreement which provides
for payments to employees of DNBF and/or DANB upon termination of employment,
including termination after a change in control.
"Encumbrance" shall mean any option, pledge, security interest, lien,
mechanic's lien, charge, encumbrance or restriction (whether on voting,
disposition or otherwise), whether imposed by agreement, understanding, law or
otherwise.
"Environmental Law" shall mean any federal, state, provincial or local
statute, law, ordinance, rule, regulation, order, consent, decree, judicial or
administrative decision or directive of the United States or other jurisdiction
whether now existing or as hereinafter promulgated, issued or enacted relating
to: (A) pollution or protection of the environment, including natural resources;
(B) exposure of persons, including employees, to Hazardous Substances (as
defined below) or other products, materials or chemicals; (C) protection of the
public health or welfare from the effects of products, by-products, wastes,
emissions, discharges or releases of chemical or other substances from
industrial or commercial activities; or (D) regulation of the manufacture, use
or introduction into commerce of substances, including, without limitation,
their manufacture, formulation, packaging, labeling, distribution,
transportation, handling, storage and disposal. For the purposes of this
definition the term "Environmental Law" shall include, without limiting the
foregoing, the following statutes, as amended from time to time: (1) the Clean
Air Act, as amended, 42 U.S.C. Section 7401 ET SEQ.; (2) the Clean Water Act, as
amended, 33 U.S.C. Section 1251 ET SEQ.; (3) the Resource Conservation and
Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 ET SEQ., (4) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (including the Superfund Amendments and Reauthorization Act of 1986), 42
U.S.C Section 9601 ET SEQ.; (5) the Toxic Substances Control Act, as amended, 15
U.S.C. Section 2601 ET SEQ.; (6) the Occupational Safety and Health Act, as
amended, 29 U.S.C. Section 651; (7) the Emergency Planning and Community
Right-To-Know Act of 1986, 42 U.S.C. Section 1101 ET SEQ.; (8) the Mine Safety
and Health Act of 1977, as amended, 30 U.S.C. Section 801 ET SEQ.; (9) the Safe
Drinking Water Act, 42 U.S.C. Section 300f ET SEQ.; (10) the Hazardous Waste
Control Law, California Health and Safety Code, 25100, ET SEQ.; and (11) all
comparable state and local laws, laws of other jurisdictions or orders and
regulations including, but not limited to, the Carpenter-Presley-Tanner
Hazardous Substance Account Act, Cal. Health & Safety Code Section 25300 ET SEQ.
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"Equity Securities" shall mean the capital stock of DNBF or any
options, rights, warrants or other rights to subscribe for or purchase, or any
plans, contracts or commitments that are exercisable in, such capital stock or
that provide for the issuance of, or grant the right to acquire, or are
convertible into, or exchangeable for, such capital stock.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and all regulations thereunder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and all rules and regulations thereunder.
"Exchange Agent" shall mean the financial institution or other company
appointed by BYL to effect the exchange contemplated by Section 2.5.
"Exchange Ratio" shall have the meaning given such term in Section
2.1.
"Executive Officer'' shall mean a natural person who participates or
has the authority to participate (other than in the capacity of a director) in
major policy making functions, whether or not such person has a title or is
serving with salary or other compensation.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"FRB" shall mean the Board of Governors of the Federal Reserve System.
"GAAP" shall mean generally accepted accounting principles,
consistently applied from period to period, applicable to banks and bank holding
companies, as appropriate, for the period in question.
"Governmental Entity" shall mean any court or tribunal in any
jurisdiction or any United States federal, state, municipal, domestic, foreign
or other administrative agency, department, commission, board, bureau or other
regulatory or governmental authority or instrumentality.
"GCL" shall mean the California Corporations Law.
"Hazardous Substances" shall mean (1) any "hazardous waste" as defined
by CERCLA and the State Acts, as such acts are in effect on the date hereof, and
any and all regulations promulgated thereunder; (2) any "hazardous substance" as
such term is defined by CERCLA; (3) any "regulated substance" as defined by the
State Acts; (4) asbestos requiring abatement, removal or encapsulation pursuant
to the requirements of governmental authorities; (5) polychlorinated biphenyls;
(6) petroleum products; (7) "hazardous chemicals" or "extremely hazardous
substances" in quantities sufficient to require reporting, registration,
notification and/or optional treatment or handling under the Emergency Planning
and Community Right to Know Act of 1986; (8) any "hazardous chemical" in levels
that would result in exposure greater than is allowed by permissible exposure
limits established pursuant to the Occupational Safety and Health
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Act of 1970; (9) any substance that requires reporting, registration,
notification, removal, abatement and/or special treatment, storage, handling or
disposal, under Section 6, 7 and 8 of the Toxic Substance Control Act (15 U.S.C.
Section 2601); (10) any toxic or hazardous chemical described in 29 C.F.R.
1910.1000-1047 in levels that would result in exposure greater than those
allowed by the permissible exposure limits pursuant to such regulations; and
(11) any (A) "hazardous waste", (B) "solid waste" capable of causing a "release
or threatened release" that present an "imminent and substantial endangerment"
to the public health and safety of the environment, (C) "solid waste" that is
capable of causing a "hazardous substance incident" (D) "solid waste" with
respect to which special requirements are imposed by applicable governmental
authorities upon the generation, transportation thereof as such terms are
defined and used within the meaning of the State Acts or (E) any "pollutant" or
"toxic pollutant" as such term is defined in the Federal Clean Water Act, 33
U.S.C. Section 1251-1376, as amended, by Public Law 100-4, February 4, 1987, and
the regulations promulgated thereunder, including 40 C.F.R. Sections 122.1 and
122.26.
"Material Adverse Change" shall include such a change or event if its
impact causes or is reasonably expected to cause (i) a reduction in
shareholders' equity to less than 100% of DNBF's or BYL's shareholders' equity
at December 31, 1997 as determined in accordance with GAAP or RAP, or (ii) a
material adverse effect upon (a) business, financial condition, operations or
prospects of such Party, taken as a whole, or (b) the ability of such Party to
timely perform its obligations under, and to timely consummate the Merger.
"Material Contract" shall have the meaning given such term in Section
4.12.
"Merger" shall mean the merger of DNBF with and into BYL.
"Party" shall mean either BYL, BOYL, DNBF or DANB, and "Parties" shall
mean BYL, BOYL, DNBF and DANB.
"Perfected Dissenting Shares" shall mean shares of BYL Stock or DNBF
Stock the holders of which have satisfied the requirements of Section 1300 of
the GCL and have not effectively withdrawn or lost their dissenters' rights.
"Permit" shall mean any United States federal, foreign, state, local
or other license, permit, franchise, certificate of authority, order or approval
necessary or appropriate under any applicable Rule (as defined below).
"Person" shall mean any natural persons corporation, trust,
association, unincorporated body, partnership, joint venture, Governmental
Entity, statutorily or regulatory sanctioned unit or any other person or
organization.
"Proxy Statement" shall mean the Joint Proxy Statement and Prospectus
that is used to solicit proxies for the shareholders meetings of DNBF and BYL
referred to in Article VIII herein and to offer and sell the shares of BYL Stock
to be issued in connection with the Merger.
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"RAP" shall mean regulatory accounting principles, if any, applicable
to a particular person.
"Real Property" shall have the meaning given such term in subsection
(a) of Section 4.6.
"Representatives" shall have the meaning given such term in subsection
(a) of Section 6.3.
"Rule" shall mean any statute or law or any judgment, decree,
injunction, order, regulation or rule of any Governmental Entity, including,
without limitation, those relating to disclosure, usury, equal credit
opportunity, equal employment, fair credit reporting and anticompetitive
activities.
"SEC" means the Securities and Exchange Commission.
"Secretary of State" shall mean the Secretary of State of the State of
California.
"Section 1300" shall mean Section 1300 ET SEQ. of the California
Corporations Code.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and all rules and regulations thereunder.
"S-4" means the registration statement on Form S-4 to be filed with
the SEC relating to the registration under the Securities Act of the BYL Stock
to be issued in connection with the Merger.
"Stipulated BYL Share Value" shall mean $18.75 per share of BYL Stock.
"Surviving Corporation" shall mean BYL as the corporation surviving
the Merger.
"Surviving Bank" shall mean BOYL as the bank surviving the merger of
DANB and BOYL.
"Tax Filings" shall have the meaning given such term in Section 4.8.
"Third Party Consent" shall have the meaning given such term in
Sections 6.17 and 7.8.
"Threshold Values" shall have the meaning given such term in Section
2.1.
"To the knowledge" and "to the best knowledge" shall have the meanings
given such terms in Section 15.15.
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"Understanding" shall mean any contract, agreement, understanding,
commitment or offer, whether written or oral, which may become a binding
obligation if accepted by another Person.
"Vavrinek" shall mean Vavrinek, Trine, Day & Co., and the successor
firm to Dayton.
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ARTICLE II
THE MERGER AND RELATED TRANSACTIONS
2.1 THE MERGER. Subject to the provisions of this Agreement, the
Parties agree to request that the approval of the Merger to be issued by the
Commissioner, the FRB and any other necessary regulatory agency on or prior to
the Closing Date shall provide that the Merger shall become effective (the
"Effective Time of the Merger") as of the Closing Date. DNBF shall cause its
officers to execute the Agreement of Merger, as well as all other necessary
documents, in order to effect the Merger in accordance with the terms hereof as
requested by BYL. At the Effective Time of the Merger, the following
transactions will occur simultaneously:
(a) MERGER OF BYL AND DNBF. DNBF will merge with and into BYL with
BYL being the Surviving Corporation pursuant to the provisions of, and with the
effect provided in, the GCL, and shall continue its corporate existence under
the laws of the State of California. The name of the Surviving Corporation
shall be "BYL Bancorp." Upon the consummation of the Merger, the separate
corporate existence of DNBF shall cease.
(b) EFFECT ON DNBF STOCK. Subject to Section 2.3, each share of DNBF
Stock issued and outstanding immediately prior to the Effective Time of the
Merger shall, on and at the Effective Time of the Merger, pursuant to the
Agreement of Merger and without any further action on the part of DNBF or the
holders of DNBF Stock, be automatically cancelled and cease to be an issued and
outstanding share of DNBF Stock, and shall be exchanged for and converted into
the right to receive a number of shares of BYL Stock equal to the quotient (such
quotient, the Exchange Ratio) of (a) the DNBF Transaction Price Per Share (as
defined in Section 2.4 below), divided by (b) the Stipulated BYL Share Value or
if adjusted, by the Adjusted BYL Share Value (as defined below). In the event
that the Average Price of BYL Stock shall be more than $22.50 or less than
$15.00 (such values, the Threshold Values), the Stipulated BYL Share Value shall
be adjusted (such adjusted price, the Adjusted BYL Share Value), with such
adjustment equal to one half the difference between the Average Price of BYL
Stock and $18.75 per share. For example, if the Average Price of BYL Stock is
$23.50, then the Adjusted BYL Share Value would be $21.125, and if the Average
Price of BYL Stock is $14.00, then the Adjusted BYL Share Value would be
$16.375.
(d) EFFECT ON BYL STOCK. Each share of BYL Stock issued and
outstanding immediately prior to the Effective Time of the Merger shall remain
an issued and outstanding share of BYL Stock, and shall not be affected by the
Merger.
2.2 EFFECT OF THE MERGER. At the Effective Time of the Merger, the
corporate existence of DNBF and BYL shall be merged into and continued in the
Surviving Corporation, and the Surviving Corporation shall be deemed the same
corporation as each corporation participating in the Merger. All rights,
franchises, and interests of DNBF and BYL in and to every type of property
(real, personal and mixed) and choses in action shall be transferred to and
vested in the Surviving Corporation by virtue of the Merger without any deed or
other transfer and the Surviving Corporation shall hold and enjoy all rights of
property, franchises and interests, in the
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same manner and to the same extent as such rights, franchises and interests were
held or enjoyed by any one of the consolidating corporations at the Effective
Time of the Merger.
2.3 DISSENTING SHAREHOLDERS.
(a) Any Perfected Dissenting Shares of DNBF Stock shall not be
converted into or represent the right to receive BYL Stock hereunder unless and
until such shares have lost their status as dissenting shares under Section
1300, at which time such shares shall be converted into BYL Stock pursuant to
Section 2.4. Each holder of Dissenting Shares who is entitled to payment for
his shares of DNBF Stock under Section 1300 shall receive such payment in an
amount as determined pursuant to Section 1300. If any shareholder of DNBF shall
fail to perfect, or shall effectively withdraw or lose, his or her rights under
Section 1300 of the GCL, the Dissenting Shares of such holder shall be treated
for purposes of this Article II as any other shares of outstanding DNBF Stock.
(b) Any Perfected Dissenting Shares of BYL Stock entitled to payment
for his shares of BYL Stock under Section 1300 shall receive such payment in an
amount as determined pursuant to Section 1300. If any shareholder of BYL shall
fail to perfect, or shall effectively withdraw or lose, his or her rights under
Section 1300 of the GCL, the Dissenting Shares of such holder shall be treated
for purposes of this Article II as any other shares of outstanding BYL Stock.
2.4 THE DNBF AGGREGATE TRANSACTION VALUE AND DNBF TRANSACTION PRICE
PER SHARE.
(a) COMPUTATION OF THE DNBF AGGREGATE TRANSACTION VALUE AND DNBF
TRANSACTION PRICE PER SHARE. The DNBF Aggregate Transaction Value will be the
sum of the following: (i) 2.7 times the DNBF Aggregate Book Value; (ii) the net
proceeds received by DNBF from the exercise of up to 22,500 DNBF Options at the
average weighted exercise price of $23.04 per share; and (iii) 1.5 times the
change in net retained earnings of DNBF, after taking into account the payment
of the quarterly dividends in November 1997, February 1998 and any other
dividends that may be declared and paid with the consent of BYL (BYL hereby
consents to the payment of the $0.25 per share cash dividends in November 1997
and February 1998), as determined in accordance with GAAP and RAP between
September 30, 1997 and the Determination Date, and adjusted to insure that the
reserve for loan losses of DANB and DNBF is at a level which is adequate to
provide for all known and reasonably expected losses on assets of DANB and DNBF
outstanding in accordance with GAAP and RAP, and for any increase recommended or
requested by (i) the Comptroller in any examination of DANB or (ii) the FRB in
any inspection of DNBF. The DNBF Transaction Price Per Share shall mean the
DNBF Aggregate Transaction Value divided by the issued and outstanding shares of
DNBF Stock on the Closing Date, up to a maximum of 232,423 shares.
(b) OFFICERS' CERTIFICATE; ACCOUNTANT'S REVIEW. The DNBF Aggregate
Transaction Value and the DNBF Transaction Price Per Share shall be set forth in
the DNBF Aggregate Transaction Value Certificate. The procedures upon which the
calculation of the
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DNBF Aggregate Transaction Value and DNBF Transaction Price Per Share are based
shall be reviewed and approved by BYL. If the parties cannot agree on the DNBF
Aggregate Transaction Value and the DNBF Transaction Price Per Share, then
Vavrinek shall review the calculation of the DNBF Aggregate Transaction Value
and DNBF Transaction Price Per Share and render a decision on the disputed
matter or matters as soon as possible, and such decision will be final,
conclusive and nonappealable. The fees and costs of such review by Vavrinek
will be paid one-half by BYL and one-half by DNBF.
2.5 DELIVERY OF CONSIDERATION. At the Closing, BYL will deliver to
the Exchange Agent the number of shares BYL Stock issuable in the Merger, plus
any payment for fractional shares of DNBF Stock. Delivery to such holders of
BYL Stock to which they are entitled will subsequently be made by the Exchange
Agent against delivery of share certificates formerly evidencing DNBF Stock
(duly executed and in proper form for transfer) to the Exchange Agent in
accordance with this Section 2.5 and an agreement to be entered into between BYL
and the Exchange Agent.
2.6 THE BANK MERGER. After the Merger, DANB shall be merged with and
into BOYL pursuant to the Bank Merger Act, the California Financial Code and
other applicable federal and state laws and regulations (the "Bank Merger").
2.7 DIRECTORS AND OFFICERS OF SURVIVING CORPORATION AND SURVIVING
BANK. At the Effective Time of the Merger, Messrs. Cox, Fischer and Hatcher,
currently members of the Boards of Directors of DNBF and DANB, will be appointed
to the Boards of Directors of BYL and BOYL, and the remaining directors of DNBF
and DANB shall resign as of the Closing Date. The officers of DNBF and DANB at
the Effective Time of the Merger shall be the officers of the Surviving
Corporation and/or the Surviving Bank, as determined by BYL, until they resign
or are replaced or terminated by the Board of Directors or management of the
Surviving Corporation and/or the Surviving Bank or otherwise in accordance with
the Surviving Corporation's and/or the Surviving Bank's Charter Documents or
management policies.
2.8 STOCK OPTIONS. Immediately prior to the Effective Time of the
Merger, each holder of a DNBF Option will be given the opportunity to, in whole
or in part, exercise such option and receive prior to the Closing the number of
shares of DNBF Stock that the DNBF Optionee is entitled. All remaining DNBF
Options which are entitled to be exercised but the holder of a DNBF Option
elects not to exercise shall be cancelled immediately prior to the Effective
Time of the Merger.
2.9 DIRECTORS' AGREEMENTS. Concurrently with the execution of this
Agreement, DNBF shall cause each of its directors to enter into the Directors'
Agreement.
2.10 TRANSMITTAL LETTER. Immediately after the Effective Time of the
Merger, BYL shall instruct the Exchange Agent to mail appropriate transmittal
materials to the former stockholders of DNBF stock, and the form of such
transmittal letter shall be subject to the reasonable approval of DNBF.
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2.11 WARRANT. Concurrent with the execution of this Agreement, BYL
and DNBF have executed the BYL Warrant Agreement, pursuant to which agreement
DNBF has issued to BYL the BYL Warrant, granting the holder of such warrant the
right to purchase up to 19.9% of the issued and outstanding shares of capital
stock of DNBF, on a fully diluted basis (as more specifically set forth in the
BYL Warrant Agreement), on the terms, and subject to the conditions set forth in
such agreement.
ARTICLE III
THE CLOSING
3.1 CLOSING DATE. Consummation of the transactions contemplated by
this Agreement shall take place as defined in the definition of "Closing." The
Effective Time shall occur following the last to occur of (i) the receipt of all
approvals and consents specified in this Agreement and the expiration of the
applicable waiting periods specified in Article IX, and (ii) satisfaction of the
conditions precedent set forth in Articles IX, X and XI or written waiver of
such conditions as provided herein (the "Closing Date", "Effective Time of the
Merger" or "Effective Time").
3.2 EXECUTION OF AGREEMENT OF MERGER. Prior to the Closing Date, the
Agreement of Merger (as amended, if necessary, to conform to any requirements of
any Governmental Entity having authority over the Merger) shall be executed by
DNBF and BYL. On the Closing Date, the Merger shall become effective in
accordance with the approvals granted by the Commissioner, the FRB, the FDIC and
any other necessary Governmental Entity, and the Agreement of Merger, bearing
the certification of the Secretary of State, together with all requisite
certificates shall be duly filed in the office of the Commissioner after being
filed with the California Secretary of State with the approval of the
Commissioner enclosed thereon, in accordance with the California Corporations
Code and Section 4880 ET SEQ. of the California Financial Code.
3.3 DOCUMENTS TO BE DELIVERED. At the Closing the Parties shall
deliver, or cause to be delivered, such documents or certificates as may be
necessary in the reasonable opinion of counsel for any of the parties, to
effectuate the transactions called for in this Agreement. If, at any time after
the Effective Time of the Merger, BYL or its successors or assigns shall
determine that any further conveyance, assignment or other documents or any
further action is necessary or desirable to further effectuate the transactions
set forth herein or contemplated hereby, the officers and directors of the
Parties hereto shall execute and deliver, or cause to be executed and delivered,
all such documents as may be reasonably required to effectuate such
transactions.
3.4 EXCHANGE PROCEDURES.
(a) EXCHANGE AGENT. No later than the Effective Time, BYL shall
deposit with the Exchange Agent the number of shares of BYL Stock issuable in
the Merger and the amount of cash payable in the Merger. The Exchange Agent
shall not be entitled to vote or exercise any
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rights of ownership with respect to BYL Stock held by it from time to time
hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account of
the persons entitled thereto.
(b) EXCHANGE OF CERTIFICATES. Each holder of a certificate
formerly representing DNBF Stock (other than Dissenting Shares) who surrenders
or has surrendered such certificate (or customary affidavits and indemnification
regarding the loss or destruction of such certificate), together with duly
executed transmittal materials included in or required by BYL, to the Exchange
Agent shall, upon acceptance thereof, be entitled to a certificate representing
BYL Stock into which the shares of DNBF Stock shall have been converted pursuant
hereto, as well as cash in lieu of any fractional shares of BYL Stock to which
such holder would otherwise be entitled. The Exchange Agent shall accept such
DNBF certificate upon compliance with such reasonable and customary terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal practices. Until surrendered as contemplated
by this Section 3.4, each certificate representing DNBF Stock shall be deemed
from and after the Effective Time to evidence only the right to receive BYL
Stock upon such surrender. BYL shall not be obligated to deliver the
consideration to which any former holder of DNBF Stock is entitled as a result
of the Merger until such holder surrenders his certificate or certificates
representing shares of DNBF Stock for exchange as provided in this Article III.
If any certificate for shares of BYL Stock, or any check representing cash
and/or declared but unpaid dividends, is to be issued in a name other than that
in which a certificate surrendered for exchange is issued, the certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and the person requesting such exchange shall affix any requisite stock transfer
tax stamps to the certificate surrendered or provide funds for their purchase or
establish to the satisfaction of the Exchange Agent that such taxes are not
payable.
(c) AFFILIATES. Certificates surrendered for exchange by any
person constituting an "affiliate" of DNBF for purposes of Rule 144(a) under the
Securities Act shall not be exchanged for certificates representing whole shares
of DNBF Stock until BYL has received a written agreement from such person as
provided in Section 6.24.
3.5 VOTING AND DIVIDENDS. Former shareholders of record of DNBF
shall be entitled to vote after the Effective Time of the Merger at any meeting
of BYL shareholders the number of whole shares of BYL Stock into which their
respective shares of DNBF Stock are converted, regardless of whether such
holders have exchanged their certificates representing DNBF Stock for
certificates representing BYL Stock in accordance with the provisions of this
Agreement. In addition, until surrendered for exchange in accordance with the
provisions of Section 3.4 of this Agreement, each certificate theretofore
representing shares of DNBF Stock (other than shares to be canceled pursuant to
Section 2.1 of this Agreement) shall from and after the Effective Time also
represent for all purposes the right to receive shares of BYL Stock and cash in
lieu of fractional shares, as set forth in this Agreement. No dividends or
other distributions declared or made after the Effective Time with respect to
BYL Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered certificate of DNBF Stock with respect to the shares
of BYL Stock represented thereby, until the holder of such certificate of DNBF
Stock shall surrender such certificate. Subject to the effect of applicable
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laws, following surrender of any such certificates of DNBF Stock for which
shares of BYL Stock are to be issued, there shall be paid to the holder of the
certificates, without interest, (i) the amount of any cash payable with respect
to a fractional share of BYL Stock to which such holder is entitled pursuant to
Section 2.1 and the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole shares
of BYL Stock, and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of BYL Stock.
3.6 NO LIABILITY. Neither BYL, DNBF nor the Exchange Agent shall be
liable to any holder of shares of DNBF Stock for any shares of BYL Stock (or
dividends or distributions with respect thereto) or cash delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
3.7 WITHHOLDING RIGHTS. BYL or the Exchange Agent shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of DNBF Stock such amounts as BYL or the
Exchange Agent is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by BYL or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares of DNBF Stock in respect of which
such deduction and withholding was made by BYL or the Exchange Agent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DNBF
DNBF represents and warrants to BYL as follows:
4.1 ORGANIZATION AND GOOD STANDING. DNBF is a California corporation
duly organized and validly existing in good standing under the laws of the State
of California and it has the corporate power and authority to carry on its
business as presently conducted, and is authorized to transact business as a
bank holding company. DANB is a national banking association duly organized and
validly existing in good standing under the laws of the United States and it has
the corporate power and authority to carry on its business as presently
conducted, is authorized to transact business as a bank, is a member of the
Federal Reserve System and its deposits are insured by the Federal Deposit
Insurance Corporation in the manner and to the extent provided by law. DNBF and
DANB have all requisite corporate power and authority to own, lease and operate
its properties and assets and to carry on its business as presently conducted.
The nature of their operations and the business transacted by them as of the
date hereof make licensing and qualification in any other state or jurisdiction
unnecessary. DNBF and DANB have delivered to BYL true and correct copies of
their Articles of Association, Articles of Incorporation and Bylaws, as
appropriate and as amended and in effect as of the date hereof.
