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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, 1999 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 STREET, ORANGE, CALIFORNIA 92685
(Address of principal executive 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 90 days.
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 2,537,102 shares of Common Stock outstanding at April 6, 2000. The
aggregate market value of Common Stock held by non-affiliates at April 6, 2000
was approximately $21.1 million based upon the last known trade of $10.06 per
share on April 6, 2000.
Documents incorporated by reference: The proxy statement for the Annual Meeting
of Shareholders of the registrant to be held in the second or third quarter of
2000. Certain information therein is incorporated by reference in Part III
hereof.
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BYL BANCORP
TABLE OF CONTENTS
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Part I
Item 1. Business......................................................................................... 3
Item 2. Properties.......................................................................................18
Item 3. Legal Proceedings................................................................................18
Item 4. Submission of Matters to a Vote of Security Holders..............................................18
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................19
Item 6. Selected Financial Data..........................................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.............22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................37
Item 8. Financial Statements and Supplementary Data......................................................40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............76
Part III
Item 10. Directors and Executive Officers of the Registrant...............................................76
Item 11. Executive Compensation...........................................................................76
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................76
Item 13. Certain Relationships and Related Transaction....................................................76
Part IV
Item 14. Exhibits Financial Statement Schedules, and Reports on Form 8-K..................................77
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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 BYL Bank Group (the "Bank"), which changed its name from Bank
of Yorba Linda 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, 1999, the Company
had total assets of approximately $354 million, total deposits of $323 million
and total shareholders' equity of $29 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 seven full-service banking centers in the Bank's
primary market areas of Orange and Riverside counties, California. The Bank
specializes in originating and selling non-conforming and conforming residential
real estate loans and SBA guaranteed loans. The Bank's specialized loan
origination divisions, non-conforming mortgages and SBA guaranteed loans,
operate under the name of Bank of Yorba Linda, a division of BYL Bank Group. The
Bank's principal office is located at 1875 North Tustin Avenue, Orange,
California. The Bank's Mortgage Division is currently located in Tustin,
California. The Bank's SBA Loan Division is currently located in Mission Viejo,
California. The Bank also has mortgage origination offices in Colorado, Indiana,
Florida, Kansas, Northern California, Nevada, Utah and Washington state. On
March 26, 1999, the Bank closed its Laguna Hills office and relocated the
branch's assets and liabilities to its Costa Mesa office. On May 20, 1999, the
Bank closed its Riverside branch office and relocated the branch's assets and
liabilities to its De Anza office.
FOCUS AND OPERATING STRATEGY
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.
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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.
From 1990 to 1999, the Bank's operating strategy emphasized: (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.
RESTRUCTURING
However, during the fourth quarter of 1999, the Company determined that the
maximum potential value of the Bank's commercial loan originations would be
realized through the retention of these loans in the Bank's loan portfolio. This
decision was based upon the current and anticipated returns obtainable from
either the sale or securitization of these commercial loan originations and the
proposed increased capital requirements on loan securitzations. The shift in the
Bank's strategy from loan sales or securitizations to portfolio retention will
require increasing levels of capital in order to maximize the value of the
Bank's ability to generate commercial loans at premium yields. In order to
conserve the Bank's capital to implement this strategic change, the Board of
Directors suspended the quarterly cash dividend for the fourth quarter of 1999.
The Bank is currently evaluating various possible alternatives of increasing
capital, including the issuance of various kinds of securities and the
divestiture or closing of those operations which were expected to continue to
provide rates of return below the Bank's targeted ROI. On February 4, 2000, the
Bank completed the sale of its automobile loan portfolio of approximately $38
million and closed its automobile division. On February 22, 2000, the Bank
completed the sale of its Diamond Bar Mortgage Division, an originator of Agency
conforming residential mortgages. As a result of this restructuring, the Company
expects to report a loss for the first quarter 2000 of approximately $500,000.
The Company also suspended quarterly dividends effective January 1, 2000. The
Company continues to explore various means to increase capital and shareholder
value, including the raising of additional capital, the formation of a holding
company subsidiary that would house many of the Bank's current lending
activities, and forming strategic alliances with other well-positioned financial
institutions.
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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 "SBA 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 SBA 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 1998-1, 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.
SALE OF COMMERCIAL LOANS
On August 11, 1999, the Bank entered into a Pooling and Servicing Agreement
dated as of June 30, 1999 (the "Business Loan Pooling Agreement") among the
Bank, as seller and master servicer, HSBC Bank USA, as Trustee, and Bankers
Trust (Delaware) as Delaware Trustee, whereby the Bank has transferred a pool of
business loans to a newly-created trust (the "Business Loan Trust") for the
benefit of the holders of certificates representing interests in such Business
Loan Trust. The Business Loan Trust consists of the Business Loans that are
subject to the Business Loan Pooling Agreement, land the Business Loan Trust has
issued three (3) classes of certificates representing certain fractional
undivided ownership interests in the Business Loan Trust. The aggregate
principal amount of the Business Loans delivered to the Business Loan Trust on
August 11, 1999 equaled approximately $47.1 million.
Pursuant to the Business Loan Pooling Agreement, the Trust issued $16 million
aggregate principal amount of BYL Bank Group Business Loan-Backed Pass-Through
Certificates, Series 1999-1, Class A-1 ("Class A-1 Certificates"), $12 million
aggregate principal amount of BYL Bank Group Business Loan-Backed Pass Through
Certificates, Series 1999-1, Class A-2 Certificates ("Class A-2 Certificates");
$27.2 million aggregate principal amount of BYL Bank Group Business Loan-Backed
Pass-Through Certificates, Series 1999-1, Class A-3 Certificates ("Class A-3
Certificates"); $4.8 million aggregate principal amount of BYL Bank Group
Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class B
Certificates ("Class B-1 Certificates"); and BYL Bank Group Business Loan-Backed
Pass-Through Certificates, Series 1999-1, Class R Certificates ("Class R
Certificates").
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The Class A 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. The Class B-1 Certificates and the Class R Certificates were
retained by the Bank and are subordinate to the Class A-1 Certificates, the
Class A-2 Certificates and the Class A-3 Certificates.
REGULATORY ACTIONS, PROMPT CORRECTIVE ACTION AND CAPITAL RESTORATION PLAN
The two securitization transactions described above were accounted for as
sales in accordance with Generally Accepted Accounting Principles. However,
as a result of a recent FDIC examination, the FDIC has indicated that such
transactions are considered to be with recourse, that the Bank did not
adequately support the assumptions utilized to project the value assigned to
various residual assets retained in the securitizations completed in 1998 and
1999, that the FDIC has advised the Bank it believes these assets are
overstated $2.7 million on a pre-tax basis, that the Bank's Total Risk Based
Capital Ratio has been recalculated to 7.99%, which does not include the
FDIC's perceived overstatement, and that the Bank is considered to be
undercapitalized for purposes of Prompt Corrective Action (see "-Prompt
Corrective Action" below) because the Bank's Total Risk Based Capital Ratio
as calculated by the FDIC was 0.01% less than being adequately capitalized.
The Bank also believes that the FDIC may issue a formal enforcement action in
the near future. As a result, the Bank has filed a capital restoration plan
with the FDIC, which provides that as a result of the sale of the Bank's $38
million auto portfolio, the closing of the Indirect Auto division and the
sale of the Diamond Bar Mortgage Division, the Bank expects to be adequately
capitalized by March 31, 2000. The capital restoration plan also provides for
increasing levels of capital every quarter until the Bank is well capitalized
in 2001. Further, the Bank has eliminated asset securitizations from its
business plan. The Bank will continue operations of all traditional retail
banking activities through the Bank's existing branch system.
Management strongly disagrees with the FDIC conclusions in this matter and
intends to appeal the FDIC findings. In connection with this appeal, the Bank
has engaged a reputable third-party consultant to evaluate the assumptions
used in the valuation of these assets as well as design a new valuation model
for ongoing measurement of the changes in valuation of these assets.
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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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.
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.
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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.
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.
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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.
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%.
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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.
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 to be "Undercapitalized" at December 31,
1999. See REGULATORY ACTIONS, PROMPT CORRECTIVE ACTION AN CAPITAL RESTORATION
PLAN.
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.
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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:
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"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
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"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
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
11
<PAGE>
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.
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.
12
<PAGE>
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.
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.
13
<PAGE>
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
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (the "Gramm Act"). The Gramm Act is expected to have a major impact on
cross-industry mergers, customer privacy and lending to lower-income
communities. The Gramm Act repeals the Glass Steagall Act of 1937 that separated
commercial and investment banking, and eliminates the Bank Holding Company Act's
prohibition on insurance underwriting activities. The Gramm Act allows both
holding company subsidiaries and national bank operating subsidiaries to offer a
wide range of new financial services, including insurance or securities sales.
However, real estate development and insurance underwriting would be restricted
to affiliates and can not be performed by bank operating subsidiaries. State
laws will govern insurance sales, but states can not discriminate against
national bank by preventing national banks from conducting insurance activities
that nonbanks may conduct. The Gramm Act bars a bank holding company from
merging with insurance or securities firms, or embarking on new powers, if any
of its banks earned less than a "satisfactory" CRA rating in its most recent
examination. The Gramm Act also provides that customers will have the right to
prevent banks from sharing information with third parties. The Gramm Act is
expected to further increase competition in providing financial services.
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.
14
<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.
The final report of examination has been received, and the Bank received a
"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.
15
<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, 1999, the Company had approximately $354 million in assets
and $323 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.
16
<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, 1999, the Bank had a total of 328 full-time employees and 28
part-time employees. The Bank believes that its employee relations are
satisfactory.
17
<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 seven 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 E 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 1999.
18
<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 2,537,102 shares outstanding, held by approximately 800
shareholders of record at year-end 1999. 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 1999 and 1998, the Company paid quarterly cash
dividends of $0.075 per share and $0.05 per share, respectively. During the
first quarter of 2000 the Company has suspended the payment of quarterly cash
dividends.
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.
