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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 000-23257
BYL BANCORP
CALIFORNIA 33-0755794
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1875 NORTH TUSTIN AVENUE, ORANGE, CALIFORNIA 92865
(Address of principalexecutive offices) (Zip Code)
Issuer's telephone number: (714) 685-1317
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 90days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K 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-K or any
amendment to this Form 10-K. [X]
There were 2,533,835 shares of Common Stock outstanding at March 15, 1999.
The aggregate market value of Common Stock held by non-affiliates at March
15, 1999 was approximately $30.3 million based upon the last known trade of
$14.38 per share on March 15, 1999.
Documents incorporated by reference: The proxy statement for the Annual
Meeting of Shareholders of the registrant to be held in the second quarter of
1999. Certain information therein is incorporated by reference in Part III
hereof.
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BYL BANCORP
TABLE OF CONTENTS
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PAGE
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Part I
Item 1. Business.................................................. 3
Item 2. Properties................................................ 15
Item 3. Legal Proceedings......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..... 15
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters............................... 16
Item 6. Selected Financial Data................................... 17
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation........... 18
Item 8. Financial Statements and Supplementary Data............... 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 69
Part III
Item 10. Directors and Executive Officers of the Registrant........ 69
Item 11. Executive Compensation.................................... 69
Item 12. Security Ownership of Certain
Beneficial Owners and Management.......................... 69
Item 13. Certain Relationships and
Related Transaction....................................... 69
Part IV
Item 14. Exhibits Financial Statement Schedules,
and Reports on Form 8-K ............................... 70
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PART I
ITEM 1: BUSINESS
GENERAL
BYL Bancorp (hereinafter the "Company") was incorporated under the laws of
the State of California in 1997 and commenced operations in November 1997 as
a bank holding company of Bank of Yorba Linda (the "Bank"), which changed its
name to BYL Bank Group in June 1998. 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
Federal Reserve's Board of Governors, the Company's primary regulator. As of
December 31, 1998, the Company had total assets of approximately $318
million, total deposits of $287 million and total shareholders' equity of
$26.9 million.
The Bank was incorporated under the laws of the State of California in 1979
and was licensed by the California State Banking Department, now known as of
the California Department of Financial Institutions ("DFI")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 Orange, California and operates full service branch offices located in
Yorba Linda (formerly the head office of the Bank), Costa Mesa, Huntington
Beach, Westminster, Riverside (2). and Mira Loma, California. The Bank's
principal office is located at 1875 North Tustin Avenue, Orange, California.
The Bank's Mortgage Divisions are currently located in Tustin and Diamond
Bar, California. The Bank's SBA Loan Division is currently located in Mission
Viejo, California. On March 26, 1999, the Bank closed its Laguna Hills office
and relocated the branch's assets and liabilities to its Costa Mesa office.
The Bank has notified its regulatory agencies of its intent to close one of
its Riverside offices, which is anticipated to occur in May, 1999.
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 conforming and 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.
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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 clients and the
local community; and (iii) continued expansion of the Bank, primarily in
Orange County and Riverside 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.
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 aggregate purchase
price of BOW was $6.17 million or $6.52 per share.
The Bank acquired 100% of the outstanding common stock of 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.
COMPLETION OF THE ACQUISITION OF DNB FINANCIAL
Following the receipt of all necessary regulatory approvals, the Company
completed the acquisition of DNB Financial ("DNBF") on May 29, 1998 pursuant
to the terms of the Agreement and Plan of Reorganization dated January 29,
1998 in which DNBF was merged with and into the Company, and De Anza National
Bank, the wholly-owned subsidiary of DNBF, was merged with and into the Bank.
The transaction was structured as a pooling of interests through a tax-free
exchange of the Company's shares of common stock for all outstanding shares
of DNBF's common stock.
As a result of the calculations required by the Agreement, each share of DNBF
common stock was converted into the right to receive 4.1162 shares of the
Company common stock, resulting in the issuance of 956,641 shares of Company
common stock to the shareholders of DNBF. The acquisition of DNBF by the
Company increased the total assets of the Company and its subsidiaries to
approximately $270 million and total shareholders' equity to approximately
$23 million as of the consummation of the transaction.
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SALE OF UNGUARANTEED INTERESTS IN SBA LOANS
On December 10, 1998, the Bank entered into a Pooling and Servicing Agreement
dated as of October 1, 1998 (the "Pooling Agreement") between the Bank, as
Servicer and Master Servicer, and Marine Midland Bank, as Trustee (the
"Trustee") whereby the Bank transferred certain unguaranteed interests (the
"Unguaranteed Interests") in loans (the "SBA Loans") partially guaranteed by
the U.S. Small Business Administration ("SBA") to a newly-created trust (the
"Trust") for the benefit of the SBA and the holders of certificate
representing interests in such Trust. The Trust consists of the Unguaranteed
Interests in such SBA Loans that are subject to the Pooling Agreement, and
the Trust has issued three (3) classes of certificates representing certain
fractional undivided ownership interests in the Trust. The Aggregate
principal amount of the Unguaranteed Interests delivered to the Trust on
October 31, 1998 equaled approximately $38.1 million.
Pursuant to the Pooling Agreement, the Trust issued $34.4 million aggregate
principal amount of BYL Bank Group SBA Loan-Backed Adjustable Rate
Certificate, Series 1998-1, Class A ("Class A Certificate"), $6.02 million
aggregate principal amount of BYL Bank Group SBA Loan-Backed Adjustable Rate
Certificate, Series 1998-1, Class M. ("Class M Certificate") and $2.58
million aggregate principal amount of BYL Bank Group SBA Loan-Back Adjustable
Rate Certificates, Series 198-1, Class B ("Class B Certificate").
The Class A and Class M Certificates were sold to a limited number of
"Qualified Institutional Buyers" as defined in Rule 144A under the Securities
Act of 1933, and institutional "Accredited Investors" as defined in Rule 501
under the Securities Act. Pursuant to the requirements of the SBA, the Class
B Certificate were retained by the Bank and are subordinate to the Class A
and Class M Certificates. The Class M Certificates are subordinate to the
Class A Certificates.
SUPERVISION AND REGULATION
THE COMPANY
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Federal
Reserve Board. The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the Bank Holding Company Act. The
Federal Reserve Board may conduct examinations of bank holding companies and
their subsidiaries.
The Company will be required to obtain the approval of the Federal Reserve
Board before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition of shares, the Company would own or control
more than 5% of the voting shares of such bank. Prior approval of the Federal
Reserve Board is also required for the merger or consolidation of the Company
and another bank holding company.
The Company is prohibited by the Bank Holding Company Act, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership
or control of more than 5% of the outstanding voting shares of any company
that is not a bank or bank holding company and from engaging, directly or
indirectly, in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiaries. However, the
Company may, subject to the prior approval of the Federal Reserve Board,
engage in any, or acquire shares of companies engaged in, activities that are
deemed by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
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The Company, and any subsidiaries which it may acquire or organize, are
deemed to be "affiliates" of the Company within the meaning of that term as
defined in the Federal Reserve Act. This means, for example, that there are
limitations (a) on loans by it subsidiaries to affiliates, and (b) on
investments by its subsidiaries in affiliates' stock as collateral for loans
to any borrower. The Company and its subsidiary are also subject to certain
restrictions with respect to engaging in the underwriting, public sale and
distribution of securities.
The Company and its subsidiary are prohibited from engaging in certain tie-in
arrangements in connection with an extension of credit, sale or lease of
property or furnishing of services. Section 106(b) of the Bank Holding
Company Act Amendments of 1970 generally prohibits a bank from tying a
product or service to another product or service offered by its subsidiaries,
or by any of its affiliates. Further, the Company and its subsidiary is
required to maintain certain levels of capital. See, "Effect of Governmental
Policies and Recent Legislation - Capital Standards."
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of or liquidate or divest subsidiaries or affiliates
when the Federal Reserve Board determines that the activity or the control or
the subsidiary or affiliates constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The
Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
the Company is required to file written notice and obtain approval from the
Federal Reserve Board prior to purchasing or redeeming its equity securities.
Under the Federal Reserve Board's regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe and unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving
as a source of strength to its subsidiary banks, a bank holding company
should stand ready to use available resources to provide adequate capital
funds to its subsidiary banks during periods of financial stress or adversity
and should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks. A bank
holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve Board to be an unsafe and unsound banking practice or a violation of
the Federal Reserve Board's regulations or both.
THE BANK
The Bank is extensively regulated under both federal and state law. Set forth
below is a summary description of certain laws which relate to the regulation
of the Bank. The description does not purport to be complete and is qualified
in its entirety by reference to the applicable laws and regulations.
The Bank is chartered under the laws of the State of California and its
deposits are insured by the FDIC to the extent provided by law. The Bank is
subject to the supervision of, and is regularly examined by, the DFI and the
FDIC. Such supervision and regulation include comprehensive reviews of all
major aspects of the Bank's business and condition.
Various requirements and restrictions under the laws of the United States and
the State of California affect the operations of the Bank. Federal and
California statutes 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.
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California law and regulations of the DFI authorize California licensed
banks, subject to applicable limitations and approvals of the DFI to (1)
provide real estate appraisal services, management consulting and advice
services, and electronic data processing services; (2) engage directly in
real property investment or acquire and hold voting stock of one or more
corporations, the primary activities of which are engaging in real property
investment; (3) organize, sponsor, operate or render investment advice to an
investment company or to underwrite, distribute or sell securities in
California; and (4) invest in the capital stock, obligations or other
securities of corporations not acting as insurance companies, insurance
agents or insurance brokers. In November 1988, Proposition 103 was adopted by
California voters. The DFI has established certain procedures to be followed
by banks desiring to engage in certain insurance activities.
CAPITAL STANDARDS
The Federal Reserve Board and FDIC have adopted risk-based minimum capital
guidelines (for bank holding companies and insured non-member state banks,
respectively) 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.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators
measure risk-adjusted assets, which includes off balance sheet items, against
both total qualifying capital (the sum of Tier 1 capital and limited amounts
of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of
common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and
minority interests in certain subsidiaries, less most intangible assets. Tier
2 capital may consist of a limited amount of the allowance for possible loan
and lease losses, cumulative preferred stock, long-term preferred stock,
eligible term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets is 3%. For all banking organizations 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
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the Bank's capital adequacy. A bank
with material weaknesses in its risk management process or high levels of
exposure relative to its capital will be directed by the agencies to take
corrective action. Such actions will include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
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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.
Federally supervised banks and savings associations are currently required to
report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies recently issued final rules governing banks and bank holding
companies, which became effective April 1, 1995, which limit the amount of
deferred tax assets that are allowable in computing an institutions
regulatory capital. The standard has been in effect on an interim basis since
March 1993. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year
of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of
any deferred tax in excess of this limit would be excluded from Tier 1
Capital and total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends. Under applicable
regulatory guidelines, the Bank is considered "Well Capitalized" at December
31, 1998.
On January 1, 1998, new legislation became effective which, among other
things, gave the power to the DFI to take possession of the business and
properties of a bank in the event that the tangible shareholders' equity of
the bank is less than the greater of (i) 3% of the bank's total assets or
(ii) $1,000,000.
PROMPT CORRECTIVE ACTION
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including
but not limited to those that fall below one or more prescribed minimum
capital ratios. 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, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
"Well capitalized" "Adequately capitalized"
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Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
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Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital Tier 1 risk-based capital
less than 4%; or less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
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Tangible equity to total assets less than 2%.
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An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
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.
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 acquisition; (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; (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.
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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.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators 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.
SAFETY AND SOUNDNESS STANDARDS
Effective in 1995 the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (AFDICIA). These
standards are designed to identify potential safety and soundness concerns
and ensure that action is taken to address those concerns before they pose a
risk to the deposit insurance fund. The standards relate to (i) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings;
and (vi) compensation, fees and benefits. If a federal banking agency
determines that an institution fails to meet any of these standards, the
agency may require the institution to submit to the agency an acceptable plan
to achieve compliance with the standard. In the event the institution fails
to submit an acceptable plan within the time allowed by the agency or fails
in any material respect to implement an accepted plan, the agency must, by
order, require the institution to correct the deficiency. Effective October
1, 1996, the federal banking agencies promulgated safety and soundness
regulations and accompanying interagency compliance guidelines on asset
quality and earnings standards. These new guidelines provide six standards
for establishing and maintaining a system to identify problem assets and
prevent those assets from deteriorating. The institution should (i) conduct
periodic asset quality reviews to identify problem assets; (ii) estimate the
inherent losses in those assets and establish reserves that are sufficient to
absorb estimated losses; (iii) compare problem asset totals to capital; (iv)
take appropriate corrective action to resolve problems assets; (v) consider
the size and potential risks of material asset concentrations; and (vi)
provide periodic asset reports with adequate information for management and
the board of directors to assess the level of risk. These new guidelines also
set forth standards for evaluating and monitoring earnings and for ensuring
that earnings are sufficient for the maintenance of adequate capital and
reserves. 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.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by 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.
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The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law. Under the regulations, which cover the
assessment periods commencing on and after January 1, 1994, insured
depository institutions are required to pay insurance premiums within a range
of 23 cents per $100 of deposits to 31 cents per $100 of deposits depending
on their risk classification. 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 health 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. The Bank pays no premiums as a result of its "well capitalized"
status.
Congress passed in 1996 and the President signed into law, provisions to
strengthen the Savings and Loan Insurance Fund ("SAIF") and to repay
outstanding bonds that were issued to recapitalize the SAIF as a result of
payments made due to the insolvency of savings and loan associations and
other federally insured savings institutions in the late 1980s and early
1990s. The new law requires saving and loan associations to be bear the cost
of recapitalizing the SAIF and, after January 1, 1997, banks will contribute
towards paying off the financing bonds, including interest. Effective January
1, 1997, SAIF-insured institutions pay 3.2 cents per $100 in domestic
deposits, and BIF-insured institutions, like the Bank, pay 0.64 cents per
$100 in domestics deposits. In 2000, the banking industry will share on a
more equal basis in the bulk of the payments.
FINANCIAL MODERNIZATION LEGISLATION
Various proposals to adopt comprehensive financial modernization legislation
have been introduced in Congress which include, among other things,
elimination of the federal thrift charter, creation of a uniform financial
institutions charter, expansion of bank powers, and integration of banking,
commerce, securities activities and insurance. Under the proposed
legislation, bank holding companies would be allowed to control both a
commercial bank and a securities affiliate, which could engage in the full
range of investment banking activities, including corporate underwriting. In
May 1998, the House passed legislation that would overhaul the financial
service industry and allow mergers among banking, securities and insurance
firms. Congress adjourned without the passage of similar legislation by the
Senate. It is anticipated that substantially similar legislation will be
considered in the current session of Congress.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Rieglel 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 approval under Bank Holding Company Act 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 it 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 requirements and conditions as for a
merger transaction.
11
<PAGE>
In 1995, California adopted "opt in" legislation under the Interstate Act
that permits out-of-state banks to acquire California banks that satisfy a
five-year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry
through acquisition of individual branches of California institutions and de
novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from
out-of-state banks in the markets in which the Company intends to operate,
although it is difficult to assess the impact that such increased competition
may have on the Company's operations. The Interstate Act may increase
competition in the Company's market areas especially from larger financial
institutions and their holding companies. It is difficult to assess the
impact such likely increased competition may have on the Company's operations.
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 a financial institution in meeting
the credit needs of their local communities, 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 1995 the federal banking agencies issued final regulations which change
the manner in which they measure a bank's compliance with CRA obligations.
The final regulations adopt a performance-based evaluation system which bases
CRA ratings on an institution's actual lending, service and investment
performance, rather than the extent to which the institution conducts needs
assessments, documents community outreach activities or complies with other
procedural requirements.
In 1994 the federal Interagency Task 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 connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding," "satisfactory," "needs
to improve" or "substantial noncompliance." The Bank has consistently been
rate "satisfactory" and was examined most recently during the fourth quarter
of 1998. Although the final report of examination has not yet been received,
the Bank expects to retain its "satisfactory" rating.
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations and bank holding companies, such as the Bank
and the Company, may be subject to potential enforcement actions by federal
and state bank regulatory officials 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 (in the case of a
depository institution), 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 enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted. Neither
the Company nor the Bank are parties to any such enforcement action.
12
<PAGE>
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 portfolios 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 Commissioner
of Financial Institutions 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, 1998, the Company had approximately $318 million in assets
and $287 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.
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 clients and securities held in the Bank investment portfolios will
comprise a 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.
13
<PAGE>
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
and 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 client 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, 1998, the Bank had a total of 339 full-time employees and 27
part-time employees. The Bank believes that its employee relations are
satisfactory.
14
<PAGE>
ITEM 2. PROPERTIES
The Company currently maintains an administrative facility in Orange,
California, which is utilized by the Company and the Bank. The Bank also
maintains nine full service branches, one regional loan center and six loan
production offices. The Bank owns three of its branch locations and leases
all of its other facilities. For additional information regarding the Bank's
lease obligations, see Note K to the Consolidated Financial Statements,
included in Item 8 hereof.
The Company believes that all of its properties are appropriately maintained
and suitable for their respective present needs and operations.
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
No matters were submitted to a vote of securities holders during the fourth
quarter of 1998.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The equity securities of BYL Bancorp consist of one class of common stock, of
which there were 2,531,302 shares outstanding, held by approximately 800
shareholders of record at year-end 1998. 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. During 1998 and 1997, the Company paid quarterly
cash dividends of $0.05 per share During the first quarter of 1999 the
Company paid a cash dividend of $0.075 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 bid and ask prices of the Company Common Stock. 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>
1997 Bid Ask
- --------------------- ------ ------
<S> <C> <C>
First Quarter 13.667 10.375
Second Quarter 15.938 12.375
Third Quarter 16.500 16.000
Fourth Quarter 21.250 16.000
1998
- ---------------------
First Quarter 21.875 23.125
Second Quarter 23.250 23.500
Third Quarter 21.500 21.500
Fourth Quarter 18.000 18.500
</TABLE>
16
<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,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income $ 24,016 $ 18,455 $ 12,642 $ 9,746 $ 9,148
Interest Expense 8,406 6,057 3,840 2,757 2,583
-------- -------- -------- -------- --------
Net Interest Income 15,610 12,398 8,802 6,989 6,565
Provision for Loan Losses 755 778 364 262 614
-------- -------- -------- -------- --------
Net Interest Income After Provision
for Loan Losses 14,855 11,620 8,438 6,727 5,951
Noninterest Income 23,408 15,920 8,752 6,726 4,794
Noninterest Expense 30,870 22,717 14,045 11,211 9,384
-------- -------- -------- -------- --------
Income Before Income Taxes 7,393 4,823 3,145 2,242 1,361
Income Taxes 3,277 1,968 1,229 872 509
-------- -------- -------- -------- --------
Net Income $ 4,116 $ 2,855 $ 1,916 $ 1,370 $ 852
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Dividends on Common Stock $ 467 $ 502 $ 168 $ 89 $ 187
PER SHARE DATA:
Net Income - Basic $ 1.63 $ 1.19 $ 0.98 $ 0.88 $ 0.58
Net Income - Diluted $ 1.55 $ 1.12 $ 0.96 $ 0.75 $ 0.50
Book Value $ 10.62 $ 9.01 $ 8.10 $ 9.26 $ 8.08
STATEMENTS OF FINANCIAL CONDITION SUMMARY:
Total Assets $318,013 $238,086 $183,755 $125,872 $117,376
Total Deposits 287,206 207,935 162,058 113,295 104,307
Loans Held for Sale 74,598 47,150 24,363 10,186 9,969
Total Loans 165,199 139,002 106,019 67,979 68,125
Allowance for Loan Losses (ALLL) 2,300 1,923 1,616 1,047 960
Total Shareholders' Equity 26,882 22,550 19,434 11,273 10,543
SELECTED RATIOS:
Return on Average Assets 1.49% 1.31% 1.23% 1.17% 0.70%
Return on Average Equity 17.03% 13.80% 12.81% 12.56% 8.20%
Net Interest Margin 6.40% 6.46% 6.47% 6.68% 6.11%
Dividend Payout Ratio - Common Stock 11.35% 17.59% 8.82% 6.50% 21.95%
Non-performing Loans to Total Loans 1.23% 0.92% 1.15% 1.98% 1.66%
Non-performing Assets to Total Assets 0.94% 0.93% 1.57% 1.81% 2.44%
ALLL to Non-performing Loans 113.30% 150.35% 132.68% 77.90% 85.11%
Average Shareholder's Equity
to Average Assets 8.75% 9.49% 9.63% 9.28% 8.56%
</TABLE>
17
<PAGE>
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 BYL Bank Group, formerly Bank of Yorba Linda ("the Bank"),
a state-chartered commercial bank headquartered in Orange, 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 Federal Reserve's Board of Governors, the
Company's primary regulator.