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4.2 CAPITALIZATION. The authorized capital stock of DNBF consists of
10,000,000 shares of Common Stock, no par value, of which 232,423 shares are
outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and are not subject to any preemptive rights. No unissued shares
of DNBF Stock or any other securities of DNBF are subject to any warrants,
options, rights or commitments of any character, kind or nature and DNBF is not
obligated to issue or repurchase any shares of its Common Stock or any other
security to or from any person except in accordance with the terms of the DNBF
Stock Option Plan and Agreements pursuant thereto, and true and correct copies,
as amended and in effect as of the date hereof, have been delivered to BYL.
Exhibit 4.2 sets forth the name of each holder of a DNBF stock option, the
number of shares of DNBF Common Stock covered by each such holder's option, the
date of grant of each such holder's option, the exercise price per share, the
vesting schedule for each such holder's option, and the expiration date of each
such holder's option.
4.3 SUBSIDIARIES. Except for DANB, DNBF nor DANB own, directly or
indirectly (except as pledgee pursuant to loans which are not in default), any
equity position or other voting interest in any corporation, partnership, joint
venture or other entity.
4.4 FINANCIAL STATEMENTS. DNBF has delivered to BYL copies of the
audited Statements of Financial Condition of DNBF as of December 31, 1996 and
1995; Statements of Earnings, Stockholders' Equity and Cash Flows for each of
the years ended December 31, 1996 and 1995, the related notes and related
opinions thereon of Vavrinek or Dayton, as appropriate, certified public
accountants, with respect to such financial statements (the "Audited DNBF
Financial Statements"). DNBF has furnished BYL with true and correct copies of
each management letter or other letter delivered to DNBF by Vavrinek or Dayton,
as appropriate, in connection with the Financial Statements of DNBF or relating
to any review of the internal controls of DNBF by Vavrinek or Dayton, as
appropriate, since January 1, 1994. The Audited DNBF Financial Statements: (i)
present fairly the financial condition and results of operations of DNBF as of
and for the dates or periods covered thereby in accordance with GAAP applied
throughout the periods involved; (ii) are based on the books and records of
DNBF; (iii) contain and reflect reserves for all material accrued liabilities
and for all reasonably anticipated losses, and set forth adequate reserves for
loan losses and other contingencies to the extent required by GAAP and RAP; and
(iv) none of the DNBF Audited Financial Statements contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements contained therein not misleading under GAAP. The books and
records of DNBF have been, and are being, maintained in all material respects in
accordance with GAAP and RAP and other applicable legal and accounting
requirements and reflect only actual transactions.
Any references to DNBF in the remaining sections of Article IV shall,
unless otherwise indicated, also be deemed references to DANB.
4.5 BOOKS AND RECORDS.
(a) The minute books of DNBF which have been made available to
BYL contain (i) true, accurate and complete records in all material respects of
all meetings and actions taken by the Board of Directors, Board committees and
shareholders of DNBF in all material respects,
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and (ii) true and complete copies in all material respects of its charter
documents and bylaws and all amendments thereto in all material respects.
(b) DNBF has records which accurately and validly reflect, in
all material respects, its transactions and accounting controls sufficient to
insure that such transactions are (i) in all material respects, executed in
accordance with management's general or specific authorization, and (ii)
recorded in conformity with GAAP; such records, to the extent they contain
important information pertaining to DNBF which is not easily and readily
available elsewhere, have been duplicated, and such duplicates are stored safely
and securely pursuant to procedures and techniques reasonably adequate for
companies of the size of DNBF and in the businesses in which DNBF is engaged;
and the data processing equipment and software used by DNBF in the operation of
its businesses (including any disaster recovery facility) to generate and
retrieve such records are reasonably adequate for companies of the size of DNBF
and in the businesses in which DNBF is engaged.
4.6 PROPERTY AND ASSETS. (a) Exhibit 4.6(a) sets forth a general
description (including the character of the ownership of DNBF) of all real
property of DNBF, including fees, leaseholds and all other interest in real
property (including real property that is DPC Property) ("Real Property").
Except as set forth on Exhibit 4.6(a), (i) DNBF has good and marketable title,
free and clear of any encumbrance, lien or charge of any kind or nature (except
liens for taxes not yet due) to all of the property, real, mixed or intangible,
reflected on DNBF's Financial Statements as of December 31, 1997, 1996 and 1995,
except as reflected therein or in the notes thereto (except property sold or
transferred or Encumbrances incurred in the ordinary course of business since
the date thereof except (a) Encumbrances in the aggregate which do not
materially detract from the value, interfere with the use, or restrict the sale,
transfer or disposition, of such properties and assets or otherwise materially
and adversely affect DNBF; (b) any lien for taxes not yet due; and (c) any
Encumbrances arising under the document that created the interest in the real
property (other than Encumbrances arising as a result of any breach or default
of DNBF); (ii) all leasehold interests for real property and any material
personal property used by DNBF in its business are held pursuant to lease
agreements which are valid and enforceable, except as the enforceability hereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
or other laws of general application relating to or affecting enforcement of
creditors rights and the application of equitable principles in any action,
legal or equitable in accordance with their terms; (iii) all such properties
comply in all material respects with all applicable private agreements, zoning
requirements and other governmental laws and regulations relating thereto and
there are no condemnation proceedings pending or, to the knowledge of DNBF,
threatened with respect to such properties; (iv) DNBF has valid title or other
ownership rights under licenses to all material intangible personal or
intellectual property used by DNBF in its business, free and clear of any claim,
defense or right of any other person or entity which is material to such
property, subject only to rights of the licensors pursuant to applicable license
agreements, which rights do not materially adversely interfere with the use of
such property; and (v) all material insurable properties owned or held by DNBF
are adequately insured in such amounts and against such risks insured as is
customary with banks of similar size. DNBF has furnished BYL with true and
correct copies of all leases included on Exhibit 4.6 delivered as of the date of
the Agreement,
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all title insurance policies relating to the Real Property and all documents
evidencing recordation of all recordable interest in the Real Property.
(b) CONDITION OF PROPERTIES. All tangible properties of DNBF
that are material to the business, financial condition, or results of operations
of DNBF are in a good state of maintenance and repair, except for ordinary wear
and tear, and are adequate for the conduct of the business of DNBF as presently
conducted. Except as set forth in Exhibit 4.6(b), (i) the execution of this
Agreement, the performance of the obligations of DNBF hereunder and the
consummation of the transactions contemplated herein, including the Merger, does
not conflict with and will not result in a breach or default under any lease,
agreement or contract described in Exhibit 4.6, or give any other party thereto
a right to terminate or modify any term thereof; (ii) DNBF has no obligation to
improve any Real Property; (iii) each lease and agreement under which DNBF is a
lessor is in full force and effect and is a valid and legally binding obligation
of DNBF, and, to the best knowledge of DNBF, each other party thereto; and (iv)
DNBF, and to the best knowledge of DNBF, each other party to any such lease or
agreement have performed in all material respects all the obligations required
to be performed by them to date under such lease or agreement and are not in
default in any material respect under any such lease or agreement and there is
no pending or, to the best knowledge of DNBF, threatened proceeding, or
proceeding which DNBF has reason to believe may be threatened, with respect to
such property or any such lease.
4.7 LITIGATION PROCEEDINGS AND AGREEMENTS WITH DNBF AUTHORITIES.
(a) DNBF is not engaged as a defendant in any legal or other
proceedings before any court, administrative agency or other governmental
authority except as is shown on Exhibit 4.7(a). Except as set forth on Exhibit
4.7(a), DNBF is not aware of any "threatened or pending litigation" (within the
meaning of Paragraph 5 of the American Bar Association Statement of Policy
Regarding Lawyers' Responses to Auditors' Requests for Information adopted
December 8, 1975) against DNBF. DNBF is not subject to any agreement, order,
writ, injunction or decree of any federal, state or local court, out of a
proceeding involving DNBF or any of its business or properties except as
described in Exhibit 4.7(a). DNBF has not been served with notice of, nor, to
best of DNBF's knowledge is it currently under investigation with respect to,
any violation of federal, state or local law or administrative regulation.
Except as set forth on Exhibit 4.7(a), there is no (i) outstanding judgment,
order, writ, injunction or decree, stipulation or award of any Governmental
Entity or by arbitration, against, or to the knowledge of DNBF, affecting DNBF
or its assets or business that (a) has had or may have a material adverse effect
on the assets, liabilities, business, financial condition or results of
operations of DNBF, (b) requires any payment by, or excuses a material
obligation of a third party to made any payment to, DNBF, or (c) has the effect
of prohibiting any business practice of, or the acquisition, retention or
disposition of property by, DNBF; or (ii) legal, administrative, arbitration,
investigatory or other proceeding pending or, to the best knowledge of DNBF that
has been threatened, or which DNBF has reason to believe may be threatened,
against or affecting any director, officer, employee, agent or representative of
DNBF, in connection with which any such person has or may have rights to be
indemnified by DNBF.
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(b) Except as set forth in Exhibit 4.7(a), DNBF is not a party to, or
otherwise subject to, any agreement or memorandum of understanding with or order
of any Governmental Entity charged with the supervision or regulation of banks
or engaged in the insurance of bank deposits, that restricts the conduct of its
business, or in any manner relates to its capital adequacy, its credit or
investment policies or its management. Except for normal examinations conducted
by a Governmental Entity in the regular course of business of DNBF and DANB, or
as set forth in EXHIBIT 4.7(b), (x) no Governmental Entity has initiated any
proceeding or, to the best knowledge of DNBF, investigation, into the business
or operations of DNBF or DANB since January 1, 1997 and (y) neither DNBF nor
DANB is a party to any cease and desist order, written agreement, memorandum of
understanding or any similar regulatory action or order with any Governmental
Entity, nor a recipient of an extraordinary supervisory letter from, nor has it
adopted any board resolution at the request of any its regulators, nor been
advised that any such issuance or request is contemplated. Except as set forth
in EXHIBIT 4.18(b), there is no material unresolved violation, criticism or
exception by any Governmental Entity with respect to any report or statement
relating to any examinations of DNBF or DANB.
(c) As of the date hereof and to DNBF's knowledge, neither DNBF
nor DANB is the subject of a referral to either the United States Department of
Justice or the Department of Housing and Urban Development for alleged
violations of the Fair Lending Acts. Except as set forth in EXHIBIT 4.7(c) to
the knowledge of DNBF, each material violation, criticism, or exception by any
Governmental Entity with respect to any examinations of DNBF or DANB has been
resolved or is in the process of resolution.
4.8 TAXES AND ASSESSMENTS. DNBF has timely filed all federal income
and state franchise tax returns and all tax reports or returns which it is
required to file with applicable federal, state, county or local authorities and
agencies except (a) where the failure to make any such filing would not have any
materially adverse effect on the business, financial condition or results of
operations of DNBF taken as a whole, and (b) where the required filing date has
been lawfully extended, and DNBF has paid all taxes provided for and to be due
in such returns and reports ("Tax Filings"). DNBF's Tax Filings have never been
formally audited by a Governmental Entity. As of December 31, 1997, to the
extent required by GAAP, DNBF had paid, or set up adequate accruals for the
payment of, all taxes, penalties and assessments for which it is liable as of
such date, whether or not disputed, with respect to any and all United Sates
federal, foreign, state, local, environmental (including under any Environmental
Law) and other taxes for the periods covered by the financial statements of DNBF
and for all prior and subsequent periods. Except as set forth in Exhibit 4.8
DNBF has no knowledge of any deficiency proposed to be assessed against it.
DNBF has paid all assessments made by the FDIC and the Commissioner required to
be paid prior the date hereof. There is currently no federal or state income
tax audit or investigation in process or to the best knowledge of DNBF any other
pending investigation by any authorized body of the taxes paid or to be paid by
DNBF, and DNBF has not been informed that any such audit or investigation is
proposed.
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4.9 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 4.9, DNBF is not in default
under or in breach of any law, ordinance, rule, regulation, order, judgment or
decree applicable to it promulgated by any governmental agency having authority
over it, where such default or breach would have a material adverse effect on
the financial condition, results of operations, or business of DNBF.
(b) DNBF has conducted in all material respects its businesses
in accordance with all applicable federal, foreign, state and local laws,
regulations and orders, including without limitation disclosure, usury, equal
credit opportunity, equal employment, fair credit reporting, antitrust,
licensing and other laws, regulations and orders, and the forms, procedures and
practices used by DNBF are in compliance with such laws, regulations, and
orders, except for such violations or noncompliance as will not have a material
adverse effect on the financial condition, results of operations, or business of
DNBF.
4.10 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit 4.10,
DNBF has performed in all respects all of the obligations required to be
performed by it to date and is not in default under or in breach of any term or
provision of any covenant, contract, lease, indenture or any other agreement to
which DNBF is a party or is subject to or is otherwise bound, and no event has
occurred which, with the giving of notice or the passage of time or both, would
constitute such default or breach, where such default or breach would have a
material adverse effect on the financial condition, results of operations, or
business of DNBF, except for loans of DNBF in default on the date of this
Agreement. No party with whom DNBF has an agreement which is material to the
financial condition, results of operations or business of DNBF is in default
thereunder.
4.11 EMPLOYEES AND CONSULTANTS.
(a) Except as set forth in Exhibit 4.11(a), there are no
understandings for the employment of any officer or employee of DNBF which are
not terminable by DNBF without liability on not more than 30 days' notice.
Except as set forth in Exhibit 4.11(a), neither DNBF nor DANB is a party to an
oral or written consultant agreement not terminable upon 60 days or less notice
or involving the payment of more than $10,000 per annum. Except as set forth in
Exhibit 4.11(a), there are no material controversies pending or threatened
between DNBF and any of its employees. Except as disclosed in DNBF Financial
Statements, or in Exhibit 4.11(a), all material sums due for employee
compensation and benefits have been duly and adequately paid or provided for,
and all deferred compensation obligations are fully funded or accrued. DNBF is
not a party to any collective bargaining agreement with respect to any of its
employees or any labor organization to which its employees or any of them
belong. Except as set forth in Exhibit 4.11(a), no director, officer or
employee of DNBF is entitled to receive any payment of any amount under any DNBF
Employment Agreement, severance plan or other benefit plan as a result of the
consummation of any transaction contemplated by this Agreement. BYL has been
provided with a complete and accurate listing of the names and current annual
salary rates of all persons employed by DNBF and DANB, showing for each such
person the amounts paid or payable as salary, bonus payments and any indirect
compensation for the year ended December 31, 1997, the
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current pay rate as of December 31, 1997, the names of all of the directors and
officers of DNBF and DANB, and the names of all persons, if any, holding tax or
other powers of attorney for DNBF and DANB.
(b) Except as may be disclosed in Exhibit 4.11(b), (i) DNBF is
and has been in material compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, including, without limitation, any such laws respecting
employment discrimination and occupational safety and health requirements, and
in any unfair labor practice; (ii) there is no material unfair labor practice
complaint against DNBF pending or, to the knowledge of DNBF, threatened before
the National Labor Relations Board; (iii) there is no labor dispute, strike,
slowdown or stoppage actually pending or, to the knowledge of DNBF, threatened
against or directly affecting DNBF; and (v) DNBF has not experienced any
material work stoppage or other material labor difficulty during the past five
years, except in each case which would not result in a Material Adverse Change.
(c) Except as may be disclosed in Exhibit 4.11(c), DNBF does not
maintain, contribute to or participate in or has any material liability under
any employee benefit plans, as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or any
nonqualified employee benefit plans or deferred compensation, bonus, stock or
incentive plans, or other employee benefit or fringe benefit programs for the
benefit of former or current employees of DNBF (the "Employee Plans"). No
present or former employee of DNBF has been charged with breaching nor has
breached a fiduciary duty under any of the Employee Plans. DNBF does not
participate in, nor has it in the past five years participated in, nor has it
any present or future obligation or liability under, any multiemployer plan (as
defined at Section 3(37) of ERISA). Except as may be separately disclosed in
Exhibit 4.11(c), DNBF does not maintain, contribute to, or participate in, any
plan that provides health, major medical, disability or life insurance benefits
to former employees of DNBF.
(d) Exhibit 4.11 (d) sets forth and describes all employee
benefit plans in which DNBF or DANB participates, or by which they are bound,
including, without limitation; (i) any profit sharing, deferred compensation,
bonus, stock option, stock purchase, pension, retainer consulting, retirement,
welfare or incentive plan or agreement whether legally binding or not; (ii) any
plan providing for "fringe benefits" to its employees, including but not limited
to vacation, sick leave, medical, hospitalization, life insurance and other
insurance plans, and related benefits; (iii) any written employment agreement
and any other employment agreement not terminable at will; or (iv) any other
"employee benefit plan" (within the meaning of Section 3(3) of ERISA)
(collectively, the "DNBF Employee Plans"). Except as set forth in Exhibit 4.11,
(d) there are no negotiations, demands or proposals that are pending or
threatened that concern matters now covered, or that would be covered, by any
employment agreements or employee benefit plans other than amendments to plans
qualified under Section 401 of the Code that are required by the Tax Reform Act
of 1986 and later legislation; (ii) DNBF is in compliance with the material
reporting and disclosure requirements of Part 1 of Subtitle IB of ERISA and the
corresponding provisions of the Code to the extent applicable to all such
employee benefit plans; (iii) DNBF has substantially performed all of its
obligations under all such employee benefit plans and employment agreements
required to be performed heretofore; and (iv) there are no actions, suits
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or claims (other than routine claims for benefits) pending or, to the best
knowledge of DNBF and DANB, threatened against any such employee benefit plans
and employment agreements or the assets of such plans, and to the best knowledge
of DNBF, no facts exist which could give rise to any actions, suits or claims
(other than routine claims for benefits) against such plans or the assets of
such plans.
(e) the "employee pension benefit plans" (within the meaning of
Section 3(2) of ERISA) described on Exhibit 4.11(d) have been duly authorized by
the Board of Directors of DNBF. Except as set forth in Exhibit 4.11(d), each
such plan and associated trust intended to be qualified under Section 401(a) and
to be exempt from tax under Section 501(a) of the Code, respectively, has either
received a favorable determination letter from the IRS, has applied for such a
determination letter or will apply for such a determination letter before the
expiration of the remedial amendment period set forth in Section 401(b) of the
Code, as the IRS may extend such period, and to the best knowledge of DNBF and
DANB, no event has occurred that will or could give rise to disqualification of
any such plan which is intended to be qualified under Section 401(a) of the Code
or loss of the exemption from tax of any such trust which is intended to be
exempt from tax under Section 501(a) of the Code. No event has occurred that
will or could subject any such plans to tax under Section 511 of the Code. None
of such plans has engaged in a merger or consolidation with any other plan or
transferred assets or liabilities from any other plan. To the best of their
knowledge, no prohibited transaction (within the meaning of Section 409 or
502(i) of ERISA or Section 4975 of the Code) or party-in-interest transaction
(within the meaning of Section 406 of ERISA) has occurred with respect to any of
such plans which could subject DNBF or DANB to an excise tax or penalty. To the
best knowledge of DNBF and DANB, no employee of DNBF or DANB has engaged in any
transactions which could subject DNBF or DANB to indemnify such person against
liability. All costs of plans have been provided for on the basis of consistent
methods in accordance with sound actuarial assumptions and practices. No
employee benefit plan has incurred any "accumulated funding deficiency" (as
defined in Section 302(2) of ERISA), whether or not waived, taking into account
contributions made within the period described in Section 412(c)(10) of the
Code; nor are there any unfunded amounts under any employee benefit plan which
is required to be funded under Part 3 of Subtitle IB of ERISA and Section 412 of
the Code); nor has DNBF or DANB failed to make any contributions or pay any
amount due and owing as required by law or the terms of any employee benefit
plan or employment agreement. Subject to amendments that are required by the Tax
Reform Act of 1986 and later legislation, since the last valuation date for each
employee pension benefit plan, there has been no amendment or change to such
plan that would increase the amount of benefits thereunder.
(f) Neither DNBF nor DANB sponsors or participates in, or has
sponsored or participated in, any employee benefit pension plan to which Section
4021 of ERISA applies that would create a liability under Title IV of ERISA.
(g) Neither DNBF nor DANB sponsors or participates in, or has
sponsored or participated in, any employee benefit pension plan that is a
"multi-employer plan" (within the meaning of Section 3(37) of ERISA) that would
subject such Person to any liability with respect to any such plan.
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(h) All group health plans of DNBF or DANB (including any plans
of Affiliates of DNBF that must be taken into account under Section 162(i) or
(k) of the Code as in effect immediately prior to the Technical and
Miscellaneous Revenue Act of 1988 and Section 4980B of the Code) have been
operated in compliance with the group health plan continuation coverage
requirements of Section 4980B of the Code to the extent such requirements are
applicable.
(i) There have been no acts or omissions by DNBF or DANB that
have given rise to or may give rise to fines, penalties, taxes, or related
charges under Sections 502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code
which could be imposed on DNBF or DANB.
(j) Except as described in Section 4.20(j), neither DNBF or DANB
maintains any employee benefit plan or employment agreement pursuant to which
any benefit plan or other payment will be required to be made by DNBF or DANB or
pursuant to which any other benefit will accrue or vest in any director, officer
or employee of DNBF or DANB, in either case as a result of the consummation of
the transactions contemplated by the Agreement.
(k) No "reportable event," as defined in ERISA, has occurred
with respect to any of the employee benefit plans.
(l) All amendments required to bring each of the employee
benefit plans into conformity with all of the provisions of ERISA and the Code
and all other applicable laws, rules and regulations have been made, or will be
made before the expiration of the remedial amendment period set forth under
Section 401(b) of the Code, as such period may be extended by the IRS.
(m) Exhibit 4.11(d) sets forth the name of each director,
officer, employee, agent or representative of DNBF or DANB and every other
person entitled to receive any benefit or any payment of any amount under any
existing employment agreement, severance plan or other benefit plan or
Understanding as a result of the consummation of any transaction contemplated in
this Agreement, and with respect to each such person, the nature of such benefit
or the amount of such payment, the event triggering the benefit or payment, and
the date of, and parties to, such employment agreement, severance or other
benefit plan or Understanding. DNBF has furnished BYL with true and correct
copies of all documents with respect to the plans and agreements referred to in
Exhibit 4.11(d) delivered as of the date of the Agreement, including all
amendments and supplements thereto, and all related summary plan descriptions.
For each of the employee pension benefit plans of DNBF and DANB referred to in
Exhibit 4.11(d) delivered as of the date of the Agreement, DNBF has furnished
BYL with true and correct copies of (i) a copy of the Form 5500 which was filed
in each of the three most recent plan years, including without limitation, all
schedules thereto and all financial statements with attached opinions of
independent accountants to the extent required; (ii) the most recent
determination letter from the IRS; (iii) the statement of assets and liabilities
as of the most recent valuation date; and (iv) the statement of changes in fund
balance and in financial position or the statement of changes in net assets
available for benefits under each of said plans for the most recently ended plan
year. The documents referred to in subdivisions (iii) and (iv) fairly present
the financial condition of each of said plans as of and at such dates and the
results of operations of each of said plans, all in accordance with
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generally accepted accounting principles or on the cash method of accounting
applied on a consistent basis.
4.12 CONTRACTS AND AGREEMENTS. Except as listed in Exhibit 4.12, DNBF
is not a party to any oral or written agreement, commitment, or obligation
(hereinafter referred to as an "Understanding" or "Material Contract") which
individually, or with all other similar Understandings relating to the same or
similar subject matter, falls within any of the following classifications:
(i) any Understanding dealing with advertising, brokerage,
licensing, dealership, representative or agency relationship;
(ii) any Understanding with any labor or collective bargaining
organization or association;
(iii) any mortgage, pledge, conditional sales contract, security
agreement, or any other similar Understanding with respect to any real or
personal property in an amount in excess of $5,000, under which DNBF is a debtor
or to which any of its property is subject;
(iv) any profit sharing, group insurance, bonus, deferred
compensation, stock option, severance pay, pension, retirement, or any other
similar Understanding which might provide benefits to the employees, officers or
directors of DNBF;
(v) any Understanding for the future purchase of materials,
supplies, services, merchandise or equipment, the price of which exceeds $2,500
and which will not be terminable without liability as to future purchases as of
the Effective Time; it being understood that materials, supplies, service,
merchandise or equipment shall not be deemed to include loans, repurchase or
reverse repurchase agreements, securities or other financial transactions
incurred by DNBF in the ordinary course of its banking business;
(vi) any Understanding for the sale of any of its assets, or for
the grant of any right to purchase any of its assets, properties or rights, or
which requires the consent of any third party to the transfer and assignment of
any of its assets, properties or rights; it being understood that the foregoing
shall not be deemed to include any Understanding for the sale of mortgage loans,
or repurchase or reverse repurchase agreements, securities or other financial
transactions incurred by DNBF in the ordinary course of its banking business;
(vii) any guarantee, subordination or other similar or related
types of Understanding except where DNBF is a beneficiary;
(viii) any Understanding for the borrowing of any money by DNBF
(other than time savings or demand deposits) or for a line of credit to it;
(ix) any Understanding for any one capital expenditure or series
of related capital expenditures in excess of $5,000 individually or $10,000 in
the aggregate;
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(x) any real property lease, whether as lessor or lessee; or any
personal property lease, whether as lessor or lessee, involving payments in
excess of $500 per month;
(xi) any Understanding to make or participate in a loan (not yet
fully disbursed or funded) to any borrower or related group of borrowers, which
undisbursed or unfunded amount would exceed $100,000 unsecured or secured;
(xii) any Understanding of any kind (other than contracts relating
to demand or time deposits or otherwise made in the ordinary course of business)
with any director or officer of DNBF or with any member of the immediate family
of any such director of officer or with any partnership, corporations, associate
or entity of which any such person is an Affiliate;
(xiii) any Understanding for insurance of any type described in
Section 4.13 below;
(xiv) any Understanding, the purpose or effect of which could
encompass (a) merging with any person or bank or bank holding company other than
with BYL (b) the selling of any of its assets (except in the ordinary course of
business) or stock to any person, (c) recommending to any of its shareholders
that their DNBF Common Stock be sold to any person or bank other than BYL, or
causing any other person to make such recommendations or acquiescing in any such
recommendations made by any other person, or (d) in any other way transferring,
directly or indirectly, control of DNBF;
Except as stated in Exhibit 4.12, true and correct copies of all
documents relating to the foregoing Understandings have been delivered by DNBF
prior to the date hereof.