<TABLE>
<CAPTION>
1998
- -------------------------
<S> <C> <C>
First Quarter 21.875 23.125
Second Quarter 23.250 23.500
Third Quarter 21.500 21.500
Fourth Quarter 18.000 18.500
1999
- -------------------------
First Quarter 16.750 17.563
Second Quarter 13.375 13.625
Third Quarter 13.250 13.688
Fourth Quarter 11.750 12.000
</TABLE>
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following is our summary consolidated financial information. The balance
sheet and income statement data as of or for the five years ended December 31,
1999 are taken from our audited consolidated financial statements as of the end
of and for each such year. You should read this summary consolidated financial
information in conjunction with our consolidated financial statements and notes
that appear in this prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income $ 27,528 $ 24,016 $ 18,455 $ 12,642 $ 9,746
Interest Expense 11,586 8,406 6,057 3,840 2,757
------------ ------------ ------------ ------------ ------------
Net Interest Income 15,942 15,610 12,398 8,802 6,989
Provision for Loan Losses 694 755 778 364 262
------------ ------------ ------------ ------------ ------------
Net Interest Income After Provision
for Loan Losses 15,248 14,855 11,620 8,438 6,727
Noninterest Income 24,049 23,408 15,920 8,752 6,726
Noninterest Expense 33,891 30,870 22,717 14,045 11,211
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes 5,406 7,393 4,823 3,145 2,242
Income Taxes 2,330 3,277 1,968 1,229 872
------------ ------------ ------------ ------------ ------------
Net Income $ 3,076 $ 4,116 $ 2,855 $ 1,916 $ 1,370
============ ============ ============ ============ ============
Dividends on Common Stock $ 760 $ 467 $ 502 $ 168 $ 89
PER SHARE DATA:
Net Income - Basic $ 1.21 $ 1.63 $ 1.19 $ 0.98 $ 0.88
Net Income - Diluted $ 1.21 $ 1.55 $ 1.12 $ 0.96 $ 0.75
Book Value $ 11.51 $ 10.62 $ 9.01 $ 8.10 $ 9.26
BALANCE SHEET SUMMARY:
Total Assets $353,736 $318,013 $238,086 $183,755 $125,872
Total Deposits 322,973 287,206 207,935 162,058 113,295
Loans Held for Sale 69,756 74,598 47,150 24,363 10,186
Total Loans 196,675 165,199 139,002 106,019 67,979
Allowance for Loan Losses (ALLL) 2,610 2,300 1,923 1,616 1,047
Total Shareholders' Equity 29,200 26,882 22,550 19,434 11,273
SELECTED RATIOS:
Return on Average Assets 0.88% 1.49% 1.31% 1.23% 1.17%
Return on Average Equity 11.05% 17.03% 13.80% 12.81% 12.56%
Net Interest Margin 5.38% 6.40% 6.46% 6.47% 6.68%
Dividend Payout Ratio - Common Stock 24.78% 11.35% 17.59% 8.82% 6.50%
Non-performing Loans to Total Loans 0.84% 1.23% 0.92% 1.15% 1.98%
Non-performing Assets to Total Assets 0.55% 0.94% 0.93% 1.57% 1.81%
ALLL to Non-performing Loans 157.04% 113.30% 150.35% 132.68% 77.90%
Average Shareholder's Equity
to Average Assets 8.00% 8.75% 9.49% 9.63% 9.28%
</TABLE>
20
<PAGE>
On June 14, 1996, our bank acquired Bank of Westminster ("BOW"), pursuant to the
terms of an Agreement and Plan of Reorganization dated January 12, 1996. Our
bank acquired 100% of the outstanding common stock of BOW for $6,174,000 in
cash. BOW had assets of approximately $54,923,000. At the time of such
acquisition, the Bank also raised approximately $7.8 million in additional
equity in a firmly underwritten offering by issuing 1,073,000 shares of the
Bank's Common Stock as adjusted for the four for three stock split effective
June 30, 1997. BOW's result of operations are included only since the second
quarter of fiscal 1996. Due to the relatively large size of this transaction,
any comparison of data as of and for the years ended December 31, 1996 and
December 31, 1997 to data as of or for prior dates or periods may not be
meaningful. On November 19, 1997, the Bank completed the reorganization of BYL
as its bank holding company, and BYL's Common Stock began trading on that date.
On May 29, 1998 pursuant to the terms of an Agreement and Plan of Reorganization
dated January 29, 1998, the Company completed the acquisition of DNB Financial
("DNBF"). This transaction was structured as a pooling of interests through a
tax-free exchange of 4.1162 of the Company's shares of common stock for each
outstanding share of DNBF's common stock, resulting in the issuance of 956,641
shares of Company common stock to the shareholders of DNBF. The acquisition of
DNBF increased the total assets of the Company and its subsidiaries to
approximately $270 million and total shareholder's equity to approximately $23
million. Due to the relatively large size of this transaction, any comparison of
data as of and for the years ended December 31, 1999 and December 31, 1998 to
data and of or for prior date or periods may not be meaningful.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 1999,
together with an assessment, when considered appropriate, of external factors
that may affect us in the future. This discussion should be read in conjunction
with our consolidated financial statements and notes included herein.
OVERVIEW
EARNINGS SUMMARY
Net income in 1999 was $3.1 million, decrease of $1.0 million or24.4%, compared
to $4.1 million in 1998. Diluted earnings per share in 1999 were $1.21 compared
to $1.55 in 1998. The decrease in earnings in 1999 was due primarily to decrease
profitability of the SBA and Mortgage Loan Divisions.
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 our SBA and Mortgage Loan
Divisions.
BALANCE SHEET SUMMARY
Total assets at December 31, 1999 were $353.7 million, a $35.7 million or 11.2%
increase from $318.0 million at December 31, 1998. Average assets for 1999 were
$347.8 million compared to $276.4 million for 1998. Total deposits increased
$35.8 million or 12.5% to $323.0 million at December 31, 1999. Gross loans
increased $26.6 million or 11.1% , to $266.4 million at December 31, 1999.
Shareholder's equity increased $2.3 million or 8.6%, to $29.2 million at
December 31, 1999.
Total assets 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 us to aggressively expand our
asset base.
The following table sets forth several key operating ratios for 1999, 1998 and
1997:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Return on Average Assets 0.88% 1.49% 1.31%
Return on Average Equity 11.05% 17.03% 13.80%
Average Shareholder's Equity to Average Total Assets 8.00% 8.75% 9.49%
</TABLE>
22
<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,
---------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ -------------------------------
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 $ 21,635 $ 1,450 6.70% $ 18,564 $ 1,119 6.03% $ 25,110 $ 1,535 6.11%
Federal Funds Sold 20,554 976 4.75% 13,322 669 5.02% 7,329 394 5.38%
Other Earning Assets 168 9 5.36% 2,935 171 5.83% 3,882 227 5.85%
Loans 253,771 25,093 9.89% 209,080 22,057 10.55% 155,588 16,299 10.48%
----------- --------- ----------- --------- ----------- ----------
Total Interest-Earning
Assets 296,128 27,528 9.30% 243,901 24,016 9.85% 191,909 18,455 9.62%
Cash and Due From
Banks 24,663 15,756 13,334
Premises and Equipment 6,561 5,299 4,830
Other Real Estate Owned 714 1,067 908
Accrued Interest and
Other Assets 22,294 12,641 8,496
Allowance for Loan Losses (2,514) (2,281) (1,552)
----------- ----------- -----------
Total Assets $ 347,846 $ 276,383 $ 217,925
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing
Liabilities:
Money Market and NOW $ 74,797 2,764 3.70% $ 53,640 1,613 3.01% $ 48,414 1,321 2.73%
Savings 87,566 4,076 4.65% 39,308 1,622 4.13% 26,164 920 3.52%
Time Deposits under
$100,000 42,386 2,165 5.11% 51,997 2,823 5.43% 37,866 2,080 5.49%
Time Deposits of
$100,000 or More 39,963 2,505 6.27% 38,120 2,258 5.92% 28,923 1,661 5.74%
Other 1,646 76 4.62% 1,623 90 5.55% 908 75 8.26%
----------- --------- ----------- --------- ----------- ----------
Total Interest-Bearing
Liabilities 246,358 11,586 4.70% 184,688 8,406 4.55% 142,275 6,057 4.26%
--------- --------- ----------
Noninterest-Bearing
Liabilities:
Demand Deposits 68,632 62,771 51,664
Other Liabilities 5,015 4,753 3,306
Shareholders' Equity 27,841 24,171 20,680
----------- ----------- -----------
Total Liabilities and
Shareholders' Equity $ 347,846 $ 276,383 $ 217,925
=========== =========== ===========
Net Interest Income $15,942 $15,610 $ 12,398
========= ========= ==========
Net Yield on
Interest-Earning Assets 5.38% 6.40% 6.46%
</TABLE>
23
<PAGE>
EARNINGS ANALYSIS
NET INTEREST INCOME
A significant component of our earnings is net interest income. Net interest
income is the difference between the interest we earn on our loans and
investments and the interest we pay on deposits and other interest-bearing
liabilities.
Our net interest income is affected by changes in the amount and mix of our
interest-earning assets and interest-bearing liabilities, referred to as a
"volume change". It is also affected by changes in the yields we earn on
interest-earning assets and rates we pay on interest-bearing deposits and other
borrowed funds, referred to as a "rate change".
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, 1999 Year Ended December 31, 1998
versus versus
Year Ended December 31, 1998 Year Ended December 31, 1997
-------------------------------------- -------------------------------------
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 $ 198 $ 133 $ 331 $( 395) $( 21) $( 416)
Federal Funds Sold 345 ( 38) 307 302 ( 27) 275
Other Earning Assets ( 79) ( 83) ( 162) ( 55) ( 1) ( 56)
Loans 4,486 ( 1,450) 3,036 5,642 116 5,758
----------- ------------ ----------- ---------- ---------- ------------
TOTAL INTEREST INCOME 4,950 ( 1,438) 3,512 5,494 67 5,561
INTEREST-BEARING LIABILITIES:
Money Market and NOW 728 423 1,151 150 142 292
Savings 2,222 232 2,454 521 181 702
Time Deposits under
$100,000 ( 499) ( 159) ( 658) 767 ( 24) 743
Time Deposits $100,000
or More 112 135 247 543 54 597
Other 1 ( 15) ( 14) 46 ( 31) 15
----------- ------------ ----------- ---------- ---------- ------------
TOTAL INTEREST EXPENSE 2,564 616 3,180 2,027 322 2,349
----------- ------------ ----------- ---------- ---------- ------------
NET INTEREST INCOME $ 2,386 $( 2,054) $ 332 $ 3,467 $( 255) $ 3,212
=========== ============ =========== ========== ========== ============
</TABLE>
24
<PAGE>
1999 COMPARED TO 1998
Net interest income for 1999 was $15.9 million, an increase of 1.9% compared to
the $15.6 million reported in 1998. This increase was primarily due to the
significant increase in average interest-earning assets which increased $52.2
million or 21.3% to $296.1 million in 1999 compared to $243.9 million in 1998.