The Bank engages in the general business of banking throughout its primary
market area of Orange and Riverside Counties in Southern California by
offering a wide range of banking products and services, including (i)
originating and selling Conforming and 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 Orange,
and presently operates nine (9) full service branches. Each banking office
concentrates on servicing the local community in which it is located. The
Bank also maintains mortgage banking offices in Tustin and Diamond Bar,
California and a SBA loan office in Mission Viejo, California.
At the close of business on May 29, 1998, the Company consummated a merger
with DNB Financial and its wholly-owned subsidiary, De Anza National Bank.
This merger was accounted for by the pooling of interest method, whereby the
Company's Financial Statements and the following discussions have been
restated as if the two companies were historically one unit. A total of
956,641 common shares were issued to the shareholders of DNB Financial in
connection with this merger.
During November 1998, the Company acquired the human resources, the marketing
network, certain existing property and equipment leases and the mortgage loan
pipeline of All Source Financial, LLC ("ASF") a subsidiary of Assurance
Mortgage Corporation of America. ASF specialized in originating, selling and
purchasing residential mortgage loans secured by first and second trust
mortgages on single family residences. During 1998, ASF's average monthly
fundings were approximately $45 million.
On December 10, 1998, the Company securitized approximately $38.1 million of
unguaranteed interests in SBA loans. The Company intends to securitize
additional unguaranteed portions of its SBA loans, as well as other
compatible loan products, as it is able to accumulate sufficient loans to
provide for an economically viable transaction.
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,
1998, 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.
18
<PAGE>
OVERVIEW
Net income in 1998 was $4.1 million, an increase of $1.2 million or 44.2%,
compared to $2.9 million in 1997. Diluted earnings per share in 1998 were
$1.55 compared to $1.12 in 1997. The increase in earnings in 1998 was due
primarily to strong asset growth and increased profitability of the SBA and
Mortgage Loan Divisions.
The Company's net income for 1997 was $2.9 million, a $1.0 million or 49.0%
increase over the 1996 net income of $1.9 million. On a diluted per share
basis, 1997 net income was $1.12 compared to $0.95 in 1996. The increase in
net income in 1997 was also due primarily to the growth in assets and the
increased profitability of its SBA and Mortgage Loan Divisions.
Shareholders' equity increased $4.3 million or 19.2%, in 1998 to $26.9
million at December 31, 1998 compared to $22.6 million at December 31, 1997.
This increase was primarily from the retention of earnings.
The following table sets forth several key operating ratios for 1998, 1997
and 1996:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Return on Average Assets 1.49% 1.31% 1.23%
Return on Average Equity 17.03% 13.80% 12.81%
Average Shareholder's Equity to Average Total Assets 8.75% 9.49% 9.63%
</TABLE>
19
<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,
----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- ------------------------------
Average Average Average
Yield Yield Yield
Interest or Interest or Interest 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 $ 18,564 $ 1,119 6.03% $ 25,110 $ 1,535 6.11% $ 24,508 $1,449 5.91%
Federal Funds Sold 13,322 669 5.02% 7,329 394 5.38% 4,339 228 5.25%
Other Earning Assets 2,935 171 5.83% 3,882 227 5.85% 5,087 302 5.94%
Loans 209,080 22,057 10.55% 155,588 16,299 10.48% 102,145 10,663 10.44%
-------- -------- -------- -------- -------- --------
Total Interest-Earning
Assets 243,901 24,016 9.85% 191,909 18,455 9.62% 136,079 12,642 9.29%
Cash and Due From Banks 15,756 13,334 11,110
Premises and Equipment 5,299 4,830 2,967
Other Real Estate Owned 1,067 908 776
Accrued Interest and Other Assets 12,641 8,496 5,775
Allowance for Loan Losses (2,281) (1,552) (1,426)
-------- -------- --------
Total Assets $276,383 $217,925 $155,281
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Money Market and NOW $ 53,640 1,613 3.01% $ 48,414 1,321 2.73% $ 43,596 1,216 2.79%
Savings 39,308 1,622 4.13% 26,164 920 3.52% 19,927 648 3.25%
Time Deposits under $100,000 51,997 2,823 5.43% 37,866 2,080 5.49% 20,590 1,073 5.21%
Time Deposits of
$100,000 or More 38,120 2,258 5.92% 28,923 1,661 5.74% 13,443 792 5.89%
Other 1,623 90 5.55% 908 75 8.26% 1,576 111 7.04%
-------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities 184,688 8,406 4.55% 142,275 6,057 4.26% 99,132 3,840 3.87%
-------- -------- --------
Noninterest-Bearing
Liabilities:
Demand Deposits 62,771 51,664 39,813
Other Liabilities 4,753 3,306 1,381
Shareholders' Equity 24,171 20,680 14,955
-------- -------- --------
Total Liabilities and
Shareholders' Equity $276,383 $217,925 $155,281
-------- -------- --------
-------- -------- --------
Net Interest Income $ 15,610 $ 12,398 $ 8,802
-------- -------- --------
-------- -------- --------
Net Yield on Interest-Earning
Assets 6.40% 6.46% 6.47%
</TABLE>
20
<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 1998 was $15.6 million, an increase of 25.9% compared
to the $12.4 million reported in 1997. This increase was primarily due to the
significant increase in average interest-earning assets which increased $52.0
million or 27.1% to $243.9 million in 1998 compared to $191.9 million in 1997.
Interest income in 1998 was $24.0 million, a $5.5 million or a 30.1% increase
over the $18.5 million recorded in 1997. Increased loan totals accounted for
the majority of this increase as the average loans outstanding increased
34.4% to $209.0 million in 1998 compared to $155.6 million in 1997. The
significant increase in shareholders' equity in 1998 and 1997 has allowed the
Company to aggressively grow its loan portfolio and other interest-earning
assets.
Interest expense also rose significantly in 1998 as the Company increased
deposits and other borrowings to fund the loan growth discussed above.
Interest expense was $8.4 million in 1998, compared to $6.0 million in 1997.
Interest rates played a minor role in the changes in net interest income in
1998. The Company was able to increase its yield on interest-earning assets
by 23 basis points, however, the rates paid on interest-bearing liabilities
increased 29 basis points. The net yield on interest-earning assets in 1998
declined 6 basis points to 6.40% compared to 6.46% in 1997.
Net interest income in 1997 was $12.4 million, an increase of $3.6 million or
40.9% from $8.8 million in 1996. This increase was also primarily
attributable to the substantial increase in average total interest-earning
assets which increased from $136.1 million in 1996 to $191.9 million in 1997.
Changing interest rates had a very minor impact as the net yield on
interest-earning assets decreased only 1 basis points from 6.47% in 1996 to
6.46% in 1997.
Total interest income in 1997 was $18.5 million compared to $12.6 million in
1996. Increased loan volume was accountable for 97% of the increase in total
interest income. The total yield on interest-earning assets also increased 33
basis points contributing slightly to the increase in interest income.
Total interest expense also increased dramatically in 1997, rising to $6.0
million from $3.8 million in 1996. Again this increase was primarily
attributable to increased volume in deposits which accounted for $2.1 million
of the total increase. The average rate paid on deposits also increased 39
basis points increasing interest expense slightly.
21
<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, 1998 Year Ended December 31, 1997
versus versus
Year Ended December 31, 1997 Year Ended December 31, 1996
---------------------------- -----------------------------
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 $ (395) $ (21) $ (416) $ 36 $ 50 $ 86
Federal Funds Sold 302 (27) 275 161 5 166
Other Earning Assets (55) (1) (56) (70) (5) (75)
Loans 5,642 116 5,758 5,599 37 5,636
------ ----- ------ ------ ----- ------
TOTAL INTEREST INCOME 5,494 67 5,561 5,726 87 5,813
INTEREST-BEARING LIABILITIES:
Money Market and NOW 150 142 292 131 (26) 105
Savings 521 181 702 216 56 272
Time Deposits under $100,000 767 (24) 743 946 61 1,007
Time Deposits $100,000 or More 543 54 597 889 (20) 869
Other 46 (31) 15 (53) 17 (36)
------ ----- ------ ------ ----- ------
TOTAL INTEREST EXPENSE 2,027 322 2,349 2,129 88 2,217
------ ----- ------ ------ ----- ------
NET INTEREST INCOME $3,467 $(255) $3,212 $3,597 $ (1) $3,596
------ ----- ------ ------ ----- ------
------ ----- ------ ------ ----- ------
</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 1998, noninterest income was $23.4 million, an increase of $7.5 million or
47.0% compared to the 1997 amount of $15.9 million. The majority of this
increase ($6.5 million) was generated by the Company's SBA and Mortgage Loan
Divisions who continued to expand their operations in 1998. Included in the
increase was a gain of $3.6 million from the securitization of the
unguranteed portion SBA loans totaling approximately $38.1 million. By the
end of 1998, these divisions had developed networks of referring brokers
throughout most pacific coast states. Service charges, fees and other income
increased almost $1.0 million in 1998 from a combination of increased deposit
activity and income from loan referral programs
22
<PAGE>
NONINTEREST INCOME - CONTINUED
During 1997, noninterest income increased $7.1 million to $15.9 million
compared to $8.8 million in 1996. The majority of this increase ($6.6
million) was again generated by the Bank's SBA and Mortgage Loan Divisions.
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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Salaries and Employee Benefits 7.11% 6.46% 4.95%
Occupancy Expenses .60 .62 .74
Furniture and Equipment .74 .64 .53
Professional Fees and Outside Services .65 .65 .77
OREO Expenses .10 .08 .24
Commission and Loan Expenses .38 .29 .29
Office Expenses .55 .60 .59
Other 1.04 1.08 .93
----- ----- ----
11.17% 10.42% 9.04%
----- ----- ----
----- ----- ----
</TABLE>
Noninterest expense was $30.9 million in 1998, an increase of $8.1 million or
35.9% over the $22.8 reported in 1997. The majority of this increase ($5.6
million) was created by increased salaries and benefits generated by 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. Other expense categories increased in total
amount but were consistent as a percentage of total assets. Included in other
in 1998 was $542,000 of acquisition related expenses.
Noninterest expenses in 1997 totaled $22.7 million, or a 61.7% increase over
the 1996 amount of $14.0 million. The majority of this increase ($6.4
million) was created by increased salaries and employee benefits generated by
and the Mortgage and the SBA Loan Divisions. Increases in furniture and
equipment were primarily related to the costs incurred in converting to a new
in-house data processing system.
INCOME TAXES
Income tax expense was $3.3, $2.9, and $1.9 million for the years ended
December 31, 1998, December 31, 1997, and December 31, 1996, respectively.
These expenses resulted in an effective tax rate of 44.3% in 1998, 40.8% in
1997 and 39.1% in 1996. The increase in effective rate in 1998 was due
primarily to non-deductible merger expenses.
BALANCE SHEET ANALYSIS
Total assets of the Company at December 31, 1998 were $318.0 million, a $79.9
million or 33.6% increase from $238.1 million at December 31, 1997. Average
assets for 1998 were $276.4 million compared to $217.9 million for 1997. The
increases in shareholders' equity in 1998 and 1997 allowed the Company to
aggressively expand its asset base.
During 1997, the Bank's total assets increased $54.3 million from $183.8
million at December 31, 1996 to $238.1 million at December 31, 1997.
23
<PAGE>
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, 1998 (dollar amounts in thousands.)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------ ------------------
Weighted
Book Market Average Book Market Book Market
Value Value Yield Value Value Value Value
------- ------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. GOVERNMENT AND AGENCY SECURITIES:
Within One Year $ -- $ -- $ 1,022 $ 1,025 $ 638 $ 635
One to Five Years -- -- 233 232 3,081 3,071
After Ten Years -- -- 1,297 1,307 1,678 1,665
------- ------- ------- ------- ------- -------
Total U.S. Government and Agency Securities -- -- 2,552 2,564 5,397 5,371
MUNICIPAL SECURITIES - FIVE TO TEN YEARS -- -- 1,018 1,032
MUTUAL FUNDS 3,000 3,000 5.44% 6,059 6,016 3,622 3,524
MORTGAGE BACKED SECURITIES 2,305 2,570 8.00% -- -- -- --
OTHER 830 830 6.00% 802 802 324 324
------- ------- ------- ------- ------- -------
TOTAL AVAILABLE-FOR-SALE SECURITIES $ 6,135 $ 6,400 6.45% $10,431 $10,414 $ 9,343 $ 9,219
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
HELD-TO-MATURITY SECURITIES
U.S. TREASURIES:
Within One Year $ 2,001 $ 2,015 5.66% $ 1,999 $ 1,998 $ 500 $ 504
One to Five Years 498 511 6.36% 2,499 2,505 2,797 2,789
------- ------- ------- ------- ------- -------
Total U.S. Treasuries Securities 2,499 2,526 5.80% 4,498 4,503 3,297 3,293
U.S. GOVERNMENT AND AGENCY SECURITIES:
Within One Year 994 1,001 6.45% -- -- 999 987
One to Five Years 7,035 7,029 5.53% 998 999 2,935 2,957
Five to Ten Years 3,968 3,990 4,197 4,191
After Ten Years -- -- 1,500 1,502 -- --
------- ------- ------- ------- ------- -------
Total U.S. Government
and Agency Securities 8,029 8,030 5.65% 6,466 6,491 8,131 8,135
MUNICIPAL SECURITIES:
One to Five Years -- -- 1,074 1,079 844 836
Five to Ten Years -- -- 852 867 1,088 1,089
------- ------- ------- ------- ------- -------
Total Municipal Securities -- -- 1,926 1,946 1,932 1,925
MORTGAGE BACKED SECURITIES 316 318 5.50% 60 56 62 59
------- ------- ------- ------- ------- -------
TOTAL HELD-TO-MATURITY SECURITIES $10,844 $10,874 5.67% $12,950 $12,996 $13,422 $13,412
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
24
<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, 1998 and 1997, the carrying values of securities pledged to
secure public deposits and other purposes were $10.8 million and $5.0
million, respectively.
LOANS HELD FOR SALE
The Company originates mortgage loans and SBA loans for sale to institutional
investors. Loans held for sale increased from $24.4 million at December 31,
1996, to $47.2 million at December 31, 1997 and $74.6 million at December 31,
1998. Historically, the Company sold these loans within sixty (60) days of
origination, but during 1998 began to warehouse and accumulate pools of loans
to take advantage of short-term fluctuations in the market.
At December 31, 1998 and 1997, the Bank was servicing approximately $164.8
million and $76.1 million, respectively, in SBA loans previously sold. In
connection with a portion of these loans, the Company has capitalized
approximately $2.5 million and $1.9 million in servicing assets at December
31, 1998 and 1997, 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.
The Company has also recorded interest-only strips receivable in connection
with its loan sales and securitizations. These totaled $5.9 million at
December 31, 1998 and $644,000 at December 31, 1997.
See also Note C in the Consolidated Financial Statements for additional
information on loans held for sale.
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,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
LOANS
Commercial $ 56,244 $ 36,359 $ 24,512 $ 13,706 $ 15,341
Real Estate - Construction 4,411 2,867 4,149 3,478 4,700
Real Estate - Other 82,235 84,792 71,799 46,885 44,134
Consumer 22,309 14,984 5,559 3,910 3,950
-------- -------- -------- -------- --------
Total Loans 165,199 139,002 106,019 67,979 68,125
Net Deferred Loan Costs (Fees) 1,255 471 173 (102) (159)
Allowance for Loan Losses (2,300) (1,923) (1,616) (1,047) (960)
-------- -------- -------- -------- --------
Net Loans $164,154 $137,550 $104,576 $ 66,830 $ 67,006
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
COMMITMENTS
Standby Letters of Credit $ 360 $ 371 $ 203 $ 398 $ 474
Undisbursed Loans and
Commitments to Grant Loans 21,627 18,521 14,843 10,014 9,445
-------- -------- -------- -------- --------
Total Commitments $ 21,987 $ 18,892 $ 15,046 $ 10,412 $ 9,919
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
25
<PAGE>
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.
The following table shows the maturity distribution of the fixed rate portion
of the loan portfolio and the repricing distribution of the variable rate
portion of the loan portfolio, including loans held for sale, at December 31,
1998
<TABLE>
<CAPTION>
Over
3 Months Due after Due after
3 Months through one year to three years to Due after
or Less 12 months three years five years five years Total
- ---------- --------- ----------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 101,637 $ 52,839 $ 15,364 $ 27,476 $ 40,674 $ 237,990
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Loans on Non-Accrual 1,807
---------
Total Loans, including Loans Held for Sale $ 239,797
---------
---------
</TABLE>
26
<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,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans 90 Days Past Due and Still Accruing $ 223 $ -- $ 122 $ 149 $ --
Nonaccrual Loans 1,807 1,279 1,096 1,195 1,128
-------- -------- -------- -------- --------
Total Nonperforming Loans 2,030 1,279 1,218 1,344 1,128
Other Real Estate Owned 971 924 1,661 930 1,734
-------- -------- -------- -------- --------
Total Nonperforming Assets $ 3,001 $ 2,203 $ 2,879 $ 2,274 $ 2,862
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Nonperforming Loans as a
Percentage of Total Loans 1.23% 0.92% 1.15% 1.98% 1.66%
Allowance for Loan Loss as a
Percentage of Nonperforming Loans 113.30% 150.35% 132.68% 77.90% 85.11%
Nonperforming Assets as a
Percentage of Total Assets 0.94% 0.93% 1.57% 1.81% 2.44%
</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 $755,000 in 1998 compared to $778,000 in 1997
and $364,000 in 1996.