As used in this Section 4.12, "immediate family" of a person shall
mean his or her spouse, parents, children, and siblings.
4.13 INSURANCE. DNBF has and at all times within three years of the
date of this Agreement has had, in full force and effect policies of insurance
and bonds (including without limitation bankers' blanket bond, fidelity
coverage, director and officer liability, fire, third party liability, use and
occupancy) with respect to its assets and business and against such casualties
and contingencies and of such amounts, types and forms which in the judgment of
DNBF are adequate or appropriate to cover its assets and businesses as set forth
in Exhibit 4.13. Set forth in Exhibit 4.13 is a schedule of all policies of
insurance (other than title or credit insurance) carried and owned by DNBF,
showing the name of the insurance or bonding company, a summary of the coverage,
the amounts, the deductible features, the annual premiums and the expiration
dates. If any such policy or bond is changed, terminated or modified following
the date of this Agreement, such termination, change or modification shall be
promptly disclosed to DNBF in writing. DNBF is not in default under any such
policy of insurance or bond such that it could be canceled, and all material
claims thereunder have been filed in a timely fashion. DNBF has filed claims
with or given notice of claim to its insurers or bonding companies with respect
to all material matters and occurrences for which it believes it has coverage.
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4.14 BROKERS. Except as indicated in EXHIBIT 4.14, no agent, broker,
investment banker, person or firm acting on behalf or under authority of DNBF
(except for any payments for fairness opinions as required in Section 10.9) is
or will be entitled to any broker's or finder's fee or any other commission or
similar fee directly or indirectly in connection with any of the transactions
contemplated by this Agreement.
4.15 AUTHORIZATION. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of DNBF. Assuming due and proper execution
and delivery of this Agreement by BYL, this Agreement constitutes a legal, valid
and binding agreement of DNBF in accordance with its respective terms, except as
the enforceability hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application relating to or
affecting enforcement of creditors rights and the application of equitable
principles in any action, legal or equitable, and by Section 8(b) 6(D) of the
Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b)(6)(D). Subject to
obtaining the requisite approval of this Agreement by the shareholders of DNBF,
DNBF has full corporate power and authority to perform its obligations under
this Agreement and the transactions contemplated hereby.
4.16 NO CONFLICTS; DEFAULTS. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated herein,
including the Merger, and compliance by DNBF with any provision hereof and
thereof will not (a) conflict with or result in a breach of, or default or loss
of any benefit under, any provision of its Charter Documents or, except as set
forth in Exhibit 4.16 any material agreement, instrument or obligation to which
it is a party or by which the property of DNBF is bound or give any other party
to any such agreement, instrument or obligation the right to terminate or modify
any term thereof; (b) except for the prior approval of the FRB, the FDIC and the
Commissioner, any federal and state securities commission or department or Blue
Sky Laws, and as set forth in Exhibit 4.16, require any Consents; or (c) result
in the creation or imposition of any Encumbrance on any of the properties or
assets of DNBF; or (d) violate the Charter Documents or any Rules to which DNBF
is subject.
4.17 CERTAIN ADVERSE CHANGES. Except as specifically required,
permitted or effected by this Agreement, and except as set forth on Exhibit
4.17, since December 31, 1997 there has not been, occurred or arisen any of the
following (whether or not in the ordinary course of business unless otherwise
indicated):
(a) Any materially adverse change in any of the assets,
liabilities, permits, methods of accounting or accounting practice, or manner of
conducting business, of DNBF or any other event or development that has had or
may reasonably be expected to have a material adverse effect on the assets,
liabilities, Permits, business, financial condition, or results of operations of
DNBF or which should be disclosed in order to make DNBF Financial Statements not
misleading; or
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(b) Any damage, destruction or other casualty loss (whether or
not covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, or results of operations of DNBF or that may involve a loss of more
than $10,000 in excess of applicable insurance coverage; or
(c) Any amendment, modification or termination of any existing,
or entry into any new Material Contract or Permit that has had or may reasonably
be expected to have a material adverse effect on the assets, liabilities,
business, financial condition, or results of operations of DNBF; or
(d) Any disposition by DNBF of an asset the lack of which has
had or may reasonably be expected to have a material adverse effect on the
business, financial condition, or results of operations of DNBF; or
(e) Any direct or indirect redemption, purchase or other
acquisition by DNBF of any Equity Securities or any declaration, setting aside
or payment of any dividend or other distribution on or in respect of DNBF Stock
whether consisting of money, other personal property, real property or other
things of value; or
(f) Any changes by DNBF in accounting principles or methods or
tax methods, except as required or permitted by, the Financial Accounting
standards Board or by any Governmental Entity having jurisdiction over DNBF.
4.18 REPORTS AND FILINGS. Since January 1, 1994, DNBF has filed all
reports, returns, registrations and statements (such reports and filings
referred to as "DNBF Filings"), together with any amendments required to be
made with respect thereto, that were required to be filed with (a) the
Comptroller, (b) the FRB and (c) any other applicable Governmental Entity,
including taxing authorities, except where the failure to file such reports,
returns, registrations and statements has not had and is not reasonably expected
to have a material adverse effect on the business, financial condition, or
results of operations of DNBF. No administrative actions have been taken or
orders issued in connection with such DNBF Filings. As of their respective
dates, each of such DNBF Filings complied in all material respects with all
Rules enforced or promulgated by the Governmental Entity with which it was filed
(or was amended so as to be so promptly following discovery of any such
noncompliance). Any financial statement contained in any of such DNBF Filings
that was intended to present the financial position of DNBF fairly and was
prepared in accordance with generally accepted accounting principles or banking
regulations consistently applied, except as stated therein, during the periods
involved. DNBF has furnished BYL with true and correct copies of all DNBF
Filings filed by DNBF since January 1, 1995.
4.19 INFORMATION REGARDING LOANS AND ALLOWANCE FOR POSSIBLE LOAN
LOSSES. (a) DNBF has provided BYL access to all of the information in its
possession concerning its loans, and such information was true and correct in
all material respects as of the date access was provided. Except as may be
disclosed in Exhibit 4.19, (i) all loans and discounts shown on DNBF Financial
Statements at December 31, 1997 or which were entered into after December 31,
1997, but before the Closing Date, were and will be made in all material
respects for good, valuable and
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adequate consideration in the ordinary course of the business of DNBF, in
accordance in all material respects with DNBF's lending practices, and are not
subject to any material known defenses, setoffs or counterclaims, including
without limitation any such as are afforded by usury or truth in lending laws,
except as may be provided by bankruptcy, insolvency or similar laws or by
general principles of equity; (ii) the notes or other evidences of indebtedness
evidencing such loans and all forms of pledges, mortgages and other collateral
documents and security agreements constituting DNBF's loan portfolio, taken as a
whole, are and will be, in all material respects, enforceable except as the
enforceability hereof and thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other laws of general application
relating to or affecting enforcement of creditors rights and the application of
equitable principles; and (iii) DNBF has complied in all material respects, and
will prior to the Closing Date comply in all material respects, with all laws
and regulations relating to such loans, or to the extent there has not been such
compliance, such failure to comply will not materially interfere with the
collection of any such loan. All loans and loan commitments extended by DNBF
and any extensions, renewals or continuations of such loans and loan commitments
that are on DNBF's books and since December 31, 1997 were made in accordance
with customary lending standards of DNBF in the ordinary course of business.
Such loans are evidenced by documentation based upon customary and ordinary past
practices of DNBF. Prior to the date hereof, DNBF has provided BYL with a
schedule which sets forth a description (a) by type and classification, if any,
of each loan, lease other extension of credit and commitment to extend credit;
(b) by type and classification of all loans, leases, other extensions of credit
and commitments to extend credit that have been classified by its DNBF examiners
or auditors (external or internal) as "Watch List," "Substandard," "Doubtful,"
"Loss" or any comparable classification; and (c) all consumer loans as to which
any payment of principal, interest or other amount is 90 days or more past due.
(b) The Allowance for Possible Loan Losses for DANB is adequate
and in accordance with GAAP and RAP.
4.20 COMPLIANCE WITH CRA To the best knowledge of DNBF, DANB's
compliance under the CRA should not constitute grounds for either the denial by
any Governmental Entity of any application to consummate the transactions
contemplated by this Agreement or the imposition of a materially burdensome
condition in connection with the approval of any such application.
4.21 CERTAIN INTERESTS. Except as described in Exhibit 4.12(xii),
Exhibit 4.21 sets forth a description of each instance in which an officer or
director of DNBF (a) has any material interest in any property, real or
personal, tangible or intangible, used by or in connection with the business of
DNBF; (b) is indebted to DNBF except for normal business expense advances; or
(c) is a creditor (other than as a Deposit holder) of DNBF except for amounts
due under normal salary and related benefits or reimbursement of ordinary
business expenses. Except as set forth in Exhibit 4.21, all such arrangements
are arm's length transactions pursuant to normal commercial terms and
conditions.
4.22 BRANCHES. Exhibit 4.22 hereto sets forth the common name and
location of each office of DNBF, an indication of whether such office is a
branch, service center, or other
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place of business, whether such premises are owned or leased, the basic terms of
such leases, the common name and location of each approved but unopened office,
and a description of each application for additional offices of DNBF, and the
status of each such application. DNBF has received appropriate and effective
permits and governmental authority where any permit, approval or notice was
required by law or regulation prior to the establishment and operation of each
such office now in operation. Except for the offices described on Exhibit 4.22,
DNBF does not operate or conduct business out of any other location and DNBF
does not have any current application for, and DNBF has not received permission
to open, any other branch or to operate out of any other location.
4.23 UNDISCLOSED LIABILITY. DNBF has no liabilities or obligations,
either accrued or contingent, which are in excess of Five Thousand Dollars
($5,000) individually or in the aggregate, which has not been:
(i) reflected or disclosed in DNBF Financial Statements;
(ii) incurred subsequent to December 31, 1997, in the ordinary
course of business; or
(iii) disclosed on Exhibit 4.23 or any other exhibit to this
Agreement.
To the best of DNBF's knowledge and the knowledge of their officers
and directors, after due investigation, there is no basis for the assertion
against DNBF of any liability, obligation or claim that is likely to result in
or cause any material adverse change in the business or financial condition of
DNBF, taken as a whole, which is not fairly reflected in the Financial
Statements, or otherwise disclosed on Exhibit 4.23 hereto.
4.24 ACCURACY OF INFORMATION FURNISHED. Except as to any statements
or information which shall include projections or forecasts, none of the
statements or information made or contained in any of the covenants,
representations or warranties of DNBF set forth in this Agreement or in any of
the schedules, exhibits, lists, certificates or other documents furnished
herewith taken as a whole contains any untrue statement of a material fact
required to be stated herein or therein or necessary to make the statements or
information contained herein or therein, in light of the circumstances in which
they were made, not misleading. As to any such information or statements which
include projections or forecast, such information or statements are based upon
assumptions believed by DNBF to be reasonable.
4.25 ENVIRONMENTAL LAWS. Except as may be disclosed in Exhibit 4.25,
to the best of its knowledge (and without conducting any site investigation or
other analysis for the purpose of making this representation), neither the
conduct nor operation of DNBF nor any condition of any property presently or
previously owned, leased or operated by any of them violates or violated
Environmental Laws in any respect material to the business of DNBF taken as a
whole and no condition or event has occurred with respect to any of them or any
such property that, with notice or the passage of time, or both, would
constitute a violation material to the business of DNBF taken as a whole of
Environmental Laws or obligate (or potentially
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obligate) DNBF to remedy, stabilize, neutralize or otherwise alter the
environmental condition of any such property where the aggregate cost of such
actions would be material to DNBF taken as a whole. Except as may be
disclosed in Exhibit 4.25, DNBF has not received any notice from any person
or entity that DNBF or the operation or condition of any property ever owned,
leased or operated by any of them are or were in violation of any
Environmental Laws or that DNBF is responsible (or potentially responsible)
for remedying, or the cleanup of, any pollutants, contaminants, or hazardous
or toxic wastes, substances or materials at, on or beneath any such property.
4.26 COMPTROLLER EXAMINATION. (a) The Comptroller has completed an
examination of DANB as of July 8, 1996, and whether or not the examination
report has been issued, it is the understanding of DNBF from discussions with
the Comptroller examiners that (i) the Comptroller believes DANB's allowance for
loan losses is adequate and that the Comptroller required no material
adjustments, (ii) DANB's CAMELS rating will not change and DANB's financial
condition is deemed by the Comptroller to be satisfactory.
(b) The FRB has completed an inspection of DNBF as of June 30,
1996, and whether or not the examination report has been issued, it is the
understanding of DNBF from discussions with the FRB examiners that (i) the FRB
believes DNBF's allowance for loan losses is adequate and that the FRB required
no material adjustments, (ii) DNBF's rating will not change and DNBF's financial
condition is deemed by the FRB to be satisfactory.
4.27 INSIDER LOANS; OTHER TRANSACTIONS. DNBF has previously provided
BYL each of its executive officers and directors and their related interests
(all as defined under Federal Reserve Board Regulation "O"), all of which have
been made in compliance with Regulation O, which listing is true, correct and
complete in all material respects. DNBF does not owe any amount to, or has any
contract or lease with or commitment to, any of the present executive officers
or directors of DNBF (other than for compensation for current services not yet
due and payable, and reimbursement of expenses arising in the ordinary course of
business).
4.28 DERIVATIVE TRANSACTIONS. Neither DNBF nor DANB is a party to a
transaction in or involving forwards, futures, options on futures, swaps or
other derivative instruments.
4.29 TRUST ADMINISTRATION. Neither DNBF nor DANB presently exercises
trust powers, including, but not limited to, trust administration, and has not
exercised such trust powers for a period of at least 3 years prior to the date
hereof. The term "trusts" as used in this Section 4.29 includes (i) any and all
common law or other trusts between an individual, corporation or other entities
and DNBF or DANB, as trustee or co-trustee, including, without limitation,
pension or other qualified or nonqualified employee benefit plans, compensation,
testamentary, INTER VIVOS, and charitable trust indentures; (ii) any and all
decedents' estates where DNBF or DANB is serving or has served as a co-executor
or sole executor, personal representative or administrator, administrator DE
BONIS NON, administrator DE BONIS NON with will annexed, or in any similar
fiduciary capacity; (iii) any and all guardianships, conservatorships or similar
positions where DNBF or DANB is serving or has served as a co-grantor or a sole
grantor or a conservator or a co-conservator of the estate, or any similar
fiduciary capacity, and (iv) any and all agency and/or custodial accounts and/or
similar arrangements, including plan administrator for employee
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benefit accounts, under which DNBF or DANB is serving or has served as an agent
or custodian for the owner or other party establishing the account with or
without investment authority.
4.30 STATEMENTS TRUE AND CORRECT. None of the information supplied or
to be supplied by DNBF for inclusion in the Form S-4 or the Proxy Statement, or
incorporated by reference therein, or any other document to be filed with any
governmental agency or regulatory authority in connection with the transactions
contemplated hereby will, in the case of the S-4 and Proxy Statement, when it is
first mailed to the shareholders of DNBF, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading or, in the case of the S-4, when it becomes
effective, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading, or, in the case of the S-4 and Proxy Statement or any amendment
thereof or supplement thereto, at the time of the meeting of shareholders of
DNBF, be false or misleading with respect to any material fact or omit to state
any material fact necessary to correct any statement or remedy any omission in
any earlier communication with respect to the solicitation of any proxy of the
DNBF shareholders' meeting.
4.31 ACCURATE DISCLOSURE. DNBF agrees that through the Effective Time
of the Merger, each of its reports, and other filings required to be filed with
any applicable Governmental Entity will comply in all material respects with all
of the applicable statutes, rules and regulations enforced or promulgated by the
Governmental Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, or other filing that is intended to
present the financial position of DNBF and/or DANB will fairly present the
financial position of such entities or entity and will be prepared in accordance
with generally accepted accounting principles or applicable banking regulations
consistently applied during the periods involved. Notwithstanding anything to
the contrary set forth in this Section 4.31, DNBF makes no representation or
warranty with respect to any information supplied by BYL or BOYL (or any of
BYL's Reports).
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BYL
BYL represents and warrants as follows:
5.1 ORGANIZATION AND GOOD STANDING. BYL is duly organized and
validly existing in good standing under the laws of the State of California,
is registered with the FRB as a bank holding company and it has the corporate
power and authority to carry on its business as presently conducted. BOYL is
duly organized and validly existing in good standing under the laws of the
state of California, is a California state-chartered bank in good standing
under the laws of the State of California and it has the corporate power and
authority to carry on its business as presently
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conducted, is authorized to transact business as a bank, is not a member of
the Federal Reserve System and its deposits are insured by the Federal
Deposit Insurance Corporation in the manner and to the extent provided by
law. BYL and BOYL have all requisite corporate power and authority to own,
lease and operate their properties and assets and to carry on its business as
presently conducted. The nature of their operations and the business
transacted by them as of the date hereof make licensing and qualification in
any other state or jurisdiction unnecessary. DNBF has received true and
correct copies of the Articles of Incorporation and Bylaws, as amended and in
effect as of the date hereof, of BYL and BOYL.
5.2 CAPITALIZATION. The authorized capital stock of BYL consists of
50,000,000 shares of Common Stock, no par value, of which 1,546,530 shares are
outstanding on the date hereof, all validly issued, fully paid and
nonassessable, and 25,000,000 shares of Preferred Stock, none of which are
outstanding. Except for outstanding stock options, no unissued shares of BYL's
Stock or any other securities of BYL are subject to any warrants, options,
rights or commitments of any character, kind or nature and BYL is not obligated
to issue or repurchase any shares of its Common Stock or any other security to
or from any person except in accordance with the terms of the proposed BYL Stock
Option Plan and Agreements pursuant thereto. Exhibit 5.2 sets forth the name of
each holder of a BYL stock option, the number of shares of BYL Common Stock
covered by each such holder's option, the date of grant of each such holder's
option, the exercise price per share, the vesting schedule for each such
holder's option and the expiration date of each such holder's option.
5.3 SUBSIDIARIES. Except for BOYL, BYL does not own, directly or
indirectly (except as pledgee pursuant to loans which are not in default), any
equity position or other voting interest in any corporation, partnership, joint
venture or other entity.
5.4 FINANCIAL STATEMENTS. BYL has delivered to DNBF copies of the
audited Statements of Financial Condition of the BYL as of December 31, 1996 and
1995; Statements of Earnings, Stockholders' Equity and Cash Flows for each of
the years ended December 31, 1996 and 1995, the related notes and related
opinions thereon of Vavrinek or Dayton, as appropriate, certified public
accountants, with respect to such financial statements (the "Audited BYL
Financial Statements"). The BYL has furnished DNBF with true and correct copies
of each management letter or other letter delivered to the BYL by Vavrinek or
Dayton, as appropriate, in connection with the Financial Statements of the BYL
or relating to any review of the internal controls of BYL by Vavrinek or Dayton,
as appropriate, since January 1, 1994. The Audited BYL Financial Statements:
(i) present fairly the financial condition and results of operations of BYL as
of and for the dates or periods covered thereby in accordance with GAAP applied
throughout the periods involved; (ii) are based on the books and records of BYL;
(iii) contain and reflect reserves for all material accrued liabilities and for
all reasonably anticipated losses, and set forth adequate reserves for loan
losses and other contingencies to the extent required by GAAP and RAP; and (iv)
none of the BYL Audited Financial Statements contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein not misleading under GAAP. The books and records
of BYL have been, and are being, maintained in all material respects in
accordance with GAAP and RAP and other applicable legal and accounting
requirements and reflect only actual transactions.
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Any references to BYL in the remaining sections of Article V shall,
unless otherwise indicated, also be deemed references to BOYL.
5.5 LITIGATION PROCEEDINGS AND AGREEMENTS WITH REGULATORY
AUTHORITIES.
(a) BYL is not engaged as a defendant in any legal or other
proceedings before any court, administrative agency or other governmental
authority except as is shown on Exhibit 5.5(a). Except as set forth on Exhibit
5.5(a), BYL is not aware of any "threatened or pending litigation" (within the
meaning of Paragraph 5 of the American Bar Association Statement of Policy
Regarding Lawyers' Responses to Auditors' Requests for Information adopted
December 8, 1975) against BYL. BYL is not subject to any agreement, order,
writ, injunction or decree of any federal, state or local court, out of a
proceeding involving BYL or any of its business or properties except as
described in Exhibit 5.5(a). BYL has not been served with notice of, nor, to
best of BYL's knowledge is it currently under investigation with respect to, any
violation of federal, state or local law or administrative regulation. Except
as set forth on Exhibit 5.5(a), there is no (i) outstanding judgment, order,
writ, injunction or decree, stipulation or award of any Governmental Entity or
by arbitration, against, or to the knowledge of BYL, affecting BYL or its assets
or business that (a) has had or may have a material adverse effect on the
assets, liabilities, business, financial condition or results of operations of
BYL, (b) requires any payment by, or excuses a material obligation of a third
party to made any payment to, BYL, or (c) has the effect of prohibiting any
business practice of, or the acquisition, retention or disposition of property
by, BYL; or (ii) legal, administrative, arbitration, investigatory or other
proceeding pending or, to the best knowledge of BYL that has been threatened, or
which BYL has reason to believe may be threatened, against or affecting any
director, officer, employee, agent or representative of BYL, in connection with
which any such person has or may have rights to be indemnified by BYL.
(b) Except as set forth in Exhibit 5.5(a), BYL is not a party
to, or otherwise subject to, any agreement or memorandum of understanding with
or order of any Governmental Entity charged with the supervision or regulation
of bank holding companies or banks or engaged in the insurance of bank deposits,
that restricts the conduct of its business, or in any manner relates to its
capital adequacy, its credit or investment policies or its management.
5.6 PERFORMANCE OF OBLIGATIONS. Except as set forth in Exhibit 5.6,
BYL has performed in all respects all of obligations required to be performed by
it to date and is not in default under or in breach of any term or provision of
any covenant, contract, lease, indenture or any other agreement to which it is a
party or is subject to or is otherwise bound, and no event has occurred which,
with the giving of notice or the passage of time or both, would constitute such
default or breach, where such default or breach would have a material adverse
effect on the financial condition, results of operations, or business of BYL.
No party with whom BYL has an agreement which is material to the financial
condition, results of operations or business of BYL is in default thereunder.
5.7 BROKERS. Except as indicated in Exhibit 5.7, no agent, broker,
investment banker, person or firm acting on behalf or under authority of BYL
(except for any payments for
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fairness opinions as required in Section 11.14) is or will be entitled to any
broker's or finder's fee or any other commission or similar fee directly or
indirectly in connection with any of the transactions contemplated by this
Agreement.
5.8 INSURANCE. BYL has in full force and effect policies of
insurance and bonds with respect to its assets and business and against such
casualties and contingencies and of such amounts, types and forms which in the
judgment of BYL are adequate or appropriate to cover its assets and businesses
as set forth in Exhibit 5.8. Set forth in Exhibit 5.8 is a schedule of all
policies of insurance (other than title or credit insurance) carried and owned
by BYL, showing the name of the insurance or bonding company, a summary of the
coverage, the amounts, the deductible features, the annual premiums and the
expiration dates. If any such policy is changed, terminated or modified
following the date of this Agreement, such termination, change or modification
shall be promptly disclosed to BYL in writing. BYL is not in default under any
such policy of insurance or bond such that it could be canceled, and all
material claims thereunder have been filed in a timely fashion. BYL has filed
claims with or given notice of claim to its insurers or bonding companies with
respect to all material matters and occurrences for which it believes it has
coverage.