Interest income in 1999 was $27.5 million, a $3.5 million or a 14.6% increase
over the $24.0 million recorded in 1998. The increase in interest income was the
result primarily of volume increases in loan totals offset by a decreased
interest rate environment. Average loans outstanding increased 21.4% to $253.8
million in 1999 compared to $209.0 million in 1998. The yield on
interest-earning assets decreased 55 basis points to 9.30% from 9.85% in 1998.
The yield on the loan portfolio, the Banks largest interest-earning asset,
decreased 66 basis points, from 10.55% to 9.89%.
Interest expense also rose significantly in 1999 as we increased deposits and
other borrowings to fund the loan growth discussed above. Interest expense was
$11.6 million in 1999, compared to $8.4 million in 1998. The increase in
interest expense was primarily the result of an increase in interest-bearing
liabilities. Average interest-bearing liabilities increased 33.4% to $246.4
million in 1999 compared to $184.7 million in 1998. An increase in the cost of
interest-bearing liabilities accounted for $616 or 19.3% of the total increase
in interest expense. Rates on interest bearing deposits increased 15 basis
points to 4.70% from 4.55% in 1998.
Interest rates played a significant role in the changes in net interest income
in 1999. Our yield on interest-earning assets decreased 55 basis points, while
the yield on interest-bearing liabilities increased 15 basis points. The net
yield on interest-earning assets in 1999 declined 102 basis points to 5.38%
compared to 6.40% in 1998.
1998 COMPARED TO 1997
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 Bank to
aggressively grow its loan portfolio and other interest-earning assets.
Interest expense also rose significantly in 1998 as the Bank 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 Bank was able to increase its yield on interest-earning assets by 23
basis points, however, the rates the Bank 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.
25
<PAGE>
NONINTEREST INCOME
The Bank receive noninterest income from three primary sources: service charges
and fees on accounts and banking services, fees and premiums generated by our
Mortgage Loan Division, and fees, premiums, and servicing income generated by
our SBA Loan Division.
In 1999, noninterest income was $24.0 million, an increase of $.6 million or
2.6% compared to the 1998 amount of $23.4 million. The majority of the increase
was generated by our SBA and Mortgage Loan Divisions who continued to expand
their operations in 1999. The majority of the increase was from the increase in
Net Servicing and Interest-Only Strip Income, which increased to $1.8 million or
157.1%, compared to $0.7 million in 1998.
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 our 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 other loan
referral programs
NONINTEREST EXPENSE
Noninterest expense reflects our costs of products and services related to
systems, facilities and personnel. The major components of noninterest expense
stated as a percentage of average assets are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Salaries and Employee Benefits 5.72% 7.11% 6.46%
Occupancy Expenses .65 .60 .62
Furniture and Equipment .80 .74 .64
Professional Fees and Outside Services .56 .65 .65
OREO Expenses .06 .10 .08
Commission and Loan Expenses .47 .38 .29
Office Expenses .58 .55 .60
Other .90 1.04 1.08
------------- ------------- -------------
9.74% 11.17% 10.42%
============= ============= =============
</TABLE>
Noninterest expense was $33.9 million in 1999, an increase of $3.0 million or
9.7% over the $30.9 million reported in 1998. The majority of this increase,
$1.9 million was from the expansion of facilities and equipment for our SBA and
Mortgage Loan Divisions. Other expense categories increased in total amount but
declined as a percentage of total average assets.
26
<PAGE>
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 our 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.
INCOME TAXES
Income tax expense was $2.3, $3.3, and $2.9 million for the years ended December
31, 1999, December 31, 1998, and December 31, 1997, respectively. These expenses
resulted in an effective tax rate of 43.1% in 1999, 44.3% in 1998, and 40.8% in
1997. The increase in effective rate in 1998 was due primarily to non-deductible
merger expenses.
27
<PAGE>
BALANCE SHEET ANALYSIS
INVESTMENT PORTFOLIO
The following table summarizes the amounts and distribution of our investment
securities held as of the dates indicated, and the weighted average yields as of
December 31, 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- --------------------- ---------------------
Weighted
Book Market Average Book Market Book Market
Value Value Yield Value Value Value Value
---------- --------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES:
Within One Year $ - $ - $ - $ - $ 1,022 $ 1,025
One to Five Years - - - - 233 232
After Ten Years - - - - 1,297 1,307
---------- --------- ---------- --------- ---------- ----------
Total U.S. Government and
Agency Securities - - - - 2,552 2,564
MUNICIPAL SECURITIES -
FIVE TO TEN YEARS - - - - 1,018 1,032
MUTUAL FUNDS - - 3,000 3,000 6,059 6,016
MORTGAGE BACKED SECURITIES 6,597 6,868 10.64% 2,305 2,570 - -
---------- --------- ---------- --------- ---------- ----------
TOTAL AVAILABLE-FOR-SALE SECURITIES $ 6,597 $ 6,868 10.64% $ 5,305 $ 5,570 $ 9,629 $ 9,612
========== ========= ========== ========= ========== ==========
U.S. TREASURIES:
Within One Year $ 500 $ 501 6.37% $ 2,001 $ 2,015 $ 1,999 $ 1,998
One to Five Years - - 498 511 2,499 2,505
---------- --------- ---------- --------- ---------- ----------
Total U.S. Treasuries Securities 500 501 2,499 2,526 4,498 4,503
U.S. GOVERNMENT AND AGENCY SECURITIES:
Within One Year 3,013 2,987 4.80% 994 1,001 - -
One to Five Years 10,995 10,755 5.66% 7,035 7,029 998 999
Five to Ten Years 3,968 3,990
After Ten Years - - - - 1,500 1,502
---------- --------- ---------- --------- ---------- ----------
Total U.S. Government
and Agency Securities 14,008 13,742 5.47% 8,029 8,030 6,466 6,491
MUNICIPAL SECURITIES:
One to Five Years - - - - 1,074 1,079
Five to Ten Years - - - - 852 867
---------- --------- ---------- --------- ---------- ----------
Total Municipal Securities - - - - 1,926 1,946
MORTGAGE BACKED SECURITIES 204 202 6.82% 316 318 60 56
---------- --------- ---------- --------- ---------- ----------
TOTAL HELD-TO-MATURITY SECURITIES $ 14,712 $ 14,445 5.52% $ 10,844 $ 10,874 $ 12,950 $ 12,996
========== ========= ========== ========= ========== ==========
</TABLE>
28
<PAGE>
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, 1999
and 1998, the carrying values of securities pledged to secure public deposits
and other purposes were $14.7 million and $10.8 million, respectively.
LOANS HELD FOR SALE
We originate mortgage loans and SBA loans for sale to institutional investors.
Loans held for sale increased from $47.2 million at December 31, 1997, to $74.6
million at December 31, 1998 and decreased to $69.8 million at December 31,
1999. Historically, we sold these loans within sixty (60) days of origination,
but during 1998 the Bank began to warehouse and accumulate pools of loans to
take advantage of short-term fluctuations in the market.
At December 31, 1999 and 1998, we were servicing approximately $220.1 million
and $164.8 million, respectively, in SBA and other loans previously sold. In
connection with a portion of these loans, the Company has capitalized
approximately $2.8 million and $2.5 million in servicing assets at December 31,
1999 and 1998, respectively. Servicing assets are amortized over the estimated
life of the serviced loan using a method that approximates the interest method.
We evaluate the carrying value of the excess servicing receivables by estimating
the excess future servicing income, based on our best estimate of the remaining
loan lives.
We have also recorded interest-only strips receivable in connection with our
loan sales and securitizations. These totaled $12.3 million in 1999 and $5.9
million at December 31, 1998.
See also Note C in the Consolidated Financial Statements for additional
information on loans held for sale and key assumptions used to value retained
interest in securitizations.
29
<PAGE>
LOAN PORTFOLIO
The following table sets forth the components of total net loans outstanding in
each category at the date indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
LOANS
Commercial $ 104,719 $ 56,244 $ 36,359 $ 24,512 $ 13,706
Real Estate - Construction 5,524 4,411 2,867 4,149 3,478
Real Estate - Other 45,976 82,235 84,792 71,799 46,885
Consumer 40,456 22,309 14,984 5,559 3,910
------------- ------------- -------------- ------------- ------------
Total Loans 196,675 165,199 139,002 106,019 67,979
Net Deferred Loan Costs (Fees) 2,209 1,255 471 173 ( 102)
Allowance for Loan Losses ( 2,610) ( 2,300) ( 1,923) ( 1,616) ( 1,047)
------------- ------------- -------------- ------------- ------------
Net Loans $ 196,274 $ 164,154 $ 137,550 $ 104,576 $ 66,830
============= ============= ============== ============= ============
COMMITMENTS
Standby Letters of Credit $ 839 $ 360 $ 371 $ 203 $ 398
Undisbursed Loans and
Commitments to Grant Loans 28,060 21,627 18,521 14,843 10,014
------------- ------------- -------------- ------------- ------------
Total Commitments $ 28,899 $ 21,987 $ 18,892 $ 15,046 $10,412
============= ============= ============== ============= ============
</TABLE>
RISK ELEMENTS
We assess and manage credit risk on an ongoing basis through our lending
policies. We strive to continue our historically low level of credit losses by
continuing our emphasis on credit quality in the loan approval process, active
credit administration and regular monitoring.
In extending credit and commitments to borrowers, we generally require
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. Our requirement for collateral and/or guarantees is
determined on a case-by-case basis in connection with our 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. We secure our collateral by
perfecting our interest in business assets, obtaining deeds of trust, or
outright possession among other means.
We believe that our lending policies and underwriting standards will tend to
minimize losses in an economic downturn, however, there is no assurance that
losses will not occur under such circumstances.
30
<PAGE>
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, 1999:
<TABLE>
<CAPTION>
Over
3 Months Due after
3 Months through one year to Due after
or Less 12 months five years five years Total
- --------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
$ 181,834 $ 6,346 $ 51,107 $ 27,811 $ 267,098
===================== ==================== ==================== ====================
Loans on Non-Accrual 1,542
--------------------
Total Loans, including Loans Held for Sale $ 268,640
====================
</TABLE>
NONPERFORMING ASSETS
The following table provides information with respect to the components of our
nonperforming assets at the dates indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Loans 90 Days Past Due and Still
Accruing $ 120 $ 223 $ - $ 122 $ 149
Nonaccrual Loans 1,542 1,807 1,279 1,096 1,195
----------- ----------- ------------ ---------- ----------
Total Nonperforming Loans 1,662 2,030 1,279 1,218 1,344
Other Real Estate Owned 277 971 924 1,661 930
----------- ----------- ------------ ---------- ----------
Total Nonperforming Assets $ 1,939 $ 3,001 $ 2,203 $ 2,879 $ 2,274
=========== =========== ============ ========== ==========
Nonperforming Loans as a
Percentage of Total Loans 0.84% 1.22% 1.21% 1.79% 1.97%
Allowance for Loan Loss as a
Percentage of Nonperforming Loans 157.04% 113.30% 126.35% 85.96% 71.43%
Nonperforming Assets as a
Percentage of Total Assets 0.55% 0.94% 1.20% 2.29% 1.94%
</TABLE>
Nonaccrual loans are generally past due 90 days or are loans that we believe the
interest on which may not be collectible. Loans past due 90 days will continue
to accrue interest only when we believe 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. We believe these properties can be liquidated at or near
their current fair value.