27
<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,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OUTSTANDING LOANS:
Average for the Year $209,080 $155,588 $102,145 $ 68,052 $ 74,101
End of the Year $165,199 $139,002 $106,019 $ 67,979 $ 68,125
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of Year $ 1,923 $ 1,616 $ 1,047 $ 960 $ 1,233
Actual Charge-Offs:
Commercial 175 486 318 133 426
Consumer 252 29 21 24 45
Real Estate 101 20 192 162 503
-------- -------- -------- -------- --------
Total Charge-Offs 528 535 531 319 974
Less Recoveries:
Commercial 140 33 19 18 80
Consumer 7 7 11 3 6
Real Estate 3 24 6 123 1
-------- -------- -------- -------- --------
Total Recoveries 150 64 36 144 87
-------- -------- -------- -------- --------
Net Loans Charged-Off 378 471 495 175 887
Provision for Loan Losses 755 778 364 262 614
Allowance on Loans Acquired from BOW -- -- 700 -- --
-------- -------- -------- -------- --------
Balance at End of Year $ 2,300 $ 1,923 $ 1,616 $ 1,047 $ 960
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RATIOS:
Net Loans Charged-Off to Average Loans 0.18% 0.30% 0.48% 0.26% 1.20%
Allowance for Loan Losses to Total Loans 1.39% 1.38% 1.87% 1.54% 1.41%
Net Loans Charged-Off to Beginning
Allowance for Loan Losses 19.66% 29.15% 47.28% 18.23% 71.94%
Net Loans Charged-Off to Provision
for Loan Losses 50.07% 60.54% 135.99% 66.79% 144.46%
Allowance for Loan Losses to
Nonperforming Loans 113.30% 150.35% 132.68% 77.90% 85.11%
</TABLE>
Management believes that the allowance for loan losses is adequate. Quarterly
detailed reviews are performed to identify the risks inherent in the loan
portfolio, assess the overall quality of the loan portfolio and to determine
the adequacy of the allowance for loan losses and the related provision for
loan losses to be charged to expense. These systematic reviews follow the
methodology set forth by the FDIC in its 1993 policy statement on the
allowance for loan losses.
28
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES - CONTINUED
A key element of our methodology is the credit classification process. Loans
identified as less than "acceptable" are reviewed individually to estimate
the amount of probable losses that need to be included in the allowance.
These reviews include analysis of financial information as well as evaluation
of collateral securing the credit. Additionally, management considers the
inherent risk present in the "acceptable" portion of the loan portfolio
taking into consideration historical losses on pools of similar loans,
adjusted for trends, conditions and other relevant factors that may affect
repayment of the loans in these pools.
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, 1998 December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- ----------------- ----------------- -----------------
Loan Loan Loan Loan Loan
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 854 34.1% $ 657 26.2% $ 806 23.1% $ 522 20.2% $ 479 22.5%
Construction 100 2.7% 33 2.1% 65 3.9% 42 5.1% 39 6.9%
Real Estate 1,049 49.8% 873 61.0% 569 67.7% 368 69.0% 337 64.8%
Consumer 55 13.5% 139 10.8% 50 5.2% 32 5.8% 29 5.8%
Unallocated 242 n/a 221 n/a 126 n/a 83 n/a 76 n/a
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
$2,300 100.0% $1,923 100.0% $1,616 100.0% $1,047 100.0% $ 960 100.0%
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
</TABLE>
FUNDING
Deposits are the Company's primary source of funds. At December 31, 1998, the
Company had a deposit mix of 55.3% in time and savings deposits, 20.4% in
money market and NOW deposits, and 24.3% in noninterest-bearing demand
deposits. The Company's net interest income is enhanced by its percentage of
noninterest-bearing deposits.
29
<PAGE>
FUNDING - CONTINUED
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,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Money Market and NOW Accounts $ 53,640 3.01% $ 48,414 2.73% $ 43,596 2.51%
Savings Deposits 39,308 4.13% 26,164 3.52% 19,927 3.25%
TCD Less than $100,000 51,997 5.43% 37,866 5.49% 20,590 5.21%
TCD $100,000 or More 38,120 5.92% 28,923 5.74% 13,443 5.89%
--------- --------- ---------
Total Interest-Bearing Deposits 183,065 4.54% 141,367 4.23% 97,556 100.00%
Noninterest-Bearing Demand Deposits 62,771 n/a 51,664 n/a 39,813 n/a
--------- --------- ---------
Total Average Deposits $ 245,836 3.38% $ 193,031 3.10% $ 137,369 2.71%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The scheduled maturity distribution of the Bank's time deposits of $100,000
or greater, as of December 31, 1998, were as follows (dollar amounts in
thousands):
<TABLE>
<S> <C>
Three Months or Less $ 15,896
Over Three Months to One Year 16,655
Over One Year to Five Years 6,685
--------
$ 39,236
--------
--------
</TABLE>
30
<PAGE>
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.
The table below sets forth the interest rate sensitivity of the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
1998, 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 $ 18,700 $ -- $ -- $ -- $ 18,700
Investment Securities 3,830 2,995 7,533 2,886 17,244
Gross Loans 103,444 52,839 42,840 40,674 239,797
-------- -------- -------- -------- --------
$125,974 $ 55,834 $ 50,373 $ 43,560 $275,741
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Money Market and NOW Deposits $ 58,740 $ -- $ -- $ -- $ 58,740
Savings 70,838 70,838
Time Deposits 37,743 39,909 10,383 -- 88,035
Other Borrowings -- -- -- -- --
-------- -------- -------- -------- --------
$167,321 $ 39,909 $ 10,383 $ -- $217,613
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Interest Rate Sensitivity Gap $(41,347) $ 15,925 $ 39,990 $ 43,560 $ 58,128
Cumulative Interest Rate Sensitivity Gap $(41,347) $(25,422) $ 14,568 $ 58,128
Ratios Based on Total Assets:
Interest Rate Sensitivity Gap (13.00%) 5.01% 12.57% 13.70% 18.28%
Cumulative Interest Rate Sensitivity Gap (13.00%) (7.99%) 4.58% 18.28%
</TABLE>
31
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY - CONTINUED
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 clients and withdrawals from deposit accounts.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1998 was $26.9, an increase of $4.3
million or 19.2% over $22.6 million at December 31, 1997. Average
shareholders' equity for 1998 was $24.2 million compared to $20.7 million in
1997.
Shareholders' equity averaged $20.7 million in 1997, an increase of $5.7
million or 383% compared to 1996. At December 31, 1997, shareholders' equity
amounted to $22.6 million, an increase of $3.2 million or 16.0% over the
prior year.
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, 1998, 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, 1998, 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% 10.00%
Total Capital 8.0% 10.94%
Leverage Ratio 4.0% 7.95%
</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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard is effective for
2000 and is not expected to have a material impact on the Bank's financial
statements.
32
<PAGE>
YEAR 2000 ISSUES
OVERVIEW
The Year 2000 issue is the result of computer programs being written using
two digits rather that four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date using "00" as
the year 1900 rather than the year 2000.
This could result in a system failure or other disruption of operations and
impede normal business activities. In June 1996, the Federal Financial
Institutions Examination Council ("FFIEC") alerted the banking industry of
the serious challenges that would be encountered with Year 2000 issues. The
FDIC has also implemented a plan to require compliance with Year 2000 issues
and regularly examines out progress.
STATE OF READINESS
In accordance with FDIC guidelines, the Company developed a comprehensive
plan which management believes will result in timely and adequate
modifications of Company's systems and technology to address Year 2000
issues, which contemplates all system conversions and testing to be
substantially completed by December 31, 1999. Management has completed a
top-down assessment of all mission-critical and other systems for Year 2000
compliance and are currently in the third and fourth of the five phases for
compliance, "renovation and validation", as defined by the FFIEC. Management
has also tested non-information technology systems, such as microprocessors
controlling environmental and alarm systems, and found them to be Year 2000
compliant.
To determine the readiness of the Company's clients, management sent a
questionnaire to, and received responses from, significant borrowers and
depositors to determine the extent of risk created by any failure by them to
remediate their own Year 2000 issues. Each borrower and depositor is
categorized according to their state of readiness based on their response to
the questionnaire and a review of the client. The Company has also taken
steps to ensure liquidity for depositors with high Year 2000 risks.
Re-assessment of each client's risk will be made on a regular basis.
To determine the readiness of the Company's vendors, letters were sent to
each vendor inquiring about their compliance with Year 2000. For those
vendors that have responded that they are Year 2000 compliant and that were
determined to not have a material impact on the Bank's operations, no further
work is performed. For those vendors that have responded they are working
towards Year 2000 compliance and that are determined to be significant,
including mission critical vendors, the Company will follow up on a regular
basis through 1999. These vendors have advised the Company that they expect
to be Year 2000 compliant prior to December 31, 1999. If those vendors do not
demonstrate compliance by a certain date, the Company will seek other
alternatives in accordance with its contingency plan, which may include
seeking replacement vendors.
COSTS AND RISKS
A few computer hardware and software applications were modified or replaced
in order to maintain their functionality as the year 2000 approaches. The
Company has spent approximately $20,000 as of December 31, 1998 to address
Year 2000 issues and estimate total costs over the two year period 1999-2000
to be approximately $119,000, which will come from general funds. None of
these costs, however, are expected to materially impact the Company's result
of operations in any one reporting period.
33
<PAGE>
COSTS AND RISKS - CONTINUED
Ultimately, the potential impact of the Year 2000 issue will depend not only
on the corrective measures the Company undertakes, but also on the way in
which the Year 2000 issue is addressed by governmental agencies, businesses,
and other entities who provide data, receive data, or whose financial
condition or operational capability is important to the Company, such as
suppliers or clients. At worst, clients and vendors will face severe Year
2000 issues, which may cause borrowers to become unable to service their
loans. The Company may also be required to replace non-compliant vendors with
more expensive Year 2000-compliant vendors. At this time management cannot
determine the financial effect if significant client and/or vendor
remediation efforts are not resolved in a timely manner.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 36
Consolidated Balance Sheets at December 31, 1998 and 1997 37 and 38
Consolidated Statements of Income for each of the Years
in the Three-Year Period Ended December 31, 1998 39
Consolidated Statements of Shareholders' Equity for each of
the Years in the Three-Year Period Ended December 31, 1998 40
Consolidated Statements of Cash Flows for each of the Years
in the Three-Year Period Ended December 31, 1998 41
Notes to Financial Statements 42 through 68
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes hereto.
35
<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, 1998 and 1997, 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, 1998. 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. The consolidated financial statements give retroactive effect
to the merger of BYL Bancorp and DNB Financial on May 29,1998, in a
transaction accounted for as a pooling of interest, as discussed in Note Q.
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, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
January 21, 1999
Laguna Hills, California
36
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 14,214 $ 11,893
Federal Funds Sold 18,700 --
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 32,914 11,893
Interest-Bearing Deposits -- 3,419
Investment Securities
Available for Sale 6,400 10,414
Held to Maturity 10,844 12,950
-------- --------
TOTAL INVESTMENT SECURITIES 17,244 23,364
Loans Held for Sale 74,598 47,150
Loans
Commercial 56,244 36,359
Real Estate 86,646 87,659
Consumer 22,309 14,984
-------- --------
TOTAL LOANS 165,199 139,002
Net Deferred Loan Costs 1,255 471
Allowance for Credit Losses (2,300) (1,923)
-------- --------
NET LOANS 164,154 137,550
Premises and Equipment 6,082 5,205
Other Real Estate Owned 971 924
Cash Surrender Value of Life Insurance 1,374 906
Deferred Tax Assets 1,843 1,762
Goodwill 1,445 1,545
Interest-Only Strips Receivable and Servicing Assets 9,025 2,564
Accrued Interest and Other Assets 8,363 1,804
-------- --------
$318,013 $238,086
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $ 69,863 $ 56,143
Money Market and NOW 58,470 48,174
Savings 70,838 27,403
Time Deposits Under $100,000 48,799 42,494
Time Deposits $100,000 and Over 39,236 33,721
---------------- ---------------
TOTAL DEPOSITS 287,206 207,935
Federal Funds Purchased - 1,000
Federal Home Loan Bank Advances - 3,000
Accrued Interest and Other Liabilities 3,925 3,601
---------------- ---------------
TOTAL LIABILITIES 291,131 215,536
Commitments and Contingencies - Note K
Shareholders' Equity
Preferred Shares - Authorized 25,000,000
Shares; None Outstanding
Common Shares - Authorized 50,000,000
Shares; Issued and Outstanding 2,531,302
Shares in 1998 and 2,503,171 Shares in 1997 12,760 12,622
Retained Earnings 13,602 9,955
Accumulated Other Comprehensive Income 520 (27)
---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 26,882 22,550
---------------- ---------------
$ 318,013 $ 238,086
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 22,057 $ 16,299 $ 10,663
Interest on Investment Securities 1,119 1,535 1,449
Other Interest Income 840 621 530
--------------- -------------- --------------
TOTAL INTEREST INCOME 24,016 18,455 12,642
INTEREST EXPENSE
Interest on Money Market and NOW 1,613 1,321 1,216
Interest on Savings Deposits 1,622 920 648
Interest on Time Deposits 5,081 3,741 1,865
Interest on Other Borrowings 90 75 111
--------------- -------------- --------------
TOTAL INTEREST EXPENSE 8,406 6,057 3,840
--------------- -------------- --------------
NET INTEREST INCOME 15,610 12,398 8,802
Provision for Credit Losses 755 778 364
--------------- -------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 14,855 11,620 8,438
NONINTEREST INCOME
Net Servicing and Interest-Only Strip Income 662 689 350
Net Gain on Sale and Securitization of Loans 19,724 13,150 6,510
Service Charges, Fees, and Other Income 3,022 2,081 1,892
--------------- -------------- --------------
23,408 15,920 8,752
--------------- -------------- --------------
38,263 27,540 17,190
NONINTEREST EXPENSE
Salaries and Employee Benefits 19,662 14,073 7,682
Occupancy Expenses 1,645 1,342 1,152
Furniture and Equipment 2,032 1,388 826
Other Expenses 7,531 5,914 4,385
--------------- -------------- --------------
30,870 22,717 14,045
--------------- -------------- --------------
INCOME BEFORE INCOME TAXES 7,393 4,823 3,145
Income Taxes 3,277 1,968 1,229
--------------- -------------- --------------
NET INCOME $ 4,116 $ 2,855 $ 1,916
--------------- -------------- --------------
--------------- -------------- --------------
Per Share Data
Net Income - Basic $ 1.63 $ 1.19 $ 0.98
Net Income - Diluted $ 1.55 $ 1.12 $ 0.95
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Shares Accumulated
---------------------- Other
Number of Comprehensive Retained Comprehensive
Shares Amount Income Earnings Income
--------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 1,332,040 $ 4,218 $ 6,033 $ 20
COMPREHENSIVE INCOME:
Net Income $ 1,916 1,916
Other Comprehensive Income - Unrealized
Loss on Available-for-Sale Securities,
Net of Taxes of $24 (133) (133)
--------
TOTAL COMPREHENSIVE INCOME $ 1,783
--------
--------
Preferred Dividends (159)
Redemption of Preferred Stock (20)
Issuance of Common Shares,
Net of Expenses of $1,096,145 1,073,333 7,759
Dividends on Common (168)
Common Stock Retired (9,570) (55)
Exercise of Stock Options 4,116 23
--------- -------- -------- ------
BALANCE AT DECEMBER 31, 1996 2,399,919 11,945 7,602 (113)
COMPREHENSIVE INCOME:
Net Income $ 2,855 2,855
Other Comprehensive Income - Unrealized
Gain on Available-for-Sale Securities,
Net of Taxes of $21 86 86
--------
TOTAL COMPREHENSIVE INCOME $ 2,941
--------
--------
Dividends on Common (502)
Common Stock Retired (823) (6)
Exercise of Stock Options, Including Tax
Benefit of $91 104,075 683
--------- -------- -------- ------
BALANCE AT DECEMBER 31, 1997 2,503,171 12,622 9,955 (27)
COMPREHENSIVE INCOME:
Net Income $ 4,116 4,116
Other Comprehensive Income - Unrealized
Gain on Available-for-Sale Securities,
Net of Taxes of $116 183 183
Unrealized Gain on Interest-Only
Strips Net of Taxes of $256 364 364
--------
TOTAL COMPREHENSIVE INCOME $ 4,663
--------
--------
Fractional Shares from Merger with DNB (2)
Cash Dividends (467)
Exercise of Stock Options 28,131 138
--------- -------- -------- ------
BALANCE AT DECEMBER 31, 1998 2,531,302 $ 12,760 $ 13,602 $ 520
--------- -------- -------- ------
--------- -------- -------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 4,116 $ 2,855 $ 1,916
Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 1,920 1,013 517
Deferred Income Taxes (496) (911) (237)
Loans Originated for Sale (336,685) (225,800) (114,260)
Proceeds from Loan Sales 319,630 216,434 106,082
Gain on Sale of Loans (19,724) (13,150) (6,510)
Provision for Credit Losses 755 778 364
Other Real Estate Owned Losses 220 53 220
Other Items - Net (5,784) 2,616 917
---------- ---------- ----------
NET CASH USED
BY OPERATING ACTIVITIES (36,048) (16,112) (10,991)
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits 3,419 685 1,769
Purchases of Available-for-Sale Securities (1,894) (5,864) (26,314)
Purchases of Held-to-Maturity Securities (10,551) 97,902) (3,391)
Proceeds from Maturities and Sale of Available-for-Sale Securities 18,683 4,787 29,400
Proceeds from Maturities of Held-to-Maturity Securities 2,663 8,407 6,647
Net Change in Loans (28,838) (35,866) (5,879)
Proceeds from Sales of Other Real Estate Owned 1,212 885 321
Net Cash Received from Purchase of Bank of Westminster -- -- 4,618
Purchases of Premises and Equipment (2,184) (1,885) (579)
Proceeds from Sale of Premises and Equipment 82 3 35
---------- ---------- ----------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (17,408) (36,750) 6,627
FINANCING ACTIVITIES
Net Change in Demand Deposits and Savings Accounts 67,451 14,568 (6,340)
Net Change in Time Deposits 11,820 31,310 5,382
Net Change Short-Term Borrowings (4,000) 3,500 500
Reductions in Long-Term Debt (465) (58) (58)
Proceeds from Exercise of Stock Options 138 592 23
Proceeds from Stock Offering -- -- 7,759
Redemption of Common and Preferred Stock -- (1,075) (6)
Dividends Paid (467) (502) (327)
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 74,477 49,404 5,864
INCREASE (DECREASE) IN ---------- ---------- ----------
CASH AND CASH EQUIVALENTS 21,021 (3,458) 1,500
Cash and Cash Equivalents at Beginning of Year 11,893 15,351 13,851
---------- ---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 32,914 $ 11,893 $ 15,351
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 8,338 $ 5,895 $ 3,749
Income Taxes Paid $ 4,237 $ 2,352 $ 1,567
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of BYL Bancorp and its
subsidiary, BYL Bank Group ("the Bank"), collectively referred to herein as
the "Company".