5.9 CERTAIN ADVERSE CHANGES. Except as specifically required,
permitted or effected by this Agreement, and except as set forth on Exhibit 5.9
since December 31, 1997, there has not been, occurred or arisen any of the
following (whether or not in the ordinary course of business unless otherwise
indicated):
(a) Any materially adverse change in any of the assets,
liabilities, permits, methods of accounting or accounting practice, or manner of
conducting business, of BYL or any other event or development that has had or
may reasonably be expected to have a material adverse effect on the assets,
liabilities, Permits, business, financial condition, or results of operations of
BYL or which should be disclosed in order to make BYL Financial Statements not
misleading.
(b) Any damage, destruction or other casualty loss (whether or
not covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, or results of operations of BYL or that may involve a loss of more
than $50,000 in excess of applicable insurance coverage; or
(c) Any amendment, modification or termination of any existing,
or entry into any new, Material Contract or Permit that has had or may
reasonably be expected to have a material adverse effect on the assets,
liabilities, business, financial condition, or results of operations of BYL;
(d) Any disposition by BYL of an asset the lack of which has had
or may reasonably be expected to have a material adverse effect on the business,
financial condition, or results of operations of BYL; or
(e) Any direct or indirect redemption, purchase or other
acquisition by BYL of any Equity Securities or any declaration, setting aside or
payment of any dividend or other distribution
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on or in respect of BYL Stock whether consisting of money, other personal
property, real property or other things of value.
5.10 COMPLIANCE WITH LAWS AND REGULATIONS.
(a) Except as set forth in Exhibit 5.10, BYL is not in default
under or in breach of any law, ordinance, rule, regulation, order, judgment or
decree applicable to it promulgated by any governmental agency having authority
over it, where such default or breach would have a material adverse effect on
its financial condition, results of operations, or business.
(b) To the best of its knowledge, BYL has conducted in all
material respects its businesses in accordance with all applicable federal,
foreign, state and local laws, regulations and orders, including without
limitation disclosure, usury, equal credit opportunity, equal employment, fair
credit reporting, antitrust, licensing and other laws, regulations and orders,
and the forms, procedures and practices used by BYL are in compliance with such
laws, regulations, and orders, except for such violations or noncompliance as
will not have a material adverse effect on the financial condition, results of
operations, or business of BYL.
5.11 AUTHORIZATION. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of BYL. Assuming due and proper execution
and delivery of this Agreement by DNBF, this Agreement constitutes a legal,
valid and binding agreement of BYL in accordance with its respective terms,
except as the enforceability hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other laws of general application
relating to or affecting enforcement of creditors rights and the application of
equitable principles in any action, legal or equitable. Subject to obtaining
requisite approval of this Agreement by the shareholders of BYL, if required,
BYL has full corporate power and authority to perform its obligations under this
Agreement and the transactions contemplated hereby.
5.12 NO CONFLICTS; DEFAULTS. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated herein,
including the Merger, and compliance by BYL with any provision hereof will not
(a) conflict with or result in a breach of, or default or loss of any benefit
under, any provision of its Charter Documents or, except as set forth in Exhibit
5.12 any material agreement, instrument or obligation to which it is a party or
by which the property of BYL is bound or give any other party to any such
agreement, instrument or obligation the right to terminate or modify any term
thereof; (b) except for the prior approval of the FRB, the Commissioner and any
other required Governmental Entity, and as set forth in Exhibit 5.12, require
any Consents; (c) result in the creation or imposition of any Encumbrance on any
of the properties or assets or BYL; or (d) violate the Charter Documents or any
Rules to which BYL is subject.
5.13 REPORTS AND FILINGS. Since inception, BYL has filed all reports,
returns, registrations and statements (such reports and filings referred to as
"BYL Filings"), together with any amendments required to be made with respect
thereto, that were required to be filed with (a) the FRB, (b) the Commissioner
and (c) any other applicable Governmental Entity, including
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taxing authorities, except where the failure to file such reports, returns,
registrations and statements has not had and is not reasonably expected to have
a material adverse effect on the business, financial condition, or results of
operations of BYL. No administrative actions have been taken or orders issued
in connection with such BYL Filings. As of their respective dates, each of such
BYL Filings complied in all material respects with all Rules enforced or
promulgated by the Governmental Entity with which it was filed (or was amended
so as to be so promptly following discovery of any such noncompliance). Any
financial statement contained in any of such BYL Filings that were intended to
present the financial position of BYL fairly and were prepared in accordance
with generally accepted accounting principles or banking regulations
consistently applied, except as stated therein, during the periods involved.
5.14 UNDISCLOSED LIABILITY. BYL has no liabilities or obligations,
either accrued or contingent, which are in excess of Fifty Thousand Dollars
($50,000) individually or in the aggregate, which has not been:
(i) reflected or disclosed in the Audited BYL Financial
Statements;
(ii) incurred since December 31, 1997, in the ordinary course of
business; or
(iii) disclosed on Exhibit 5.14 or any other exhibit to this
Agreement.
To the best of BYL's knowledge and the knowledge of its officers and
directors, after due investigation, there is no basis for the assertion against
BYL of any liability, obligation or claim that is likely to result in or cause
any material adverse change in the business or financial condition of BYL, taken
as a whole, which is not fairly reflected in the Financial Statements, or
otherwise disclosed on Exhibit 5.14 hereto.
5.15 ACCURACY OF INFORMATION FURNISHED. Except as to any statements
or information which shall include projections or forecasts, none of the
statements or information made or contained in any of the covenants,
representations or warranties of BYL set forth in this Agreement or in any of
the schedules, exhibits, lists, certificates or other documents furnished
herewith taken as a whole contains any untrue statement of a material fact
required to be stated herein or therein or necessary to make the statements or
information contained herein or therein, in light of the circumstances in which
they were made, not misleading. As to any such information or statements which
include projections or forecast, such information or statements are based upon
assumptions believed by BYL to be reasonable.
5.16 STATEMENTS TRUE AND CORRECT. None of the information supplied
or to be supplied by BYL for inclusion in the S-4 or the Proxy Statement, or
incorporated by reference therein, or any other document to be filed with any
governmental agency or regulatory authority in connection with the transactions
contemplated hereby will, in the case of the S-4 and Proxy Statement/ Prospectus
(or incorporated by reference therein), when it is first mailed to the
shareholders of BYL, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which such statements are made, not
misleading or, in the case of the S-4, when it becomes
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effective, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading, or, in the case of the S-4 and Proxy Statement or any amendment
thereof or supplement thereto, at the time of the meeting of shareholders of
BYL, be false or misleading with respect to any material fact or omit to state
any material fact necessary to correct any statement or remedy any omission in
any earlier communication with respect to the solicitation of any proxy of the
BYL shareholders' meeting.
5.17 ACCURATE DISCLOSURE. BYL agrees that through the Effective Time
of the Merger, each of its reports, and other filings required to be filed with
any applicable Governmental Entity will comply in all material respects with all
of the applicable statutes, rules and regulations enforced or promulgated by the
Governmental Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of them
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, or other filing that is intended to
present the financial position of BYL and BOYL will fairly present the financial
position of BYL and BOYL, will be prepared in accordance with generally accepted
accounting principles or applicable banking regulations consistently applied
during the periods involved. Notwithstanding anything to the contrary set forth
in this Section 5.17, BYL makes no representation or warranty with respect to
any information supplied by DNBF or DANB (or any of the DNBF Reports).
5.18 FDIC AND COMMISSIONER EXAMINATIONS. (a) The FDIC has completed
an examination of BOYL as of May 22, 1995, and whether or not the examination
report has been issued, it is the understanding of BOYL from discussions with
the FDIC examiners that (i) the FDIC believes BOYL's methodology for computing
the allowance for loan losses is adequate, due to classifications during the
examination the FDIC believed that BOYL's allowance was slightly underfunded,
that BOYL made an additional provision during the examination to correct the
deficiency, and that the FDIC required no material adjustments, (ii) BOYL's
CAMELS rating will not change and BOYL's financial condition is deemed by the
FDIC to be satisfactory.
(b) The Commissioner has completed an inspection of BOYL as of
November 14, 1996, and whether or not the examination report has been issued, it
is the understanding of BOYL from discussions with the Commissioner's examiners
that (i) the Commissioner believes BOYL's methodology for computing the
allowance for loan losses is adequate, due to classifications during the
examination the Commissioner believed that BOYL's allowance was slightly
underfunded, that BOYL made an additional provision during the examination to
correct the deficiency, and that the Commissioner required no material
adjustments, (ii) BOYL's CAMELS rating will not change and BOYL's financial
condition is deemed by the Commissioner to be satisfactory.
(c) The FRB has not inspected BYL, as the formation of BYL as a bank
holding company was completed on November 19, 1997.
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ARTICLE VI
COVENANTS OF DNBF AND DANB PENDING EFFECTIVE TIME
DNBF covenants and agrees with BYL as follows:
6.1 BEST EFFORTS. DNBF shall use its best efforts to bring about the
satisfaction of the conditions specified in Articles IX and XI hereof.
6.2 CONDUCT OF BUSINESS. Unless BYL shall give its prior consent, or
unless otherwise indicated, until the Effective Time, DNBF will, and shall cause
DANB to:
(i) conduct its affairs and business in the usual and ordinary
course, generally consistent with past practice, and in accordance with safe and
sound banking practices; and take no action which would reasonably be expected
to adversely affect or delay the ability of BYL, DNBF or DANB to obtain any
necessary approvals, consents or waivers of any Governmental Entity or other
parties required for the Merger or to perform its covenants or agreements under
this agreement on a timely basis;
(ii) refrain from (a) creating, incurring, or suffering to exist,
any encumbrance or restriction of any kind against or in respect of any property
or right of DNBF except for such which are not material in amount or nature to
the financial condition or results of operations of DNBF, except for a pledge or
security interest given in connection with the acceptance of government or
public deposits; it being understood that the foregoing shall not be deemed to
preclude loans, repurchase or reverse repurchase agreements, securities or other
financial transactions incurred in the ordinary course of DANB's banking
business, and (b) borrowing or agreeing to borrow any amount of funds except in
the ordinary course of business, or directly or indirectly guaranteeing or
agreeing to guarantee any obligations of others except for such which are not
material in amount or nature to the financial condition or results of operations
of DNBF;
(iii) refrain from making or becoming a party to any Material
Contract or material commitment, or renewing, extending, amending or modifying
any such contract or commitment except for loan and deposit transactions, in the
usual and ordinary course of business, consistent with past practice, and
refrain from making any loan or other extension of credit, or enter into any
commitment to make any loan or other extension of credit, to any DNBF or DANB
director, officer or employee or 5% or more shareholder, except in accordance
with existing practice or policy;
(iv) refrain from making any capital expenditures, except for
ordinary repairs and replacements not exceeding $5,000 for any one item;
(v) refrain from paying or agreeing to pay any bonus, extra
compensation, pension or severance pay, under any pension plan or otherwise,
deferred compensation, profit
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sharing or welfare benefit plan or increasing the rate of compensation paid by
DNBF at December 31, 1997, to any officer, director, agent, consultant, or
employee (except for raises and bonuses consistent with past practices accrued
and paid prior to the end of the month prior to the Closing Date), and any such
amounts shall be accrued and paid prior to the Determination Date; or agreeing
to enter into any employment agreements or hire any officer level staff where
such agreements or arrangements cannot be terminated without any liability upon
not more than 90 days notice;
(vi) maintain its assets and properties in good condition and
repair (ordinary wear and tear excepted) and refrain from selling or otherwise
disposing of any of its assets or properties, except in the usual and ordinary
course, consistent with prior customary practice, and in accordance with safe
and sound practices, and maintain DANB's present branch operations unless
changed by mutual agreement;
(vii) refrain from declaring or paying any dividend on or making
any other distribution upon, or purchasing or redeeming, any shares of DNBF
Stock, except BYL hereby consents to the payment of a $0.25 per share cash
dividend in February 1998 on the shares of DNBF outstanding, up to a maximum of
232,423 shares;
(viii) refrain from (a) issuing or selling or obligating itself to
issue or sell any shares of DNBF Stock or any other securities or any warrants,
rights or options to acquire DNBF Stock or other securities, except pursuant to
previously outstanding stock options granted pursuant to DNBF Stock Option Plan,
(b) effecting a reclassification, recapitalization, split-up, exchange of
shares, readjustment or other similar change in or to any capital stock or
otherwise reorganize or recapitalize;
(ix) refrain from directly or indirectly redeeming, purchasing or
otherwise acquiring any DNBF Stock or stock of any corporation or any interest
in any business enterprise except as it relates to a foreclosure in the usual
and ordinary course of its business;
(x) refrain from amending its Charter Documents except to the
extent as may be required or contemplated by this Agreement;
(xi) use its best efforts to preserve its business organization
intact and to retain its present officers and employees in a manner consistent
with DNBF's other obligations under this Agreement; and refrain from introducing
any new service or products, institute any new advertising campaign, open, or
apply to open or close any branch or facility, or, in general, change in any
material respects its products and services from those in effect at the date of
this Agreement;
(xii) use its best efforts to maintain and preserve intact the
goodwill of its depositors, customers and those having business relations with
it, continue to develop such customer relationships, refrain from materially
changing the make-up of DANB's deposit structure, refrain from amending,
modifying, terminating or failing to renew or preserve its business
organization, material rights, franchises, Permits, and refrain from taking any
action
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which would jeopardize the continuance of the goodwill of its customers where
such action would have a material adverse effect on the financial condition, or
results of operations of DNBF in a manner consistent with DNBF's other
obligations under this Agreement;
(xiii) use its best efforts to maintain insurance and bond coverage at
least equal to that now in effect on all its properties and all properties for
which it is responsible and on its business operations, and carry the same
coverage for public liability, personal injury and property damage that is now
in effect, except if such insurance and coverage (a) is not available except at
extraordinary rates, or (b) is not available except under materially different
terms which are consistent with those in effect as of the date of this
Agreement;
(xiv) meet its material contractual obligations and not become in
default in any material respect on any thereof; refrain from entering into or
renewing any material contract or agreement to a date past March 31, 1998;
(xv) duly observe and conform to lawful requirements applicable to
its business in all material respects;
(xvi) duly and timely file all reports and returns required to be
filed with any federal, state or local Governmental Entity unless any extensions
have been duly granted by such authorities;
(xvii) refrain from commencing any proceeding to merge, consolidate or
liquidate or dissolve (except as contemplated by this Agreement) or obligating
itself to do so;
(xviii) maintain its books of account and records in the regular manner
substantially in accordance with all applicable statutory and regulatory
requirements applied on a consistent basis;
(xix) except for instituting actions against DANB borrowers to
collect loans in default, refrain from instituting, settling, or agreeing to any
material claim, action or proceeding before any court or governmental body
unless not instituting, settling or agreeing to any material claim, action or
proceeding would result in a Material Adverse Change to DNBF;
(xx) refrain from making its credit underwriting policies, standards
or practices applicable to all loans relating to the making of loans and other
extensions of credit, or commitments to make loans and other extensions of
credit, less stringent than those in effect on the date hereof. DNBF and/or
DANB shall not grant or commit to grant, without receiving BYL's Consent, (i)
any loan or other extension of credit, including renewals and participations, to
an existing customer of DNBF or DANB, if such loan or other extension of credit,
together with all other credit then outstanding to the same Person and all
Affiliates of such Person, would exceed $300,000 irrespective of any plans or
intentions to sell or participate all or a portion of such loans, on an
unsecured or secured basis, except for loans secured entirely by cash or readily
marketable collateral, as that term is used in the National Bank Act, or (ii)
any renewals or other extensions of credit to any borrower whose loans or other
extensions of credit have been classified
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by any Governmental Entity. In addition, DNBF and/or DANB shall not take any
property into Other Real Estate Owned ("OREO"), or sell any OREO property,
without receiving BYL's Consent. Consent shall be deemed granted if within two
Business Days of written notice received by BYL's designee, notice of objection
is not received by DNBF or DANB in writing or by fax. During this period, DNBF
and DANB agree to provide BYL a listing monthly of every loan made by DNBF
and/or DANB;
(xxi) refrain from making special or extraordinary material
payments to any Person other than as contemplated and as disclosed in this
Agreement as of the date hereof; and refrain from altering its method of
establishing interest rates for deposits;
(xxii) except for transactions in accordance with safe and sound
banking practices, refrain from making any material investments, by purchase of
stock or securities, contributions to capital, property transfers, purchases of
any property or assets or otherwise, in any other individual, corporation or
other entity;
(xxiii) advise BYL promptly in writing of any Material Adverse
Change known to DNBF in the capital structure, financial condition, results of
operations or of any event or condition which with the passage of time is
reasonably likely to result in a Material Adverse Change to DNBF, or of any
other materially adverse change known to DNBF respecting the business and
operations of DNBF, or in the event DNBF determines that the Merger will not be
consummated because of any inability to meet the conditions to the performance
of BYL set forth in Article XI or of any matter which would make the
representations and warranties set forth in Article IV hereof not true and
correct in any material respect at the Closing.
(xxiv) promptly advise BYL in writing of any event or any other
transaction within DNBF's knowledge whereby any person or related group of
persons acquires, directly or indirectly, record or beneficial ownership (as
defined in Rule 13d3 promulgated by the Securities Exchange Act of 1934, as
amended ("Exchange Act") or control of 5% or more of the outstanding shares of
DNBF Stock or DANB Stock prior to the record date fixed for DNBF shareholders'
meeting or any adjourned meeting thereof to approve the transactions
contemplated herein;
(xxv) charge-off all loans, receivables and other assets, or
portions thereof, deemed uncollectible in accordance with GAAP or RAP,
applicable law or regulation, or classified as "loss" or as directed by any
regulatory authority; and maintain the allowance for loan losses of DNBF and /or
DANB, as appropriate, at a level which in the reasonable opinion of DNBF
management is adequate to provide for all known and estimated credit losses on
loans and leases outstanding and other inherent risks in DANB's loan portfolio,
but in no case less than the level which in the reasonable opinion of DNBF and
DANB management is adequate to provide for all known and reasonably expected
losses on assets outstanding in accordance with GAAP and applicable regulatory
accounting principles.
(xxvi) furnish to BYL, as soon as practicable, and in any event
within ten (10) days after it is prepared (except for the reports submitted to
the board of directors of DNBF, as
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described in clause (i) below, which shall be furnished to BYL within ten (10)
days after DNBF's and DANB's Board of Directors has reviewed the report), (i) a
copy of any report submitted to the Board of Directors of DNBF and DANB, and
access to the working papers related thereto and copies of other operating or
financial reports prepared for management of any of their businesses and access
to the working papers thereto, provided, however, that DNBF need not furnish BYL
communications of DNBF's legal counsel regarding DNBF's rights against and
obligations to BYL or its affiliates under this Agreement, (ii) to the extent
permitted by law, copies of all reports, renewals, filings, certificates,
statements and other documents filed with or received from the FRB, the
Comptroller, the Commissioner or any other governmental or regulatory body,
(iii) monthly unaudited average statements of condition and statements of
operations for DNBF and DANB, and quarterly unaudited statements of condition
and statements of operations for DNBF and DANB and statements of changes in
stockholders' equity for DNBF, in each case prepared in a manner consistent with
past practice, and (iv) such other reports as BYL may reasonably request
relating to DNBF and/or DANB. Each of the financial statements delivered
pursuant to this Section 6.2(xxvi), except as stated therein, shall be prepared
in accordance with DNBF's and DANB's normal practices;
(xxvii) consistent with the standards set forth in this subsection 6.2
(xxvii), DNBF and DANB agree that through the Effective Time of the Merger, as
of their respective dates, (i) each of DNBF filings and DANB filings with any
regulatory agency will be true and complete in all material respects; and (ii)
each of DNBF filings DANB filings with any regulatory agency will comply in all
material respects with all of the statutes, rules and regulations enforced or
promulgated by the governmental or regulatory authority with which it will be
filed and none will contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they will be made,
not misleading. Any financial statement contained in any of such DNBF filings
and DANB filings that is intended to present the financial position of the
entities or entity to which it relates will be prepared in accordance with GAAP
or applicable banking regulations consistently applied, except as stated
therein, during the periods involved;
(xxviii) maintain reserves for contingent liabilities in accordance
with GAAP and RAP;
(xxix) promptly notify BYL of the filing of any material litigation,
governmental or regulatory action, or similar proceeding or notice of any claims
against DNBF, DANB or any of their assets;
(xxx) conduct good faith settlement negotiations, and, with the
written consent of BYL, settle when deemed prudent by the Parties, of all
existing or threatened litigation as specified in Exhibits 4.7(a) and 4.7(b), or
for any new litigation filed or threatened from the date hereof to the Closing
Date;
(xxxi) except in the ordinary course of business, refrain from
cancelling or accelerating any material indebtedness owing to DNBF or DANB or
any claims which DNBF or DANB may possess or waive any material rights of
substantial value;
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(xxxii) refrain from selling or otherwise disposing of any real
property or any material amount of any tangible or intangible personal property
other than properties acquired in foreclosure or otherwise in the ordinary
collection of indebtedness to DNBF or DANB;
(xxxiii) refrain from foreclosing upon or otherwise taking title to or
possession or control of any real property without first obtaining a phase one
environmental report thereon which indicates that the property is free of
pollutants, contaminants or hazardous or toxic waste materials; provided,
however, that DNBF and DANB shall not be required to obtain such a report with
respect to single family, non-agricultural residential property of one acre or
less to be foreclosed upon unless it has reason to believe that such property
might contain any such waste materials or otherwise might be contaminated;
(xxxiv) refrain from committing any act or failing to do any act which
will cause a breach of any agreement, contract or commitment and which will have
a material adverse effect on DNBF's or DANB's business, financial condition, or
results of operations.
For purposes of this Section 6.2, BYL shall be deemed to have given
its consent to any action which is contrary to any specified covenant set forth
in this section if, within five (5) Business Days, or three (3) Business Days
for loans, after actual receipt by BYL of written notice from DNBF or DANB of
DNBF's or DANB's intention to act contrary to any of the specified covenants set
forth in this section, DNBF or DANB shall not have received written objection to
any such action from BYL.
6.3 ACCESS TO INFORMATION. (a) As long as the transaction
contemplated herein has not been terminated, DNBF will afford BYL, its
representatives, counsel, accountants, agents and employees including its
financial advisor (collectively "Representatives"), access during normal
business hours to all of its business, operations, properties, personnel books,
files and records and will do everything reasonably necessary to enable BYL and
its Representatives, to make a complete examination of the financial statements,
books, records, loans and leases, operating reports, audit reports, contracts
and documents, including access to DNBF and DANB management personnel in order
to ask questions and receive full, complete and accurate answers to such
questions, and all other information with respect to assets and properties of
DNBF and DANB and the condition thereof, and to update such examination at such
intervals as BYL shall deem appropriate. Such access shall include reasonable
access by BYL and its representatives to auditors' work papers with respect to
the business and properties of DNBF, other than (i) books, records and documents
covered by the attorney-client privilege, or which are attorneys' work product,
and (ii) books, records and documents that DNBF is legally obligated to keep
confidential. Such examination shall be conducted in cooperation with the
officers of DNBF and in such a manner as to minimize, to the extent possible
consistent with the conducting of a comprehensive examination, any disruption
of, or interference with, the normal business operations of DNBF. No such
examination, however, shall constitute a waiver or relinquishment on the part of
BYL to rely upon the representations and warranties made by DNBF herein or
pursuant hereto; provided, that BYL shall disclose any fact or circumstance it
may discover which it believes renders any representation or warranty made by
DNBF hereunder incorrect in any
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respect. BYL will hold in strict confidence all documents and information
concerning DNBF so obtained (except to the extent that such documents or
information are a matter of public record or require disclosure in the S-4 and
Proxy Statement or as may be necessary for the accomplishment of the purposes of
such examination) and, if the transactions contemplated herein are not
consummated, such confidence shall be maintained and all such documents
including all copies shall be returned to DNBF.
(b) As long as the transaction contemplated hereunder has not
been terminated, one Representative of BYL, selected by BYL in its sole
discretion, shall be invited by DNBF to attend all regular and special Board of
Directors' meetings of DNBF from the date hereof until the Effective Time of the
Merger; DNBF shall inform BYL of such Board meeting at least five (5) days in
advance of such meeting; provided, however, that the attendance of such
Representative shall not be permitted at any meeting, or portion thereof, for
the sole purpose of discussing the transactions contemplated by this Agreement
on the obligations of DNBF under this Agreement.
In the event the Merger provided for hereby is not consummated for any
reason, BYL shall not, directly or indirectly: (i) utilize for its own benefit
any Confidential Information regarding DNBF (as hereinafter defined) or (ii)
disclose to any person any such Confidential Information, except as such
disclosure may be required in connection with this Agreement or by law.