31
<PAGE>
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 our loans. The provision for
loan losses was $694,000 in 1999 compared to $755,000 in 1998 and $778,000 in
1997.
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,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
OUTSTANDING LOANS:
Average for the Year $ 253,771 $ 209,080 $ 155,588 $ 102,145 $ 68,052
End of the Year $ 196,675 $ 165,199 $ 139,002 $ 106,019 $ 67,979
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of Year $ 2,300 $ 1,923 $ 1,616 $ 1,047 $ 960
Actual Charge-Offs:
Commercial 102 175 486 318 133
Consumer 118 252 29 21 24
Real Estate 298 101 20 192 162
------------- ------------ ------------ ------------ -----------
Total Charge-Offs 518 528 535 531 319
Less Recoveries:
Commercial 123 140 33 19 18
Consumer 10 7 7 11 3
Real Estate 1 3 24 6 123
------------- ------------ ------------ ------------ -----------
Total Recoveries 134 150 64 36 144
------------- ------------ ------------ ------------ -----------
Net Loans Charged-Off 384 378 471 495 175
Provision for Loan Losses 694 755 778 364 262
Allowance on Loans Acquired
from BOW - - - 700 -
------------- ------------ ------------ ------------ -----------
Balance at End of Year $ 2,610 $ 2,300 $ 1,923 $ 1,616 $ 1,047
============= ============ ============ ============ ===========
RATIOS:
Net Loans Charged-Off to Average
Loans 0.15% 0.18% 0.30% 0.48% 0.26%
Allowance for Loan Losses to Total
Loans 1.33% 1.39% 1.38% 1.87% 1.54%
Net Loans Charged-Off to Beginning
Allowance for Loan Losses 16.70% 19.66% 29.15% 47.28% 18.23%
Net Loans Charged-Off to Provision
for Loan Losses 55.33% 50.07% 60.54% 135.99% 66.79%
Allowance for Loan Losses to
Nonperforming Loans 157.04% 113.30% 150.35% 132.68% 77.90%
</TABLE>
32
<PAGE>
We believe 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.
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, we consider 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, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- -------------------- --------------------- -------------------
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 $ 960 53.2% $ 854 34.1% $ 657 26.2% $ 806 23.1% $ 522 20.2%
Construction 134 2.8% 100 2.7% 33 2.1% 65 3.9% 42 5.1%
Real Estate 1,034 23.4% 1,049 49.8% 873 61.0% 569 67.7% 368 69.0%
Consumer 267 20.6% 55 13.5% 139 10.8% 50 5.2% 32 5.8%
Unallocated 215 n/a 242 n/a 221 n/a 126 n/a 83 n/a
--------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
$2,610 100.0% $2,300 100.0% $1,923 100.0% $1,616 100.0% $1,047 100.0%
========= ========= ========= ========= ========= ========= ========= =========== ========= =========
</TABLE>
FUNDING
Deposits are our primary source of funds. At December 31, 1999, we had a deposit
mix of 56.7% in time and savings deposits, 22.7% in money market and NOW
deposits, and 20.6% in noninterest-bearing demand deposits. Our net interest
income is enhanced by our percentage of noninterest-bearing deposits.
33
<PAGE>
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,
------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------ ---------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Money Market and NOW Accounts $ 74,797 3.70% $ 53,640 3.01% $ 48,414 2.73%
Savings Deposits 87,566 4.65% 39,308 4.13% 26,164 3.52%
TCD Less than $100,000 42,386 5.11% 51,997 5.43% 37,866 5.49%
TCD $100,000 or More 39,963 6.27% 38,120 5.92% 28,923 5.74%
------------ ----------- ------------
Total Interest-Bearing Deposits 244,712 4.70% 183,065 4.54% 141,367 4.23%
Noninterest-Bearing Demand Deposits 68,632 n/a 62,771 n/a 51,664 n/a
------------ ----------- ------------
Total Average Deposits $313,344 3.67% $245,836 3.38% $193,031 3.10%
============ =========== ============
</TABLE>
The scheduled maturity distribution of the Bank's time deposits of $100,000 or
greater, as of December 31, 1999, were as follows (dollar amounts in thousands):
<TABLE>
<S> <C>
Three Months or Less $ 20,012
Over Three Months to One Year 23,457
Over One Year to Three Years 2,959
--------------
$ 46,428
==============
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of the Bank'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 our shareholders.
We manage the Bank's interest rate risk exposure by limiting the amount of
long-term fixed rate loans we hold for investment, by originating mortgage and
SBA loans for sale to the secondary market, increasing emphasis on shorter-term,
higher yield loans for portfolio, increasing or decreasing the relative amounts
of long-term and short-term borrowings and deposits and/or purchasing
commitments to sell loans.
34
<PAGE>
The table below sets forth the interest rate sensitivity of the our
interest-earning assets and interest-bearing liabilities as of December 31,
1999, 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 we 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:
Interest Bearing Deposits $ - $ 100 $ - $ - $ 100
Investment Securities and FHLB Stock 3,385 3,513 10,995 4,800 22,693
Gross Loans 181,834 6,346 51,107 27,811 267,098
------------ ------------- ------------- ------------ ------------
$185,219 $ 9,959 $ 62,102 $ 32,611 $ 289,891
============ ============= ============= ============ ============
INTEREST-BEARING LIABILITIES:
Money Market and NOW Deposits $ 73,193 $ - $ - $ - $ 73,193
Savings 79,983 - - - 79,983
Time Deposits 44,812 52,098 6,268 - 103,178
Other Borrowings - - - - -
------------ ------------- ------------- ------------ ------------
$ 197,988 $ 52,098 $ 6,268 $ - $ 256,354
============ ============= ============= ============ ============
Interest Rate Sensitivity Gap $( 12,769) $( 42,139) $ 55,834 $ 32,611 $ 33,537
Cumulative Interest Rate Sensitivity Gap $( 12,769) $( 54,908) $ 926 $ 33,537 $ 67,074
Ratios Based on Total Assets:
Interest Rate Sensitivity Gap ( 3.61%) ( 11.91%) 15.78% 9.22% 9.48%
Cumulative Interest Rate Sensitivity Gap ( 3.61%) ( 15.52%) 0.26% 9.48%
</TABLE>
Liquidity refers to our 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, 1999 was $29.2 million, an increase of $2.3
million or 8.6% over $26.9 million at December 31, 1998. Average shareholders'
equity for 1999 was $27.8 million compared to $24.2 million in 1998. The
increase in shareholder's equity is primarily from net income of $3,076 in 1999
less dividends paid totaling $760.
Shareholders' equity at December 31, 1998 was $26.9 million, 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.
35
<PAGE>
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, 1999, the Bank's capital exceeded
the Tier 1 Capital and Leverage Ratio's minimum regulatory requirement and was
below the minimum regulatory requirement for Total Capital. The Bank was
considered to be under-capitalized at December 31, 1999, as defined in the
regulations issued by the FDIC. The Bank's risk-based capital ratios, shown
below as of December 31, 1999, have been computed in accordance with regulatory
accounting policies (Our capital ratios are comparable to the Bank's).
<TABLE>
<CAPTION>
Minimum
Requirements Bank
----------------- -----------
<S> <C> <C>
Tier 1 Capital 4.00% 7.28%
Total Capital 8.00% 7.99%
Leverage Ratio 4.00% 7.40%
</TABLE>
On March 8, 2000 the Bank was notified by the FDIC that the Bank is
under-capitalized for purposes of Prompt Corrective Action. Accordingly, the
Bank is prohibited, among other things, from renewing broker deposits, paying
dividends and is subject to enforcement actions. Subsequent to the
notification by the FDIC, the Bank has filed a capital restoration plan with
the FDIC. The plan provides that the Bank will have Total Capital in excess
of 8% by March 31, 2000 and in excess of 10% by the third quarter of 2001.
See also Note O in the Consolidated Financial Statements for additional
information on our regulatory capital requirements and computations.
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 No.
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 was originally
effective for 2000. In June 1999, the FASB issued SFAS No. 137, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133". This Statement establishes the effective date of
SFAS No. 133 for 2001 and is not expected to have a material impact on the
Company's financial statements.
36
<PAGE>
YEAR 2000 ISSUES
During the periods leading up to January 1, 2000, the Company addressed the
potential problems associated with the possibility that the computers that
control or operate the Company's information technology system and
infrastructure may not have been programmed to read four-digit date codes and,
upon arrival of the Year 2000, may have recognized the two-digit code "00" as
the year 1900, causing systems to fail to function or generate erroneous data.
The Company expended approximately $61,000 through the periods ended December
31, 1999 in connection with its year 2000 compliance program. The Company
experienced no significant problems related to its information technology
systems upon arrival of the Year 2000, nor was there any interruption in service
to its customers.
The Company could still incur losses if Year 2000 issues adversely affect its
depositors or borrowers. Such problems could include delayed loan payments due
to Year 2000 problems affecting any significant borrowers or impairing the
payroll systems of large employers in the Company's primary market areas.
Because the Company's loan portfolio is highly diversified with regard to
individual borrowers and types of business, the Company does not expect, and to
date has not realized, any significant or prolonged difficulties that will
affect net earnings or cash flow.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NET INTEREST MARGIN. As previously discussed, net interest income is the
difference between the interest income and fees earned on loans and investments
and the interest expense paid on deposits and other liabilities. The amount by
which interest income exceed interest expense depends on two factors: the volume
of earnings assets compared to the volume of interest-bearing deposits and
liabilities, and the interest rat earned on those interest earning assets
compared with the interest paid on those interest-bearing deposits and
liabilities.
Net interest margin is the net interest income expressed as a percentage of
earning assets. To maintain its net interest margin, the Company must manage the
relationship between interest earned and paid, and the relationship is subject
to the following types of risks that are related to changes in interest rates.
MARKET RISK. The market values of assets or liabilities on which the interest
rate is fixed will increase or decrease with changes in market interest rates.