NATURE OF OPERATIONS
The Bank operates nine retail branches in Orange and Riverside 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 clients 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
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the federal reserve bank.
The Company maintains amounts due from banks which exceed federally insured
limits. The Company has not experienced any losses in such accounts.
INVESTMENT SECURITIES
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.
Investments not classified as trading securities nor as held to maturity
securities are classified as available-for-sale securities and recorded at
fair value. Unrealized gains or losses on available-for-sale securities are
excluded from net income and reported as an amount net of taxes as a separate
component of other comprehensive income included in shareholders' equity.
Premiums or discounts on held-to-maturity and available-for-sale securities
are amortized or accreted into income using the interest method. Realized
gains or losses on sales of held-to-maturity or available-for-sale securities
are recorded using the specific identification method.
42
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LOANS HELD FOR SALE
Mortgage, SBA loans and other 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.
On January 1, 1997, the Company adopted SFAS No. 125 "ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES". The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Under this statement, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and dercognizes liabilities when extinguished.
43
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LOANS - CONTINUED
To calculate the gain (loss) on sale of loans, the Company's investment in
the loan is allocated among the retained portion of the loan, the servicing
retained, the interest-only strip and the sold portion of the loan, based on
the relative fair market value of each portion. The gain (loss) on the sold
portion of the loan is recognized at the time of sale based on the difference
between the sale proceeds and the allocated investment. As a result of the
relative fair value allocation, the carrying value of the retained portion is
discounted, with the discount accreted to interest income over the life of
the loan. That portion of the excess servicing fees that represent
contractually specified servicing fees (contractual servicing) are reflected
as a servicing asset which is amortized over an estimated life using a method
approximating the level yield method; in the event future prepayments exceed
Management's estimates and future expected cash flows are inadequate to cover
the unamortized servicing asset, additional amortization would be recognized.
The portion of excess servicing fees in excess of the contractual servicing
fees is reflected as interest-only (I/O) strips receivable which are
classified as interest-only strips receivable available for sale and are
carried at fair value.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is increased by charges to income and
decreased by charge-offs (net of recoveries). The company performs quarterly
detailed reviews to identify the risks inherent in the loan portfolio, assess
the overall quality of the loan portfolio and to determine the adequacy of
the allowance for loan losses and the related provision for loan losses to be
charged to expense. This systematic reviews follow the methodology set forth
by the FDIC in its 1993 policy statement on the allowance for loan losses.
Loans identified as less than "acceptable" are reviewed individually to
estimate the amount of probable losses that need to be included in the
allowance. These reviews include analysis of financial information as well as
evaluation of collateral securing the credit. Additionally, management
considers the inherent risk present in the "acceptable" portion of the loan
portfolio taking into consideration historical losses on pools of similar
loans, adjusted for trends, conditions and other relevant factors that may
affect repayment of the loans in these pools.
MORTGAGE BANKING ACTIVITIES
The Company originates and sells residential mortgage loans to a variety of
secondary market investors, including the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association (FNMA) and
others. Gains and losses on the sale of mortgage loans are recognized upon
delivery based on the difference between the selling price and the carrying
value of the related mortgage loans sold. Deferred origination fees and
expenses are recognized at the time of sale in the determination of the gain
or loss. The Company sells the servicing for such loans to the purchaser of
the loans. The Company recognizes the gain or loss on servicing sold when all
risks and rewards of ownership have transferred.
44
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
MORTGAGE BANKING ACTIVITIES - CONTINUED
Mortgage loans held for sale are stated at the lower of cost or market as
determined by the outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis. Valuation
adjustments are charged against noninterest income.
Forward commitments to sell, and put options on mortgage-backed securities
are used to reduce interest rate risk on a portion of loans held for sale and
anticipated loan fundings. The resulting gains and losses on forward
commitments are deferred and included in the carrying values of loans held
for sale. Premiums on put options are capitalized and amortized over the
option period. Gains and losses on forward commitments and put options
deferred against loans held for sale approximately offset equivalent amounts
of unrecognized gains and losses on the related loans. Forward commitments to
sell and put options on mortgage-backed securities that hedge anticipated
loan funding are not reflected in the consolidated statement of financial
condition. Gains and losses on these instruments are not recognized until the
actual sale of the loans held for sale. Loans generally fund in 10 to 30 days
from the date of commitment.
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.
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.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price over the estimated fair
value of net assets associated with acquisition transactions of the Company
accounted for as purchases and is amortized over fifteen years. Core deposit
intangibles represent the intangible value of depositor relationships
resulting from deposit liabilities assumed in acquisitions and are amortized
over seven years. Goodwill and other intangibles are evaluated periodically
for other than temporary impairment. Should such an assessment indicate that
the undiscounted value of an intangible may be impaired, the net book value
of the intangible would be written down to net estimated recoverable value.
45
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INCOME TAXES
Deferred income taxes are computed using the asset and liability method,
which recognizes a liability or asset representing the tax effects, based on
current tax law, of future deductible or taxable amounts attributable to
events that have been recognized in the consolidated financial statements. A
valuation allowance is established to reduce the deferred tax asset to the
level at which it is "more likely than not" that the tax asset or benefits
will be realized. Realization of tax benefits of deductible temporary
differences and operating loss carryforwards depends on having sufficient
taxable income of an appropriate character within the carryforward periods.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 specifies the disclosure of the estimated fair value of
financial instruments. The Bank's estimated fair value amounts have been
determined by the Bank using available market information and appropriate
valuation methodologies.
However, considerable judgment is required to develop the estimates of fair
value. Accordingly, the estimates are not necessarily indicative of the
amounts the Company could have realized in a current market exchange. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since the
balance sheet date and, therefore, current estimates of fair value may differ
significantly from the amounts presented in the accompanying Notes.
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.
46
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay
to acquire the stock. The pro forma effects of adoption are disclosed in Note I.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard is effective for
2000 and is not expected to have a material impact on the Bank' s financial
statements.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' presentations to conform
to the current year. These classifications are of a normal recurring nature.
47
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
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
Cost Gains (Losses) Fair Value
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1998:
Investment in Mutual funds $ 3,000 $ -- $ -- $ 3,000
Mortgage-Backed Securities 2,305 265 2,570
Other 830 -- -- 830
-------- ----- ----- --------
$ 6,135 $ 265 $ -- $ 6,400
-------- ----- ----- --------
-------- ----- ----- --------
DECEMBER 31, 1997:
U.S. Government and Agency Securities $ 2,552 $ 14 $ (2) $ 2,564
Municipal Securities 1,018 14 -- 1,032
Investment in Mutual funds 6,059 -- (43) 6,016
Other 802 -- -- 802
-------- ----- ----- --------
$ 10,431 $ 28 $ (45) $ 10,414
-------- ----- ----- --------
-------- ----- ----- --------
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1998:
U.S. Treasury $ 2,499 $ 27 $ -- $ 2,526
U.S. Government and Agency Securities 8,029 7 (6) 8,030
Mortgage-Backed Securities 316 2 -- 318
-------- ----- ----- --------
$ 10,844 $ 36 $ (6) $ 10,874
-------- ----- ----- --------
-------- ----- ----- --------
DECEMBER 31, 1997:
U.S. Treasury $ 4,498 $ 7 $ (2) $ 4,503
U.S. Government and Agency Securities 6,466 25 -- 6,491
Municipal Securities 1,926 20 -- 1,946
Mortgage-Backed Securities 60 -- (6) 56
-------- ----- ----- --------
$ 12,950 $ 52 $ (8) $ 12,996
-------- ----- ----- --------
-------- ----- ----- --------
</TABLE>
The gross unrealized gain of $265 on available-for-sale securities is
included in accumulated other comprehensive income at December 31, 1998, net
of taxes of $109.
48
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE B - INVESTMENT SECURITIES - CONTINUED
During 1998, the Company received $1,504 in proceeds and recorded a loss of
$39 from the sale of investment securities. The Company did not sell any
investment securities for the years ended December 31, 1997, and 1996.
Investment securities carried at approximately $10,843 and $5,007 at December
31, 1998 and 1997, respectively, were pledged to secure public deposits and
other purposes as required by law.
The scheduled maturities of securities available for sale and securities held
to maturity at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Due In One Year or Less $ 3,000 $ 3,000 $ 2,995 $ 3,016
Due from One to Five Years -- -- 7,533 7,540
Mortgage-Backed Securities 2,305 2,570 316 318
Other 830 830 -- --
--------- ------- -------- --------
$ 6,135 $ 6,400 $ 10,844 $ 10,874
--------- ------- -------- --------
--------- ------- -------- --------
</TABLE>
NOTE C - LOANS HELD FOR SALE
The Bank originates auto, 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, 1998 and 1997, the Bank was servicing approximately $164,764
and $76,085, respectively, in SBA loans previously sold.
Prior to January 1, 1997, the Company's excess servicing fees were recorded
as excess servicing assets which were amortized over the estimated life of
the related loans. Effective January 1, 1997, under provisions of SFAS 125,
excess servicing assets on loans sold prior to January 1, 1997 were
reclassified to interest-only strips receivable and to servicing assets.
These assets are amortized as an offset to loan servicing income and I/O
strip income over the estimated life of the related loans.
49
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE C - LOANS HELD FOR SALE - CONTINUED
A summary of the changes in the servicing assets and interest-only strips
receivable was as follows:
<TABLE>
<CAPTION>
Servicing Assets
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at Beginning of Year $ 1,920 $ 1,249 $ 632
Transfer to Interest-Only Strips Receivable -- (312) --
Increase from Loan Sales 968 1,057 844
Amortization and Prepayments Charged to Income (409) (74) (227)
-------- -------- --------
Balance at End of Year $ 2,479 $ 1,920 $ 1,249
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Interest-Only Strips Receivable
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at Beginning of Year $ 644 $ -- $ --
Transfer from Servicing Assets -- 312 --
Increase from Loan Sales 5,437 353 --
Amortization and Prepayments Charged to Income (155) (21) --
-------- -------- --------
Balance at End of Year $ 5,926 $ 644 $ --
-------- -------- --------
-------- -------- --------
Unrecognized Gain at End of Year $ 620 $ -- $ --
</TABLE>
The unrecognized gain on interest-only strips receivable of $620 is included
in accumulated other comprehensive income at December 31, 1998, net of taxes
of $256.
The estimated fair value of the servicing assets was approximately $2,500 at
December 31, 1998. 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.
50
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE D - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within
Orange and Riverside 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.
A summary of the changes in the allowance for credit losses as of December 31
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at Beginning of Year $ 1,923 $ 1,616 $ 1,047
Additions to the Allowance Charged to Expense 755 778 364
Recoveries on Loans Charged Off 150 64 36
Allowance on Loans Acquired from Bank of Westminster -- -- 700
-------- -------- --------
2,828 2,458 2,147
Less Loans Charged Off (528) (535) (531)
-------- -------- --------
$ 2,300 $ 1,923 $ 1,616
-------- -------- --------
-------- -------- --------
</TABLE>
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>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Recorded Investment in Impaired Loans $ 1,806 $ 2,325 $ 2,508
Related Allowance for Impaired Losses $ 289 $ 341 $ 538
Average Recorded Investment in Impaired Loans $ 2,102 $ 2,324 $ 2,039
Interest Income Recognized from Cash Payments $ -- $ 103 $ 19
</TABLE>
Loans having carrying values of $1,479, $336 and $995 were transferred to other
real estate owned in 1998, 1997 and 1996, respectively.
51
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land $ 943 $ 943
Buildings 2,039 2,068
Leasehold Improvements 1,380 1,130
Furniture, Fixtures, and Equipment 5,739 5,214
-------- --------
10,101 9,355
Less Accumulated Depreciation and Amortization (4,019) (4,150)
-------- --------
$ 6,082 $ 5,205
-------- --------
-------- --------
</TABLE>
NOTE F - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1999 $ 77,652
2000 through 2002 10,331
After 2002 52
--------
$ 88,035
--------
--------
</TABLE>
52
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE G - OTHER EXPENSES
A summary of other expenses for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Regulatory Assessments $ 58 $ 79 $ 59
Other Real Estate Owned 288 185 375
Commissions 13 278 200
Professional Fees and Outside Services 1,792 1,406 1,198
Loan Expenses 1,047 511 247
Office Expenses 1,527 1,303 910
Merger Related Expenses 542 -- --
Other 2,264 2,152 1,396
------- ------- -------
$ 7,531 $ 5,914 $ 4,385
------- ------- -------
------- ------- -------
</TABLE>
NOTE H - INCOME TAXES
The provisions for income taxes included in the statements of income consist of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 2,723 $ 2,176 $ 1,072
State 1,050 704 394
-------- -------- --------
3,773 2,880 1,466
Deferred (496) (912) (237)
-------- -------- --------
$ 3,277 $ 1,968 $ 1,229
-------- -------- --------
-------- -------- --------
</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.
53
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE H - INCOME TAXES - CONTINUED
The following is a summary of the components of the deferred tax asset
account recognized in the accompanying consolidated balance sheets:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses $ 510 $ 395
Other Real Estate Writedowns 222 155
Gain on Sale of Loans 1,196 1,169
California Franchise Tax 312 211
Other Assets/Liabilities 401 271
------- -------
2,641 2,201
Deferred Tax Liabilities:
Unrealized Gains on Securities and Other Assets (365) --
Premises and Equipment (433) (439)
------- -------
(798) (439)
------- -------
$ 1,843 $ 1,762
------- -------
------- -------
</TABLE>
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>
1998 1997 1996
--------------- ------------------ ------------------
Amount Rate Amount Rate Amount Rate
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal Tax Rate $ 2,514 34.0% $ 1,640 34.0% $ 1,069 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 536 7.3 330 6.8 222 7.1
Tax Savings from Exempt Interest (44) (0.6) (79) (1.6) (93) (3.0)
Merger Expenses 222 3.0 -- -- -- -
Other Items - Net 49 0.6 77 1.6 31 1.0
------- ------ ------- ------ ------- ------
Bank's Effective Rate $ 3,277 44.3% $ 1,968 40.8% $ 1,229 39.1%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
54
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I - 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>
1998 1997 1996
------------------- ---------------------- ----------------------
Income Shares Income Shares Income Shares
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income as Reported $ 4,116 $ 2,855 $ 1,916
Current Period Preferred
Dividends -- -- (29)
Weighted Average Shares
Outstanding During the Year 2,520,828 2,403,103 1,918,438
------- ---------- ------- ---------- ------- ----------
USED IN BASIC EPS 4,116 2,520,828 2,855 2,403,103 1,887 1,918,438
Dilutive Effect of:
Outstanding Stock Options 135,410 134,084 74,104
------- ---------- ------- ---------- ------- ----------
USED IN DILUTIVE EPS $ 4,116 2,656,238 $ 2,855 2,537,187 $ 1,887 1,992,542
------- ---------- ------- ---------- ------- ----------
------- ---------- ------- ---------- ------- ----------
</TABLE>
NOTE J - EMPLOYEE BENEFITS
The Company has a salary deferral 401(k) Plan that covers substantially all
employees. The Bank contributed matching funds at its option, which amounted
to $302 and $34 in 1998 and 1997, respectively. No contribution for matching
funds was made in 1996.
The Bank has entered into retirement benefit agreements with certain officers
providing for future benefits aggregating approximately $3,180, payable in
equal annual installments for fifteen years from the death or retirement
dates of each participating officer. The obligations for these agreements are
funded by single premium life insurance policies, with cash surrender values
aggregating approximately $1,374, $906 and $862 at December 31, 1998, 1997
and 1996, respectively. As of December 31, 1998, 1997 and 1996, approximately
$152, $97, and $48, respectively, has been accrued in conjunction with these
agreements.
55
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE K - 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>
1999 $ 1,288
2000 889
2001 687
2002 500
2003 191
Thereafter 355
-------
$ 3,910
-------
-------
</TABLE>
The minimum rental payments shown above are given for the existing lease
obligations, are not a forecast of future rental expense, and do not include
sublease income.
Total rental expense included in occupancy expense and furniture and
equipment expense was approximately $987 in 1998, $768 in 1997 and $772 in
1996.
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 clients. 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, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K - COMMITMENTS AND CONTINGENCIES - CONTINUED
As of December 31, 1998, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
<TABLE>
<S> <C>
Commitments to Extend Credit $ 21,627
Standby Letter of Credit 360
--------
$ 21,987
--------
--------
</TABLE>
Commitments to extend credit are agreements to lend to a client 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 client. The majority of the Bank's
commitments to extend credit and standby letters of credit are secured by
real estate.
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 for comparable transactions with other persons.
The balance of these loans outstanding at December 31, 1998 was approximately
$2,241 and approximately $1,486 at December 31, 1997.
The Bank leases its Main Riverside facility from a partnership comprised of
two 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 $14, is adjusted for cost of living increases every
three years. The Bank also pays its pro-rata share of taxes and common
operating expenses.
NOTE M - 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 to
members of the Board of Directors.
During 1996 the Bank redeemed all outstanding preferred stock for $1,020.
57
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE N - STOCK OPTION PLAN
At December 31, 1998, 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.
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions;
risk-free rates of 4.5% in 1998 and 5.8% in 1997, volatility of 28% in 1998
and 19% in 1997 and expected lives of five years. The weighted-average fair
value of options granted during 1998 was $5.22 and $3.87 for 1997.
A summary of the status of the Company's fixed stock option plan as of
December 31, 1998, 1997, and 1996, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
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 288,700 $ 9.56 125,865 $ 4.88 130,397 $ 4.88
Options Granted 152,533 17.47 179,368 12.70 --
Options Exercised (28,131) 4.88 (11,466) 6.40 --
Options Forfeited -- (5,067) 11.79 4,532 4.88
-------- -------- --------
Outstanding at End of Year 413,102 12.80 288,700 9.56 134,929 4.88
-------- -------- --------
-------- -------- --------
Options Exercisable at Year-End 203,052 9.31 171,783 7.41 129,542 4.88
Weighted-Average
Fair Value of Options
Granted During the Year $ 5.22 $ 3.87 N/A
</TABLE>
58
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE N - STOCK OPTION PLAN - CONTINUED
The following table summarizes information about fixed options outstanding at
December 31, 1998:
<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>
$4.48 88,001 3.8 years $4.48 88,001 $4.48
$12.00 to $13.00 172,568 8.3 years 12.71 115,051 12.71
$17.00 to $21.00 152,533 10.0 years 17.47 --
------- -------
413,102 7.9 years 12.80 203,052 9.31
------- -------
------- -------
</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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net Income:
As Reported $ 4,116 $ 2,855 $ 1,916
Pro Forma $ 3,888 $ 2,640 $ 1,916
Per Share Data:
Net Income - Basic
As Reported 1.63 1.19 0.98
Pro Forma 1.54 1.10 0.98
Net Income - Diluted
As Reported 1.55 1.12 0.96
Pro Forma 1.46 1.04 0.96
</TABLE>
The information above does not include options from DNB Financial which was
acquired in 1998 (see Note Q). DNB Financial had no options granted in 1998,
1997 and 1996 and therefore did not impact the pro forma data presented
above. During 1997 and 1996, options previously granted equal to 92,609
shares and 4,116 shares, respectively, were exercised.