6.4 FINANCIAL STATEMENTS. In the event the following have not been
previously delivered prior to the date hereof, DNBF will deliver to BYL a copy
of the audited Statements of Financial Condition of DNBF as of December 31,
1997; Statements of Earnings, Stockholders' Equity and Cash Flows for the year
ended December 31, 1997, the related notes and related opinions thereon of
Vavrinek, certified public accountants, with respect to such financial
statements (the "1997 Audited DNBF Financial Statements"). DNBF will furnish
BYL with a true and correct copy of the management letter or other letter
delivered to DNBF by Vavrinek, in connection with the 1997 Audited DNBF
Financial Statements relating to any review of the internal controls of DNBF by
Vavrinek The 1997 Audited DNBF Financial Statements will: (i) present fairly
the financial condition and results of operations of DNBF as of and for the
dates or periods covered thereby in accordance with generally accepted
accounting principles consistently applied throughout the periods involved; (ii)
be based on the books and records of DNBF; (iii) contain and reflect reserves
for all material accrued liabilities and for all reasonably anticipated losses,
and set forth adequate reserves for loan losses and other contingencies, to the
extent required by GAAP; and (iv) none of the 1997 Audited DNBF Financial
Statements will contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements contained therein not
misleading under GAAP.
6.5 NO SOLICITATION.
(a) DNBF shall not, and will cause each of its officers,
directors, employees, agents, legal and financial advisors and Affiliates not
to, directly or indirectly, make, solicit, encourage, initiate or, except as
permitted in this Section 6.5, enter into any agreement or agreement in
principle, or announce any intention to do any of the foregoing, concerning the
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acquisition of DNBF, or substantially all of DNBF's business and properties, any
of DNBF's Equity Securities or debt securities, whether by purchase, merger
(other than by BYL), purchase of assets, sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets of DNBF; a sale of shares of
capital stock (or securities convertible or exchangeable into or otherwise
evidencing, or any agreement or instrument evidencing, the right to acquire
capital stock), representing 10% or more of the voting power of DNBF or DANB; a
tender offer or exchange offer for at least 10% of the outstanding shares of
DNBF; or a solicitation of proxies in opposition to approval of the Merger by
DNBF's shareholders (an "Alternative Transaction").
(b) DNBF shall not, and will cause each of its officers,
directors, legal and financial advisors, agents and Affiliates not to, directly
or indirectly, participate in any negotiations or discussions regarding, or
furnish any information with respect to, or otherwise cooperate in any way in
connection with, or assist or participate in, facilitate or encourage, any
effort or attempt to effect or seek to effect, any Alternative Transaction with
or involving any Person other than BYL, unless DNBF shall have received an
unsolicited written offer from a Person other than BYL to effect an Alternative
Transaction and the Board of Directors of DNBF is advised in writing by outside
legal counsel that in the exercise of the fiduciary obligations of the Board of
Directors such information should be provided to or such discussions or
negotiations undertaken with the Person submitting such unsolicited written
offer.
(c) DNBF will promptly communicate to BYL the receipt of any
proposal with respect to any Alternative Transaction, and will keep BYL informed
as to the status of any such proposal; PROVIDED, HOWEVER, that DNBF shall not be
required to disclose any matters which, in the written opinion of outside legal
counsel, may not be disclosed in the exercise of the fiduciary obligations of
the Board of Directors.
6.6 CERTAIN LOANS AND OTHER EXTENSIONS OF CREDIT. DNBF will promptly
inform BYL of the amounts and categories of any loans, leases or other
extensions of credit that have been criticized special mention or classified by
any bank regulatory authority or deemed by DNBF to require special attention
pursuant to its internal policies (collectively "Classified Credits"). In
addition, DNBF will furnish to BYL, as soon as practicable, and in any event
within seven days after receipt by DNBF's Board of Directors, schedules
including the following: (a) Classified Credits; (b) nonaccrual credits; (c)
accrual exception credits that are delinquent 90 or more days and have not been
placed on nonaccrual status; (d) participating loans and leases, stating, with
respect to each, whether it is purchased or sold, the loan or lease type, and
the originating unit; (e) loans or leases (including any commitments) by DNBF to
any director, officer or shareholder holding 5% or more of the capital stock of
such party; (f) letters of credit; (g) loans or leases charged-off during the
previous month; (h) loans or leases written down during the previous month; and
(i) other real estate or assets owned, stating with respect to each its type.
6.7 BREACHES. DNBF shall, in event it becomes aware of the impending
or threatened occurrence of any event or condition which would cause or
constitute a breach (or would have caused or constituted a breach had such event
occurred or been known prior to the date hereof) of any of its representations
or agreements contained or referred to herein, give
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prompt written notice thereof to BYL and, without limiting BYL's rights under
paragraph 14.1(a)(ii), DNBF shall use its best efforts to prevent or promptly
remedy the same.
6.8 FILINGS, APPLICATIONS AND SHAREHOLDER APPROVAL. As soon as
practicable, DNBF and BYL shall jointly prepare the S-4 and Proxy Statement, and
take all action necessary in accordance with applicable Rules and their Charter
Documents to submit to their shareholders for approval, and DNBF and BYL shall
use their best efforts to obtain shareholder approval by April 30, 1998, or as
soon thereafter as is reasonably possible, of the Agreement and the other
transactions contemplated hereby. In connection with such submission, subject
to its fiduciary obligations specified in Section 6.5(b), the DNBF Board of
Directors shall recommend shareholder approval of all the matters referred to in
this Section 6.8 and DNBF shall use its best efforts to obtain such shareholder
approval. DNBF and DANB covenant and agree that all information furnished by
DNBF and DANB for inclusion in the S-4 and the Proxy Statement and in all
applications or statements filed with the appropriate regulatory authorities for
approval of, or consent to, the Merger and the Bank Merger will comply in all
material respects with the provisions of applicable law, and will not contain
any untrue statement or material fact or omit to state a material fact required
to be stated therein or necessary to make the statements contained therein, in
light of the circumstances under which they were made, not misleading.
6.9 COMPLIANCE WITH RULES. DNBF shall comply with the requirements of
all applicable Rules, the noncompliance with which would materially and
adversely affect the assets, liabilities, business, financial condition,
results of operations or prospects of DNBF.
6.10 TERMINATION OF DNBF'S EMPLOYEE STOCK OPTION PLAN AND AGREEMENTS.
DNBF will take all steps necessary to cause the DNBF Stock Option Plan to be
terminated as of or prior to the Effective Time of the Merger, will grant no
additional options under said plan prior to the Effective Time of the Merger,
and, except for any presently outstanding options which are exercised in
accordance with the terms and provisions of DNBF Stock Option Plan, will use its
best efforts to cause any options outstanding thereunder (irrespective of their
exercise price and whether or not then presently exercisable or fully vested) to
be canceled as of or prior to the Effective Time of the Merger together with a
release of all claims against DNBF or DANB related to such options.
6.11 OFFICERS AND EMPLOYEES. Between the date of this Agreement and
the Closing Date, BYL and/or BOYL will use its best efforts to complete
interviews with each officer and employee of DNBF and DANB. Five (5) days prior
to the Determination Date, BYL and/or BOYL shall provide to DNBF and/or DANB a
list of such officers and employees that BYL and/or BOYL desires to terminate
following the Merger. Officers and employees of DNBF and DANB on such list will
be terminated by BYL and/or BOYL following the Effective Time of the Merger,
which shall use its best efforts to obtain appropriate releases, the form of
which has been approved by BYL, from such officers and employees. DNBF and BYL
will each pay one-half the amounts required for obtaining the appropriate
releases, and such amounts will be accrued and deducted from retained earnings
of DNBF and BYL, as appropriate, prior to the Determination Date. Each officer
and employee of DNBF and/or DANB to be retained by BYL and/or BOYL will be
required to indicate in writing to BYL and/or BOYL, as appropriate, that such
officer or
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employee agrees to BYL's employment policies, procedures and Handbook,
acknowledges his or her at-will employment status while employed by BYL and/or
BOYL, acknowledges his or her salary or compensation and title while employed by
BYL and/or BOYL, and acknowledges the limitation on vesting for employee
benefits, substantially in the form attached as EXHIBIT 6.11(a). DNBF and/or
DANB, as appropriate will terminate all DNBF and/or DANB Employment Agreements
specified in EXHIBIT 4.11(a) prior to the Effective Time of the Merger, without
any liability to DNBF, DANB, BYL or BOYL, except that BYL or BOYL agrees to
enter into five-year consulting agreements with Messrs. Hatcher and West and a
three-year employment agreement with Ms. Van Kampen, the general terms of which
are specified in EXHIBIT 6.11(b).
6.12 TERMINATION OF CONTRACTS AND ACCRUAL OF LIABILITIES. DNBF
and/or DANB shall furnish to BYL and/or BOYL a list of any contracts,
commitments or Understandings as defined in Section 4.12(v). Each of these
contracts shall be examined by a committee made up of the Senior Executive Vice
President of BYL and BOYL and the Executive Vice President of DNBF and DANB as
to the continued usefulness of such contracts in the Surviving Corporation
and/or the Surviving Bank. If the above-described committee determines that a
contract described herein should be cancelled, the above-described committee
will also determine the most cost effective method for cancellation. All such
contracts to be terminated will be identified no later than five (5) business
days before the Determination Date. DNBF and BYL will each pay one-half the
amounts required for terminating any such contracts, and such amounts will be
accrued and deducted from retained earnings of DNBF and BYL, as appropriate,
prior to the Determination Date. Before the end of the month prior to the
Closing Date, DNBF shall have paid, or set-up adequate accruals for the payment
of, all material expenses that DNBF shall be liable for up to the Closing Date,
including, but not limited to, all accounting, attorney fees and data processing
costs and related costs in connection with this Agreement.
6.13 EXECUTION OF AGREEMENT OF MERGER. Subject to receipt of any and
all necessary approvals and permits by any Governmental Entity, DNBF shall
execute the Agreement of Merger and any and all related documents.
6.14 ACCOUNTANTS. Promptly upon request of BYL, DNBF will ask its
accountants to permit BYL or its representatives to review and examine the work
papers relating to DNBF's audited financial statements for the years ended
December 31, 1994, 1995 and 1996, and the pending audit for the year ended
December 31, 1997, and DNBF will permit such accountants to discuss with BYL any
matter relating to the audits or pending audits of DNBF. In addition, DNBF will
make available to BYL copies of each management letter or other letter delivered
to DNBF by its accountants in connection with such financial statements or
relating to any review by its accountants of the internal controls of the party
since January 1, 1994, unless previously provided to BYL and DNBF has instructed
its accountants to make available for inspection by BYL or its representatives
all reports and working papers produced or developed by its accountants in
connection with their examination of such financial statements, as well as all
such reports and working papers for any periods for which any tax of the party
has not been finally determined or barred by applicable statutes of limitation.
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6.15 CORPORATE ACTION. The parties shall each take or cause to be
taken all necessary corporate action required to carry out the transactions
contemplated in this Agreement.
6.16 REGULATORY APPROVALS. Promptly following execution of this
Agreement, the parties hereto shall prepare, submit and file, or cause to be
prepared, submitted and filed, all applications for approvals and consents as
may be required of any of them, respectively, by applicable law and regulations
with respect to the transactions contemplated by this Agreement, including
without limitation any and all applications required to be filed with the
California Department of Financial Institutions, the FRB, the FDIC and such
other Governmental Entity as BYL or DNBF may reasonably believe necessary. Each
party shall cooperate with the other in the preparation of all of such
applications and will furnish promptly upon request all documents, information,
financial statements or other materials as may be required in order to complete
such applications. Each party shall afford the other a reasonable opportunity
to review all such applications (except confidential portions thereof) and all
amendments and supplements thereto before filing. BYL and DNBF each covenant
and agree that any and all information furnished by it to the other for
inclusion in such applications will not contain any untrue statement of a
material fact and will not omit to state any material fact required to be stated
therein or necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
6.17 NECESSARY CONSENTS. In addition to the regulatory approvals
referred to in Section 6.16, the parties hereto shall each apply for and
diligently seek to obtain all other third party consents or approvals which may
be necessary for the consummation of the Merger, including, without limitation,
the written consent of any lessors of real and personal property which property
cannot be assigned without the written consent of the other such lessors.
6.18 FURTHER ASSURANCES. The parties agree that from time to time,
whether prior to, at or after the Effective Time of the Merger, they will
execute and deliver such further instruments of conveyance and transfer and take
such other action as may reasonably be expected to consummate the transactions
contemplated hereby. BYL and DNBF each agrees to take such further action as
may reasonably be requested by the other in order to consummate the transactions
contemplated by this Agreement and that are not inconsistent with the other
provisions hereof.
6.19 DNBF EMPLOYEE BENEFITS. Except as otherwise agreed in writing,
DNBF shall cause all employee benefits and benefit programs of DNBF to be
terminated except as otherwise provided by applicable labor laws as of the
Effective Time of the Merger.
6.20 (Reserved)
6.21 NO CONFLICTS; DEFAULTS. The execution, delivery and performance
of the Agreement of Merger and the consummation of the transactions
contemplated therein, and compliance by DNBF or DANB with any provision thereof
will not (a) conflict with or result in a breach of, or default or loss of any
benefit under, any provision of their Charter Documents or, except as set forth
in Exhibit 6.21 any material agreement, instrument or obligation to which the
Surviving Corporation or the Surviving Bank will become a party or by which the
property of the
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Surviving Corporation or the Surviving Bank will become bound or give any other
party to any such agreement, instrument or obligation the right to terminate or
modify any term thereof; (b) except for the prior approval of the FRB, the
Comptroller and the Commissioner and as set forth in Exhibit 6.21, require any
Consents; or (c) result in the creation or imposition of any Encumbrance on any
of the properties or assets of the Surviving Corporation or the Surviving Bank;
or (d) violate the Charter Documents or any Rules to which the Surviving
Corporation or the Surviving Bank is subject.
6.22 S-4 AND PROXY STATEMENT. DNBF will assist BYL in connection
with the preparation of the S-4 and the Proxy Statement for the issuance of BYL
Stock contemplated by this Agreement, and such assistance will include, but not
necessarily be limited to, the preparation or provision, as appropriate, of
information concerning the business, properties and personnel of DNBF needed in
connection with the issuance of BYL Stock and the closing of the Merger. Such
information to be supplied by DNBF including any and all information furnished
by DNBF for inclusion in all applications for statements filed with the
appropriate regulatory authorities for approval of, or consent to, the Merger
and the Bank Merger, will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not intentionally misleading.
6.23 PUBLICITY. The initial press release announcing this Agreement
shall be a joint press release and thereafter BYL and DNBF shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and in making any filings
with any governmental authority or with any national securities exchange with
respect thereto. If any party hereto, on the advice of counsel, determines that
a disclosure is required by law, it may make such disclosure without the consent
of the other parties, but only after affording the other parties a reasonable
opportunity to review and comment upon the disclosure. The parties hereby agree
that all public statements after the initial press release announcing this
Agreement referring to DNBF shall be made by Mr. Hatcher, and all public
statements made after the initial press release announcing this Agreement
referring to BYL shall be made by Mr. Robert Ucciferri, and both parties agree
that all public statements shall be made by mutual agreement, if possible.
6.24 AFFILIATES AND FIVE PERCENT SHAREHOLDERS.
(a) At least 40 days prior to the Effective Time, DNBF shall deliver
to BYL a letter identifying all persons who are, at the time this Agreement is
submitted for approval to the shareholders of DNBF, "affiliates" of DNBF for
purposes of Rule 145 under the Securities Act. DNBF shall use commercially
reasonable efforts to cause each such affiliate to deliver to BYL prior to the
Effective Time a written "Affiliates" agreement, in customary form, providing
that such person shall dispose of BYL Stock to be received by such person in the
Merger only in accordance with applicable law.
(b) Prior to the Effective Time, DNBF shall use commercially
reasonable efforts to cause each person or group of persons who holds five
percent (5%) or more of DNBF's Stock
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(regardless of whether such person is an "affiliate") to deliver to the law firm
delivering the opinion pursuant to Section 10.1 a letter stating that such
shareholder(s) have no present intention to dispose of BYL Stock he or she or
they will receive in the Merger, and committing that he, she or they will not
dispose of such BYL Stock in such a manner as to cause a violation of the
"continuity of shareholder interest" requirements of Treasury Regulation
1.368-1.
6.25 INDEMNIFICATION AND INSURANCE. DNBF at its expense shall
maintain in effect policies of directors' and officers' liability insurance for
a period of 18 months with respect to all matters arising from facts or events
which occurred before the Effective Time of the Merger for which DNBF would have
had an obligation to indemnify its directors and officers, and coverage for a
period of at least 18 months following the Effective Time of the Merger under a
bankers' blanket bond which is no less protective in terms of coverage or
limitations than possessed by DNBF prior to the Effective Time of the Merger
which covers losses incurred prior to the Effective Time and actions related to
this Agreement.
ARTICLE VII
COVENANTS OF THE COMPANY PENDING EFFECTIVE TIME
7.1 BEST EFFORTS. BYL shall use its best efforts to bring about the
satisfaction of the conditions specified in Articles IX and X hereof.
7.2 CONDUCT OF BUSINESS. Unless DNBF shall give its prior consent,
which consent will not be unreasonably withheld, until the Effective Time, or
unless otherwise indicated BYL will:
(i) conduct its affairs and business in the usual and ordinary
course, generally consistent with past practice, and in accordance with safe and
sound practices;
(ii) refrain from amending its Charter Documents except to the
extent as may be required or contemplated by this Agreement;
(iii) use its best efforts to preserve its business organization
intact and to retain its present officers and employees in a manner consistent
with BYL's other obligations under this Agreement;
(iv) use its best efforts to preserve the goodwill of those
having business relations with BYL, refrain from amending, modifying,
terminating or failing to renew or preserve its business organization, material
rights, franchises, Permits, and refrain from taking any action which would
jeopardize the continuance of the goodwill of its customers where such action
would have, taken as a whole, a material adverse effect on the financial
condition, or results of operations of BYL in a manner consistent with BYL's
other obligations under this Agreement;
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(v) duly and timely file all reports and returns required to be
filed with any federal, state or local governmental authority unless any
extensions have been duly granted by such authorities;
(vi) maintain its books of account and records in the regular manner
substantially in accordance with all applicable statutory and regulatory
requirements applied on a consistent basis;
(vii) advise DNBF promptly in writing of any material adverse change
known to BYL in the capital structure, financial condition, results of
operations, or of any event or condition which with the passage of time is
reasonably likely to result in a material adverse change in the capital
structure, financial condition or results of operations of BYL, or in the event
BYL determines that the Merger will not be consummated because of any inability
to meet the conditions to the performance of DNBF set forth in Article X or of
any matter which would make the representations and warranties set forth in
Article V hereof not true and correct in any material respect at the Closing;
(viii) BYL agrees that through the Effective Time of the Merger, as of
their respective dates, (i) each of the filings with any regulatory agency will
be true and complete in all material respects; and (ii) each of the filings with
any regulatory agency will comply in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the governmental or
regulatory authority with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any of such filings that is intended to present the
financial position of the entities or entity to which it relates will fairly
present the financial position of such entities or entity and will be prepared
in accordance with GAAP or applicable banking regulations consistently applied,
except as stated therein, during the periods involved;
For purposes of this Section 7.2, DNBF shall be deemed to have given
its consent to any action which is contrary to any specified covenant set forth
in this section if, within five (5) Business Days, after actual receipt by DNBF
of written notice from BYL of BYL's intention to act contrary to any of the
specified covenants set forth in this section, DNBF shall not have delivered to
BYL written objection to any such action.
7.3 ACCESS TO INFORMATION. BYL will afford DNBF, its
representatives, counsel, accountants, agents and employees (collectively
"Representatives"), access during normal business hours to all of their
business, operations, properties, books, files and records and will do
everything reasonably necessary to enable DNBF and its Representatives to make a
complete examination of the financial statements, books, records, loans and
leases, operating reports, audit reports, contracts and documents, and all other
information with respect to assets and properties of BYL and the condition
thereof, and to update such examination at such intervals as DNBF shall deem
appropriate. Such access shall include reasonable access by DNBF or its
representatives to
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auditors' work papers with respect to the business and properties of BYL, other
than (i) books, records and documents covered by the attorney-client privilege,
or which are attorneys' work product, and (ii) books, records and documents that
BYL is legally obligated to keep confidential. Such examination shall be
conducted in cooperation with the officers of BYL and in such a manner as to
minimize, to the extent possible consistent with the conducting of a
comprehensive examination, any disruption of, or interference with, the normal
business operations of BYL. No such examination, however, shall constitute a
waiver or relinquishment on the part of DNBF to rely upon the representations
and warranties made by BYL herein or pursuant hereto; provided, that DNBF shall
disclose any fact or circumstance it may discover which it believes renders any
representation or warranty made by BYL hereunder incorrect in any respect. DNBF
will hold in strict confidence all documents and information concerning BYL so
obtained (except to the extent that such documents or information are a matter
of public record or require disclosure in the S-4 and Proxy Statement or as may
be necessary for the accomplishment of the purposes of such examination) and, if
the transactions contemplated herein are not consummated, such confidence shall
be maintained and all such documents including all copies shall be returned to
BYL.
In the event the Merger provided for hereby is not consummated for any
reason, DNBF shall not, directly or indirectly: (i) utilize for its own benefit
any Confidential Information regarding BYL (as hereinafter defined) or (ii)
disclose to any person any such Confidential Information.
7.4 BREACHES. BYL shall, in event it becomes aware of the impending
or threatened occurrence of any event or condition which would cause or
constitute a breach (or would have caused or constituted a breach had such event
occurred or been known prior to the date hereof) of any of its representations
or agreements contained or referred to herein, given prompt written notice
thereof to DNBF and, without limiting DNBF's rights under paragraph 14.1(a)(ii),
BYL shall use its best efforts to prevent or promptly remedy the same.
7.5 COMPLIANCE WITH RULES. BYL shall comply with the requirements of
all applicable Rules, the noncompliance with which would materially and
adversely affect the assets, liabilities, business, financial condition, or
results of operations of BYL taken as a whole. BYL shall also comply with all
securities statutes, rules and regulations, whether federal or state, in
connection with the Proxy Statement and the S-4. Except for information
supplied by DNBF pursuant to Section 6.22, the information contained in the S-4
and Proxy Statement disclosure documents shall not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
7.6 CORPORATE ACTION. BYL shall take or cause to be taken all
necessary corporate action required to carry out the transactions contemplated
in this Agreement and the Agreement of Merger.
7.7 REGULATORY APPROVALS. Promptly following execution of this
Agreement, the parties hereto shall prepare, submit and file, or cause to be
prepared, submitted and filed, all applications for approvals and consents as
may be required of any of them, respectively, by
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applicable law and regulations with respect to the transactions contemplated by
this Agreement, including without limitation any and all applications required
to be filed with the Commissioner, the FRB, the FDIC and such other Governmental
Entity as BYL or DNBF may reasonably believe necessary. Each party shall
cooperate with the other in the preparation of all of such applications and will
furnish promptly upon request all documents, information, financial statements
or other materials as may be required in order to complete such applications.
Each party shall afford the other a reasonable opportunity to review all such
applications (except confidential portions thereof) and all amendments and
supplements thereto before filing. BYL and DNBF each covenant and agree that
any and all information furnished by one party to the other for inclusion in
such applications will not contain any untrue statement of a material fact and
will not omit to state any material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
7.8 NECESSARY CONSENTS. In addition to the regulatory approvals
referred to in Section 7.7, the parties hereto shall each apply for and
diligently seek to obtain all other third party consents or approvals which may
be necessary for the consummation of the Merger, including, without limitation,
the written consent of any lessors of real and personal property which property
cannot be assigned without the written consent of the other such lessors.
7.9 FURTHER ASSURANCES. The parties agree that from time to time,
whether prior to, at or after the Effective Time of the Merger, they will
execute and deliver such further instruments of conveyance and transfer and take
such other action as may reasonably be expected to consummate the transactions
contemplated hereby. BYL and DNBF each agree to take such further action as may
reasonably be requested by the other in order to consummate the transactions
contemplated by this Agreement and that are not inconsistent with the other
provisions hereof.
7.10 INDEMNIFICATION AND INSURANCE. If BYL or any of its successors
or assigns (i) shall consolidate with or merge into any other corporation or
entity and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) shall transfer all or substantially all of
its properties and assets to any individual, corporation or other entity, then
and in each such case, BYL shall take no action to impair the rights provided in
Section 6.25.
7.11 EXECUTION OF AGREEMENT OF MERGER. As soon as practicable, BYL
shall execute the Agreement of Merger.
7.12 AUTHORIZATION. The execution and delivery of the Agreement of
Merger and the consummation of the transactions contemplated thereby will have
been duly authorized by the Board of Directors of BYL. The Agreement of Merger
will constitute a legal, valid and binding agreement of BYL in accordance with
its respective terms, except as the enforceability hereof and thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other laws of general application relating to or affecting enforcement of
creditors rights and the application of equitable principles in any action,
legal or equitable. BYL has full corporate power and authority to perform its
obligations under the Agreement of Merger and the transactions contemplated
thereby.