If the Company invests funds in a fixed rate long-term security and then
interest rates rise, the security is worth less than a comparable security just
issued because the older security pays less interest than the newly issued
security. If the older security had to be sold, the Company would have to
recognize a loss. Correspondingly, if interest rates decline after a fixed rate
security is purchased, its value increases. Therefore, while the value changes
regardless of which direction interest rates move, the adverse exposure to
"market risk" is primarily due to rising interest rates. This exposure is
lessened by managing the amount of fixed rate assets and by keeping maturities
relatively short. However, this strategy must be balanced against the need for
adequate interest income because variable rate and shorter fixed rate securities
generally earn less interest than longer term fixed rate securities.
37
<PAGE>
There is market risk relating to the Company's fixed rate or term liabilities as
well as its assets. For liabilities, the adverse exposure to market risk is to
lower rates because the Company must continue to pay the higher rate until the
end of the term. However, because the amount of fixed rate liabilities is
significantly less that the fixed rate assets, and because the average maturity
is substantially less than for the assets, the market risk is not as great.
Net interest margin was 5.38% in 1999 compared to 6.40% in 1998 and 6.46% in
1997.
The following is a summary of the carrying amounts and estimated fair values of
selected Company financial assets and liabilities at December 31, 1999 (amounts
in thousands):
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
------------------ -----------------
<S> <C> <C>
Financial Assets:
Securities $ 21,580 $ 21,313
Loans, Net of Allowance for Credit Losses $ 196,274 $ 196,136
Financial Liabilities:
Deposits $ 322,973 $ 323,010
</TABLE>
Other than a relatively small difference due to credit quality issues pertaining
to loans, the difference between the carrying amount and the fair value is a
measure of how much more or less valuable the Company's financial instruments
are to it than when acquired. The net difference for interest-bearing financial
assets is $0.4 million. The amount is not deemed to be significant compared to
the outstanding balances taken as a whole.
MISMATCH RISK. Another interest-related risk arises from the fact that when
interest rate change, the changes do not occur equally in the rates of interest
earned and paid because of difference in the contractual terms of the assets and
liabilities held. The Company has a large portion of its loan portfolio tied to
the prime interest rate. If the prime rate is lowered because of general market
conditions, e.g., other banks are lowering their lending rates; these loans will
be repriced. If the Company were at the same time to have a large proportion of
its deposits in long-term fixed rate certificates, net interest income would
decrease immediately. Interest earned on loans would decline while interest
expense would remain at higher levels for a period of time because of the higher
rate still being paid on deposits.
A decrease in net interest income could also occur with rising interest rates if
the Company had a large portfolio of fixed rate loans and securities funded by
deposit accounts on which the rate is steadily rising. This exposure to
"mismatch risk" is managed by matching the maturities and repricing
opportunities of assets and liabilities. This is done by varying the terms and
conditions of the products that are offered to depositors and borrowers. For
example, if many depositors want longer-term certificates while most borrowers
are requesting loans with floating interest rates, the Company will adjust the
interest rates on the certificates and loans to try to match up demand. The
company can then partially fill in mismatches by purchasing securities with the
appropriate maturity or repricing characteristics.
One of the means of monitoring this matching process is the use of a "gap"
report table. This table show the extent to which the maturities or repricing
opportunities of the major categories of assets and liabilities are matched
based upon specific interest rate shifts of up to +/- 300 basis points.
38
<PAGE>
The following table shows the estimated impact to net interest income for an
instantaneous shift in various interest rates as of December 31, 1999 (the
dollar change in net interest income represents the estimated change for the
next 12 months):
<TABLE>
<CAPTION>
CHANGE IN NET
CHANGE IN INTEREST RATES INTEREST INCOME
-------------------------------- --------------------
<S> <C>
+300 basis points $ 4,175
+200 basis points 2,263
+100 basis points 1,360
-100 basis points ( 1,400)
-200 basis points ( 2,771)
-300 basis points ( 4,092)
</TABLE>
The Company has adequate capital to absorb any potential losses as a result of a
decrease in interest rates. Periods of more than one year is not estimated
because steps can be taken to mitigate the adverse effects of any interest rate
changes.
BASIS RISK. A third interest-related risk arises from the fact that interest
rates rarely change in a parallel or equal manner. The interest rates associated
with the various assets and liabilities differ in how often they change, the
extent to which they change, and whether they change sooner or later than other
interest rates. For example, while the repricing of a specific asset and a
specific liability may fall in the same period of a gap report the interest rate
on the asset may rise 100 basis points, while market conditions dictate that the
liability increases only 50 basis points. While evenly matched in the gap
report, the Company would experience an increase in net interest income. This
exposure to "basis risk" is the type of interest risk least able to be managed,
but is also the least dramatic. Avoiding concentration in only a few types of
assets or liabilities is the best insurance that the average interest received
and paid will move in tandem, because the wider diversification means that many
different rates, each with their own volatility characteristics, will come into
play. The Company has made an effort to minimize concentrations in certain types
of assets and liabilities.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 41
Consolidated Balance Sheets at December 31, 1999 and 1998 42 and 43
Consolidated Statements of Income for each of the Years
in the Three-Year Period Ended December 31, 1999 44
Consolidated Statements of Shareholders' Equity for each of the
Years in the Three-Year Period Ended December 31, 1999 45
Consolidated Statements of Cash Flows for each of the Years
in the Three-Year Period Ended December 31, 1999 46
Notes to Financial Statements 47 through 75
</TABLE>
All supplemental schedules are omitted as inapplicable or because the required
information is included in the financial statements or notes hereto.
40
<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, 1999 and 1998, 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, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BYL Bancorp and Subsidiary as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Laguna Hills, California
February 11, 2000
41
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 34,119 $ 14,214
Federal Funds Sold - 18,700
---------------- ----------------
TOTAL CASH AND CASH EQUIVALENTS 34,119 32,914
Interest-Bearing Deposits 100 -
Investment Securities
Available for Sale 6,868 5,570
Held to Maturity 14,712 10,844
---------------- ----------------
TOTAL INVESTMENT SECURITIES 21,580 16,414
Federal Home Loan Bank Stock, at Cost 1,113 830
Loans Held for Sale 69,756 74,598
Loans
Commercial 104,719 56,244
Real Estate 51,500 86,646
Consumer 40,456 22,309
---------------- ----------------
TOTAL LOANS 196,675 165,199
Net Deferred Loan Costs 2,209 1,255
Allowance for Credit Losses ( 2,610) ( 2,300)
---------------- ----------------
NET LOANS 196,274 164,154
Premises and Equipment 6,447 6,082
Other Real Estate Owned 277 971
Cash Surrender Value of Life Insurance 2,196 1,374
Deferred Tax Assets 1,804 1,843
Goodwill 1,324 1,445
Interest-Only Strips Receivable and Servicing Assets 15,659 9,025
Accrued Interest and Other Assets 3,087 8,363
---------------- ----------------
$ 353,736 $ 318,013
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $ 66,619 $ 69,863
Money Market and NOW 73,193 58,470
Savings 79,983 70,838
Time Deposits Under $100,000 56,750 48,799
Time Deposits $100,000 and Over 46,428 39,236
---------------- ----------------
TOTAL DEPOSITS 322,973 287,206
Accrued Interest and Other Liabilities 1,563 3,925
---------------- ----------------
TOTAL LIABILITIES 324,536 291,131
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 2,537,102
Shares in 1999 and 2,531,302 Shares in 1998 12,788 12,760
Retained Earnings 15,918 13,602
Accumulated Other Comprehensive Income 494 520
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 29,200 26,882
---------------- ----------------
$ 353,736 $ 318,013
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 25,093 $ 22,057 $ 16,299
Interest on Investment Securities 1,310 1,119 1,535
Other Interest Income 1,125 840 621
--------------- -------------- --------------
TOTAL INTEREST INCOME 27,528 24,016 18,455
INTEREST EXPENSE
Interest on Money Market and NOW 2,764 1,613 1,321
Interest on Savings Deposits 4,076 1,622 920
Interest on Time Deposits 4,670 5,081 3,741
Interest on Other Borrowings 76 90 75
--------------- -------------- --------------
TOTAL INTEREST EXPENSE 11,586 8,406 6,057
--------------- -------------- --------------
NET INTEREST INCOME 15,942 15,610 12,398
Provision for Credit Losses 694 755 778
--------------- -------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 15,248 14,855 11,620
NONINTEREST INCOME
Net Servicing and Interest-Only Strip Income 1,817 662 689
Net Gain on Sale and Securitization of Loans 19,563 19,724 13,150
Service Charges, Fees, and Other Income 2,669 3,022 2,081
--------------- -------------- --------------
24,049 23,408 15,920
--------------- -------------- --------------
39,297 38,263 27,540
NONINTEREST EXPENSE
Salaries and Employee Benefits 19,906 19,662 14,073
Occupancy Expenses 2,287 1,645 1,342
Furniture and Equipment 2,798 2,032 1,388
Other Expenses 8,900 7,531 5,914
--------------- -------------- --------------
33,891 30,870 22,717
--------------- -------------- --------------
INCOME BEFORE INCOME TAXES 5,406 7,393 4,823
Income Taxes 2,330 3,277 1,968
--------------- -------------- --------------
NET INCOME $ 3,076 $ 4,116 $ 2,855
=============== ============== ==============
Per Share Data
Net Income - Basic $ 1.21 $ 1.63 $ 1.19
Net Income - Diluted $ 1.21 $ 1.55 $ 1.12
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<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, 1997 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
=============
Cash in Lieu of Fractional Shares from
Merger with DNB ( 2)
Dividends on Common ( 467)
Exercise of Stock Options 28,131 138
----------- ---------- ------------- ---------------
BALANCE AT DECEMBER 31, 1998 2,531,302 12,760 13,602 520
COMPREHENSIVE INCOME:
Net Income $ 3,076 3,076
Other Comprehensive Income - Unrealized
Gain on Available-for-Sale Securities,
Net of Taxes of $2 3 3
Unrealized Loss on Interest-Only
Strips Net of Taxes of $21 ( 29) ( 29)
-------------
TOTAL COMPREHENSIVE INCOME $ 3,050
=============
Cash Dividends ( 760)
Exercise of Stock Options 5,800 28
----------- ---------- ------------- ---------------
BALANCE AT DECEMBER 31, 1999 2,537,102 $ 12,788 $ 15,918 $ 494
=========== ========== ============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Income $ 3,076 $ 4,116 $ 2,855
Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 3,622 1,920 1,013
Deferred Income Taxes 57 ( 496) ( 912)
Loans Originated for Sale ( 690,108) ( 336,685) ( 225,800)
Proceeds from Loan Sales 701,551 319,630 216,434
Gain on Sale of Loans ( 19,563) ( 19,724) ( 13,150)
Provision for Credit Losses 694 755 778
Other Real Estate Owned Losses 72 220 53
Other Items - Net 1,995 ( 5,784) 2,617
------------ ------------ ------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 1,396 ( 36,048) ( 16,112)
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits ( 100) 3,419 685
Purchases of Available-for-Sale Securities ( 236) ( 1,894) ( 5,864)
Purchases of Held-to-Maturity Securities ( 10,994) ( 10,551) ( 7,902)
Proceeds from Maturities and Sale of Available-for-Sale
Securities 3,452 18,683 4,787
Proceeds from Maturities of Held-to-Maturity Securities 7,108 2,663 8,407
Net Change in Loans ( 33,022) ( 28,838) ( 35,866)
Proceeds from Sales of Other Real Estate Owned 830 1,212 885
Purchases of Premises and Equipment ( 2,294) ( 2,184) ( 1,885)
Proceeds from Sale of Premises and Equipment 30 82 3
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES ( 35,226) ( 17,408) ( 36,750)
FINANCING ACTIVITIES
Net Change in Demand Deposits and Savings Accounts 20,624 67,451 14,568
Net Change in Time Deposits 15,143 11,820 31,310
Net Change Short-Term Borrowings - ( 4,000) 3,500
Reductions in Long-Term Debt - ( 465) ( 58)
Proceeds from Exercise of Stock Options 28 138 592
Redemption of Common Stock - - ( 6)
Dividends Paid ( 760) ( 467) ( 502)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 35,035 74,477 49,404
------------ ------------ ------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,205 21,021 ( 3,458)
Cash and Cash Equivalents at Beginning of Year 32,914 11,893 15,351
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 34,119 $ 32,914 $ 11,893
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 11,495 $ 8,338 $ 5,895
Income Taxes Paid $ 2,470 $ 4,237 $ 2,352
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(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 seven 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 customers for both retention in the Bank's loan portfolio
as well as sales to other institutional investors.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks and federal funds sold. Generally, federal funds are sold for one
day periods.