59
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE O - 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 clients 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, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - CONTINUED
Forward Commitments to Sell Mortgage-Backed Securities - Fair value is based
on quoted prices for financial instruments with identical or similar terms.
The fair value of forward commitments to sell mortgage-backed securities is
not material.
Put Options to Sell Mortgage-Backed Securities - Fair value is derived from
active exchange quotations. The fair value of put options to sell
mortgage-backed securities is not material.
The estimated fair value of financial instruments at December 31, 1998 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and Due From Banks $ 14,214 $ 14,214 $ 11,893 $ 11,893
Federal Funds Sold 18,700 18,700 -- --
Interest-Bearing Deposits -- -- 3,419 3,419
Investment Securities 17,244 17,274 23,364 23,410
Loans Held for Sale 74,598 76,836 47,150 49,290
Loans 164,154 164,138 137,550 136,650
I/O Strips Receivable and Servicing Assets 9,025 9,025 2,564 2,564
Cash Surrender Value - Life Insurance 1,374 1,374 906 906
FINANCIAL LIABILITIES:
Deposits 287,206 287,394 207,935 207,944
Federal Funds Purchased -- -- 1,000 1,000
Federal Home Loan Bank Advances -- -- 3,000 3,000
</TABLE>
61
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE P - 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, 1998,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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>
Minimum 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, 1998:
Total Capital (to Risk-Weighted Assets) $ 26,782 10.9% $ 19,593 8.0% $ 24,491 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $ 24,483 10.0% $ 9,796 4.0% $ 14,694 6.0%
Tier 1 Capital (to Average Assets) $ 24,483 7.9% $ 12,314 4.0% $ 15,392 5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk-Weighted Assets) $ 20,811 11.5% $ 14,475 8.0% $ 18,094 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $ 18,887 10.5% $ 7,238 4.0% $ 10,856 6.0%
Tier 1 Capital (to Average Assets) $ 18,887 7.8% $ 9,727 4.0% $ 12,160 5.0%
</TABLE>
62
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE Q - 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.
On June 13, 1996, the Bank acquired 100% of the outstanding common stock of
Bank of Westminster (BOW) for $6,174 in cash. BOW had total assets of
approximately $54,923. 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 and is being amortized over fifteen years on a straight-line basis.
BOW's pre-acquisition income in 1996 was not material.
At the close of business on May 29, 1998, the Company consummated a merger
with DNB Financial and its wholly-owned subsidiary, De Anza National Bank.
This merger was accounted for by the pooling of interest method, whereby the
Company's Financial Statements have been restated as if the two companies
were historically one unit. A total of 956,641 common shares were issued to
the shareholders of DNB Financial in connection with this merger.
The following table summarizes the separate revenue and net income of the
Company and DNB Financial that have been reported in the restated financial
statements included herein:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest and Noninterest Income:
The Company $ 44,635 $ 27,818 $ 15,151
DNB Financial 2,789 6,557 6,243
-------- -------- --------
$ 47,424 $ 34,375 $ 21,394
-------- -------- --------
-------- -------- --------
Net Income:
The Company $ 3,794 $ 2,110 $ 1,202
DNB Financial
322 745 714
-------- -------- --------
$ 4,116 $ 2,855 $ 1,916
-------- -------- --------
-------- -------- --------
</TABLE>
63
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE R - 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,
---------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS:
Cash $ 193 $ 50
Investment Securities -- 1,106
Investment in Subsidiary 26,689 21,092
Loans -- 555
Other Assets -- 216
-------- --------
$ 26,882 $ 23,019
-------- --------
-------- --------
LIABILITIES:
Long-Term Debt $ -- $ 465
Other Liabilities -- 4
-------- --------
TOTAL LIABILITIES -- 469
SHAREHOLDER'S EQUITY 22,550 26,882
-------- --------
$ 26,882 $ 23,019
-------- --------
-------- --------
</TABLE>
64
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
INCOME:
Cash Dividends from Subsidiary $ 531 $ 389
Interest Income 36 96
------- -------
TOTAL INCOME 567 485
EXPENSES:
Merger Related Expenses 542 --
Other 44 154
------- -------
TOTAL EXPENSES 586 154
------- -------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY (19) 331
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 4,135 2,524
------- -------
NET INCOME $ 4,116 $ 2,855
------- -------
------- -------
</TABLE>
65
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,116 $ 2,855
Noncash Items Included in Net Income:
Equity in Income of Subsidiary (4,666) (2,913)
Change in Other Assets and Liabilities 212 (94)
-------- --------
NET CASH USED
IN OPERATING ACTIVITIES (338) (152)
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends Received from Subsidiary 531 389
Investment in Subsidiary (915) --
Change in Investments 1,106 (584)
Change in Loans 555 131
-------- --------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 1,277 (64)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Short-Term Debt -- 100
Repayment of Short-Term Debt -- (100)
Repayments of Long-Term Debt (465) (58)
Options Exercised and Shares Retired 138 604
Dividends Paid (469) (287)
-------- --------
NET CASH PROVIDED (USED)
IN FINANCING ACTIVITIES (796) 259
-------- --------
NET INCREASE IN
CASH AND CASH EQUIVALENTS 143 43
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF YEAR 50 7
-------- --------
CASH AND CASH EQUIVALENTS
AT ENDING OF YEAR $ 193 $ 50
-------- --------
-------- --------
</TABLE>
66
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE S - SEGMENT INFORMATION
The Company has two primary reportable segments; its wholesale lending
operations and its retail banking operations. The wholesale lending segment
originates loans for resale to institutional investors. The Company's SBA
Loan Division and its Mortgage Loan Division are included in this segment.
The retail banking segment accepts deposits, originates loans and provides
other banking services to the communities in which its nine branch offices
are located.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before allocation of the
provision for loan losses, administrative costs, amortization of goodwill and
income taxes. The retail segment charges the wholesale segments for use of
excess funds based on the estimated cost of outside financing
The following tables summarize segment operations and asset allocations for
the last three years:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Wholesale Segments
---------------------- Retail Total
Mortgage SBA Segment Company
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT
Net Interest Income $ 2,772 $ 3,382 $ 9,456 $ 15,610
Noninterest Income 13,487 6,899 3,022 23,408
Operating Expense (11,225) (4,405) (10,433) (26,063)
-------- --------- --------- ---------
OPERATIONAL PROFIT 5,876 5,034 2,045 12,955
Provision for Loan Losses (755)
Administrative Costs (4,686)
Goodwill Amortization (121)
Income Taxes (3,277)
---------
NET INCOME $ 4,116
---------
---------
Total Assets at December 31, 1998 $ 37,365 $ 74,720 $205,928 $318,013
Loans Originated for Sale during 1998 $245,000 $ 89,000
Loans Sold during 1998 $222,000 $ 94,000
</TABLE>
67
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE S - SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
1997
-------------------------------------------------
Wholesale Segments
---------------------- Retail Total
Mortgage SBA Segment Company
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT
Net Interest Income $ 2,733 $ 2,023 $ 7,642 $ 12,398
Noninterest Income 8,655 3,681 3,584 15,920
Operating Expense (7,513) (3,121) (9,017) (19,651)
-------- --------- --------- ---------
OPERATIONAL PROFIT 3,875 2,583 2,209 8,667
Provision for Loan Losses (778)
Administrative Costs (2,952)
Goodwill Amortization (114)
Income Taxes (1,968)
---------
NET INCOME $ 2,855
---------
---------
Total Assets at December 31, 1997 $ 46,957 $ 43,861 $147,268 $238,086
Loans Originated for Sale during 1997 $190,000 $ 62,000
Loans Sold during 1997 $163,000 $ 42,000
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Wholesale Segments
---------------------- Retail Total
Mortgage SBA Segment Company
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT
Net Interest Income $ 684 $ 944 $ 7,174 $ 8,802
Noninterest Income 4,039 2,255 2,458 8,752
Operating Expense (3,345) (1,883) (6,760) (11,988)
-------- --------- --------- ---------
OPERATIONAL PROFIT 1,378 1,316 2,872 5,566
Provision for Loan Losses (364)
Administrative Costs (2,000)
Goodwill Amortization (57)
Income Taxes (1,229)
---------
NET INCOME $ 1,916
---------
---------
Total Assets at December 31, 1996 $ 20,278 $ 19,884 $143,593 $183,755
Loans Originated for Sale during 1996 $ 89,000 $ 38,000
Loans Sold during 1996 $ 76,000 $ 28,000
</TABLE>
68
<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, 1999.
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, 1999.
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, 1999.
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, 1999.
69
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
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, as amended in 1999
10.3 Form of Proxy
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 Employment Agreement - Ms. Gloria Van Kampen
10.8 Salary Continuation Agreement - Mr. Robert Ucciferri (A)
10.9 Salary Continuation Agreement - Mr. Barry J. Moore (A)
10.11 Agreement and Plan of Reorganization with DNB Financial (B)
21.1 Subsidiary of BYL Bancorp (A)
23.1 Consent of Vavrinek, Trine, Day & Co.
</TABLE>
- ---------------------------------
(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.
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 December 24,
1998, announcing the completion of the securitization of a
pool of unguaranteed interests in SBA loans.
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 Executive Vice President March 30, 1999
- ------------------------ and Chief Financial Officer
Barry J. Moore
/s/ Henry C. Cox II Director March 30, 1999
- ------------------------
Henry C. Cox II
/s/ Eddie R. Fischer Director March 30, 1999
- ------------------------
Eddie R. Fischer
/s/ Neil Hatcher Director March 30, 1999
- ------------------------
Neil Hatcher
/s/ Leonard O. Lindborg Director March 30, 1999
- ------------------------
Leonard O. Lindborg
/s/ H. Rhoads Martin, Jr. Chairman of the Board, Director March 30, 1999
- ------------------------
H. Rhoads Martin, Jr.
/s/ John F. Myers Director March 30, 1999
- ------------------------
John F. Myers
/s/ Brent W. Walberg Director March 30, 1999
- ------------------------
Brent W. Walberg
71
<PAGE>
BYL BANCORP
1997 STOCK OPTION PLAN
Adopted April 23, 1997
Amended July 23, 1997
Amended February 18, 1998
Amended March 24, 1999
1. PURPOSE
The purpose of the BYL Bancorp 1997 Stock Option Plan (the "Plan") is to
strengthen BYL Bancorp (the "Corporation") and those corporations which are or
hereafter become subsidiary corporations by providing additional means of
attracting and retaining competent managerial personnel and by providing to
participating directors, officers, key employees, consultants and others with
significant and material business relationships added incentives for high levels
of performance and for unusual efforts to increase the earnings of the
Corporation and any Subsidiary corporations; and to allow such individuals the
opportunity to participate in the ownership of the Corporation and thereby have
an interest in the success and increased value of the Corporation. The Plan
seeks to accomplish these purposes and achieve these results by providing a
means whereby such directors, officers, key employees, consultants and others
with significant and material business relationships may purchase shares of
Common Stock of the Corporation pursuant to Stock Options granted in accordance
with this Plan.
-1-
<PAGE>
Stock Options granted pursuant to this Plan are intended to be Incentive
Stock Options or Non-Qualified Stock Options, as shall be determined and
designated by the Stock Option Committee upon the grant of each Stock Option
hereunder.
2. DEFINITIONS
For the purposes of this Plan, the following terms shall have the
following meanings:
(a) "COMMON STOCK." This term shall mean shares of the Corporation's
no par value common stock, subject to adjustment pursuant to Paragraph 14
(Adjustment Upon Changes in Capitalization) hereunder.
(b) "CORPORATION." This term shall mean BYL Bancorp, a California
corporation.
(c) "ELIGIBLE PARTICIPANT." This term shall mean: (i) all directors
of the Corporation or any Subsidiary; (ii) all full time officers (whether or
not they are also directors) of the Corporation or any Subsidiary; (iii) all
full time key employees (as such persons may be determined by the Stock Option
Committee from time to time) of the Corporation or any Subsidiary; and (iv)
consultants and others with significant and material business relationships with
the Corporation.
(d) "EMPLOYER." This term shall mean the Corporation, as defined
herein, or any other subsidiary of the Corporation, as appropriate, depending
upon which company Optionee is employed.
(e) "FAIR MARKET VALUE." This term shall mean the fair market value
of the Corporation's Common Stock as determined by any reasonable valuation
method in
-2-
<PAGE>
accordance with the Commissioner of Corporations Regulation Section
260.140.50, which generally provides that in determining whether the price is
fair, predominant weight will be given to the following: (a) if securities
of the same class are publicly traded on an active market of substantial
depth, the recent market price of such securities; (b) if the securities of
the same class have not been so publicly traded, the price at which
securities of reasonable comparable corporations (if any) in the same
industry are being traded, subject to appropriate adjustments for the
dissimilarities between the corporations being compared; or (c) in the
absence of any reliable indicator under subsection (a) or (b), the earnings
history, book value and prospects of the issuer in light of market conditions
generally.
(f) "INCENTIVE STOCK OPTION." This term shall mean a Stock Option
which is an "Incentive Stock Option" within the meaning of Section 422A of the
Internal Revenue Code of 1986, as amended.
(g) "NON-QUALIFIED STOCK OPTION." This term shall mean a Stock Option
which is not an Incentive Stock Option.
(h) "OPTION SHARES." This term shall mean shares of Common Stock
which are covered by and subject to any outstanding unexercised Stock Option
granted pursuant to this Plan.
(i) "OPTIONEE." This term shall mean any Eligible Participant to whom
a stock option has been granted pursuant to this Plan, provided that at least
part of the Stock Option is outstanding and unexercised.
-3-
<PAGE>
(j) "PLAN." This term shall mean the BYL Bancorp 1997 Stock Option
Plan as embodied herein and as may be amended from time to time in accordance
with the terms hereof and applicable law.
(k) "STOCK OPTION." This term shall mean the right to purchase from
the Corporation a specified number of shares of Common Stock under the Plan at a
price and upon terms and conditions determined by the Stock Option Committee.
(l) "STOCK OPTION COMMITTEE." The Board of Directors of the
Corporation may select and designate a stock option committee consisting of at
least three and not more than five persons, at least two of whom are directors,
having full authority to act in the matters. Regardless of whether a Stock
Option Committee is selected, the Board of Directors may act as the Stock Option
Committee and any action taken by the Board of Directors as such shall be deemed
to be action taken by the Stock Option Committee. All references in the Plan to
the "Stock Option Committee" shall be deemed references to the Board of
Directors acting as a stock option committee and to a duly appointed Stock
Option Committee, if there be one. In the event of any conflict between any
action taken by the Board of Directors acting as a Stock Option Committee and
any action taken by a duly appointed Stock Option Committee, the action taken by
the Board of Directors shall be controlling and the action taken by the duly
appointed Stock Option Committee shall be disregarded.
(m) "SUBSIDIARY." This term shall mean any subsidiary corporation of
the Corporation as such term is defined in Section 425(f) of the Internal
Revenue Code of 1986, as amended.
-4-
<PAGE>
3. ADMINISTRATION
(a) STOCK OPTION COMMITTEE. This Plan shall be administered by the
Stock Option Committee. The Board of Directors of the Corporation shall have
the right, in its sole and absolute discretion, to remove or replace any person
from or on the Stock Option Committee at any time for any reason whatsoever.
(b) ADMINISTRATION OF THE PLAN. Any action of the Stock Option
Committee with respect to the administration of the Plan shall be taken
pursuant to a majority vote, or pursuant to the unanimous written consent, of
its members. Any such action taken by the Stock Option Committee in the
administration of this Plan shall be valid and binding, so long as the same
is in conformity with the terms and conditions of this Plan. Subject to
compliance with each of the terms, conditions and restrictions set forth in
this Plan, including, but not limited to, those set forth in Section 6(a)(ii)
hereof, the Stock Option Committee shall have the exclusive right, in its
sole and absolute discretion, to establish the terms and conditions of any
Stock Options granted under the Plan, including, without limitation, the
power to: (i) establish the number of Stock Options, if any, to be granted
hereunder, in the aggregate and with regard to any individual Eligible
Participant; (ii) determine the time or times when such Stock Options, or any
parts thereof, may be exercised; (iii) determine and designate which Stock
Options granted under the Plan shall be Incentive Stock Options and which
shall be Non-Qualified Stock Options; (iv) determine the Eligible
Participants, if any, to whom Stock Options are granted; (v) determine the
duration and purposes, if any, of leaves of absence which may be permitted to
holders of unexercised,
-5-
<PAGE>
unexpired Stock Options without such constituting a termination of employment
under the Plan; (vi) prescribe and amend the terms, provisions and form of
any instrument or agreement setting forth the terms and conditions of every
Stock Option granted hereunder; and (vii) make loans to or guarantee any
obligations of any Optionees, except directors, in connection with the
exercise of Stock Options as specified in Section 8(d) hereof, whenever the
Stock Option Committee determines that such loan or guarantee may reasonably
be expected to benefit the corporation, subject to the provisions of Section
315(b) of the California General Corporations Law of 1977, as amended and
subject to Regulations G, U and T promulgated by the Board of Governors of
the Federal Reserve System pursuant to Section 7 of the Securities Exchange
Act of 1934, if the Option Shares are listed on a stock exchange or are
contained in the list of over-the-counter margin securities published by the
Federal Reserve Board.
(c) DECISIONS AND DETERMINATIONS. Subject to the express provisions
of the Plan, the Stock Option Committee shall have the authority to construe and
interpret the Plan, to define the terms used therein, to prescribe, amend, and
rescind rules and regulations relating to the administration of the Plan, and to
make all other determinations necessary or advisable for administration of the
Plan. Determinations of the Stock Option Committee on matters referred to in
this Section 3 shall be final and conclusive so long as the same are in
conformity with the terms of this Plan.
-6-
<PAGE>
4. SHARES SUBJECT TO THE PLAN
Subject to adjustments as provided in Section 14 hereof, the maximum number
of shares of Common Stock which may be issued upon exercise of Stock Options
granted under this Plan is limited to 30% of the issued and outstanding shares
of the Corporation up to a maximum of 759,390 shares in the aggregate. If any
Stock Option shall be canceled, surrendered, or expire for any reason without
having been exercised in full, the unpurchased Option Shares represented thereby
shall again be available for grants of Stock Options under this Plan.
5. ELIGIBILITY
Only Eligible Participants shall be eligible to receive grants of Stock
Options under this Plan.
6. GRANTS OF STOCK OPTIONS
(a) GRANT. Subject to the express provisions and limitations of the
Plan, the Stock Option Committee, in its sole and absolute discretion, may grant
Stock Options to Eligible Participants of the Corporation, for a number of
Option Shares, at the price(s) and time(s), on the terms and conditions and to
such Eligible Participants as it deems advisable and specifies in the respective
grants.
Subject to the limitations and restrictions set forth in the Plan,
an Eligible Participant who has been granted a Stock Option may, if otherwise
eligible, be granted additional Stock Options if the Stock Option Committee
shall so determine. The Stock Option Committee shall designate in each grant
of a Stock Option whether the Stock Option is an Incentive Stock Option or a
Non-Qualified Stock Option.