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7.13 NO CONFLICTS; DEFAULTS. The execution, delivery and performance
of the Agreement of Merger and the consummation of the transactions
contemplated therein, and compliance of BYL with any provision thereof will not
(a) conflict with or result in a breach of, or default or loss of any benefit
under, any provision of its Charter Documents or, except as set forth in Exhibit
7.13 any material agreement, instrument or obligation to which BYL will become a
party or by which the property of BYL will become bound or give any other party
to any such agreement, instrument or obligation the right to terminate or modify
any term thereof; (b) except for the prior approval of the FRB, the FDIC and the
Commissioner and any federal and state securities commissioner or department as
set forth in Exhibit 7.13, require any Consents; or (c) result in the creation
or imposition of any Encumbrance on any of the properties or assets of BYL; or
(d) violate the Charter Documents or any Rules to which BYL is subject.
7.14 ACCURACY OF INFORMATION FURNISHED. Except as to any statements
or information which shall include projections or forecasts, none of the
statements or information made or contained in any of the covenants,
representations or warranties of BYL set forth in this Agreement or in any of
the schedules, exhibits, lists, certificates or other documents furnished
herewith contains any untrue statement of a material fact required to be stated
herein or therein or necessary to make the statements or information contained
herein or therein, in light of the circumstances in which they were made, not
misleading. As to any such information or statements which include projections
or forecast, such information or statements are based upon assumptions believed
by BYL to be reasonable. BYL shall further amend or supplement the schedule as
of the Closing Date if necessary to reflect any additional changes in the status
of BYL.
7.15 EMPLOYEE BENEFITS. BYL shall, with respect to each person who
remains an employee of BYL or BOYL following the Closing Date (each a "Continued
Employee"), provide the benefits described in this Section 7.15. Subject to the
right of subsequent amendment, modification or termination in BYL's sole
discretion, each Continued Employee shall be entitled, as a new employee of BYL,
to participate in such employee benefit plans, as defined in Section 3(3) of
ERISA, or any non-qualified employee benefit plans or deferred compensation,
stock option, bonus or incentive plans, or other employee benefit or fringe
benefit programs that may be in effect generally for employees of BYL or BOYL
(the "BYL Plans"), if and as a Continued Employee shall be eligible and, if
required, selected for participation therein under the terms thereof. DNBF and
DANB employees shall participate therein on the same basis as similarly situated
employees of BYL and BOYL, and BYL shall give credit for each year of service to
DNBF or DANB for purposes of eligibility and vesting, except that no former
officer or employee of DNBF or DANB shall be deemed to have accrued any rights
to past contributions under the BYL 401K Plan by reason of past employment by
DNBF or DANB. All such participation shall be subject to the terms of such
plans as may be in effect from time to time and this Section 7.15 is not
intended to give Continued Employees any rights or privileges superior to those
of other employees of BYL or BOYL. BYL may terminate or modify all Employee
Plans and BYL's obligation under this Section 7.15 shall not be deemed or
construed so as to provide duplication of similar benefits but, subject to that
qualification, BYL shall, for purposes of vesting and any age or period of
services requirements for commencement of participation with respect to any BYL
Plans in which Continued Employees may participate, credit each Continued
Employee with his or her term of service with DNBF or DANB.
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7.16 FINANCIAL STATEMENTS. BYL will deliver to DNBF a copy of the
audited Statements of Financial Condition of BYL as of December 31, 1997;
Statements of Earnings, Stockholders' Equity and Cash Flows for the year ended
December 31, 1997, the related notes and related opinions thereon of Vavrinek,
certified public accountants, with respect to such financial statements (the
"1997 Audited BYL Financial Statements"). BYL will furnish DNBF with a true and
correct copy of the management letter or other letter delivered to BYL by
Vavrinek in connection with the 1997 Audited BYL Financial Statements relating
to any review of the internal controls of BYL by Vavrinek. The 1997 Audited BYL
Financial Statements: (i) present fairly the financial condition and results of
operations of BYL as of and for the dates or periods covered thereby in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved; (ii) be based on the books and records of BYL;
(iii) contain and reflect reserves for all material accrued liabilities and for
all reasonably anticipated losses, and set forth adequate reserves for loan
losses and other contingencies, to the extent required by GAAP; and (iv) none of
the 1997 Audited BYL Financial Statements will contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein not misleading under GAAP.
ARTICLE VIII
MEETING OF SHAREHOLDERS AND FEDERAL SECURITIES LAWS
The parties covenant and agree as follows:
8.1 SHAREHOLDER MEETING. DNBF and BYL will use their best efforts,
by April 30, 1998, or as soon thereafter as is reasonably possible, to cause
either (i) a meeting of their shareholders (hereinafter referred to as the
"DNBF Meeting" or "BYL Meeting," as appropriate) to be duly called and held upon
requisite notice, or (ii) to obtain the required written consents in accordance
with the California Corporations Code for the purpose of:
(i) authorizing and approving this Agreement and the transactions
contemplated herein; and
(ii) conducting such other business as its Board of Directors
deems advisable and proper in connection therewith;
DNBF and BYL shall use their respective best efforts to have the Form
S-4 declared effective under the Securities Act as promptly as practicable. BYL
shall take any action required to be taken under any applicable state securities
laws in connection with the issuance of BYL Stock in the Merger, and DNBF shall
furnish all information concerning DNBF as may be reasonably requested in
connection with any such action. Each party shall immediately notify the other
Party in writing in the event either party becomes aware that the S-4 or the
Proxy Statement at any time contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading or that the S-4 or the S-4 and Proxy
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Statement otherwise is required to be amended or supplemented, which notice
shall specify, in reasonable detail, the circumstances thereof.
DNBF, through its Board of Directors, will recommend that its
shareholders approve the transactions contemplated hereby, and it will use its
best efforts to obtain the affirmative votes of the holders of the largest
possible percentage of its outstanding DNBF Stock, so long as it is consistent
with its fiduciary obligation to do so.
8.2 FEDERAL SECURITIES LAWS. In obtaining the consent of its
shareholders of the matters described in Section 8.1 hereof, DNBF, BYL and their
respective officers, directors and controlling shareholders, in all respects,
comply with Sections 10 and 14 of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the rules and regulations of the SEC promulgated under
the 1934 Act applicable to commercial banks which are not reporting companies,
other applicable provisions of the United States Code, the rules and regulations
of the Commissioner, the California Commissioner of Corporations and the
securities laws of all states in which shareholders of the parties reside.
Without in any way limiting the generality of the foregoing, DNBF and
BYL agree that the Notice of Meeting, S-4 and Proxy Statement submitted in
connection therewith, Form of Proxy and other solicitation materials that will
be used in soliciting the aforesaid shareholder approvals and authorizations:
(i) will be filed with, and not be used before the same are
cleared for use by, the SEC, the California Commissioner of Corporations, and
other agencies having jurisdiction over BYL and DNBF and this transaction,
including the securities administrators of all states in which their respective
shareholders reside;
(ii) will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, except that neither party warrants
the accuracy or completeness of any information contained therein which is
furnished to it by the other relating to the business, assets, properties,
financial condition or management of the other or any corporation or person
affiliated or contractually obligated to become affiliated therewith, whether by
merger, acquisition or of assets or otherwise.
(iii) DNBF and BYL will use their best efforts to obtain clearance
by all appropriate regulatory authorities for the use of their Notice of
Meeting, Proxy Statement, Form of Proxy and other solicitation materials. Each
party will consult and cooperate with the other in the preparation of all such
proxy solicitation material for the aforesaid Meeting and DNBF agrees not to
transmit any proxy materials without the prior consent of BYL and its counsel.
(iv) BYL and DNBF shall each pay one-half of the expenses in
connection with the preparation and filing, including attorney fees, of the
Notice of Meeting, Proxy Statement, form of Proxy and other solicitation
materials.
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8.3 MAILING OF PROXY STATEMENT. DNBF and BYL each covenant and agree
that they will use their best efforts and shall cooperate with each other in the
preparation, filing and mailing of the Proxy Statement as soon as it reasonably
practicable and is permitted under applicable law; it being the intention of
DNBF and BYL to include their December 31, 1997 financial statements and
information in the financial disclosures contained in the Proxy Statement.
8.4 MATERIALS TO BE FURNISHED PRIOR TO MAILING DATES. On or prior to
the DNBF Mailing Date, DNBF (a) shall use its best efforts to cause an
appropriate firm that shall be selected by DNBF in its discretion, subject to
the reasonable approval of BYL, to deliver to BYL a copy of any letter to the
Board of Directors of DNBF, dated as of a date not more than five days prior to
such Mailing Date, in form and substance satisfactory to BYL to the effect set
forth in Section 10.9 hereof, and (b) shall have received a letter by a date not
more than five days prior to such Mailing Date, to the effect that the
consideration to be received by the shareholders of DNBF in the Merger is fair
from a financial point of view, and (c) shall have received a letter by a date
not more than five days prior to the DNBF Mailing Date, of the valuation of
dissenters rights shares as described in Section 1300.
8.5 REGULATORY APPROVALS. DNBF and BYL each agree to use their best
efforts to provide promptly such information and reasonable assistance as may be
requested by the other party to this Agreement and to take promptly such other
actions as shall be necessary or appropriate in order to consummate the
transactions contemplated hereby. Without limiting the foregoing, DNBF and BYL
will each (a) prepare, submit and file, or cause to be prepared, submitted and
filed, all applications for all authorizations, consents, orders and approvals
of federal, state, local and other governmental regulatory bodies and officials
necessary under applicable law for the performance of its obligations pursuant
to this Agreement and the consummation of the transactions contemplated hereby,
(b) use their best efforts to obtain all such authorizations, consents, orders
and approvals as expeditiously as possible in accordance with the terms of this
Agreement, and (c) cooperate fully with each of the other parties to this
Agreement in promptly seeking to obtain such authorizations, consents, orders
and approvals, including without limitation, in each case, the approval of the
FRB, the FDIC and the Commissioner. DNBF and BYL each agree to promptly provide
the other with copies of all applications referred to in clause (a) above and
copies of all written communications, letters, reports or other documents
delivered to or received from any regulatory authorities, and copies of all
memoranda relating to discussions with such authorities, if any, with respect to
the Merger, except that BYL and DNBF shall not be required to provide DNBF and
BYL, as appropriate, with any of the foregoing documents submitted or received
on a confidential basis or which incorporate confidential information relating
to other financial institutions.
8.6 MERGER OF DANB AND BOYL. The parties agree to use their
reasonable best efforts between the date of this agreement and the Closing to
take all actions necessary or desirable, including the filing of any regulatory
applications, so that the Bank Merger will occur substantially concurrently
with, or as soon as practicable after, the Effective Time of the Merger. A copy
of the Bank Merger agreement is attached hereto as Exhibit D. The original of
such Bank Merger Agreement shall be executed and delivered as son as practicable
after the execution of this Agreement.
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ARTICLE IX
CONDITIONS PRECEDENT TO THE CONTEMPLATED TRANSACTIONS
The obligations of the parties to consummate the transactions as
provided for herein are subject to the fulfillment, at or prior to the Effective
Time, of the conditions that:
9.1 PERMITS AND APPROVALS. Appropriate permits or approvals from the
Commissioner, the FRB, the FDIC and/or any other governmental agencies which are
necessary to carry out the transactions contemplated in this Agreement, shall
have been received, the United States Department of Justice shall not have taken
any adverse action within the period allowed under 12 U.S.C. Section 1828(c)(6),
and all other statutory or regulatory requirements for the valid completion of
the transactions contemplated hereby shall have been satisfied by June 30, 1998,
or as soon thereafter as is reasonably possible. Said permits and approvals
shall include, but shall not be limited to, the following:
(i) prior written approval from the Commissioner pursuant to the
California Financial Code, the FRB pursuant to the Federal Reserve Act and the
BHC Act, and the FDIC pursuant to the Federal Deposit Insurance Act;
(ii) to the extent required by applicable Rule, all Consents of any
Governmental Entity, including, without limitation, those of the FRB, the FDIC
and the Commissioner, shall have been obtained, granted or waived for the
Merger, and all applicable waiting periods under all rules shall have expired.
(iii) all approvals and/or permits necessary for the S-4 and any other
necessary regulatory approvals and the issuance of approvals or assurances from
the Commissioner, the FRB, the FDIC and any other necessary Governmental Entity
having authority over the Merger that the approval of the Merger will be
forthcoming that are satisfactory to BYL.
9.2 ABSENCE OF LITIGATION. On the Closing Date and at the Effective
Time: (i) there shall be no action pending before any court of competent
jurisdiction in which any injunction is sought by any governmental authority
against the transactions contemplated hereby; and (ii) there shall be in effect
no order, writ, injunction or decree of any court or governmental authority
prohibiting the consummation of any of the transactions contemplated hereby.
9.3 SHAREHOLDER APPROVAL. The Agreement, the Merger, and the other
transactions contemplated hereby, shall have been approved by the holders of at
least a majority of the issued and outstanding shares of DNBF Stock and BYL
Stock, by DNBF as the sole shareholder of DANB, and by BYL as the sole
shareholder of BOYL, and entitled to vote by March 31, 1998, or as soon
thereafter as is reasonably possible. Any and all other action required by the
shareholders of DNBF or BYL to authorize or effect the transactions called for
herein shall have been duly and validly taken.
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9.4 TAX OPINION. DNBF and BYL shall have received an opinion from
Vavrinek that the Merger and the Bank Merger will not result in the recognition
or gain or loss for federal income tax purposes to DNBF, DANB, BYL or BOYL, nor
will the issuance of the BYL Stock result in the recognition of gain or loss by
the holders of DNBF Stock who receive such stock in connection with the Merger.
9.5 POOLING OF INTERESTS ACCOUNTING TREATMENT. Vavrinek shall have
confirmed in writing to BYL and DNBF that the Merger and the Bank Merger qualify
for pooling of interests accounting treatment.
9.6 DISSENTERS. The sum of (i) of the shares of DNBF Stock that will
not be converted into BYL Stock due to the exercise of dissenters' rights
granted under the California Corporations Code and (ii) the shares of BYL Stock
that become Dissenting Shares shall not exceed 10% of the aggregate number of
issued and outstanding shares of DNBF Stock and BYL Stock.
ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF DNBF
All of the obligations of DNBF to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of the
Board of Directors of DNBF:
10.1 LEGAL OPINION. DNBF shall have received the opinion of Knecht &
Hansen, acting as counsel for BYL, dated as of the Closing Date, in
substantially the form of EXHIBIT 10.1.
10.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and conditions
of this Agreement to be complied with and performed by BYL at or before the
Closing Date shall have been complied with and performed in all material
respects and the representations and warranties of BYL contained in Article V
hereof shall have been true and correct in all material respects as of the
Effective Time, with the same effect as though such representations and
warranties had been made on and as of the Effective Time, except as otherwise
specified in, or permitted or contemplated by, this Agreement. BYL shall have
delivered certificates dated the Closing Date, signed by its President,
certifying the fulfillment of this condition.
10.3 CLOSING DOCUMENTS. BYL shall have delivered to DNBF all items
required by DNBF pursuant to Section 3.3, all of which documents shall be
properly executed and, if required by DNBF, acknowledged before a notary.
10.4 EFFECTIVE S-4 AND PROXY STATEMENT. The S-4 and Proxy Statement
shall have been approved or otherwise become effective and no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by any regulatory agency at the Closing
Date.
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10.5 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all
governmental and regulatory approvals and consents referred to in Section 9.1
and any other section of this Agreement shall have been granted without the
imposition of conditions, or with conditions subject to the approval of BYL and
DNBF, that are or would have become applicable to BYL as the Surviving
Corporation, or BOYL as the Surviving Bank, and that BYL reasonably and in good
faith concludes would materially adversely affect the financial condition or
operations of BYL or the Surviving Bank, or otherwise would be materially
burdensome; provided, however, that conditions or requirements which are imposed
on purchasers or acquired institutions by Governmental Entities in comparable
transactions shall not be deemed to be a basis for excuse of performance under
this Agreement. All actions necessary to authorize the execution, delivery and
performance of the Agreement by BYL and consummation of the Merger by BYL and
DNBF shall have been duly and validly taken by the Board of Directors of BYL and
DNBF.
10.6 THIRD PARTY CONSENTS. BYL shall have obtained all consents of
other parties to their material mortgages, notes, leases, franchises,
agreements, licenses and permits as may be necessary to permit the transactions
contemplated herein to be consummated, without default, acceleration, breach or
loss of rights or benefits thereunder.
10.7 ABSENCE OF CERTAIN CHANGES. As of the Closing Date there shall
not exist any of the following:
(i) any change(s) in the financial condition or results of operation
of BYL since December 31, 1997 which individually is or in the aggregate are
materially adverse to BYL; or
(ii) any damage, destruction, loss or event materially and adversely
affecting the properties, business or prospects of BYL on a consolidated basis.
10.8 VALIDITY OF TRANSACTIONS. The validity of all transactions
herein contemplated, as well as the form and substance of all opinions,
certificates, instruments of transfer and other documents to be delivered to
DNBF hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for DNBF.
10.9 FAIRNESS OPINION. Prior to solicitation of shareholder
approval, DNBF shall have received an opinion pursuant to Section 8.4 confirming
the fairness of the terms of the Merger from a financial perspective, and such
opinion shall not have been withdrawn prior to the Effective Time of the Merger.
10.10 APPOINTMENT OF DIRECTORS. All necessary action shall have been
taken to have Messrs. Cox, Hatcher and Fischer elected or appointed to serve,
from and after the Effective Time of the Merger and the Bank Merger, as
directors of the Surviving Company and the Surviving Bank.
10.11 NASDAQ LISTING. The shares of BYL Stock issuable pursuant to
this Agreement shall have been duly authorized for listing, subject to notice of
issuance, on Nasdaq
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National Market System or any other national exchange on which the shares of BYL
Stock may be listed.
ARTICLE XI
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BYL
All of the obligations of BYL to consummate the transactions
contemplated herein shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, or their waiver by resolution of the
Board of Directors of BYL, as appropriate:
11.1 LEGAL OPINION. BYL shall have received the opinion of
Rothgerber, Appel, Powers & Johnson LLP, acting as counsel for DNBF, dated as of
the Closing Date, in substantially the form of EXHIBIT 11.1.
11.2 CERTIFICATE OF NO DEFAULT. All covenants, terms and conditions
of this Agreement to be complied with and performed by DNBF at or before the
Closing Date shall have been complied with and performed in all material
respects and the representations and warranties of DNBF contained in Article IV
hereof shall have been true and correct in all material respects as of the
Effective Time, with the same effect as though such representations and
warranties had been made on and as of the Effective Time, except as otherwise
specified in, or permitted or contemplated by, this Agreement. DNBF shall have
delivered to BYL a certificate, dated the Closing Date, signed by the President
and Chief Financial Officer of DNBF, certifying the fulfillment of this
condition.
11.3 CLOSING DOCUMENTS. DNBF shall have delivered to BYL all items
required by BYL pursuant to Section 3.3, all of which documents shall be
properly executed and, if required by BYL, acknowledged before a notary.
11.4 EFFECTIVE S-4 AND PROXY STATEMENT. The S-4 and Proxy Statement
shall have become effective and no stop order suspending the effectiveness
thereof shall be in effect and no proceedings therefor shall be pending or
threatened by the SEC, FDIC, the Commissioner, the FRB or any blue sky authority
at the Closing Date.
11.5 DNBF SHAREHOLDERS AGAINST MERGER. DNBF shareholders voting
against the Merger or DNBF shareholders giving notice in writing to DNBF at or
before DNBF's meeting that such shareholder dissents from the Merger, and the
DNBF shares of such shareholder are Perfected Dissenting Shares, on a combined
basis, shall hold not more than five percent (5%) of the outstanding shares of
DNBF.
11.6 REGULATORY APPROVALS AND RELATED CONDITIONS. Any and all
governmental and regulatory approvals and consents referred to in Section 9.1
and any other section of this Agreement shall have been granted without the
imposition of conditions, or with conditions subject to the approval of BYL,
that are or would have become applicable to BYL or the Surviving Bank and that
BYL reasonably and in good faith concludes would materially adversely
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affect the financial condition or operations of BYL or the Surviving Bank, or
otherwise would be materially burdensome; provided, however, that conditions or
requirements which are imposed on purchasers or acquired institutions by
Governmental Entities in comparable transactions shall not be deemed to be a
basis for excuse of performance under this Agreement.
11.7 THIRD PARTY CONSENTS. BYL shall have obtained all consents of
other parties to DNBF's material mortgages, notes, leases, franchises,
agreements, licenses and permits as may be necessary to permit the transactions
contemplated herein to be consummated, without default, acceleration, breach or
loss of rights or benefits thereunder.
11.8 ABSENCE OF CERTAIN CHANGES. As of the Effective Time of the
Merger there shall not exist any of the following: (i) any change(s) in the
consolidated financial condition, or results of operation of DNBF since December
31, 1997, which individually is or in the aggregate are materially adverse to
DNBF; (ii) any damage, destruction, loss or event materially and adversely
affecting the properties, business or prospects of DNBF; or (iii) any material
adverse change in the deposit structure of DNBF from the date of this Agreement
to the Closing Date.
11.9 TERMINATION OF DNBF STOCK OPTION PLAN, AND OFFICERS AND
EMPLOYEES. DNBF shall have caused DNBF's Stock Option Plan, and used its best
efforts to cause any outstanding DNBF Option not exercised, to be terminated as
of or prior to the Effective Time of the Merger and shall have obtained the
consents or agreements specified in, and otherwise shall have complied with the
terms of, Section 6.10. Pursuant to California Law and its employment policies
and practices, DNBF shall have complied with Section 6.11 of this Agreement as
of the Effective Time of the Merger.
11.10 DIRECTOR AGREEMENTS. Pursuant to Section 2.9, concurrently
with the execution of this Agreement, each director of DNBF shall enter into
separate agreements with BYL in the form attached hereto as EXHIBIT "B".
11.11 TERMINATION OF CONTRACTS. Pursuant to Section 6.12, DNBF and
BYL shall have terminated all contracts, commitments or understandings as
defined in Section 4.12(v) for the future purchase of materials, supplies,
services, merchandise or equipment, the price of which exceeds $2,500. All such
contracts to be terminated will be identified no later than five (5) business
days before the Determination Date. DNBF and BYL will each pay one-half the
amounts required for terminating any such contracts, and such amounts will be
accrued and deducted from retained earnings of DNBF and BYL, as appropriate,
prior to the Determination Date. Before the Determination Date prior to the
Closing Date, DNBF shall have paid, or set-up adequate accruals for the payment
of all material expenses that DNBF shall be liable for up to the Closing Date,
including, but not limited to, all accounting and attorney fees in connection
with this Agreement.
11.12 VALIDITY OF TRANSACTIONS. The validity of all transactions
herein contemplated, as well as the form and substance of all opinions,
certificates, instruments of transfer and other documents to be delivered to BYL
hereunder, shall be subject to the approval, to be reasonably exercised, of
counsel for BYL.
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11.13 EMPLOYEE BENEFIT PLANS. BYL shall have received satisfactory
evidence that (i) all of DNBF's employee benefit plans, programs and
arrangements, have been terminated on terms and conditions satisfactory to BYL,
and (ii) all benefits payable under such plans, programs and arrangements have
been paid.
11.14 FAIRNESS OPINION. Prior to commencement of the solicitation of
shareholders of BYL and DNBF, BYL shall have received an opinion concerning the
fairness of the terms of the Merger to the shareholders of BYL from a financial
point of view.
11.15 S-4, PROXY STATEMENT AND REGULATORY APPLICATIONS. DNBF shall
have provided such information as deemed necessary by BYL in connection with the
S-4, the Proxy Statement and any other regulatory applications including but not
limited to, certificates of its officers and directors attesting to, among other
things, the truthfulness and correctness of the representations contained in
this Agreement, opinions of legal counsel and comfort letters from DNBF's
accountants.
11.16 BYL WARRANT AGREEMENT. Concurrently with the execution of this
Agreement, DNBF shall have executed and delivered to BYL the BYL Warrant and the
BYL Warrant Agreement.
11.17 INSURANCE COVERAGE. DNBF shall have obtained (i) coverage for
a period of 18 months following the Effective Time of the Merger for the
directors and officers of DNBF and DANB under a directors' and officers'
liability insurance policy covering acts or omissions occurring prior to the
Effective Time of the Merger, and (ii) coverage for a period of at least 18
months following the Effective Time under a bankers' blanket bond which is no
less protective in terms of coverage or limitations than possessed by DNBF and
DANB prior to the effective Time of the Merger which covers losses incurred
prior to the Effective Time and actions related to this Agreement.
11.18 BLUE SKY MATTERS. The issuance of the BYL Stock in the Merger
shall have been qualified or registered with the appropriate Governmental Entity
under state securities or Blue Sky laws, and such qualification or registrations
are in effect on the Closing Date.
ARTICLE XII
DISSENTING SHAREHOLDERS
Following the completion of the Conversion, any BYL or DNBF
shareholder who lawfully dissents shall be entitled to receive cash for the fair
market value of his shares determined in accordance with Section 1300.
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ARTICLE XIII
EXPENSES
13.1 EXPENSES. All fees and out-of-pocket expenses incurred in
connection with the transactions contemplated by this Agreement shall be paid by
the party incurring such expenses, except that BYL and DNBF shall each pay
one-half the costs and expenses of the preparation of the S-4 and Proxy
Statement.