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
Bank complied with the reserve requirements as of December 31, 1999.
The Bank maintains amounts due from banks which exceed federally insured limits.
The Bank 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.
47
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENT SECURITIES - CONTINUED
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.
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 ("SFAS") No. 114,
"ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN", 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.
48
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LOANS - CONTINUED
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
derecognizes liabilities when extinguished.
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.
49
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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 of the Diamond Bar Mortgage Division. 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. As noted in Note S, in conjunction with the
closing of the Diamond Bar Mortgage Division, the Company no longer utilizes
these activities to reduce interest rate risk.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives, which ranges from three to
ten years for furniture and fixtures and forty years for buildings. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the improvements or the remaining lease term, whichever is
shorter. Expenditures for betterment or major repairs are capitalized and those
for ordinary repairs and maintenance are charged to operations as incurred.
50
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
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.
51
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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.
STOCK-BASED COMPENSATION
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 ("APB") 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 M.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1998, FASB issued SFAS No. 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 was originally effective for 2000. In June 1999, the FASB issued SFAS
No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133". This Statement
establishes the effective date of SFAS No. 133 for 2001 and is not expected to
have a material impact on the Company'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.
52
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(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, 1999:
Mortgage-Backed Securities $ 6,597 $ 271 $ - $ 6,868
============= ============= ============= =============
DECEMBER 31, 1998:
Investment in Mutual funds $ 3,000 $ - $ - $ 3,000
Mortgage-Backed Securities 2,305 265 - 2,570
------------- ------------- ------------- -------------
$ 5,305 $ 265 $ - $ 5,570
============= ============= ============= =============
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1999:
U.S. Treasury $ 500 $ 1 $ - $ 501
U.S. Government and Agency Securities 14,008 - ( 266) 13,742
Mortgage-Backed Securities 204 - ( 2) 202
------------- ------------- ------------- -------------
$ 14,712 $ 1 $( 268) $ 14,445
============= ============= ============= =============
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
============= ============= ============= =============
</TABLE>
The gross unrealized gain of $271 on available-for-sale securities is included
in accumulated other comprehensive income at December 31, 1999, net of taxes of
$111.
53
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(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, 1999, and 1997.
Investment securities carried at $14,712 and $10,844 at December 31, 1999 and
1998, 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, 1999, 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 $ - $ - $ 3,513 $ 3,488
Due from One to Five Years - - 10,995 10,755
Mortgage-Backed Securities 6,597 6,868 204 202
-------------- --------------- -------------- ---------------
$ 6,597 $ 6,868 $ 14,712 $ 14,445
============== =============== ============== ===============
</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, 1999 and 1998, the Bank was servicing approximately $220,120 and
$164,764, respectively, in 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.
54
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(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 is as follows:
<TABLE>
<CAPTION>
Servicing Assets
---------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Balance at Beginning of Year $ 2,479 $ 1,920 $ 1,249
Transfer to Interest-Only Strips Receivable - - ( 312)
Increase from Loan Sales 1,045 968 1,057
Amortization and Prepayments Charged to Income ( 721) ( 409) ( 74)
------------ ------------ -----------
Balance at End of Year $ 2,803 $ 2,479 $ 1,920
============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Interest-Only Strips Receivable
---------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Balance at Beginning of Year $ 5,926 $ 644 $ -
Transfer from Servicing Assets - - 312
Increase from Loan Sales 7,224 5,437 353
Amortization and Prepayments Charged to Income ( 864) ( 155) ( 21)
------------ ------------ -----------
Balance at End of Year $ 12,286 $ 5,926 $ 644
============ ============ ===========
Unrecognized Gain at End of Year $ 570 $ 620 $ -
</TABLE>
The unrecognized gain on interest-only strips receivable of $570 is included in
accumulated other comprehensive income at December 31, 1999, net of taxes of
$236.
The estimated fair value of the servicing assets was approximately $2,815 at
December 31, 1999. 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.
55
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE C - LOANS HELD FOR SALE - CONTINUED
Included in the above Interest-Only Strips Receivable are retained interest in
securitized assets ("RISA"), which has been capitalized upon the securitization
of $43,000 of the unguaranteed portion of SBA loans in 1998 and $60,000 of
commercial real estate loans in 1999. The RISA represents the present value of
the estimated future earnings to be received by the company from the excess
spread created in securitization transactions. Excess spread is calculated by
taking the difference between the coupon rate of the loans sold and the
certificate rate paid to the investors less contractually specified servicing
and costs and projected credit losses, after giving effect to estimated
prepayments. The Company utilized prepayment rates for the 1998 securitization
of 12% in 1998 and 15.3% in 1999. The prepayment rate for the 1999
securitization is 5% for the first sixty months and 15% thereafter. Annual net
credit loss assumptions utilized for the 1999 and 1998 securitization
transactions ranged from .25% to .50%. The Company used a discount rate during
1999 and 1998 of 125 to 525 points over the certificate rates paid to investors
at the time of securitization in discounting future earnings.
RISA is classified in a manner similar to available for sale securities and as
such is marked to market each quarter. The Company is not aware of an active
market for the purchase or sale of the RISA, and accordingly, the company
determines the estimated fair value of the RISA by discounting the expected cash
flows released from the trust (the "Cash-Out Method") using a discount rate
which the Company believes is commensurate with the risks involved. Any changes
in the market value of RISA is reported as a separate component of shareholders'
equity as an unrealized gain or loss, net of deferred taxes.
In initially valuing the RISA, the Company establishes an off balance sheet
allowance for expected future credit losses. The allowance is based upon
historical experience and management's estimate of future performance regarding
credit losses. The amount is reviewed periodically and adjustments are made if
actual experience or other factors indicate that future performance may differ
from management's prior estimates.
56
<PAGE>
BY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE C - LOANS HELD FOR SALE - CONTINUED
The following table presents the estimated future undiscounted retained interest
earnings to be received from securitizations. Estimated future undiscounted RISA
earnings are calculated by taking the difference between the coupon rate of the
contracts sold and the rates paid to the investors, less the contractually
specified servicing fee of .40% and costs, after giving effect to estimated
prepayments and assuming no losses. To arrive at the RISA, this amount is
reduced by the off balance sheet allowance established for potential future
losses and by discounting to present value.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Estimated Net Undiscounted RISA Earnings $ 19,475 $ 11,114
Off Balance Sheet Allowance for Losses ( 1,864) ( 1,355)
Discount to Present Value ( 6,966) ( 3,920)
------------ ------------
Retained Interest in Securitized Assets $ 10,645 $ 5,839
============ ============
Outstanding Balance of Loans Sold Through Securitizations $ 94,297 $ 37,420
============ ============
</TABLE>
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>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 2,300 $ 1,923 $ 1,616
Additions to the Allowance Charged to Expense 694 755 778
Recoveries on Loans Charged Off 134 150 64
----------- ------------ ------------
3,128 2,828 2,458
Less Loans Charged Off ( 518) ( 528) ( 535)
----------- ------------ ------------
$ 2,610 $ 2,300 $ 1,923
=========== ============ ============
</TABLE>
57
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE D - LOANS - CONTINUED
The following is a summary of the investment in impaired loans, the related
allowance for credit losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Recorded Investment in Impaired Loans $ 1,542 $ 1,806 $ 2,325
Related Allowance for Impaired Losses $ 243 $ 289 $ 341
Average Recorded Investment in Impaired Loans $ 2,349 $ 2,102 $ 2,324
Interest Income Recognized from Cash Payments $ - $ - $ 103
</TABLE>
Loans having carrying values of $725, $1,479, and $336 were transferred to other
real estate owned in 1999, 1998 and 1997, respectively. During 1999 loans
totaling $517 were made to facilitate the sale of other real estate owned.
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 943 $ 943
Buildings 2,091 2,039
Leasehold Improvements 1,685 1,380
Furniture, Fixtures, and Equipment 7,584 5,739
------------ ------------
12,303 10,101
Less Accumulated Depreciation and Amortization ( 5,856) ( 4,019)
------------ ------------
$ 6,447 $ 6,082
============ ============
</TABLE>
The Bank has entered into various operating lease agreements, primarily covering
its branch locations. These agreements expire at various times through the year
2005.
58
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE E - PREMISES AND EQUIPMENT - CONTINUED
The approximate future minimum annual payments for these leases by year are as
follows:
<TABLE>
<S> <C>
2000 $ 1,289
2001 1,258
2002 826
2003 262
2004 152
Thereafter 76
-------------
$ 3,863
=============
</TABLE>
The minimum rental payments shown above represent 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 $1,526 in 1999, $987 in 1998, and $768 in 1997.
