<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . . . .
Commission file number: 000-23257
BYL BANCORP
CALIFORNIA NO. 33-0755794
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
1875 North Tustin Street, Orange, California 92865
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 685-1317
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(c) of the Securities Exchange Act of 1934 during
the preceding 12 months (of 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 / /
APPLICABLE ONLY TO CORPORATE ISSUERS
On May 12, 2000, there were 2,537,102 shares of BYL Bancorp Common Stock
outstanding.
1
<PAGE>
BYL Bancorp and Subsidiary
March 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheet at March 31, 2000 and
December 31, 1999......................................................................... 3
Consolidated Condensed Statement of Income for the three
months ended March 31, 2000 and 1999...................................................... 4
Consolidated Condensed Statement of Changes in Shareholders' Equity from
January 1, 1998 through March 31, 2000.................................................... 5
Consolidated Condensed Statement of Cash Flows for the three months ended
March 31, 2000 and 1999................................................................... 6
Notes to Consolidated Financial Statements..................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 9 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................15 - 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 16
Item 2. Changes in Securities........................................................................... 16
Item 3. Defaults upon Senior Securities................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................................. 16
Item 5. Other Information............................................................................... 17
Item 6. Exhibits and Reports on Form 8-K................................................................ 17
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Cash and Due From Bank $ 55,301 $ 34,119
Federal Funds Sold 100 -
---------------- ----------------
TOTAL CASH AND CASH EQUIVALENTS 55,401 34,119
Interest-Bearing Deposits 400 100
Investment Securities 41,501 21,580
Federal Home Loan Bank Stock, at Cost 1,178 1,113
Loans Held For Sale 48,392 69,756
Loans 180,090 198,884
Allowance for Loan Losses ( 2,607) ( 2,610)
---------------- ----------------
NET LOANS 177,483 196,274
Premises and Equipment 6,081 6,447
Other Real Estate Owned 468 277
Goodwill 1,294 1,324
Interest-Only Strips Receivable and Servicing Assets 15,741 15,659
Accrued Interest and Other Assets 7,696 7,087
---------------- ----------------
$ 355,635 $ 353,736
================ ================
Noninterest-Bearing Deposits $ 74,058 $ 66,619
Interest-Bearing Deposits 250,918 256,354
---------------- ----------------
TOTAL DEPOSITS 324,976 322,973
Accrued Interest and Other Liabilities 1,719 1,563
---------------- ----------------
TOTAL LIABILITIES 326,695 324,536
Common Shares 12,788 12,788
Retained Earnings 15,658 15,918
Accumulated Other Comprehensive Income 494 494
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 28,940 29,200
---------------- ----------------
$ 355,635 $ 353,736
================ ================
</TABLE>
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Interest Income $ 7,547 $ 6,492
Interest Expense 2,990 2,798
-------------- ---------------
Net Interest Income 4,557 3,694
Provision for Loan Losses 50 180
-------------- ---------------
Net Interest Income after
Provision for Loan Losses 4,507 3,514
Noninterest Income 5,122 5,968
Noninterest Expense 10,018 8,683
-------------- ---------------
Income (Loss) Before Taxes (389) 799
Income Taxes (129) 340
-------------- ---------------
Net Income (Loss) $ (260) $ 459
============== ===============
Per Share Data:
Net Income (Loss) - Basic $ (.10) $ .18
============== ===============
Net Income (Loss) - Diluted $ (.10) $ .18
============== ===============
</TABLE>
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP
UNAUDITED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Common Shares Other
------------------------- Comprehensive Retained Comprehensive
Number Amount Income Earnings Income Total
----------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 2,503,171 $ 12,622 $ 9,955 $ (27) $ 22,550
Comprehensive Income:
Net Income $ 4,116 4,116 4,116
Other Comprehensive Income-
Unrealized Gain on
Available-for-Sale Securities, Net 183 183 183
Unrealized Gain on Interest-Only
Strips, Net 364 364 364
-----------
Total Comprehensive Income $ 4,663
===========
Dividends on Common (467) (467)
Options Exercised 28,131 138 138
Fractional Shares from Merger
with DANB0 (2) (2)
----------- ------------ ---------- ----------- -----------
Balance at December 31, 1998 2,531,302 12,760 13,602 520 26,882
Comprehensive Income:
Net Income $ 3,076 3,076 3,076
Other Comprehensive Income-
Unrealized Gain on
Available-for-Sale Securities, Net 3 3 3
Unrealized Gain on Interest-Only
Strips, Net (29) (29) (29)
-----------
Total Comprehensive Income $ 3,050
===========
Exercise of Stock Option 5,800 28 28
Dividends on Common (760) (760)
----------- ------------ ---------- ----------- -----------
Balance at December 31, 1998 2,537,102 12,788 15,918 494 29,200
Comprehensive Income:
Net Loss $ (260) (260) (260)
Other Comprehensive Income-
Unrealized Gain on
Available-for-Sale Securities, Net -
-----------
Total Comprehensive Income $ (260)
===========
----------- ------------ ---------- ----------- -----------
Balance at March 31, 2000 2,537,102 $ 12,788 $15,658 $ 494 $ 28,940
=========== ============ ========== =========== ===========
</TABLE>
5
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ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ (260) $ 459
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 480 431
Provision for Loan Losses 50 180