-7-
<PAGE>
An eligible director, officer or employee shall not participate in the
granting of his or her own options.
(b) DATE OF GRANT AND RIGHTS OF OPTIONEE. The determination of the
Stock Option Committee to grant a Stock Option shall not in any way
constitute or be deemed to constitute an obligation of the Corporation, or a
right of the Eligible Participant who is the proposed subject of the grant,
and shall not constitute or be deemed to constitute the grant of a Stock
Option hereunder unless and until both the Corporation and the Eligible
Participant have executed and delivered the form of stock option agreement
then required by the Stock Option Committee as evidencing the grant of the
Stock Option, together with such other instruments as may be required by the
Stock Option Committee pursuant to this Plan; provided, however, that the
Stock Option Committee may fix the date of grant as any date on or after the
date of its final determination to grant the Stock Option (or if no such date
is fixed, then the date of grant shall be the date on which the determination
was finally made by the Stock Option Committee to grant the Stock Option),
and such date shall be set forth in the stock option agreement. The date of
grant as so determined shall be deemed the date of grant of the Stock Option
for purposes of this Plan.
(c) SHAREHOLDER-EMPLOYEES. Notwithstanding anything to the
contrary contained elsewhere herein, a Stock Option shall not be granted
hereunder to an Eligible Participant who owns, directly or indirectly, at the
date of the grant of the Stock Option, more than ten percent (10%) of the
total combined voting power of all classes of capital stock of the
Corporation or a Subsidiary corporation, unless the
-8-
<PAGE>
purchase price of the Option Shares subject to said Stock Option is at least
110% of the Fair Market Value of the Option Shares, determined as of the date
said Stock Option is granted.
(d) MAXIMUM VALUE OF STOCK OPTIONS. Except as provided in
paragraph (e) of this Section 6, the maximum aggregate Fair Market Value of
Option Shares (determined as of the respective Stock Option grant dates) for
which an Eligible Participant may be granted Incentive Stock Options in any
calendar year shall not exceed $100,000, plus any "unused carryover amount."
The unused carryover amount, determined on a yearly basis, shall be equal to
one-half (1/2) of the difference between $100,000 and the aggregate Fair
Market Value (determined as of the respective Stock Option grant dates) of
all of the Option Shares subject to Incentive Stock Options granted to the
Optionee during the calendar year under the Plan. The provisions of Section
422A(c)(4) of the Internal Revenue Code of 1986, as amended, are incorporated
herein by this reference for the purpose of the determination and application
of the unused carryover amount.
The aggregate fair market value (determined at the time the option
is granted) of the stock with respect to which incentive stock options are
exercisable for the first time by such individual under the terms of the Plan
during any calendar year is limited to $100,000, but the value of stock for
which options may be granted to an employee in a given year may exceed
$100,000, but such options in excess of $100,000 shall be treated as
non-qualified options.
-9-
<PAGE>
(e) SUBSTITUTED STOCK OPTIONS. If all of the outstanding shares of
common stock of another corporation are changed into or exchanged solely for
common stock in a transaction to which Section 425(a) of the internal Revenue
Code of 1986, as amended, applies, then, subject to the approval of the Board
of Directors of the Bank, Stock Options under the Plan may be substituted
("Substituted Options") in exchange for valid, unexercised and unexpired
stock options of such other corporation. Substituted options shall qualify
as Incentive Stock Options under the Plan, provided that (and to the extent)
the stock options exchanged for the Substituted Options were "Incentive Stock
Options" within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended.
(f) NON-QUALIFIED STOCK OPTIONS. All Stock Options granted by the
Stock Option Committee which: (i) are designated at the time of grant as
Incentive Stock Options but do not so qualify under the provisions of Section
422A of the Code or any regulations or rulings issued by the Internal Revenue
Service for any reason; (ii) are in excess of the fair market value
limitations set forth in Section 6(d); or (iii) are designated at the time of
grant as Non-Qualified Stock Options, shall be deemed Non-Qualified Stock
Options under this Plan. Non-Qualified Stock Options granted or substituted
hereunder shall be so designated in the stock option agreement entered into
between the Corporation and the Optionee.
7. STOCK OPTION EXERCISE PRICE
(a) MINIMUM PRICE. The exercise price of any Option Shares shall
be determined by the Stock Option Committee, in its sole and absolute
discretion, upon
-10-
<PAGE>
the grant of a Stock Option. Except as provided elsewhere herein, said
exercise price shall not be less than one hundred percent (100%) of the Fair
Market Value of the Common Stock represented by the Option Share on the date
of grant of the related Stock Option.
(b) EXCHANGED STOCK OPTIONS. Where the outstanding shares of stock
of another corporation are changed into or exchanged for shares of Common
Stock of the Corporation without monetary consideration to that other
corporation, then, subject to the approval of the Board or Directors of the
Corporation, Stock Options may be granted in exchange for unexercised,
unexpired stock options of the other corporation, and the exercise price of
the Option Shares subject to each Stock Option so granted may be fixed at a
price less than one hundred percent (100%) of the Fair Market Value of the
Common Stock at the time such Stock Option is granted if said exercise price
has been computed to be not less than the exercise price set forth in the
stock option of the other corporation, with appropriate adjustment to reflect
the exchange ratio of the shares of stock of the other corporation into the
shares of Common Stock of the Corporation.
(c) SUBSTITUTED OPTIONS. The exercise price of the Option Shares
subject to each Substituted Option may be fixed at a price less than one
hundred percent (100%) of the Fair Market Value of the Common Stock at the
time such Substituted option is granted if said exercise price has been
computed to be not less than the exercise price set forth in the stock option
of the other corporation for which it was
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exchanged, with appropriate adjustment to reflect the exchange ratio of the
shares of stock of the other corporation into the shares of Common Stock.
8. EXERCISE OF STOCK OPTIONS.
(a) EXERCISE. Except as otherwise provided elsewhere herein, each
Stock Option shall be exercisable in such increments, which need not be
equal, and upon such contingencies as the Stock Option Committee shall
determine at the time of grant of the Stock Option; provided, however, (i)
that if an Optionee shall not in any given period exercise any part of a
Stock Option which has become exercisable during that period, the Optionee's
right to exercise such part of the Stock Option shall continue until
expiration of the Stock Option or any part thereof as may be provided in the
related Stock Option Agreement, and (ii) in the case of options that are not
granted to officers, directors, consultants of, or others with significant
and material business relationships with, the Company, a minimum of 20% of
the stock options shall be exercisable in each year over a five year period
from the date the option is granted. No Stock Option or part thereof shall
be exercisable except with respect to whole shares of Common Stock, and
fractional share interests shall be disregarded except that they may be
accumulated.
(b) PRIOR OUTSTANDING INCENTIVE STOCK OPTIONS. Incentive Stock
Options granted to an Optionee may be exercisable while such Optionee has
outstanding and unexercised any Incentive Stock Option previously granted (or
substituted) to him or her pursuant to this Plan. The Stock Option Committee
shall determine if such options shall be exercisable if there are any
Incentive Stock Options previously granted (or
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substituted) to him or her pursuant to this Plan, and such determination
shall be evidenced in the Agreement executed by the Optionee and Company,
subject to the requirements of Rule 260.141.41(f) of the California
Commissioner of Corporations. An Incentive Stock Option shall be treated as
outstanding until it is exercised in full or expires by reason of lapse of
time.
(c) NOTICE AND PAYMENT. Stock Options granted hereunder shall be
exercised by written notice delivered to the Corporation specifying the
number of Option Shares with respect to which the Stock Option is being
exercised, together with concurrent payment in full of the exercise price as
hereinafter provided in Section 8(d) hereof. If the Stock Option is being
exercised by any person or persons other than the Optionee, said notice shall
be accompanied by proof, satisfactory to counsel for the Corporation, of the
right to such person or persons to exercise the Stock Option. The
Corporation's receipt of a notice of exercise without concurrent receipt of
the full amount of the exercise price shall not be deemed an exercise of a
Stock Option by an Optionee, and the Corporation shall have no obligation to
an Optionee for any Option Shares unless and until full payment of the
exercise price is received by the Corporation in accordance with Section 8(d)
hereof, and all of the terms and provisions of the Plan and the related stock
option agreement have been complied with.
(d) PAYMENT OF EXERCISE PRICE. The exercise price of any Option
Shares purchased upon the proper exercise of a Stock Option shall be paid in
full at the time of each exercise of a Stock Option in cash and/or, with the
prior written approval of the Stock Option Committee, in Common Stock of the
Corporation which, when added
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to the cash payment, if any, has an aggregate Fair Market Value equal to the
full amount of the exercise price of the Stock Option, or part thereof, then
being exercised and/or, with the prior written approval of the Stock Option
Committee and if legally permitted, on a deferred basis evidenced by a
promissory note, containing such terms and subject to such security as the
Stock Option Committee shall determine to be fair and reasonable from time to
time, for the total option price for the number of shares so purchased. No
Director may purchase any Stock Option on a deferred basis evidenced by a
promissory note. Unless payment is on a deferred basis, payment by an
Optionee as provided herein shall be made in full concurrently with the
Optionee's notification to the Corporation of his intention to exercise all
or part of a Stock Option. If all or part of payment is made in shares of
Common Stock as heretofore provided, such payment shall be deemed to have
been made only upon receipt by the Corporation of all required share
certificates, and all stock powers and other required transfer documents
necessary to transfer the shares of Common Stock to the Corporation.
(e) REORGANIZATION. Notwithstanding any provision in any stock
option agreement pertaining to the time of exercise of a Stock Option, or
part thereof, upon adoption by the requisite holders of the Corporation's
outstanding shares of Common Stock of any plan of dissolution, liquidation,
reorganization, merger, consolidation or sale of all or substantially all of
the assets of the Corporation to another corporation, or the acquisition of
stock representing more than 50% of the voting power of the Corporation then
outstanding, by another corporation or person, which would, upon
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consummation, result in termination of a Stock Option in accordance with
Section 16 hereof, the Stock Option shall become immediately exercisable as
to all Option Shares, whether or not vested, for such period of time as may
be determined by the Stock Option Committee, but in any event not less than
30 days prior to the adoption of the plan of dissolution, liquidation,
reorganization, merger, consolidation, sale, or acquisition on the condition
that the terminating event described in Section 16 hereof is consummated.
Any Option Shares not exercised will be terminated. If such Terminating Event
is not consummated, Stock Options granted pursuant to the Plan shall be
exercisable in accordance with their respective terms.
(f) MINIMUM EXERCISE. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of a Stock Option unless the number
of shares purchased is the total number which remains to be purchased under
the Stock Option.
(g) COMPLIANCE WITH LAW. No shares of Common Stock shall be issued
by the Corporation upon exercise of any Stock Option, and an Optionee shall
have no rights or claim to such shares, unless and until: (a) payment in full
as provided in Section 8(d) hereof has been received by the Corporation; (b)
in the opinion of the counsel for the Corporation, all applicable
registration requirements of the Securities Act of 1933, all applicable
listing requirements of securities exchanges or associations on which the
Corporation's Common Stock is then listed or traded, and all other
requirements of law and of regulatory bodies having jurisdiction over such
issuance and delivery, have been fully complied with; and (c) if required by
federal or state law
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or regulation, the Optionee shall have paid to the Corporation the amount, if
any, required to be withheld on the amount deemed to be compensation to the
Optionee as a result of the exercise of his or her Stock Option, or made
other arrangements satisfactory to the Corporation, in its sole discretion,
to satisfy applicable income tax withholding requirements.
9. NONTRANSFERABILITY OF STOCK OPTIONS.
Each Stock Option shall, by its terms, be nontransferable by the
Optionee other than by will or the laws of descent and distribution, and
shall be exercisable during the Optionee's lifetime only by the Optionee or
his or her guardian or legal representative.
10. CONTINUATION OF EMPLOYMENT
Except for Optionees with a written contract for any definite term, this
Agreement shall not obligate the Corporation or a Subsidiary to employ
Optionee.
11. CESSATION OF EMPLOYMENT
Except as provided in Sections 8(e), 12, 13, 14, 15 or 16 hereof, if,
for any reason, an Optionee's status as an Eligible Participant is
terminated, the Stock Options granted to such Optionee shall expire on the
expiration dates specified for said Stock Options at the time of their
initial grant, or three (3) months after the Optionee's status as an Eligible
Participant is terminated, whichever is earlier. Thereafter, Options shall
be exercisable only as to those increments, if any, which had become
exercisable as of such expiration date, and any Stock Options or increments
which had not become exercisable as of such date shall expire and terminate
automatically on such expiration date.
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12. TERMINATION FOR VIOLATION OF STANDARDS OF CONDUCT AS REFERENCED IN
OPTIONEE'S EMPLOYEE HANDBOOK
If Optionee's status as an Eligible Participant is terminated for
violation of the Employer's Standards of Conduct, the vested portion of Stock
Options granted to such Optionee shall be exercisable for a thirty (30) day
period following such termination, and thereafter such Stock Options shall
automatically expire and terminate in their entirety; provided, however, that
the Stock Option Committee may, in its sole discretion, within thirty (30)
days of such termination, reinstate such Stock Options to the status of
options terminated for reasons other than violations of the Employer's
Standards of Conduct, death or disability by giving written notice of such
reinstatement to the Optionee. In the event of such reinstatement, the
Optionee may exercise the Stock Options as provided in Section 11 herein.
Reasons for termination for violation of the Employer's Standards of Conduct
shall include, but not be limited to, termination for malfeasance or gross
misfeasance in the performance of duties or conviction of illegal activity in
connection therewith, and, in any event, the determination of the Stock
Option Committee with respect thereto shall be final and conclusive.
13. DEATH OF OPTIONEE
If an Optionee loses his status as an Eligible Participant by reason of
death, or if an Optionee dies during the three-month period referred to in
Section 12 hereof, the Stock Options granted to such Optionee shall expire on
the expiration dates specified for said Stock Options at the time of their
initial grant, or one (l) year after the date of
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such death, whichever is earlier. After such death but before such
expiration, subject to the terms and provisions of the Plan and the related
stock option agreements, the person or persons to whom such Optionee's rights
under the Stock Options shall have passed by will or by the applicable laws
of descent and distribution, or the executor or administrator of the
Optionee's estate, shall have the right to exercise such Stock Options to the
extent that increments, if any, had become exercisable as of the date on
which the Optionee's status as an Eligible Participant had been lost.
14. DISABILITY OF OPTIONEE
If an Optionee is disabled while employed by or while serving as a
director of the Corporation or a Subsidiary or during the three-month period
referred to in Section 12 hereof, the Stock Options granted to such Optionee
shall expire on the expiration dates specified for said Stock Options at the
time of their initial grant, or one (l) year after the date of such
disability, whichever is earlier. After such disability but before such
expiration, the Optionee or a guardian or conservator of the Optionee's
estate, as duly appointed by a court of competent jurisdiction, shall have
the right to exercise such Stock Options to the extent that increments, if
any, had become exercisable as of the date on which the Optionee became
disabled or ceased to be employed by the Corporation or a Subsidiary as a
result of the disability. For the purpose of this Section 14, an Optionee
shall be deemed to have become "disabled" if it shall appear to the Stock
Option Committee, upon written certification delivered to the Corporation by
a qualified licensed physician, that the Optionee has become permanently and
totally unable to engage in any substantial gainful activity by reason of any
medically
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determinable physical or mental impairment which can be expected to result in
death, or which has lasted or can be expected to last for a continuous period
of not less than 12 months.
15. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
If the outstanding shares of Common Stock of the Corporation are
increased, decreased, or changed into or exchanged for a different number or
kind of shares or securities of the Corporation, through a reorganization,
merger, recapitalization, reclassification, stock split, stock dividend,
stock consolidation, or otherwise, without consideration to the Corporation,
an appropriate and proportionate adjustment shall be made in the number and
kind of shares as to which Stock Options may be granted. A corresponding
adjustment changing the number or kind of Option Shares and the exercise
prices per share allocated to unexercised Stock Options, or portions thereof,
which shall have been granted prior to any such change, shall likewise be
made. Any such adjustment, however, in an outstanding Stock Option shall be
made without change in the total price applicable to the unexercised portion
of the Stock Option, but with a corresponding adjustment in the price for
each Option Share subject to the Stock Option. Any adjustment under this
Section shall be made by the Stock Option Committee, whose determination as
to what adjustments shall be made, and the extent thereof, shall be final and
conclusive. No fractional shares of stock shall be issued or made available
under the Plan on account of any such adjustment, and fractional share
interests shall be disregarded and the fractional share interest shall be
rounded down to the nearest whole number.
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16. TERMINATING EVENTS
Not less than thirty (30) days prior to consummation of a plan of
dissolution or liquidation of the Corporation, or consummation of a plan of
reorganization, merger or consolidation of the Corporation with one or more
corporations, as a result of which the Corporation is not the surviving
corporation and the outstanding securities of the class then subject to
options hereunder are changed or exchanged for cash or property or securities
not of the Corporation's issue, or upon the sale of all or substantially all
the assets of the Corporation to another corporation, or the acquisition of
stock representing more than fifty percent (50%) of the voting power of the
Corporation then outstanding by another corporation or person (the
"Terminating Event"), the Stock Option Committee or the Board of Directors
shall notify each Optionee of the pendency of the Terminating Event. Upon
the effective date of the Terminating Event, the Plan shall automatically
terminate and all Stock Options theretofore granted shall terminate, unless
provision is made in connection with such transaction for the continuance of
the Plan and/or assumption of Stock Options theretofore granted, or
substitution for such Stock Options with new stock options covering stock of
a successor employer corporation, or a parent or subsidiary corporation
thereof, solely at the discretion of such successor corporation, or parent or
subsidiary corporation, with appropriate adjustments as to number and kind of
shares and prices, in which event the Plan and options theretofore granted
shall continue in the manner and under the terms so provided. If the Plan
and unexercised options shall terminate pursuant to the foregoing sentence,
all persons shall have the right to exercise any unexercised
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portions of options outstanding and not exercised, shall have the right, at
such time prior to the consummation of the transaction causing such
termination as the Corporation shall designate and for a period of not less
than 30 days, to exercise all unexercised portions of teir options, including
the portions which would, but for this paragraph entitled "Terminating
Events," not yet be exercisable.
17. AMENDMENT AND TERMINATION
The Board of Directors of the Corporation may at any time and from
time-to-time suspend, amend, or terminate the Plan and may, with the consent
of Optionee, make such modifications of the terms and conditions of a Stock
Option as it shall deem advisable; provided that, except as permitted under
the provisions of Section 16 hereof, no amendment or modification may be
adopted without the Corporation having first obtained all necessary
regulatory approvals and approval of the holders of a majority of the
Corporation's shares of Common Stock present, or represented, and entitled to
vote at a duly held meeting of shareholders of the Corporation if the
amendment or modification would:
(a) materially increase the benefits accruing to participants under
the Plan;
(b) materially increase the number of securities which may be
issued under the Plan;
(c) materially modify the requirements as to eligibility for
participation in the Plan;
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(d) increase or decrease the exercise price of any Stock Options
granted under the Plan;
(e) increase the maximum term of Stock Options provided for herein;
(f) permit Stock Options to be granted to any person who is not an
Eligible Participant; or
(g) change any provision of the Plan which would affect the
qualification as an Incentive Stock Option under the Plan.