NOTE F - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
2000 $ 96,910
2001 through 2003 6,264
After 2003 4
-------------
$ 103,178
=============
</TABLE>
59
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE G - OTHER EXPENSES
A summary of other expenses for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Regulatory Assessments $ 61 $ 58 $ 79
Other Real Estate Owned 226 288 185
Commissions - 13 278
Professional Fees and Outside Services 1,965 1,792 1,406
Loan Expenses 1,649 1,047 511
Office Expenses 2,016 1,527 1,303
Merger Related Expenses - 542 -
Other 2,983 2,264 2,152
------------ ------------ ------------
$ 8,900 $ 7,531 $ 5,914
============ ============ ============
</TABLE>
NOTE H - INCOME TAXES
The provisions for income taxes included in the statements of income consist of
the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 1,704 $ 2,723 $ 2,176
State 569 1,050 704
------------ ----------- -----------
2,273 3,773 2,880
Deferred 57 ( 496) ( 912)
------------ ----------- -----------
$ 2,330 $ 3,277 $ 1,968
============ =========== ===========
</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.
60
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(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>
1999 1998
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses $ 763 $ 510
Other Real Estate Writedowns 91 222
Gain on Sale of Loans 1,098 1,196
California Franchise Tax 196 312
Other Assets/Liabilities 160 401
------------ ------------
2,308 2,641
Deferred Tax Liabilities:
Unrealized Gains on Securities and Other Assets ( 347) ( 365)
Premises and Equipment ( 157) ( 433)
------------ ------------
( 504) ( 798)
------------ ------------
$ 1,804 $ 1,843
============ ============
</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>
1999 1998 1997
------------------------ ------------------------ ------------------------
Amount Rate Amount Rate Amount Rate
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal Tax Rate $ 1,838 34.0% $ 2,514 34.0% $ 1,640 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 387 7.1 536 7.3 330 6.8
Tax Savings from Exempt
Interest ( 42) ( 0.8) ( 44) ( 0.6) ( 79) ( 1.6)
Merger Expenses
- - 222 3.0 - -
Other Items - Net 147 2.8 49 0.6 77 1.6
----------- ----------- ----------- ----------- ----------- -----------
Bank's Effective Rate $ 2,330 43.1% $ 3,277 44.3% $ 1,968 40.8%
=========== =========== =========== =========== =========== ===========
</TABLE>
61
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(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>
1999 1998 1997
-------------------------- ------------------------- --------------------------
Income Shares Income Shares Income Shares
------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Income as Reported $ 3,076 $ 4,116 $ 2,855
Weighted Average Shares
Outstanding During the Year 2,534,053 2,520,828 2,403,103
------------ ------------ ----------- ----------- ------------ ------------
USED IN BASIC EPS 3,076 2,534,053 4,116 2,520,828 2,855 2,403,103
Dilutive Effect of:
Outstanding Stock Options 17,556 135,410 134,084
------------ ------------ ----------- ----------- ------------ ------------
USED IN DILUTIVE EPS $ 3,076 2,551,609 $ 4,116 2,656,238 $ 2,855 2,537,187
============ ============ =========== =========== ============ ============
</TABLE>
NOTE J - EMPLOYEE BENEFITS
The Bank has a salary deferral 401(k) Plan that covers substantially all
employees. The Bank contributed matching funds at its option, which amounted to
$381, $302 and $34 in 1999, 1998 and 1997, respectively.
The Bank has entered into retirement benefit agreements with certain officers
providing for future benefits aggregating approximately $2,415, payable in equal
annual installments for ten 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 $2,196, $1,374, and $906 at December 31, 1999, 1998 and 1997,
respectively. As of December 31, 1999, 1998 and 1997, approximately $216, $152,
and $97, respectively, has been accrued in conjunction with these agreements.
NOTE K - COMMITMENTS AND CONTINGENCIES
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.
62
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE K - COMMITMENTS AND CONTINGENCIES - CONTINUED
In the ordinary course of business, the Bank enters into financial commitments
to meet the financing needs of its customers. These financial commitments
include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk not recognized in the statement of financial position.
The Bank's exposure to loan loss in the event of nonperformance on commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments as it does for loans reflected in the financial statements.
As of December 31, 1999, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
<TABLE>
<S> <C>
Commitments to Extend Credit $ 28,060
Standby Letter of Credit 839
-------------
$ 28,899
=============
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Bank customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank, is based on
management's credit evaluation of the customer. The majority of the Bank's
commitments to extend credit and standby letters of credit are secured by real
estate.
NOTE 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
63
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE L - RELATED PARTY TRANSACTIONS - CONTINUED
The following is an analysis of the activity of all such loans:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Beginning Balance $ 2,241 $ 1,486
Credits Granted, Including Renewals 1,033 887
Repayments ( 493) ( 132)
------------ ------------
Ending Balance $ 2,781 $ 2,241
============ ============
</TABLE>
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 - STOCK OPTION PLAN
At December 31, 1999, the Company has an option plan which is described below.
The Company applies APB Opinion No. 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.
64
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M - STOCK OPTION PLAN - CONTINUED
A summary of the status of the Company's fixed stock option plan as of December
31, 1999, 1998, and 1997, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ------------------------
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 413,102 $ 12.80 288,700 $ 9.56 125,865 $ 4.88
Options Granted - - 152,533 17.47 179,368 12.70
Options Exercised ( 5,800) 4.88 ( 28,131) 4.88 ( 11,466) 6.40
Options Forfeited ( 3,200) 17.38 - ( 5,067) 11.79
----------- ----------- -----------
Outstanding at
End of Year 404,102 12.88 413,102 12.80 288,700 9.56
=========== =========== ===========
Options Exercisable at Year-End 284,636 10.95 203,052 9.31 171,783 7.41
Weighted-Average
Fair Value of Options
Granted During the Year $ - $ 5.22 $ 3.87
</TABLE>
The following table summarizes information about fixed options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------
Weighted- Weighted Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- ------------------------ ---------------- -------------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
$4.88 82,201 2.8 years $ 4.88 82,201 $ 4.88
$12 to $13 172,568 6.9 years $ 12.71 172,568 $ 12.71
$17 to $21 149,333 8.2 years $ 17.47 29,867 $ 17.47
---------------- ----------------
404,102 6.8 years 284,636
================ ================
</TABLE>
65
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M - STOCK OPTION PLAN - CONTINUED
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the following pro forma amount:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Net Income:
As Reported $ 3,076 $ 4,116 $ 2,855
Pro Forma $ 2,703 $ 3,888 $ 2,640
Per Share Data:
Net Income - Basic
As Reported 1.21 1.63 1.19
Pro Forma 1.07 1.54 1.10
Net Income - Diluted
As Reported 1.21 1.55 1.12
Pro Forma 1.06 1.46 1.04
</TABLE>
The information above does not include options from DNB Financial which was
acquired in 1998 (see Note P). DNB Financial had no options granted in 1998 and
1997 and therefore did not impact the pro forma data presented above. During
1997, options previously granted equal to 92,609 shares were exercised.
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
66
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash, short term investments, due from customers on
acceptances, and Bank acceptances outstanding are considered to approximate fair
value. Short term investments include federal funds sold, securities purchased
under agreements to resell, and interest bearing deposits with Banks. The fair
values of investment securities, including available-for-sale, are generally
based on quoted market prices. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand, commercial paper,
and other borrowed funds are considered to approximate fair value. For fixed
maturity deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities. The fair value of long term debt is based on rates currently
available to the Bank for debt with similar terms and remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements. The
fair value of these financial instruments is not material.
67
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair value of financial instruments at December 31, 1999 and 1998
is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and Due From Banks $ 34,119 $ 34,119 $ 14,214 $ 14,214
Federal Funds Sold - - 18,700 18,700
Interest-Bearing Deposits 100 100 - -
Investment Securities 21,580 21,313 16,414 16,444
Federal Home Loan Bank Stock, at Cost 1,113 1,113 830 830
Loans Held for Sale 69,756 71,849 74,598 76,836
Loans, net 196,274 196,136 164,154 164,138
I/O Strips Receivable and Servicing Assets 15,659 15,674 9,025 9,025
Cash Surrender Value - Life Insurance 2,196 2,196 1,374 1,374
FINANCIAL LIABILITIES:
Deposits 322,973 323,010 287,206 287,394
</TABLE>
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
68
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE O - REGULATORY MATTERS - CONTINUED
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).
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as under-capitalized under the
regulatory framework for prompt corrective action (there are no conditions or
events since that notification that management believes have changed the Bank's
category). To be categorized as well-capitalized, the Bank must maintain minimum
ratios as set forth in the table below.
<TABLE>
<CAPTION>
Required Capital
--------------------------------------------
To Be Well-
Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Provisions
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total Capital (to Risk-Weighted Assets) $ 29,539 7.99% $ 29,542 8.00% $ 36,928 10.00%
Tier 1 Capital (to Risk-Weighted Assets) $ 26,930 7.28% $ 14,771 4.00% $ 22,157 6.00%
Tier 1 Capital (to Average Assets) $ 26,930 7.40% $ 14,550 4.00% $ 18,187 5.00%
AS OF DECEMBER 31, 1998:
Total Capital (to Risk-Weighted Assets) $ 26,782 9.68% $ 22,123 8.00% $ 27,653 10.00%
Tier 1 Capital (to Risk-Weighted Assets) $ 24,483 8.85% $ 11,061 4.00% $ 16,592 6.00%
Tier 1 Capital (to Average Assets) $ 24,483 7.95% $ 12,314 4.00% $ 15,392 5.00%
</TABLE>
On March 8, 2000 the Bank was notified by the FDIC that the Bank is
under-capitalized for purposes of Prompt Corrective Action. Accordingly, the
Bank is prohibited, among other things, from renewing broker deposits, paying
dividends and is subject to enforcement actions.
NOTE P - MERGERS AND ACQUISITIONS
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.