ARTICLE XIV
TERMINATION
14.1 TERMINATION OF THIS AGREEMENT.
(a) Notwithstanding that this Agreement and the Agreement of Merger
may have already been approved by shareholders of one or both of the constituent
entities to the transactions contemplated by this Agreement, this Agreement may
be terminated prior to the Effective Time of the Merger:
(i) by mutual agreement of the parties, in writing;
(ii) by (A) BYL immediately upon the expiration of 30 days from
the date that BYL has given notice to DNBF of a material breach or default by
DNBF in the performance of any covenant, agreement, representation, warranty,
duty or obligation hereunder or (B) DNBF immediately upon the expiration of 30
days from the date that DNBF has given notice to BYL of a breach or default by
BYL in the performance of any covenant, agreement, representation, warranty,
duty or obligation hereunder, which termination shall be effective immediately
unless (unless otherwise agreed) within such 30 day period, the breaching or
defaulting party shall have substantially corrected and cured the grounds for
the termination as set forth in said notice of termination;
(iii) by BYL or DNBF if any governmental or regulatory authority
denies or refuses to grant the approvals, consents or authorizations required to
be obtained, or if any governmental or regulatory authority approves the
transaction covered and contemplated by this Agreement upon conditions not
reasonably acceptable to BYL, in order to consummate the transactions covered
and contemplated by this Agreement. If any regulatory application filed
pursuant to this Agreement hereof should be finally denied or disapproved by the
respective regulatory authority, then this Agreement thereupon shall be deemed
terminated and canceled; provided, however, that a request for additional
information or undertaking by BYL, as a condition for approval, shall not be
deemed to be a denial or disapproval so long as BYL diligently provides the
requested information or undertaking. In the event an application is denied
pending an appeal, petition for review, or similar such act on the part of BYL
(hereinafter referred to as the "appeal") then the application will be deemed
denied unless BYL prepares and timely
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files such appeal and continues the appellate process for purposes of obtaining
the necessary approval.
(iv) by BYL or DNBF if (A) the Board of Directors of DNBF
approves a transaction (or DNBF executes a letter of intent or other agreement)
pursuant to which any person or entity or related group of persons or entities
acquires, directly or indirectly, record or beneficial ownership (as defined in
Rule 13d3 promulgated by the SEC pursuant to the Exchange Act) or control of 10%
or more of the outstanding shares of DNBF Common Stock or other securities of
DNBF; (B) any person or entity or related group of persons or entities seeks to
acquire 10% or more of the outstanding shares of DNBF Common Stock by tender
offer or otherwise, and the Board of Directors of DNBF does not advise DNBF's
shareholders that the Board does not support such tender offer or acquisition
and that it supports the Merger; (C) if DNBF violates its covenant pursuant to
Section 6.2 (xxiii) and (xxiv); or (D) the Merger does not receive the requisite
approval of DNBF's or BYL's shareholders.
(v) by DNBF, if any of the conditions set forth in Article X
shall not have been met, by BYL if any of the conditions set forth in Article XI
shall not have been met, or by DNBF or BYL, if any conditions set forth in
Article IX have not been met by September 30, 1998, or such earlier time as it
becomes apparent that such conditions cannot be met.
(vi) by DNBF if the Average Price of BYL Stock exceeds 135% of
the Stipulated BYL Share Value, or $25.31; by BYL if the Average Price of BYL
Stock is less than 65% of the Stipulated BYL Share Value, or $12.19.
(b) TERMINATION DATE. This Agreement shall be terminated if the
Closing Date shall not have occurred by September 30, 1998, unless extended in
writing by the parties.
(c) REGULATORY ENFORCEMENT MATTERS. In the event that DNBF or BYL or
any of their respective subsidiaries shall, after the date of this Agreement,
become a party or subject to any new or amended written agreement, memorandum of
understanding, cease and desist order, imposition of civil money penalties or
other regulatory enforcement action or proceeding with any federal or state
agency charged with the supervision or regulation of banks or bank holding
companies which is material to DNBF or BYL and their respective subsidiaries
taken as a whole, then either BYL or DNBF may terminate this Agreement.
(d) Notwithstanding anything to the contrary contained herein:
(i) If this Agreement is terminated by DNBF before the Closing
Date pursuant to Sections 14.1(a)(ii)(B), BYL shall pay to DNBF, as reasonable
and full liquidated damages and reasonable compensation for the loss sustained
thereby and not as a penalty or forfeiture, the direct expenses incurred by DNBF
in connection with the transaction contemplated by this Agreement, plus 20% of
such expenses, within ten (10) business days of such termination; and
(ii) If this Agreement is terminated by BYL before the Closing
Date pursuant to Sections 14.1(a)(ii)(A) hereof, DNBF shall pay to BYL, as
reasonable and full liquidated
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damages and reasonable compensation for the loss sustained thereby, and not as a
penalty or forfeiture, the direct expenses incurred by BYL in connection with
the transaction contemplated by this Agreement, plus 20% of such expenses,
within ten (10) business days of such termination.
(iii) If this Agreement is terminated by BYL before the Closing
pursuant to Section 14.1(a)(iv) hereof, DNBF will pay to BYL, as reasonable and
full liquidated damages and reasonable compensation for the loss sustained
thereby, and not as a penalty or forfeiture, the direct expenses incurred by
DNBF in connection with the transaction contemplated by this Agreement, plus 20%
of such expenses, within ten (10) business days of such termination.
ARTICLE XV
GENERAL PROVISIONS
15.1 CONFIDENTIALITY. All Confidential Information disclosed
heretofore or hereafter by any Party to this Agreement to any other Party to
this Agreement shall be kept confidential by such other Party and shall not be
used by such other Party otherwise than as herein contemplated, except to the
extent that (a) it is necessary or appropriate to disclose to the jurisdiction
over DNBF or BYL or as may otherwise be required by Rule (any disclosure of
Confidential Information to a Governmental Entity shall be accompanied by a
request that such Governmental Entity preserve the confidentiality of such
Confidential Information); or (b) to the extent such duty as to confidentiality
is waived by the other Party. Such obligation as to confidentiality and non-use
shall survive the termination of this Agreement pursuant to Article 10. In the
event of such termination and on request of another Party, each Party shall use
all reasonable efforts to (y) return to the other Parties all documents (and
reproductions thereof) received form such other Parties that contain
Confidential Information (and, in the case of reproductions, all such
reproductions made by the receiving Party); and (z) destroy the originals and
all copies of any analyses, computations, studies or other documents prepared
for the internal use of such Party that include Confidential Information, unless
otherwise advised by counsel in connection with any controversy under the
Agreement.
15.2 PUBLICITY. The Parties shall coordinate all publicity relating
to the transactions contemplated by this Agreement, and no Party shall issue any
press release, publicity statement, shareholder communication or other public
notice relating to this Agreement or any of the transactions contemplated hereby
without obtaining the prior consent of the Parties except to the extent that
independent legal counsel to the Parties, as the case may be, shall deliver a
written opinion to the Parties that a particular action is required by
applicable Rules. The parties hereby agree that all public statements after the
initial press release announcing this Agreement referring to DNBF shall be made
by Mr. Neil Hatcher, and all public statements made after the initial press
release announcing this Agreement referring to BYL shall be made by Mr. Robert
Ucciferri, and both parties agree that all public statements shall be made by
mutual agreement, if possible.
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15.3 INDEMNIFICATION.
(a) DNBF agrees to defend, indemnify and hold harmless BYL, its
officers and directors, attorneys, and each person who controls BYL within the
meaning of the Securities Act from and against any costs, damages, liability and
expenses of any nature, insofar as such costs, damages, liabilities and expenses
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the S-4 and Proxy Statement, applications or
other disclosure documents or any amendments or supplements thereto, or arise
out of or are based solely upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading based upon information with respect to DNBF
furnished to BYL by or on behalf of DNBF specifically for use therein; provided,
however, that DNBF shall not be liable in any such case to the extent that any
such cost, damage, liability or expense arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in the S-4 and Proxy Statement, applications or other disclosure documents
or amendments or supplements thereto, in reliance upon and in conformity with
information with respect to BYL furnished to DNBF by or on behalf of BYL
specifically for use therein.
(b) BYL agrees to defend indemnify and hold harmless DNBF, its
officers and directors, its attorneys, accountants and each person who controls
DNBF within the meaning of the Securities Act from and against any costs,
damages, liabilities and expenses of any nature, insofar as any such costs,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact provided contained in
the S-4 and Proxy Statement, applications or other disclosure documents or any
amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make statements therein not misleading based
solely upon information with respect to BYL and its subsidiaries furnished to
DNBF by or on behalf of BYL and its subsidiaries specifically for use therein;
provided, however, that BYL will not be liable in any such case to the extent
that any such cost, damage, liability or expenses arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged omission
made in the S-4 and Proxy Statement, applications or other disclosure documents
or amendments or supplements thereto, in reliance upon and in conformity with
information with respect to DNBF furnished to BYL by or on behalf of DNBF
specifically for use therein.
(c) Promptly after receipt by any party to be indemnified pursuant to
this section ("Indemnified Party") of notice of (i) any claim or (ii) the
commencement of any action or proceeding, Indemnified Party will give the other
party "(Indemnifying Party") written notice of such claim or the commencement of
such action or proceeding. Indemnifying Party shall have the right, at its
option, to compromise or defend, by its own counsel, any such matter involving
Indemnified Party's asserted liability, at the expense of the Indemnifying
Party. In the event that Indemnifying Party shall undertake to compromise or
defend any such asserted liability, it shall promptly notify Indemnified Party
of its intention to do so, and Indemnified Party agrees to cooperate fully with
Indemnifying Party and its counsel in the compromise of, or defense against, any
such asserted liability. In any event, Indemnifying Party shall have the right
to participate in the defense of such asserted liability.
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15.4 NOTICES. All notices, demands or other communications hereunder
shall be in writing and be made by (a) hand delivery; (b) overnight mail; (c)
United States mail, first class, certified or registered, postage prepaid; or
(d) facsimile transmission, and shall be deemed to have been duly given (i) on
the date of service if delivered by hand or facsimile transmission (provided
that telecopied notices are also mailed by United States mail, first class,
certified or registered, postage prepaid); (ii) on the next day if delivered by
overnight mail or delivery service; or (iii) 72 hours after mailing if mailed by
United States mail, first-class, certified or registered, postage prepaid, and
properly addressed as follows:
(a) If to DNBF:
Mr. Neil F. Hatcher
President and Chief Executive Officer
DNB Financial
7710 Limonite Avenue
Riverside, California 92509
Telecopier No.: (909) 681-4901
With copies to:
William P. Johnson, Esq.
Rothgerber, Appel, Powers & Johnson LLP
Suite 3000, One Tabor Center
1200 17th Street
Denver, Colorado 80202-5839
Telecopier No.: (303) 623-9222
(b) If to BYL:
Mr. Robert Ucciferri
President and Chief Executive Officer
BYL Bancorp
18206 Imperial Highway
Yorba Linda, California 92886
Telecopier No.: (714) 579-1195
With copies to:
Loren P. Hansen, Esquire
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
Telecopier No.: (714) 851-1732
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The persons or addresses to which mailings or deliveries shall be made may
change from time to time by notice given pursuant to the provisions of this
Section 15.4.
15.5 SUCCESSORS AND ASSIGNS. Subject to Section 7.10 and 15.3, all
terms and provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective transferees, successors and
assigns; provided, however, that, except as otherwise contemplated herein, this
Agreement and all rights, privileges, duties and obligations of the parties
hereto may not be assigned or delegated by any party hereto without the prior
written consent of the other party to this Agreement and any purported
assignment in violation of this Section 15.5 shall be null and void.
15.6 THIRD PARTY BENEFICIARIES. Except as provided in Section 7.10,
each party hereto intends that this Agreement shall not benefit, or create any
right or cause of action in or on behalf of, any person other than the parties
hereto. As used in this Agreement, the term "party" or "parties" shall refer
only to BYL, BOYL, DNBF and DANB or any of them.
15.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
15.8 GOVERNING LAW. This Agreement is made and entered into in the
State of California and the laws of the State of California shall govern the
validity and interpretation hereof and the performance of the parties hereto of
their respective duties and obligations hereunder.
15.9 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
15.10 WAIVER AND MODIFICATION. No waiver of any term, provision or
condition of this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such term, provision or condition of this Agreement. This Agreement and
the Agreement of Merger, when executed and delivered, may be modified or amended
by action of the Board of Directors of BYL and DNBF without action by their
respective shareholders to the extent permitted by law. This Agreement may be
modified or amended only by an instrument of equal formality signed by the
parties of their duly authorized agents.
15.11 ATTORNEYS' FEES. In the event either of the parties to this
Agreement brings an action or suit against the other party by reason of any
breach of any covenant, agreement, representation, warranty or other provision
hereof, or any breach of any duty or obligation created hereunder by such other
party, the prevailing party, as determined by the court or other body having
jurisdiction, shall be entitled to have and recover of and from the losing
party, as determined by the court or other body have jurisdiction, all
reasonable costs and expenses incurred or sustained by such prevailing party in
connection with such suit or action, including, without limitation, legal fees
and court costs (whether or not taxable as such).
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15.12 ENTIRE AGREEMENT. The making, execution and delivery of this
Agreement by the parties hereto have not been induced by any representations,
statements, warranties or agreements other than those herein expressed. This
Agreement embodies the entire understanding of the parties and there are no
further or other agreements or understandings, written or oral, in effect
between the parties relating to the subject matter hereof, unless expressly
referred to by reference herein.
15.13 SEVERABILITY. Whenever possible, each provision of this
Agreement and every related document shall be interpreted in such manner as to
be valid under applicable law. However, if any provision of any of the
foregoing shall be invalid or prohibited under said applicable law, it shall be
construed, interpreted and limited to effectuate its purpose to the maximum
legally permissible extent. If it cannot be so construed and interpreted so as
to be valid under such law, such provision shall be ineffective to the extent of
such invalidity or prohibition without invalidating the remainder of such
provision or the remaining provisions of this Agreement, and this Agreement
shall be construed to the maximum extent possible to carry out its terms without
such invalid or unenforceable provision or portion thereof.
15.14 EFFECT OF DISCLOSURE. Any list, statement, document, writing
or other information set forth in, referenced to or attached to any schedule or
exhibit delivered pursuant to any provision of this Agreement shall be deemed to
constitute disclosure for purposes of any other schedule or exhibit required to
be delivered pursuant to any other provision of this Agreement.
15.15 KNOWLEDGE. Whenever any statement herein or in any schedule,
exhibit, certificate or other documents delivered to any party pursuant to this
Agreement is made "to the knowledge" or "to the best knowledge" of any party or
other person, such party or other person, who shall be an officer of a party,
shall make such statement only after conducting an investigation which such
person determines in good faith to be reasonable under the circumstances of the
subject matter thereof, and each such statement shall constitute a
representation that such investigation has been conducted.
15.16 TERMINATION OF REPRESENTATION, WARRANTIES AND COVENANTS. The
representations, warranties and covenants of each party contained herein or in
any certificate or other writing delivered by such party pursuant hereto or in
connection herewith shall not survive the Merger other than those provided for
in Sections 8.8, 13.1, 14.1(d), 15.1, 15.3, 15.11 and 15.12 which shall survive
a termination.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
BYL BANCORP
By: /s/ H. Rhoads Martin, Jr.
----------------------------
H. Rhoads Martin, Jr.
Chairman of the Board
By: /s/ Robert Ucciferri
----------------------------
Robert Ucciferri
President and Chief Executive Officer
By: /s/ Barry J. Moore
----------------------------
Barry J. Moore
Assistant Secretary
BANK OF YORBA LINDA
By: /s/ H. Rhoads Martin, Jr.
----------------------------
H. Rhoads Martin, Jr.
Chairman of the Board
By: /s/ Robert Ucciferri
----------------------------
Robert Ucciferri
President and Chief Executive Officer
By: /s/ Barry J. Moore
----------------------------
Barry J. Moore
Assistant Secretary
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DNB FINANCIAL
By: /s/ Neil F. Hatcher
--------------------------------
Neil F. Hatcher
President, Chief Executive Officer,
and Director
By: /s/ Richard T. Anderson, Esq.
--------------------------------
Richard T. Anderson, Esq.
Director
By: /s/ Henry C. Cox II
--------------------------------
Henry C. Cox II
Director
By: /s/ James F. Davidson
--------------------------------
James F. Davidson
Director
By: /s/ Eddie Fischer
--------------------------------
Eddie Fischer
Director
By: /s/ Donald D. Galleano
--------------------------------
Donald D. Galleano
Director
By: /s/ Ralph R. Neilson
--------------------------------
Ralph R. Neilson
Director
By: /s/ Marjorie R. Steinbrinck
--------------------------------
Marjorie R. Steinbrinck
Director
By: /s/ John L. West
--------------------------------
John L. West
Director
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DE ANZA NATIONAL BANK
By: /s/ Neil F. Hatcher
--------------------------------
Neil F. Hatcher
President, Chief Executive Officer,
and Director
By: /s/ Richard T. Anderson, Esq.
--------------------------------
Richard T. Anderson, Esq.
Director
By: /s/ Henry C. Cox II
--------------------------------
Henry C. Cox II
Director
By: /s/ James F. Davidson
--------------------------------
James F. Davidson
Director
By: /s/ Eddie Fischer
--------------------------------
Eddie Fischer
Director
By: /s/ Donald D. Galleano
--------------------------------
Donald D. Galleano
Director
By: /s/ Ralph R. Neilson
--------------------------------
Ralph R. Neilson
Director
By: /s/ Marjorie R. Steinbrinck
--------------------------------
Marjorie R. Steinbrinck
Director
By: /s/ John L. West
--------------------------------
John L. West
Director
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FIRST AMENDMENT TO AGREEMENT AND
PLAN OF REORGANIZATION
This FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (the
"First Amendment") is dated as of February 25, 1998 and entered into by BYL
Bancorp, a California corporation ("BYL"), DNB Financial ("DNBF"), Bank of Yorba
Linda ("BOYL") and De Anza National Bank ("DANB").
WHEREAS, BYL, DNBF, BOYL and DANB entered into an Agreement and Plan
of Reorganization dated as of January 29, 1998 (the "Agreement"); and
WHEREAS, the parties have agreed to eliminate the requirement for an
extension of the DANB Banker's Blanket Bond; and
WHEREAS, the parties hereto desire to amend the Agreement as provided
in this First Amendment to take into account such matters.
NOW, THEREFORE, in consideration of the premises and mutual promises
of the parties set forth below, the parties hereto agree as follows:
1. Capitalized terms used herein and not otherwise defined shall
have the same meaning as set forth in the Agreement.
2. Section 6.25 of the Agreement is hereby amended to read in its
entirety as follows:
"6.25 INDEMNIFICATION AND INSURANCE. DNBF at its expense shall
maintain in effect policies of directors' and officers' liability insurance for
a period of 18 months with respect to all matters arising from facts or events
which occurred before the Effective Time of the Merger for which DNBF would have
had an obligation to indemnify its directors and officers."
3. Section 11.17 of the Agreement is hereby amended to read in its
entirety as follows:
"11.17 INSURANCE COVERAGE. DNBF shall have obtained coverage
for a period of 18 months following the Effective Time of the Merger for the
directors and officers of DNBF and DANB under a directors' and officers'
liability insurance policy covering acts or omissions occurring prior to the
Effective Time of the Merger."
4. This First Amendment may be entered into in one or more
counterparts, all of which shall be considered one in the same instrument, and
shall become effective when one or more counterparts have been signed by each of
the
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parties and delivered to the other party, it being understood that all parties
need not sign the same counterpart.
6. Except as herein amended, the Agreement shall remain in full force
and effect.
7. This First Amendment shall be governed by and construed in
accordance with the laws of the State of California, except where inconsistent
with the National Bank Act and in that case, the National Bank Act shall govern
the validity and interpretation hereof and the performance of the parties hereto
of their respective duties and obligations hereunder.
8. The execution and delivery of this First Amendment by the officers
executing the First Amendment have been duly authorized by the Boards of
Directors of BYL, DNBF, BOYL and DANB, and this First Amendment constitutes a
legal, valid and binding agreement of the parties in accordance with its
respective terms.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
BYL BANCORP
By: /s/ Robert Ucciferri
-------------------------------
Robert Ucciferri
President and Chief Executive Officer
By: /s/ Barry J. Moore
--------------------------------
Barry J. Moore
Assistant Secretary
BANK OF YORBA LINDA
By: /s/ Robert Ucciferri
--------------------------------
Robert Ucciferri
President and Chief Executive Officer
<PAGE>
By: /s/Barry J. Moore
--------------------------------
Barry J. Moore
Assistant Secretary
DNB FINANCIAL
By: /s/Gloria Van Kampen
--------------------------------
Gloria Van Kampen
Executive Vice President
DE ANZA NATIONAL BANK
By: /s/Gloria Van Kampen
--------------------------------
Gloria Van Kampen
Executive Vice President
<PAGE>
APPENDIX D
FAIRNESS OPINION OF HOEFER & ARNETT
<PAGE>
[LETTERHEAD]
January 27, 1998
Members of the Board of Directors
DNB Financial
7710 Limonite Avenue
Riverside, CA 92509
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from
a financial point of view, to the shareholders of DNB Financial, Riverside,
California ("DNB") of the terms of the proposed merger of DNB with and into
BYL Bancorp, Yorba Linda, California ("BYL") as defined in the Agreement and
Plan of Merger, to be executed on January 29, 1998 (the "Agreement").
Pursuant to the Agreement and subject to the terms and conditions therein,
each share of DNB Stock issued and outstanding immediately prior to the
Effective Time of the Merger shall, on and at the Effective Time of the
Merger, pursuant to the Agreement and without any further action on the part
of DNB or the holders of DNB stock, be cancelled and cease to be an issued
and outstanding share of DNB Stock, and shall be exchanged for and converted
into the right to receive BYL Stock equal to the quotient of (a) the DNB
Transaction Price Per Share (as defined in the agreement), divided by (b) the
Stipulated BYL Share Value or Adjusted BYL Share Value (also defined in the
Agreement). The DNB Aggregate Transaction Value will be the sum of the
following: (i) 2.7 times the DNB Aggregate Book Value as of September 30,
1997; (ii) the net proceeds received by DNB from the exercise of 22,500 DNB
Options; and (iii) 1.5 times the change in net retained earnings of DNB from
September 30, 1997 until the Determination Date. The Stipulated BYL Share
Value is $18.75. The Adjusted BYL Share Value will be calculated only if the
Average Price of BYL Stock is more than $22.50 or less than $15.00.
As part of its investment banking business, Hoefer & Arnett, Incorporated is
continually engaged in the valuation of bank, bank holding company and thrift
securities in connection with mergers and acquisitions nationwide. We have
not previously provided investment banking and financial advisory services to
DNB.
In arriving at our opinion, we have reviewed and analyzed, among other
things, the following: (i) a draft of the Agreement; (ii) Annual Reports to
Shareholders of DNB and BYL for the years ended December 31, 1996 and
December 31, 1995; (iii) Quarterly FDIC Call reports
<PAGE>
[LETTERHEAD]
for the quarters ended December 31, 1997, September 30, 1997, June 30, 1997,
March 31, 1997 and December 31, 1996; (iv) certain other publicly available
financial and other information concerning DNB and BYL; and (v) publicly
available information concerning other banks and holding companies, the
trading markets for their securities and the nature and terms of certain
other merger transactions we believe relevant to our inquiry. We have held
discussions with senior management of DNB and BYL concerning their past and
current operations, financial condition and prospects, as well as the results
of regulatory examinations.
We have reviewed with senior management of DNB earnings projections for 1998
through 2002 for DNB as a stand-alone entity, assuming the merger does not
occur, prepared by DNB. We reviewed with senior management of BYL earnings
projections for 1998 through 2002 for BYL as a stand-alone entity, assuming
the merger does not occur, as well as projected operating cost savings and
earnings enhancement opportunities expected to be achieved in each such years
resulting from the merger. Certain pro forma financial projections for the
combined entity were derived by us based partially upon the projections
discussed above, as well as our own assessment of general economic, market
and financial conditions. In certain cases, such combined pro forma
financial projections included projected operating cost savings and earnings
enhancement opportunities derived by us partially based upon the projections
discussed above to be realizable in the merger.