No Stock Option may be granted during any suspension of the Plan or
after termination of the Plan. Amendment, suspension, or termination of the
Plan shall not (except as otherwise provided in Section 17 hereof), without
the consent of the Optionee, alter or impair any rights or obligations under
any Stock Option theretofore granted.
18. RIGHTS OF ELIGIBLE PARTICIPANTS AND OPTIONEES
Neither any Eligible Participant, any Optionee or any other person shall
have any claim or right to be granted any Stock Option under this Plan, and
neither this Plan nor any action taken hereunder shall be deemed or construed
as giving any Eligible Participant, Optionee or any other person any right to
be retained in the employ of the Corporation or any subsidiary of the
Corporation. Without limiting the generality of the foregoing, there is no
vesting of any right in the classification of any person as an Eligible
Participant or Optionee, such classification being used solely to define and
limit those persons who are eligible for consideration of the grant of Stock
Options under the Plan.
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19. PRIVILEGES OF STOCK OWNERSHIP; SECURITIES LAW COMPLIANCE; NOTICE OF SALE
No Optionee shall be entitled to the privileges of stock ownership as to
any Option Shares not actually issued and delivered. No Option Shares may be
purchased upon the exercise of a Stock Option unless and until all then
applicable requirements of all regulatory agencies having jurisdiction and
all applicable requirements of securities exchanges upon which the stock of
the Corporation is listed (if any) shall have been fully complied with. The
Corporation will diligently endeavor to comply with all applicable securities
laws before any options are granted under the Plan and before any stock is
issued pursuant to options. The Optionee shall, not more than five (5) days
after each sale or other disposition of shares of Common Stock acquired
pursuant to the exercise of Stock Options, give the Corporation notice in
writing of such sale or other disposition.
The Corporation will provide to each Optionee its Annual Report as
required by Section 260.140.46 of the regulations of the California
Commissioner of Corporations.
20. EFFECTIVE DATE OF THE PLAN
The Plan shall be deemed adopted as of April 23, 1997, and shall be
effective immediately, subject to approval of the Plan by the holders of at
least a majority of the Corporation's outstanding shares of Common Stock and
approval of the Plan by the California Commissioner of Corporations.
21. TERMINATION
Unless previously terminated as aforesaid, the Plan shall terminate ten
(10) years from the earliest date of (i) adoption of the Plan by the Board of
Directors, or (ii)
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approval of the Plan by holders of at least a majority of the Corporation's
outstanding shares of Common Stock. No Stock Options shall be granted under
the Plan thereafter, but such termination shall not affect any Stock Option
theretofore granted.
22. OPTION AGREEMENT
Each Stock Option granted under the Plan shall be evidenced by a written
stock option agreement executed by the Corporation and the Optionee, and shall
contain each of the provisions and agreements herein specifically required to be
contained therein, and such other terms and conditions as are deemed desirable
by the Stock Option Committee and are not inconsistent with the Plan.
23. STOCK OPTION PERIOD
Each Stock Option and all rights and obligations thereunder shall expire
on such date as the Stock Option Committee may determine, but not later than
ten (10) years from the date such Stock Option is granted, and shall be
subject to earlier termination as provided elsewhere in the Plan.
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24. EXCULPATION AND INDEMNIFICATION OF STOCK OPTION COMMITTEE
In addition to such other rights of indemnification which they may have
as directors of the Corporation or as members of the Stock Option Committee,
the present and former members of the Stock Option Committee, and each of
them, shall be indemnified by the Corporation for and against all costs,
judgments, penalties and reasonable expenses, including reasonable attorney's
fees, actually and necessarily incurred by them in connection with any
action, suit or proceeding, or in connection with any appeal thereof, to
which they or any of them may be a party by reason of any act or omission of
any member of the Stock Option Committee under or in connection with the Plan
or any Stock Option granted thereunder; provided, however, that a member of
the Stock Option Committee shall not be entitled to any indemnification
whatsoever pursuant to this Section for or as a result of any act or omission
of such member which was not taken in good faith and which constituted
willful misconduct or gross negligence by such member; provided further, that
any amounts paid by any member of the Stock Option Committee in settlement of
any action, suit or proceeding for which indemnification may be sought
pursuant to this Section shall be first approved in writing by independent
legal counsel selected by the Corporation; and, provided further, that within
thirty (30) days after institution of any action, suit or proceeding against
any member with respect to which such member is entitled to indemnification
hereunder, such member shall, in writing, offer the Corporation the
opportunity, at its own expense, to handle (including settle) and
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conduct the defense thereof. The provisions of this Section shall apply to
the estate, executor and administrator of each member of the Stock Option
Committee.
25. (Reserved)
26. NOTICES
All notices and demands of any kind which the Stock Option Committee,
any Optionee, Eligible Participant, or any other person may be required or
desires to serve under the terms of this Plan shall be in writing and shall
be served by personal service upon the respective person or by leaving a copy
of such notice or demand at the address of such person as may be reflected in
the records of the Corporation, or in the case of the Stock Option Committee,
with the Secretary of the Corporation, or by mailing a copy thereof by
certified or registered mail, postage prepaid, with return receipt requested.
In the case of service by mail, it shall be deemed complete at the
expiration of the third day after the day of mailing, except for notice of
the exercise of any Stock Option and payment of the Stock Option exercise
price, both of which must be actually received by the Corporation.
27. (Reserved)
28. LIMITATION OF RIGHTS
The Stock Option Committee, in its sole and absolute discretion, is
entitled to determine who, if anyone, is an Eligible Participant under this
Plan, and which, if any, Eligible Participant shall receive any grant of a
Stock Option. No oral or written agreement by any person on behalf of the
Corporation relating to this Plan or any
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Stock Option granted hereunder is authorized, and such agreement may not bind
the Corporation or the Stock Option Committee to grant any Stock Option to
any person.
29. SEVERABILITY
If any provision of this Plan as applied to any person or to any
circumstances shall be adjudged by a court of competent jurisdiction to be
void, invalid, or unenforceable, the same shall in no way effect any other
provision hereof, the application of any such provision in any other
circumstances, or the validity of enforceability hereof.
30. CONSTRUCTION
Where the context or construction requires, all words applied in the
plural shall be deemed to have been used in the singular and vice versa, and
the masculine gender shall include the feminine and the neuter.
31. HEADINGS
The headings of the several paragraphs of this Plan are inserted solely
for convenience of reference and are not intended to form a part of and are
not intended to govern, limit or aid in the construction of any term or
provision hereof.
32. SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of
the Corporation and any Optionee.
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33. GOVERNING LAW
This Plan shall be governed by and construed in accordance with the laws of
the State of California.
34. CONFLICT
In the event of any conflict between the terms and provisions of this Plan,
and any other document, agreement or instrument, including, without limitation,
any stock option agreement, the terms and provisions of this Plan shall control.
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SECRETARY'S CERTIFICATE OF ADOPTION
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Assistant Secretary of BYL
Bancorp; and
2. That the foregoing BYL Bancorp 1997 Stock Option Plan, as amended,
was duly adopted by the Board of Directors of BYL Bancorp as the Stock Option
Plan for the Corporation at a meeting duly called as required by law and
convened on the 24th day of March, 1999.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the Corporation this 24th day of March, 1999.
/s/ John F. Myers
-----------------------------------
John F. Myers, Secretary
[SEAL]
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OPTIONEES TO WHOM INCENTIVE STOCK OPTIONS ARE GRANTED MUST MEET CERTAIN
HOLDING PERIOD AND EMPLOYMENT REQUIREMENTS FOR FAVORABLE TAX TREATMENT.
UNLESS OTHERWISE STATED, ALL DEFINED TERMS IN THE PLAN SHALL HAVE THE SAME
MEANING HEREIN AS SET FORTH IN THE PLAN.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
BYL BANCORP
STOCK OPTION AGREEMENT
/ / Incentive Stock Option
/ / Non-Qualified Stock Option
THIS AGREEMENT, dated the ____ day of ____________, 19__, by and
between BYL Bancorp, a California corporation (the "Corporation"), and
_____________________ (the "Optionee");
WHEREAS, pursuant to the Corporation's 1997 Stock Option Plan (the
"Plan"), the Stock Option Committee has authorized the grant to Optionee of a
Stock Option to purchase all or any part of _____________________ (______)
authorized but unissued shares of the Corporation's Common Stock at the price of
_________________ Dollars ($_____) per share, such Stock Option to be for the
term and upon the terms and conditions hereinafter stated;
NOW, THEREFORE, it is hereby agreed:
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1. GRANT OF STOCK OPTION. Pursuant to said action of the Stock
Option Committee and pursuant to authorizations granted by all appropriate
regulatory and governmental agencies, the Corporation hereby grants to
Optionee a Stock Option to purchase, upon and subject to the terms and
conditions of the Plan, which is incorporated in full herein by this
Reference, all or any part of ________________ (_______) Option Shares of the
Corporation's Common Stock, at the price of ____________________ Dollars
($_____) per share. For purposes of this Agreement and the Plan, the date of
grant shall be _________________, 19__. At the date of grant, Optionee [DOES]
[DOES NOT OWN] stock possessing more than 10% of the total combined voting
power of all classes of capital stock of the Corporation or any Subsidiary.
The Stock Option granted hereunder [IS] [IS NOT] intended to qualify
as an Incentive Stock Option within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended.
2. EXERCISABILITY. This Stock Option shall be exercisable as to
________________ Option Shares on ________________, 19__, as to
__________________ Option Shares on ________________, 19__, as to
__________________ Option Shares on ________________, 19__, as to
__________________ Option Shares on ________________, 19__, and as to
_________________ Option Shares on ________________, 19__. This Stock
Option shall remain exercisable as to all of such Option Shares until
_______________, 19__ (but not later than ten (10) years from the date
hereof), at which time it shall expire in its entirety, unless this Stock
Option has expired or
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terminated earlier in accordance with the provisions hereof. Option shares
as to which this Stock Option becomes exercisable may be purchased at any
time prior to expiration of this Stock Option.
3. EXERCISE OF STOCK OPTION. Subject to the provision of
Paragraph 4 hereof, this Stock Option may be exercised by written notice
delivered to the Corporation stating the number of Option Shares with respect
to which this Stock Option is being exercised, together with cash and/or, if
permitted at the time of exercise by the Stock Option Committee, shares of
Common Stock of the Corporation which, when added to the cash payment, if
any, have an aggregate Fair Market Value equal to the full amount of the
purchase price of such Option Shares, and/or, if permitted at the time of
exercise by the Stock Option Committee and if legally permitted, and if
Optionee is not also a director, consultant or business advisor of the
Corporation or any of its subsidiaries, on a deferred basis evidenced by a
promissory note. Not less than ten (10) Option shares may be purchased at
any one time unless the number purchased is the total number which remains to
be purchased under this Stock Option and in no event may the Stock Option be
exercised with respect to fractional shares. Upon exercise, Optionee shall
make appropriate arrangements and shall be responsible for the withholding of
any federal and state income taxes then due.
4. PRIOR OUTSTANDING STOCK OPTIONS. Incentive Stock Options
granted to an Optionee may be exercisable while such Optionee has outstanding
and unexercised any Incentive Stock Option previously granted to him or her
pursuant to this Plan. The
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Stock Option Committee shall determine if such options shall be exercisable
if there are any Incentive Stock Options previously granted (or substituted)
to him or her pursuant to this Plan, and such determination shall be
evidenced in the Agreement executed by the Optionee and the Corporation,
subject to the requirements of Rule 260.141.41(f) of the California
Commissioner of Corporations. An Incentive Stock Option shall be treated as
outstanding until it is exercised in full or expires by reason of lapse of
time.
5. CESSATION OF EMPLOYMENT. Except as provided in paragraphs 7,
9, or 11 hereof, if Optionee's status as an Eligible Participant under the
Plan is terminated, this Stock Option shall expire three (3) months
thereafter or on the date specified in Paragraph 2 hereof, whichever is
earlier. During such period after termination of status as an Eligible
Participant, this Stock Option shall be exercisable only as to those
increments, if any, which had become exercisable as of the date on which the
Optionee's status as an Eligible Participant was terminated, and any Stock
Options or increments which had not become exercisable as of such date shall
expire and terminate automatically on such date.
6. TERMINATION FOR VIOLATION OF STANDARDS OF CONDUCT AS REFERENCED IN
OPTIONEE'S EMPLOYEE HANDBOOK. If Optionee's status as an Eligible
Participant under the Plan is terminated for violation of the Employer's
Standard of Conduct, the vested portion of this Stock Option shall be
exercisable for a thirty (30) day period following such termination, and
thereafter this Stock Option shall automatically expire and terminate in
their entirety; provided, however, that the Stock Option Committee may,
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<PAGE>
in its sole discretion, within thirty (30) days of such termination,
reinstate such Stock Options to the status of options terminated for reasons
other than voilations of the Employer's Standards of Conduct, death or
disability by giving written notice of such reinstatements to the Optionee.
In the event of such reinstatement, the Optionee may exercise the Stock
Options as provided in Section 11 herein. Termination for violation of the
Employer's Standard of Conduct shall include, but not be limited to, or
termination for malfeasance or gross misfeasance in the performance of duties
or conviction of illegal activity in connection therewith, and, in any event,
the determination of the Stock Option Committee with respect thereto shall be
final and conclusive.
7. DISABILITY OR DEATH OF OPTIONEE. If Optionee loses his or her
status as an Eligible Participant under the Plan by reason of death or if
Optionee is disabled while employed by the Corporation or a Subsidiary, or if
Optionee dies or becomes so disabled during the three-month period referred
to in Paragraph 5 hereof, this Stock Option shall automatically expire and
terminate one (l) year after the date of Optionee's disability or death or on
the day specified in Paragraph 2 hereof, whichever is earlier. After
Optionee's disability or death but before such expiration, the person or
persons to whom Optionee's rights under this Stock Option shall have passed
by order of a court of competent jurisdiction or by will or the applicable
laws of descent and distribution, or the executor, administrator or
conservator of Optionee's estate, shall have the right to exercise this Stock
Option to the extent that increments, if any, had become exercisable as of
the date on which Optionee's status as an Eligible Participant
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<PAGE>
under the Plan had been terminated. For purposes hereof, "disability" shall
have the same meaning as set forth in Section 14 of the Plan.
8. NONTRANSFERABILITY. This Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during Optionee's lifetime only by Optionee or his or
her guardian or legal representative.
9. EMPLOYMENT. Except for optionees with a written contract for
any definite term, this Agreement shall not obligate the Corporation or a
Subsidiary to employ Optionee.
10. PRIVILEGES OF STOCK OWNERSHIP. Optionee shall have no rights
as a stockholder with respect to the Option Shares unless and until said
Option Shares are issued to Optionee as provided in the Plan. Except as
provided in Section 15 of the Plan, no adjustment will be made for dividends
or other rights in respect of which the record date is prior to the date such
stock certificates are issued.
11. MODIFICATION AND TERMINATION BY BOARD OF DIRECTORS. The
rights of Optionee are subject to modification and termination upon the
occurrence of certain events as provided in Sections 12, 13, 14, 15 and 16
of the Plan. Upon adoption by the requisite holders of the Corporation's
outstanding shares of Common Stock of any plan of dissolution, liquidation,
reorganization, merger, consolidation or sale of all or substantially all of
the assets of the Corporation to, or the acquisition of stock representing
more than fifty percent (50%) of the voting power of the Corporation then
outstanding by another corporation or person which would, upon consummation,
result in termination of this Stock Option in accordance with Section 16 of
the Plan,
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<PAGE>
this Stock Option shall become immediately exercisable as to all unexercised
Option Shares notwithstanding the incremental exercise provisions of
paragraph 2 of this Agreement for a period then specified by the Stock Option
Committee, but in any event not less than 30 days, in accordance with Section
8(e) of the Plan, on the condition that the terminating event described in
Section 16 of the Plan is consummated. If such terminating event is not
consummated, this Stock Option shall be exercisable in accordance with the
terms of the Agreement, excepting this Paragraph 11.
12. NOTIFICATION OF SALE. Optionee agrees that Optionee, or any
person acquiring Option Shares upon exercise of this Stock Option, will
notify the Corporation in writing not more than five (5) days after any sale
or other disposition of such Shares.
13. (Reserved)
14. NOTICES. All notices to the Corporation provided for in this
Agreement shall be addressed to it in care of its President or Chief
Financial Officer at its principal office and all notices to Optionee shall
be addressed to Optionee's address on file with the Corporation or a
subsidiary corporation, or to such other address as either may designate to
the other in writing, all in compliance with the notice provisions set forth
in Section 26 of the Plan.
15. INCORPORATION OF PLAN. All of the provisions of the Plan are
incorporated herein by reference as if set forth in full hereat. In the
event of any conflict between the terms of the Plan and any provision
contained herein, the terms
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<PAGE>
of the Plan shall be controlling and the conflicting provisions herein shall
be disregarded.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
BYL BANCORP
By:
----------------------------------
By:
----------------------------------
OPTIONEE
-------------------------------------
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PROXY BYL BANCORP PROXY
ANNUAL MEETING OF SHAREHOLDERS
____ __, 1999
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 (the "Company") and the
accompanying Proxy Statement dated ________ __, 1999, and revoking any proxy
heretofore given, hereby appoints ________________, _____________, and
________________, 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 the Company which the undersigned would be entitled
to vote at the Annual Meeting of Shareholders to be held on ____ __, 1999, at
5:30 p.m., in the Main Lobby, BYL Bank Group, 1875 North Tustin Avenue,
Orange, 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. ELECTION OF DIRECTORS.
To elect for a two (2) year term as directors the nominees set forth
below:
/ / FOR all nominees listed below (except as indicated to the
contrary below).
/ / WITHHOLD AUTHORITY to vote for all nominees listed below.
H. Rhoads Martin, Jr. _________________
John F. Myers _________________
Robert Ucciferri
___________________________________________________
(Instruction: To withhold authority to vote for any individual
nominee(s), write the nominee(s) name in the space above.)
2. APPROVAL OF AMENDMENT TO BYL BANCORP'S 1997 STOCK OPTION PLAN.
Approval of an amendment to BYL Bancorp's 1997 Stock Option Plan would
increase the shares subject to the Plan from 460,519 shares to 759,390 shares
of the unissued common stock of the Company as described in the Proxy
Statement
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<PAGE>
dated __________, 1999, subject to any necessary changes required
by any regulatory agency.
/ / FOR / / AGAINST / /ABSTAIN
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: _________________, 1999 __________________
(Number of Shares)
______________________________
Signature of Shareholder(s)
______________________________
Signature of Shareholder(s)
2
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of May
29, 1998, by and between BANK OF YORBA LINDA, a California banking
corporation, with its headquarters office located at 18206 Imperial Highway,
Yorba Linda California 92686 (the "Bank"), and GLORIA VAN KAMPEN, residing
at 24692 Evening Star Drive, Dana Point, California 92629 (the "Employee").
A. The Bank is a corporation organized for the purpose of carrying
on the business of banking.