69
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE P - MERGERS AND ACQUISITIONS - CONTINUED
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>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Interest and Noninterest Income:
The Company $ 51,577 $ 44,635 $ 27,818
DNB Financial - 2,789 6,557
-------------- --------------- ---------------
$ 51,577 $ 47,424 $ 34,375
============== =============== ===============
Net Income:
The Company $ 3,076 $ 3,794 $ 2,110
DNB Financial - 322 745
-------------- --------------- ---------------
$ 3,076 $ 4,116 $ 2,855
============== =============== ===============
</TABLE>
NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
BYL Bancorp operates BYL Bank Group. 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,
------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS:
Cash $ 134 $ 193
Investment in Subsidiary 29,029 26,689
Other Assets 37 -
-------------- --------------
$ 29,200 $ 26,882
============== ==============
LIABILITIES:
Long-Term Debt $ - $ -
Other Liabilities - -
-------------- --------------
TOTAL LIABILITIES - -
SHAREHOLDER'S EQUITY 29,200 26,882
-------------- --------------
$ 29,200 $ 26,882
============== ==============
</TABLE>
70
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
INCOME:
Cash Dividends from Subsidiary $ 760 $ 531
Interest Income - 36
-------------- --------------
TOTAL INCOME 760 567
EXPENSES:
Merger Related Expenses - 542
Other 50 44
-------------- --------------
TOTAL EXPENSES 50 586
-------------- --------------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY 710 ( 19)
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 2,366 4,135
-------------- --------------
NET INCOME $ 3,076 $ 4,116
============== ==============
</TABLE>
71
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,076 $ 4,116
Noncash Items Included in Net Income:
Equity in Income of Subsidiary ( 3,126) ( 4,666)
Change in Other Assets and Liabilities ( 37) 212
-------------- --------------
NET CASH USED IN
OPERATING ACTIVITIES ( 87) ( 338)
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends Received from Subsidiary 760 531
Investment in Subsidiary - ( 915)
Change in Investments - 1,106
Change in Loans - 555
-------------- --------------
NET CASH PROVIDED
BY INVESTING ACTIVITIES 760 1,277
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Long-Term Debt - ( 465)
Options Exercised and Shares Retired 28 138
Dividends Paid ( 760) ( 469)
-------------- --------------
NET CASH USED IN
FINANCING ACTIVITIES ( 732) ( 796)
-------------- --------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS ( 59) 143
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF YEAR 193 50
-------------- --------------
CASH AND CASH EQUIVALENTS
AT ENDING OF YEAR $ 134 $ 193
============== ==============
</TABLE>
72
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE R - 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 seven 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>
1999
----------------------------------------------------------------
Wholesale Segments
------------------------------- Retail Total
Mortgage SBA Segment Company
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT
Net Interest Income $ 2,933 $ 3,398 $ 9,611 $ 15,942
Noninterest Income 16,582 5,641 1,826 24,049
Operating Expense ( 16,011) ( 4,031) ( 7,604) ( 27,646)
-------------- --------------- -------------- --------------
OPERATIONAL PROFIT 3,504 5,008 3,833 12,345
Provision for Loan Losses ( 694)
Administrative Costs ( 6,124)
Goodwill Amortization ( 121)
Income Taxes ( 2,330)
--------------
NET INCOME $ 3,076
==============
Total Assets at December 31, 1999 $ 44,103 $ 139,488 $ 170,145 $ 353,736
Loans Originated for Sale during 1999 $ 567,000 $ 123,000
Loans Sold during 1999 $ 587,000 $ 108,000
</TABLE>
73
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE R - SEGMENT INFORMATION - CONTINUED
<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 5,034 5,876 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>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Wholesale Segments
------------------------------- Retail Total
Mortgage SBA Segment Company
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT
Net Interest Income $ 1,230 $ 2,023 $ 9,145 $ 12,398
Noninterest Income 10,158 3,681 2,081 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>
74
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE S - SUBSEQUENT EVENTS
As discussed in Note O, the Bank is under capitalized pursuant to the regulatory
capital requirements administered by the FDIC. In order to improve its capital
ratios, during the first quarter of 2000, the Bank closed its Indirect Auto
Division, sold the related loan portfolio and divested itself of its Diamond Bar
Mortgage Division, an originator of Agency conforming residential mortgages. As
a result of these restructurings, the Company expects to report a loss for the
first quarter of 2000 approaching approximately $500,000.
On a recent exam, the FDIC concluded that the Bank did not adequately support
the assumptions utilized to project the value assigned to various residual
assets retained in securitization completed in 1998 and 1999. The FDIC has
advised the Bank it believes these assets are overstated by approximately $2.7
million, on a pre-tax basis.
Management strongly disagrees with the FDIC conclusions in this matter and
intends to appeal the FDIC findings. In connection with this appeal, the Bank
has engaged a reputable third-party consultant to evaluate the assumption used
in the valuation of these assets as well as design a new valuation model for
ongoing measurement of the changes in valuation of these assets.
75
<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 or third quarter, 2000.
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 or third quarter, 2000.
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 or third quarter, 2000.
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 or third quarter, 2000.
76
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
EXHIBIT NO.
-----------
2.1 Plan of Reorganization and Merger Agreement -
Annex I of Proxy Statement/Prospectus
incorporated by reference (A)
3.1 Articles of Incorporation of the Registrant (A)
3.2 Amendment to Articles of Incorporation of Registrant
(A)
3.3 Bylaws of the Registrant (A)
4.1 Specimen Certificate evidencing shares of
Registrant's Common Stock (A)
4.2 Stockholder Agreement Covering Issuance and
Compulsory Repurchase of Organizing Shares
of Registrant - Annex II of Proxy Statement/
Prospectus incorporated by reference (A)
10.1 Form of Indemnification Agreement (A)
10.2 BYL Bancorp 1997 Stock Option Plan (C)
10.3 Form of Proxy,Proxy Statemment and Notice of Annual
Meeting (E)
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 (D)
10.8 Employment Agreement - Mr. Gary Strachn
10.9 Salary Continuation Agreement - Mr. Robert Ucciferri
(A)
10.10 Salary Continuation Agreement - Mr. Barry J. Moore
(A)
10.11 Salary Continuation Agreement - Mr. Michael Mullarky
(F)
10.12 Salary Continuation Agreement - Ms. Gloria Van Kampen
(F)
10.13 Agreement and Plan of Reorganization with DNB
Financial (B)
21.1 Subsidiary of BYL Bancorp (A)
23.1 Consent of Vavrinek, Trine, Day & Co., LLP
b) REPORTS ON FORM 8-K
None.
- ---------------------------------
(A) Filed as an Exhibit to the Registrant's 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.
(C) Filed as an Exhibit to the Registration Statement on Form S-8 filed
on May 15, 1998.
(D) Filed as an Exhibit to the Annual Report on Form 10-K as of December
31, 1998.
(E) Filed as an exhibit to the Annual Report on Form 10-K as of December
31, 1998, incorporating Schedule 14 A information pursuant to
Section 14(a) of the Securities Exchange Act of 1934, filed on May
18, 1999.
(F) Filed as an Exhibit to Form 10-Q filed on November 15, 1999, which
Exhibit is incorporated herein by this reference.
77
<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:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Barry J. Moore Senior Executive Vice President April 13, 2000
- --------------------------------- and Chief Financial Officer
Barry J. Moore
/s/ Henry C. Cox II Director April 13, 2000
- ---------------------------------
Henry C. Cox II
/s/ Eddie R. Fischer Director April 13, 2000
- ---------------------------------
Eddie R. Fischer
/s/ Neil Hatcher Director April 13, 2000
- ---------------------------------
Neil Hatcher
/s/ Leonard O. Lindborg Director April 13, 2000
- ---------------------------------
Leonard O. Lindborg
/s/ H. Rhoads Martin, Jr. Chairman of the Board, Director April 13, 2000
- ---------------------------------
H. Rhoads Martin, Jr.
/s/ John F. Myers Director April 13, 2000
- ---------------------------------
John F. Myers
/s/ Brent W. Walberg Director April 13, 2000
- ---------------------------------
Brent W. Walberg
</TABLE>
78
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of December
22,1999 , by and between BYL Bank Group , a California banking corporation, with
its headquarters office located at 1875 N. Tustin Ave., Orange, California 92865
(the "Bank"), and Gary Strachn, residing at 1655 Clark Avenue #225, Long Beach,
California 90815 (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 a Senior Vice President and Chief Financial Officer 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
December 22, 1999, 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 period commencing on December
22, l999 and ending on December 31, 2000.
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 January 1, 2001 after the expiration of the 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
September 30 of each year, that the Agreement shall not be automatically renewed
on the next January 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.
-1-
<PAGE>
2. DUTIES AND AUTHORITY
(a) During the Employment Period, Employee shall devote all his
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 his best efforts, skill and abilities to promote the
Bank's interests and to serve as an Senior Vice President and Chief Financial
Officer of the Bank. Employee's duties shall include all responsibilities
assigned to the Senior Vice President. For the purposes of regulatory reporting,
the position of Chief Financial Officer is considered an Executive Officer.
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 his duties and to carry out and to perform all
appropriate orders, directions and policies stated by the Board of Directors to
him 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 $85,000 per annum, beginning on the effective date of
this Agreement and payable on the first and fifteenth 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, 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 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.
-2-
<PAGE>
(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 he is eligible under the provisions thereof and commensurate with his
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 his resignation or upon the
termination of this employment for any other reason, including his 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 Senior Vice President 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 communityrelations 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.
-3-
<PAGE>
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 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 his employment hereunder he 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 Employeehereunder, 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 nine (9) 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.
-4-
<PAGE>
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 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
eighteen (18) 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 his 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 his then accrued
salary at the rate provided in Section 4(a), plus his 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 he 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
-5-
<PAGE>
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 his
inability to discharge his duties as an Senior 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 his 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 his 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
-6-
<PAGE>
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 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.
-7-
<PAGE>
16. MISCELLANEOUS.
(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 he is then serving as a
director of the Bank and/or the Bank's holding company, agrees to immediately
resign his position as a director by giving written notice of his 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.
-8-
<PAGE>
BANK: BYL Bank Group
By: /s/ H. RHOADS MARTIN
---------------------------------
H. Rhoads Martin
Chairman of the Board
EMPLOYEE:
By: /s/ GARY STRACHN
---------------------------------
Gary Strachn
-9-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our Independent Auditor's Report dated
February 11, 2000 regarding the consolidated balance sheets of BYL Bancorp and
Subsidiary as of December 31, 1999 and 1998, 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, 1999 in the Form 10-K filed
with the Securities and Exchange Commission.
VAVRINEK, TRINE, DAY & CO., LLP
April 13, 2000
Laguna Hills, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 34,119
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,868
<INVESTMENTS-CARRYING> 14,712
<INVESTMENTS-MARKET> 14,445
<LOANS> 268,640
<ALLOWANCE> 2,610
<TOTAL-ASSETS> 353,736
<DEPOSITS> 322,973
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,563
<LONG-TERM> 0
0
0
<COMMON> 12,788
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<TOTAL-LIABILITIES-AND-EQUITY> 353,736
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<INTEREST-INCOME-NET> 15,942
<LOAN-LOSSES> 694
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<CHANGES> 0
<NET-INCOME> 3,076
<EPS-BASIC> 1.21
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</TABLE>