In conducting our review and in arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of the same. We have relied upon
the managements of DNB and BYL as to the reasonableness of the financial and
operating forecasts, projections and projected operating cost savings and
earnings enhancement opportunities (and the assumptions and bases therefor)
provided to us, and we have assumed that such forecasts, projections and
projected operating cost savings and earnings enhancement opportunities
reflect the best currently available estimates and judgments of the
applicable managements. We have also assumed, without assuming any
responsibility for the independent verification of the same, that the
aggregate allowances for loan losses for DNB and BYL are adequate to cover
such losses. We have not made or obtained any evaluations or appraisals of
the property of DNB or BYL, nor have we examined any individual loan credit
files. For purposes of this opinion, we have assumed that the merger will
have the tax, accounting and legal effects described in the Agreement and
assumed the accuracy of the disclosures set forth in the Agreement. Our
opinion as expressed herein is limited to the fairness, from a financial
point of view, to the holders of the Common Shares of DNB of the terms of the
proposed merger of DNB with and into BYL and does not
<PAGE>
[LETTERHEAD]
address DNB's underlying business decision to proceed with the merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following:
(i) the historical and current financial position and results of operations
of DNB and BYL, including interest income, interest expense, net interest
income, net interest margin, provision for loan losses, non-interest income,
non-interest expense, earnings, dividends, internal capital generation, book
value, intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
DNB and BYL; (ii) the assets and liabilities of DNB and BYL, including the
loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (iii)
the nature and terms of certain other merger transactions involving banks and
bank holding companies. We have also taken into account our assessment of
general economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of the banking industry generally. Our opinion is necessarily
based upon conditions as they exist and can be evaluated on the date hereof
and the information made available to us through the date hereof.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the terms of proposed merger of DNB with
and into BYL are fair, from a financial point of view, to the holders of the
Common Shares of DNB.
It is understood that this letter is for the information of the Board of
Directors of DNB and does not constitute a recommendation to the Board of
Directors or to any shareholder of DNB with respect to any approval of the
merger. We hereby consent to the reference to our firm in the proxy
statement or prospectus related to the merger transaction and to the
inclusion of our opinion as an exhibit to the proxy statement or prospectus
related to the merger transaction.
Respectfully Submitted,
/s/ Hoefer & Arnett, Incorporated
Hoefer & Arnett, Incorporated
<PAGE>
APPENDIX E
FAIRNESS OPINION OF RYAN, BECK & CO.
<PAGE>
D R A F T
___________, 1998
The Board of Directors
BYL Bancorp
18206 Imperial Highway
Yorba Linda, California 92886
Members of the Board:
BYL Bancorp ("BYL") and DNB Financial ("DNBF") have entered into an Agreement
and Plan of Merger dated January 29, 1998 (the "Agreement"). Pursuant to the
Agreement, among other things, DNBF shall merge with and into BYL (the
"Merger"), and each share of DNBF's issued and outstanding common stock will be
converted into shares of BYL's common stock in accordance with the Exchange
Ratio.
The Exchange Ratio shall equal the quotient of the DNBF Transaction Price Per
Share divided by the Stipulated BYL Share Value ($18.75) or, if adjusted, by the
Adjusted BYL Share Value. The DNBF Transaction Price Per Share shall equal the
quotient of (A) the sum of (i) $6,911,426; (ii) the net proceeds received by
DNBF from the exercise of DNBF stock options subsequent to September 30, 1997
and prior to the end of the month prior to the closing date; and (iii) 1.5 times
the change in net retained earnings of DNBF between September 30, 1997 and the
end of the month prior to the closing date, and (B) the issued and outstanding
shares of DNBF common stock on the closing date up to a maximum of 232,423
shares. If the Average Price of BYL Stock (the average closing price of BYL
common stock for the twenty consecutive trading days immediately preceding the
three trading days prior to the closing date) is more than $22.50 or less than
$15.00, the Stipulated BYL Share Value shall be adjusted with such adjustment
equaling one half the difference between the Average Price of BYL Stock and
$18.75 per share (the "Adjusted BYL Share Value"); therefore, if the Average
Price of BYL Stock is $23.50, then the Adjusted BYL Share Value would be
$21.125, and if the Average Price of BYL Stock is $14.00, then the Adjusted BYL
Share Value would be $16.375. The Agreement may be terminated by DNBF if the
Average Price of BYL Stock exceeds $25.31 and by BYL if the Average Price of BYL
Stock is less than $12.19.
Based upon a pro forma calculation of the estimated DNBF Transaction Price Per
Share assuming a closing date in April 1998 and a Stipulated BYL Share Value of
$18.75, the Exchange Ratio would be 4.5413 shares of BYL common stock to be
exchanged for each share of DNBF common stock.
<PAGE>
BYL Bancorp
___________, 1998
Page 2
You have requested our opinion as to whether the Exchange Ratio in the Merger is
fair, from a financial point of view, to the holders of BYL Common Stock. We
have assumed that the Merger will be accounted for as a pooling of interests
transaction by BYL.
Ryan, Beck & Co., as a customary part of its investment banking business, is
engaged in the valuation of banking and savings institutions and their
securities in connection with mergers and acquisitions. In conducting our
investigation and analysis of this transaction, we have met separately with
members of senior management of BYL and DNBF to discuss their respective
operations, historical financial statements, strategic plans and future
prospects. We have reviewed and analyzed material prepared in connection with
the Merger, including but not limited to the following: (i) the Merger Agreement
and related documents; (ii) the Joint Proxy Statement / Prospectus; (iii) BYL's
Annual Report to Shareholders and Annual Report on Form 10-K for the year ended
December 31, 1996, BYL's Quarterly Reports on Form 10-Q for the periods ended
March 31, June 30, and September 30, 1997, and BYL's preliminary financial
statements for the fiscal year ended December 31, 1997; (iv) DNBF's Annual
Reports to Shareholders, regulatory financial reports and audited financial
statements for the years ended December 31, 1994, 1995, and 1996, DNBF's
quarterly financial statements and regulatory financial reports for the periods
ended March 31, June 30, and September 30, 1997 and DNBF's preliminary financial
statements for the fiscal year ended December 31, 1997; (v) certain operating
and financial information provided to us by the managements of BYL and DNBF
relating to their business and prospects; (vi) the historical stock prices and
trading volume of BYL's Common Stock; (vii) the publicly available financial
data of commercial banking organizations which Ryan, Beck deemed generally
comparable to BYL; (viii) the publicly available financial data of commercial
banking organizations which Ryan, Beck deemed generally comparable to DNBF; and
(ix) the terms of recent acquisitions of commercial banking organizations which
Ryan, Beck deemed generally comparable to DNBF. We also conducted or reviewed
such other studies, analyses, inquiries and examinations as we deemed
appropriate. Ryan, Beck as part of its review of the Merger also analyzed BYL's
ability to consummate the Merger.
While we have taken care in our investigation and analyses, we have relied upon
and assumed the accuracy, completeness and fairness of the financial and other
information provided to us by the respective institutions or which was publicly
available and have not assumed any responsibility for independently verifying
such
<PAGE>
BYL Bancorp
___________, 1998
Page 3
information. We have also relied upon the managements of BYL and DNBF as to the
reasonableness and achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to us and in
certain instances we have made certain adjustments to such financial and
operating forecasts which in our judgment were appropriate under the
circumstances. In addition, we have assumed with your consent that such
forecasts and projections reflect the best currently available estimates and
judgments of the respective managements. We are not experts in the evaluation
of allowances for loan losses. Therefore, we have not assumed any
responsibility for making an independent valuation of the adequacy of the
allowances for loan losses set forth in the balance sheets of BYL and DNBF at
December 31, 1997, and we assumed such allowances were adequate and comply fully
with applicable law, regulatory policy and sound banking practice as of the date
of such financial statements. We also assumed that the Merger in all respects
is, and will be, consummated in compliance with all laws and regulations
applicable to BYL and DNBF. We have not made or obtained any independent
evaluations or appraisals of the assets and liabilities of either BYL or DNBF or
their respective subsidiaries, nor have we reviewed any individual loan files of
BYL, DNBF or their respective subsidiaries.
In conducting our analysis and arriving at our opinion as expressed herein, we
have considered such financial and other factors as we have deemed appropriate
in the circumstances. In rendering our opinion, we have assumed that in the
course of obtaining the necessary regulatory approvals for the Merger, no
conditions will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger to BYL.
Our opinion is necessarily based on economic, market and other conditions and
projections as they exist and can be evaluated on the date hereof. Ryan, Beck
did not express any opinion as to the price or range of prices at which BYL
Common Stock might trade subsequent to the Merger.
We have been retained by the Board of Directors of BYL as an independent
contractor to act as financial advisor to BYL with respect to the Merger and
will receive a fee for our services. We have no prior relationship with DNBF.
In addition, we may actively trade equity securities of BYL and its respective
affiliates for our own account and the account of our customers, and we
therefore may from time to time hold a long or short position in such
securities.
<PAGE>
BYL Bancorp
___________, 1998
Page 4
Our opinion is directed to the Board of Directors of BYL and does not constitute
a recommendation to any shareholder of BYL as to how such shareholder should
vote at any shareholder meeting held in connection with the Merger.
Based upon and subject to the foregoing it is our opinion as investment bankers
that the Exchange Ratio in the Merger as provided and described in the Agreement
is fair to the holders of BYL Common Stock from a financial point of view.
Very truly yours,
RYAN, BECK & CO., INC.
<PAGE>
APPENDIX F
CHAPTER 13 OF THE CGCL
<PAGE>
APPENDIX F
CALIFORNIA CORPORATIONS CODE
CHAPTER 13
DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-term merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-term merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stocks split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities
exchange certified by the Commissioner of Corporations under
subdivision (o) of Section 25100 or (B) listed on the list of OTC
margin stocks issued by the Board of Governors of the Federal
Reserve System, and the notice of meeting of shareholders to act
upon the reorganization summarizes this section and Sections
1301, 1302, 1303 and 1304; provided, however, that this provision
does apply to any shares with respect to which there exists any
restrictions on transfer imposed by the corporation or by any law
or regulation; and provided, further, that this provision does
not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or
more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were
not voted in favor of reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph
(A)
<PAGE>
or (B) of paragraph (1) (without regard to the provisos in that
paragraph), were voted against the reorganization, or which were
held of record on the effective date of a short-form merger;
provided, however, that subparagraph (A) rather than subparagraph
(B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than
at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance
with Section 1301.
(4) Which the dissenting shareholder has submitted the endorsement,
in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of
record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares of cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's rights under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subsection (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares
<PAGE>
pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section
1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to vote
the fair market value of those shares as of the day before the announcement of
the proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates or appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares,
or the corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares
<PAGE>
or any interested corporation, within six months after the date on which notice
of the approval by the outstanding shares (Section 152) or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder, but not
thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholder may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting shares
is in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed, by the court, the appraisers, or a majority of them, shall make and file
a report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has intervened,
is entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys'
<PAGE>
fees, fees of expert witnesses and interest at the legal rate on judgments from
the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by
the court for the shares is more than 125 percent of the price offered by the
corporation under subdivision (a) of Section 1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in
<PAGE>
Section 1304, within six months after the date on which notice of the approval
by the outstanding shares or notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V of the Registrant's Articles of Incorporation provides that the
liability of the directors of the corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law. Article VI of
the Registrant's Articles of Incorporation provides that the corporation is
authorized to provide for the indemnification of agents (as defined in Section
317 of the California General Corporation Law) of the corporation in excess of
that expressly permitted by such Section 317 for breach of duty to the
corporation and its shareholders to the fullest extent permissible under
California law.
Article III of the Registrant's Bylaws provides, in pertinent part, that
each person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic corporation
or other entity, shall be indemnified by the Registrant to the full extent
permitted by the General Corporation Law of the State of California or any other
applicable laws. Article III also authorizes the registrant to enter into one or
more agreements with any person which provides for indemnification greater or
different than that provided for in that Article.
Both the Registrant and its proposed wholly-owned subsidiary, Bank of Yorba
Linda, have entered into indemnification agreements with their respective
officers and directors in the forms incorporated by reference as Exhibit 10.1 to
this Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted pursuant to the foregoing provisions to directors,
officers or persons controlling the Registrant, the Registrant has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in said Act and is
therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
2.1 Plan of Reorganization and Merger Agreement between BYL, BOYL and BYL
Merger Corporation in connection with the formation of BYL as a holding
company for BOYL - Annex I of Proxy Statement/Prospectus incorporated by
reference*
2.2 Agreement and Plan of Reorganization dated January 29, 1998 by and between
BYL, DNBF, BOYL and DANB -- Annex C of Joint Proxy Statement/Prospectus
incorporated by reference
3.1 Articles of Incorporation of the Registrant.*
3.2 Amendment to Articles of Incorporation of Registrant*
3.3 Bylaws of the Registrant*
4.1 Specimen Certificate evidencing shares of Registrant's Common Stock*
4.2 Stockholder Agreement Covering Issuance and Compulsory Repurchase of
Organizing Shares of Registrant in connection with the formation of BYL
as a holding company for BOYL - Annex II of Proxy Statement/Prospectus
incorporated by reference*
5.1 Opinion of Knecht & Hansen
8.1 Tax Opinion of Vavrinek, Trine, Day & Co.
10.1 Form of Indemnification Agreement*
10.2 BYL Bancorp 1997 Stock Option Plan and form of Stock Option Agreement*
10.3 Form of BYL Proxy
10.4 Form of DNBF Proxy
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.5 Employment Agreement - Mr. Robert Ucciferri*
10.6 Employment Agreement - Mr. Barry J. Moore*
10.7 Employment Agreement - Mr. Michael Mullarky*
10.8 Salary Continuation Agreement - Mr. Robert Ucciferri*
10.9 Salary Continuation Agreement - Mr. Barry J. Moore*
10.10 H&A Fairness Opinion - Appendix D of Joint Proxy Statement/Prospectus
incorporated by reference
10.11 Ryan, Beck Fairness Opinion - Appendix E of Joint Proxy Statement/
Prospectus incorporated by reference
13.1 Annual Report to Securityholders - Annual Report on Form 10-KSB at Annex A
incorporated by reference
21.1 Subsidiary of BYL Bancorp - Bank of Yorba Linda is the only subsidiary of
BYL Bancorp
23.1 Consent of Vavrinek, Trine, Day & Co.
23.2 Consent of Knecht & Hansen (included in Exhibit 5.1)
23.3 Consent of H&A
23.4 Consent of Ryan, Beck**
27 Financial Data Schedule***
</TABLE>
- ------------------------
* Filed as an exhibit to Registrant's Registration Statement (File No.
333-34995) filed on September 5, 1997, which exhibit is incorporated herein
by this reference.
** To be filed as an exhibit to the Form S-4 by pre-effective amendment.
*** Filed as an exhibit to Form 10-KSB filed on February 26, 1998.
(b) Financial Statement Schedules
All schedules are omitted because the required information is not applicable
or is included in the Financial Statements of BYL and the related notes.
(c) Not applicable.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officer and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of
II-2
<PAGE>
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Item 4 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by mans of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Yorba Linda, State of
California, on February 27, 1998.
<TABLE>
<S> <C> <C>
BYL BANCORP
a California corporation
By: /s/ ROBERT UCCIFERRI
-----------------------------------------
Robert Ucciferri, President and Chief
Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President and Chief
/s/ ROBERT UCCIFERRI Executive (Principal
- ------------------------------ Executive Officer and February 27, 1998
Robert Ucciferri Director)
Senior Executive Vice
President and Chief
/s/ BARRY J. MOORE Financial Officer
- ------------------------------ (Principal Financial February 27, 1998
Barry J. Moore Officer and Accounting
Officer)
/s/ LEONARD O. LINDBORG
- ------------------------------ Director February 27, 1998
Leonard O. Lindborg
/s/ H. RHOADS MARTIN
- ------------------------------ Chairman of the Board, February 27, 1998
H. Rhoads Martin Director
/s/ JOHN F. MYERS
- ------------------------------ Director February 27, 1998
John F. Myers
/s/ BRENT W. WAHLBERG
- ------------------------------ Director February 27, 1998
Brent W. Wahlberg
II-4
<PAGE>
EXHIBIT 5.1
OPINION OF KNECHT & HANSEN
<PAGE>
February __, 1998
Board of Directors
BYL Bancorp
18206 Imperial Highway
Yorba Linda, California 92686
Re: BYL BANCORP COMMON STOCK
Gentlemen:
We are acting as counsel for BYL Bancorp in connection with the
Registration under the Securities Act of 1933, as amended (the "Act"), of at
least 1,056,000 shares of Common Stock, no par value (the "Shares") of BYL
Bancorp, a California corporation. A registration statement on Form S-4 (the
"Registration Statement") will be filed under the Act with respect to the
offering of the shares. Based upon the examination of such instruments,
documents and records as we deem necessary, including the Registration
Statement, we are of the opinion that:
1. BYL Bancorp has been duly incorporated and is validly
existing under the laws of the State of California.
2. The shares of BYL Bancorp, to be offered by BYL Bancorp,
have been duly authorized and, when issued after such time as the
Registration Statement becomes effective under the Act, will be legally
issued, fully paid, and nonassessable under the laws of the State of
California.
Consent is hereby given to the filing of this opinion as an
Exhibit to the Registration Statement and to the reference to this firm under
the caption "Legal Opinions" in the Exhibits to the Registration Statement.
Very truly yours,
/s/ Loren P. Hansen
--------------------
Loren P. Hansen of
Knecht & Hansen
<PAGE>
Exhibit 8.1
BYL Bancorp
18206 Imperial Highway
Yorba Linda, CA 92885
DNB Financial
7710 Limonite Avenue, Suite M
Riverside, CA 92509
RE: REGISTRATION STATEMENT ON FORM S-4
BYL BANCORP
FEDERAL INCOME TAX CONSEQUENCES
----------------------------------
We have acted as accountants to BYL Bancorp and DNB Financial in connection
with the preparation of the Joint Proxy Statement included within the
Registration Statement on Form S-4, filed with the United States Securities
and Exchange Commission. In that capacity, we hereby confirm to you our
opinion as set forth under the caption "The Merger - Certain Federal Income
Tax Consequences".
We hereby consent to the use of our name in the Prospectus under the heading
"The Merger - Certain Federal Income Tax Consequences".
/s/ Vavrinek, Trine, Day & Co. LLP
February 25, 1998
Laguna Hills, California
<PAGE>
P R O X Y BYL BANCORP
ANNUAL MEETING OF SHAREHOLDERS
, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder acknowledges receipt of the Notice of Annual
Meeting of Shareholders of BYL Bancorp ("BYL") and the accompanying Joint Proxy
Statement/Prospectus dated , 1998, and revoking any proxy
heretofore given, hereby appoints Robert Ucciferri, John F. Myers, and H. Rhoads
Martin, Jr., or any one of them, with full power to act alone, my true and
lawful attorney(s), agent(s) and proxy, with full power of substitution, for me
and in my name, place and stead to vote and act with respect to all shares of
common stock of BYL which the undersigned would be entitled to vote at the
Annual Meeting of Shareholders to be held on , 1998, at 5:30 p.m.,
in the Main Lobby, Bank of Yorba Linda ("BOYL"), 18206 Imperial Highway, Yorba
Linda, California, and at any and all adjournment or adjournments thereof, with
all the powers that the undersigned would possess if personally present, as
follows:
1. APPROVAL OF MERGER AGREEMENT. To approve the Agreement and Plan of
Reorganization dated January 29, 1998, as amended (the "Agreement"), by
and among BYL, BOYL, DNB Financial ("DNBF") and De Anza National Bank
("DANB") whereby DNBF would merge with and into BYL, with BYL surviving
the Merger, and DANB will merge with and into BOYL, with BOYL surviving
the Bank Merger. Pursuant to the Agreement, each issued and outstanding
share of DNBF Common Stock will be converted into the right to receive
shares of BYL Common Stock in exchange for shares of DNBF Common Stock.
The terms and conditions of the Agreement and the formulas for
calculating the number of shares of BYL Common Stock to be issued for
each shares of DNBF Common Stock are set forth in the accompanying Joint
Proxy Statement/Prospectus dated , 1998. Approval of the
principal terms of the Agreement requires the affirmative vote of a
majority of the outstanding shares of BYL Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
2. ELECTION OF DIRECTORS.
To elect for a two (2) year term as directors the nominees set forth
below:
<TABLE>
<S> <C>
/ / FOR all nominees listed below (except as indicated to the contrary below).
/ / WITHHOLD AUTHORITY to vote for all nominees listed below.
Leonard O. Lindborg, Barry J. Moore and Brent W. Wahlberg
-------------------------------------------------------------------------------------------------------------------------
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S), WRITE THE NOMINEE(S) NAME IN THE SPACE ABOVE.)
</TABLE>
<PAGE>
3. OTHER BUSINESS.
To transact such other business as may properly come before the meeting.
Execution of this proxy confers authority to vote "FOR" each proposal listed
above unless the shareholder directs otherwise. If any other business is
presented at said meeting, this proxy shall be voted in accordance with the
recommendations of the Board of Directors. When signing as attorney, executor,
administrator, trustee or guardian, please give full title. If more than one
trustee, all should sign. All joint owners SHOULD sign.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED
PRIOR TO ITS EXERCISE.
I/We do / / or I/We do not / / expect to attend the meeting.
Dated:
---------------------------------------------------------,
1998
--------------------------------------------------------
(Number of Shares)
-------------------------------------------
Signature of Shareholder(s)
-------------------------------------------
Signature of Shareholder(s)
<PAGE>
REVOCABLE PROXY
DNB FINANCIAL
7710 LIMONITE AVENUE
RIVERSIDE, CALIFORNIA 92509
SOLICITED BY THE BOARD OF DIRECTORS FOR
SPECIAL MEETING OF SHAREHOLDERS
________, 1998
The undersigned holder of common stock of DNB Financial, a California
corporation (the "Company"), acknowledges receipt of a copy of the Notice of
Special Meeting of Shareholders dated ___________, 1998, and, revoking any proxy
heretofore given, hereby appoints Marjorie R. Steinbrinck and Donald D.
Galleano, and each of them, with full power to each of substitution as attorneys
and proxies to appear and vote all shares of common stock of the Company
registered in the name(s) of the undersigned and held by the undersigned of
record as of ________, 1998, at the Special Meeting of Shareholders of the
Company to be held at 7710 Limonite Avenue, Suite M, Riverside, California, on
Wednesday, __________, 1998, at 5:30 p.m., and at any postponements and
adjournments thereof, upon the following items as set forth in the Notice of
Special Meeting and to vote according to their discretion on all other matters
which may be properly presented for action at the meeting.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE FOLLOWING ITEM:
(1) To approve the Agreement and Plan of Reorganization dated January 29,
1998, as amended (the "Agreement"), by and among the Company, BYL
Bancorp ("BYL"), De Anza National Bank ("DANB") and Bank of Yorba
Linda ("BOYL"), whereby the Company will merge with and into BYL, with
BYL surviving the merger, and DANB will merge with and into BOYL, with
BOYL surviving the merger. Pursuant to the Agreement, the holders of
Company common stock will be entitled to receive shares of BYL common
stock in exchange for shares of Company common stock. The terms and
conditions of the Agreement and the formulas for calculating the
number of shares of BYL common stock to be received for each share of
Company common stock are set forth in the accompanying Joint Proxy
Statement/Prospectus. Approval of the Agreement requires the
affirmative vote of a majority of the outstanding shares of Company
common stock.
_____ FOR _____ AGAINST _____ ABSTAIN
(2) In their discretion, the proxy holders are authorized to vote upon
such other business as may properly come before the meeting or matters
incidental to the conduct of the meeting.
THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO ITS EXERCISE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
PROPOSAL 1. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE IT WILL BE
VOTED "FOR" PROPOSAL 1.
<PAGE>
WITNESS my hand this _____ day of _______________, 1998.
NAME AND ADDRESS OF (Please sign exactly as name appears
COMPANY SHAREHOLDER(S) hereon. When signing as attorney,
executor, administrator, trustee or
guardian, give full title as such. If
a corporation, please affix corporate
seal. If a partnership, please sign in
partnership name by authorized
persons. If joint tenants, each joint
tenant should sign.)
_______________________________________
Signature
_______________________________________
Signature if held jointly
WHETHER OR NOT YOU PLAN TO ATTEND THIS SPECIAL MEETING, PLEASE MARK, SIGN, DATE
AND RETURN THIS PROXY PROMPTLY, USING THE ENCLOSED POSTAGE-PAID ENVELOPE.
<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 (SEC) and included as
Appendix A to the Form S-4 filed by BYL Bancorp with the SEC and the
reference to our firm as experts.
We hereby also consent to the inclusion of our Independent Auditor's Report
dated January 8, 1998 (except for Note O as to which the date is January 29,
1998) regarding the consolidated balance sheets of DNB Financial and
Subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended in the Appendix B to the Form S-4 filed by BYL Bancorp with
the SEC.
VAVRINEK, TRINE, DAY & CO., LLP
February 25, 1998
Laguna Hills, California
<PAGE>
CONSENT OF HOEFER & ARNETT, INCORPORATED
In connection with the proposed merger of DNB Financial, Riverside, California
with and into BYL Bancorp, Yorba Linda, California, the undersigned, acting as
an independent financial analyst to the common shareholders of DNB Financial,
hereby consents to the reference to our firm in the proxy statement and to the
inclusion of our fairness opinion as an exhibit to the proxy statement.
February 25, 1998
/s/ Hoefer & Arnett, Incorporated
HOEFER & ARNETT, INCORPORATED
AUSTIN, TEXAS