B. The Bank desires to avail itself of the skill, knowledge and
experience of Employee in order to insure the successful management of its
business;
C. The parties hereto desire to specify the terms of Employee's
employment by Bank as an Executive Vice President in this written agreement
which supersedes all prior agreements, whether written or oral; and
D. The employment, the duration thereof, the compensation to be
paid to Employee, termination and other terms and conditions of employment
provided in this Agreement were duly fixed, stated, approved and authorized
for and on behalf of the Bank by action of its Board of Directors at a
meeting held on May 20, 1998, at which meeting a quorum was present and
voted.
NOW, THEREFORE, on the basis of the foregoing facts and in
consideration of the mutual covenants and agreements contained herein, the
parties hereto agree as follows:
1. TERM
(a) Subject to the provisions below, the Bank agrees to
continue to employ Employee, and Employee agrees to be employed by the Bank,
subject to the terms and conditions of this Agreement, for a three-year
period commencing on May 29, 1998 and ending on May 29, 2001.
The term for which Employee is employed hereunder is hereinafter
referred to as the "Employment Period".
(b) Subject to the notice provisions set forth in this
paragraph, the term of this Agreement shall automatically be extended for one
(1) additional year on June 1 of each calendar year after the expiration of
the three (3) year term described in Paragraph 1(a). The term shall not be
automatically extended as provided in this paragraph if either party shall
give written notice to the other, on or before January 1 of each year, that
the Agreement shall not be automatically renewed on the next June 1. In the
event either party shall give the other written notice as provided in this
paragraph, the term of this Agreement shall thereafter terminate on the next
following agreement termination date.
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<PAGE>
2. DUTIES AND AUTHORITY
(a) During the Employment Period, Employee shall devote all
her productive time, ability and attention to the business and affairs of the
Bank. Employee shall not directly render service of a business, commercial or
professional nature to any other person or organization without the consent
of the Board of Directors of the Bank (the "Board of Directors"); provided,
however, that nothing contained herein shall prohibit Employee, or require
the Board of Directors to approve or consent to Employee serving a charitable
or nonprofit organization or serving as an advisor or director of any
corporation which does not compete with the business of the Bank. Employee
agrees during the Employment Period to use her best efforts, skill and
abilities to promote the Bank's interests and to serve as an Executive Vice
President of the Bank. Employee's duties shall include all responsibilities
assigned to the Executive Vice President.
3. BANK'S AUTHORITY. Employee agrees to observe and comply with
all laws and the Bank's rules and regulations as adopted by the Board of
Directors regarding performance of her duties and to carry out and to perform
all appropriate orders, directions and policies stated by the Board of
Directors to her periodically, either orally or in writing.
4. COMPENSATION.
(a) The Bank agrees to pay to Employee during the term of this
Agreement a base salary of $112,000 per annum, beginning on the effective
date of this Agreement and payable on the fifteenth and thirtieth day of each
month during the term of this Agreement; provided, however, that the base
salary shall be reviewed annually by the Board of Directors, on or before
January 31 of each year for that year, and may be changed by mutual agreement
of the parties. Any such change may be subject to review by the Bank's
regulatory agencies.
(b) In addition to all other compensation referred to above,
the Employee shall be entitled to participate in any and all other bonus
plans, employee benefits and other plans currently in effect or that may be
developed and adopted by the Bank.
(c) All compensation shall be subject to the customary
withholding tax and other employment taxes as required with respect to
compensation paid by a corporation to an employee.
(d) The Bank shall provide a car for Employee's use during
the term, and shall pay all insurance, gas and maintenance expenses of such
automobile. Any expenses of such automobile which are paid by the Bank and
which are for the personal use of the automobile by Employee shall be taxable
as income to Employee. The Employee shall use due care and reasonable
efforts to furnish to the Bank adequate written records and other documentary
evidence required by Federal and State laws and regulations substantiating
the extent to which use of the automobile constitutes deductible business
expenses of the Bank.
(e) During the Employment Period, Employee shall be eligible
to participate in any pension or profit-sharing plan, or similar employee
benefit plan or retirement program of the Bank now or hereafter existing, to
the extent that she is eligible under the
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<PAGE>
provisions thereof and commensurate with her position in relationship to
other participants. The Bank shall pay for cost of an annual physical
examination of Employee.
(f) Employee shall accrue vacation at the rate of 8.3 hours
per semi-monthly pay period (for a total of 200 hours or 25 days per year)
and shall accumulate sick leave at the rate of 3.3 hours per semi-monthly pay
period (for a total of 80 hours or 10 days per year). Notwithstanding any
terms of the Bank's personnel policy to the contrary, any unused sick leave
shall carry forward to the next year until used, but in no event shall any
compensation for unused sick leave be due to Employee upon her resignation or
upon the termination of this employment for any other reason, including her
death or disability. Vacation time shall not accrue to more than 200 hours
(25 days), except that under special circumstances up to 280 hours (35 days)
of vacation may be accrued if such accrual is approved in advance by the
Board of Directors in its discretion. Employee shall be required to take at
least two consecutive weeks of vacation during each calendar year at a time
mutually convenient to Employee and the Bank.
(g) The Bank agrees to provide medical and dental insurance
for Employee on the same terms as provided for all executive officers of the
Bank. The Bank shall provide for Employee, at the Bank's expense,
participation in medical, accident and health, and life insurance benefits
equivalent to the maximum benefits available from time to time under the
California Bankers Association Group insurance program for Employee's salary
level, as long as Employee is insurable at a normal premium payment. Said
coverage shall take effect as of the Effective Date hereof and shall continue
throughout the Term. The Bank's liability to Employee for any breach of this
paragraph shall be limited to the amount of premiums payable by the Bank to
obtain the coverage contemplated herein.
5. REIMBURSEMENT OF EXPENSES.
The services required by the Bank will require Employee to
incur business, entertainment and community relations expenses and the Bank
hereby agrees to provide credit cards and charge accounts for Employee's use
for such expenses. The Bank agrees to reimburse Employee for all
out-of-pocket expenses which are business related, upon submission of
appropriate documentation therefor and approval thereof by the Board of
Directors or a committee thereof appointed for such purpose. The Board or a
committee thereof shall review such expenses at least monthly so that
reimbursement of appropriate expenses is not unreasonably delayed. Each
expense, to be reimbursed, must be of a nature qualifying it as a proper
deduction on the income tax returns of the Bank as a business expense and not
as deductible compensation to Employee. The records and other documentary
evidence submitted by Employee to the Bank with each request for
reimbursement of such expenses shall be in the form required by applicable
statutes and regulations issued by appropriate taxing authorities for the
substantiation of such expenditures as deductible business expenses of the
Bank and not as deductible compensation to Employee.
6. CONFIDENTIAL INFORMATION.
Without the prior written permission of the Bank in each case,
Employee shall not publish, disclose or make available to any other person,
firm or corporation, either during or after the termination of this
Agreement, any confidential information which Employee
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<PAGE>
may obtain during the Employment Period, or which Employee may
create prior to the end of the Employment Period relating to the business of
the Bank, or to the business of any customer or supplier of any of them;
provided, however, Employee may use such information during the Employment
Period for the benefit of the Bank. Prior to or at the termination of this
Agreement, Employee shall return all documents, files, notes, writings and
other tangible evidence of such confidential information to the Bank.
7. COVENANT NOT TO SOLICIT CUSTOMERS OR
FELLOW EMPLOYEES.
Employee agrees that for a period of twelve (12) months
following the termination of her employment hereunder she will not solicit
the banking business of any customer with whom the Bank had done business
during the preceding one year period. Employee further agrees not to solicit
the services of any officer or employee of the Bank during such twelve (12)
month period.
8. REMEDY.
Employee understands that, because of the unique character of
the services to be rendered by Employee hereunder, the Bank would not have
any adequate remedy at law for the material breach or threatened breach by
Employee of any one or more of the covenants set forth in this Agreement and
agrees that in the event of any such material breach or threatened breach,
the Bank may in addition to the other remedies which may be available to it:
(a) Declare forfeited any moneys representing accrued salary,
contingent payments or other fringe benefits due and payable to Employee,
and, or alternatively,
(b) File a suit in equity to enjoin Employee from the breach
or threatened breach of such covenants.
9. TERMINATION OF EMPLOYEE WITHOUT CAUSE.
(a) The Board of Directors may terminate Employee's employment
hereunder without Cause (as defined in subsection 10(b) below) at any time,
provided, however, that such termination by the Board without Cause shall
entitle Employee to the compensation described in subsection 9(b) below.
(b) In the event Employee is terminated by the Bank without
Cause, the Bank shall pay to Employee an amount equal to twelve (12) months
of base salary, auto allowance, vacation pay and insurance benefits, and
accrued bonuses as severance pay in lieu of and in substitution for any other
claims for salary and continued benefits hereunder (based on Employee's base
salary and benefits prevailing at the time of termination). Such severance
payment shall be in addition to all other sums owing to Employee as accrued
vacation pay.
However, if Employee's employment is terminated by the Bank or
the Bank's successor pursuant to this Section 9 within nine (9) months as a
result of the consummation
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<PAGE>
of a plan of dissolution or a liquidation of the Bank, or consummation of a
plan of reorganization, merger or consolidation of the Bank with one or more
corporations, as a result of which the Bank is not the surviving corporation,
or upon the sale of all or substantially all of the assets of the Bank to
another corporation, or the acquisition of stock representing more than 25%
of the voting power of the Bank then outstanding by another corporation or
person, the Bank shall pay to Employee an amount equal to twenty-four (24)
months of base salary, auto allowance, vacation pay, and insurance benefits,
as severance pay in lieu of and in substitution for any other claims for
salary and continued benefits hereunder (based on Employee's base salary and
benefits prevailing at the time of termination). Such severance payment
shall be in addition to all sums owing to employee as accrued vacation pay.
With respect to any stock options issued to the Employee that
were outstanding on the date of the termination of her employment under this
Section 9, any options which would become exercisable had the Employee
remained in the employ of the Bank through the end of the Employment Period
but which are not exercisable on the effective date of the Employee's
termination of employment under this Section 9 shall automatically become
exercisable upon any such termination, and shall remain exercisable in full
for a period of one year after such termination of employment.
10. TERMINATION OF EMPLOYEE FOR CAUSE.
(a) Notwithstanding anything herein contained, on or after the
date hereof and prior to the end of the Employment Period, the Bank shall
have the right to terminate Employee's employment hereunder for Cause (as
defined in Subsection 10(b) below) by giving to Employee written notice of
such termination as of a date (not earlier than ten (10) days after such
notice) to be specified in such notice, and the Employment Period shall
terminate on the date so specified, whereupon Employee shall be entitled to
receive only her then accrued salary at the rate provided in Section 4(a),
plus her accrued vacation pay, but only to the date on which termination
shall take effect; provided, however, that if termination is due to physical
or mental disability of Employee, such termination shall not affect any
rights which Employee may have at the time of termination pursuant to any
insurance or other death benefit, bonus, retirement, or arrangements of the
Bank; or any stock option plan or any options thereunder, which rights shall
continue to be governed by the provisions of such plans and arrangements.
(b) For purposes of this Agreement, "Cause" shall mean the
determination by the Board of Directors, acting in good faith and by majority
vote, with or without a meeting, that Employee has (i) willfully failed to
perform or habitually neglected the appropriate duties which she is required
to perform hereunder; or (ii) willfully failed to follow any policy of the
Bank which materially adversely affects the condition of the Bank; or (iii)
engaged in any activity in contravention of any Bank policy, statute,
regulation or governmental policy which materially adversely affects the
Bank's condition, or its reputation in the community, or which evidences the
lack of Employee's fitness or ability to perform Employee's duties; or (iv)
willfully refused to follow any appropriate instruction from the Board of
Directors unless Employee asserts that compliance with such instruction would
cause the Bank or Employee to violate any statute, regulation or governmental
or Bank policy; or (v) subject to subsection (c) below, become physically or
mentally disabled or otherwise evidenced her inability to discharge her
duties as an
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<PAGE>
Executive Vice President of the Bank, or (vi) been convicted of or pleaded
guilty or nolo contendere to any felony, or (vii) committed any act which
would cause termination of coverage under the Bank's Bankers Blanket Bond as
to Employee, as distinguished from termination of coverage as to the Bank as
a whole.
(c) If Employee becomes disabled and such disability
continues for a period of one hundred eighty (180) consecutive days, then
upon expiration of such 180-day period, if the term of this Agreement has not
already expired, the Bank may, in its discretion, terminate the Agreement and
all benefits due hereunder, but Employee shall be entitled upon such
termination to receive disability payments in accordance with such disability
plan as may be established for the payment of disability benefits as
permitted under the Internal Revenue Code; provided, however, that if such
disability is job related, as determined by an arbitrator mutually acceptable
to the Bank and Employee or Employee's representative, then the compensation
due hereunder shall continue for a period of one year after the commencement
of such disability.
(d) This Agreement shall terminate immediately without
further liability or obligation to Employee if the Bank is closed by any
supervisory authority.
11. TERMINATION UPON EMPLOYEE'S DEATH; EFFECT OF
TERMINATION ON OTHER PLANS
(a) Notwithstanding anything herein contained, if Employee
shall die, this Agreement shall terminate on the date of Employee's death,
whereupon Employee's estate shall be entitled to receive her salary, accrued
vacation, and any bonus earned up through the date of termination. Such
termination shall not affect any rights which Employee may have at the time
of her death pursuant to any of the Bank's plans or arrangements for
insurance or for any other death benefit, bonus, or retirement benefit.
(b) Notwithstanding anything herein contained, any termination
of employment under this Section 11 shall not affect any accrued rights which
Employee may have at the time of such termination, including, but not limited
to, any of the Bank's plans for arrangements for insurance, vacation,
retirement, and stock options, which then accrued rights shall continue to be
governed by the provisions of such plans and arrangements to the extent they
are not inconsistent with the terms of this Agreement.
12. MERGER, CONSOLIDATION OR REORGANIZATION.
In the event of a merger where the Bank is not the surviving
corporation, or in the event of a consolidation, or in the event of a
transfer of all or substantially all of the assets of the Bank, or in the
event of any other corporation reorganization where there is a change in
ownership of at least twenty-five percent (25%) except as may result from a
transfer of shares to another corporation in exchange for at least eighty
percent (80%) control of that corporation, or in the event of the dissolution
of the Bank, this Agreement shall not be terminated, in which case, except in
the event of dissolution, the surviving or resulting corporation, the
transferee of the Bank's assets, or the Bank shall be bound by and shall have
the benefit of the provisions of this Agreement. The Bank shall endeavor to
take all reasonable actions necessary to insure that
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such corporation or transferee, if other than the Bank, is bound by the
provisions of this Agreement.
13. MODIFICATION
This Agreement sets forth the entire understanding of the
parties with respect to the subject matter hereof, supersedes all existing
agreements between them concerning such subject matter, and may be modified
only by written instrument duly executed by each party.
14. NOTICES
Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested or delivered against receipt to the party set forth
in the preamble to this Agreement (or to such other address as the party
shall have furnished in writing in accordance with the provisions of this
Section 14). Notice to the estate of Employee shall be sufficient if
addressed to Employee as provided in this Section 14. Any notice or other
communication given by certified mail shall be deemed given at the time of
certification thereof, except for a notice changing a party's address which
shall be deemed given at the time of receipt thereof.
15. DISPUTE RESOLUTION PROCEDURES
Any controversy or claim arising out of or this Agreement or
the breach thereof, or the interpretation thereof, shall be settled by
binding arbitration in accordance with the Rules of the American Arbitration
Association; and judgment upon the award rendered in such arbitration shall
be final and may be entered in any court having jurisdiction thereof. Notice
of the demand for arbitration shall be filed in writing with the other party
to this Agreement and with the American Arbitration Association. In no event
shall the demand for arbitration be made after the date when institution or
legal or equitable proceedings based on such claim, dispute or other matter
in questions would be barred by the applicable statute of limitations. This
agreement to arbitrate shall be specifically enforceable under the prevailing
arbitration law. Any party desiring to initiate arbitration procedures
hereunder shall serve written notice on the other party. The parties agree
that an arbitrator shall be selected pursuant to these provisions within
thirty (30) days of the service of the notice of arbitration. In the event of
any arbitration pursuant to these provisions, the parties shall retain the
rights of all discovery provided pursuant to the California Code of Civil
Procedure and the Rules thereunder, except that all time periods contained in
said Code and Rules shall be shortened by fifty percent (50%) for purposes of
arbitration proceedings hereunder. Any arbitration initiated pursuant to
these provisions shall be on an expedited basis and the dispute shall be
heard within one hundred twenty (120) days following the serving of the
notice of arbitration and a written decision shall be rendered within sixty
(60) days thereafter. All rights, causes of action, remedies and defenses
available under California law and equity are available to the parties hereto
and shall be applicable as though in a court of law. The parties shall share
equally all costs of any such arbitration.
16. MISCELLANEOUS.
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<PAGE>
(a) This Agreement is drawn to be effective in the State of
California and shall be construed in accordance with California laws, except
to the extent superseded by any other federal law. No amendment or variation
of the terms of this Agreement shall be valid unless made in writing and
signed by Employee and a duly authorized representative of the Bank.
(b) Any waiver by either party of a breach of any provision of
this Agreement shall not operate as to be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of
this Agreement. The failure of a party to insist upon strict adherence to any
term of this Agreement on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. Any waiver must
be in writing.
(c) Employee's rights and obligations under this Agreement
shall not be transferable by assignment or otherwise, such rights shall not
be subject to commutation, encumbrance or the claims of Employee's creditors,
and any attempt to do any of the foregoing shall be void. The provisions of
this Agreement shall be binding upon and inure to the benefit of the Bank and
its successors and those who are its assigns under Section 12.
(d) This Agreement does not create, and shall not be construed
as creating, any rights enforceable by a person not a party to this Agreement
(except as provided in subsection (c) above).
(e) The headings in this Agreement are solely for the
convenience of reference and shall be given no effect on the construction or
interpretation of this Agreement.
(f) This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall be governed
by and construed in accordance with the laws of the State of California,
without giving effect to conflict of laws, except where federal law governs.
17. RESIGNATION AS DIRECTOR UPON TERMINATION.
Upon termination of this Agreement, Employee, if she is then
serving as a director of the Bank and/or the Bank's holding company, agrees
to immediately resign her position as a director by giving written notice of
her resignation to the Chairman of the Board of Directors of the Bank and/or
the Bank's holding company.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be signed
by its duly authorized officers and Employee has executed this Agreement to
be effective as of the day and year written above.
BANK: BANK OF YORBA LINDA
By: /s/ H. Rhoads Martin
-----------------------------------------
H. Rhoads Martin
Chairman of the Board
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EMPLOYEE:
/s/ Gloria Van Kampen
-----------------------------------------
Gloria Van Kampen
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our Independent Auditor's Report dated
January 21, 1999 regarding the consolidated balance sheets of BYL Bancorp and
Subsidiary as of December 31, 1998 and 1997, 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-K filed with the Securities and Exchange Commission.
VAVRINEK, TRINE, DAY & CO., LLP
March 30, 1999
Laguna Hills, California
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<INT-BEARING-DEPOSITS> 0
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