Net Change in Loans Held for Sale 21,364 14,918
Other Items - Net (581) 1,733
-------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 21,053 17,721
INVESTING ACTIVITIES
Change in Interest-Bearing Deposits (300) (630)
Purchases of Investment Securities (20,006) (10,000)
Maturities of Investment Securities 82 5,117
Net Change in Loans 18,382 9,665
Purchase of Premises and Equipment (161) (780)
Other Items - Net 229 115
-------------- --------------
NET CASH PROVIDED (USED) BY
BY INVESTING ACTIVITIES (1,774) 3,487
FINANCING ACTIVITIES
Decrease in Borrowed Funds -
Net Change in Deposits 2,003 22,804
Proceeds from Exercise of Options - 12
Dividends - (190)
-------------- --------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 2,003 22,626
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 21,282 43,834
Cash and Cash Equivalents at Beginning of Period 34,119 32,914
-------------- --------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 55,401 $ 76,748
============== ==============
</TABLE>
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial information has been prepared in accordance with the
Securities and Exchange Commission rules and regulations for quarterly reporting
and therefore does not necessarily include all information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles. This information should be read
in conjunction with the Company's Annual Report for the year ended December 31,
1999.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management, the
unaudited financial information for the three month periods ended March 31, 2000
and 1999, reflect all adjustments, consisting only of normal recurring accruals
and provisions, necessary for a fair presentation thereof.
NOTE 2 - EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". Accordingly, basic earnings per share are computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during each period. The computation of diluted earnings per share
also considers the number of shares issuable upon the assumed exercise of
outstanding common stock options. All earnings per common share amounts
presented have been restated in accordance with the provisions of this
statement.
NOTE 3 - SEGMENTS
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 eight branch offices are located.
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.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SEGMENTS - CONTINUED
The following tables summarize segment operations for the three months ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
----------------------------------------------------------------
Wholesale Segments Retail Total
-------------------------------
Mortgage SBA Segment Company
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Condensed Income Statement
Net Interest Income $ 680 $ 1,305 $ 2,572 $ 4,557
Noninterest Income 3,027 1,880 215 5,122
Operating Expense (3,720) (1,447) (3,186) (8,353)
-------------- --------------- -------------- --------------
Operational Profit (Loss) (13) 1,738 (399) 1,326
Provision for Loan Losses (50)
Administrative Costs (1,635)
Goodwill Amortization (30)
Income Taxes 129
--------------
Net Income $ (260)
==============
Loans Originated for Sale during 2000 $ 82,000 $ 28,000
Loans Sold during 2000 $ 85,000 $ 36,000
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
----------------------------------------------------------------
Wholesale Segments Retail Total
-------------------------------
Mortgage SBA Segment Company
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Condensed Income Statement
Net Interest Income $ 737 $ 718 $ 2,239 $ 3,694
Noninterest Income 3,696 1,732 540 5,968
Operating Expense (3,934) (1,413) (2,396) (7,743)
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
Operational Profit 499 1,037 383 1,919
Provision for Loan Losses (180)
Administrative Costs (910)
Goodwill Amortization (30)
Income Taxes (340)
--------------
Net Income $ 459
==============
Loans Originated for Sale during 1999 $ 125,000 $ 33,000
Loans Sold during 1999 $ 137,000 $ 28,000
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BYL Bancorp (the "Company") has one wholly owned subsidiary, BYL Bank Group,
formerly the Bank of Yorba Linda (the "Bank"). The Bank's operations are the
only significant operations of the Company. The accompanying financial
information should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Statements contained in this Report on Form 10Q that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding the Company's expectations, intentions, beliefs
or strategies regarding the future. All forward-looking statements included in
this document are based on information available to the Company on the date
thereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Factors that could cause actual results to differ materially from those in such
forward-looking statements are included in the discussions below.
SALE OF UNGUARANTEED INTEREST 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, and the Business Loan
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
SALE OF COMMERCIAL LOANS- CONTINUED
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").
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 by $2.7 million on a pre-tax basis, that the Bank's Total Risk
Based Capital Ratio has been recalculated to 7.99% as of December 31, 1999,
which does not include the FDIC's perceived overstatement and that the Bank
is considered to be undercapitalized for purposes of Prompt Corrective
Action, 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. During the quarter
ended March 31, 2000 the Bank had sold the indirect auto portfolio and closed
the Indirect Auto Division and the Diamond Bar Mortgage Division. As a result
the Bank's Total Risk Based Capital Ratio was 8.46% as of March 31, 2000.
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.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
REGULATORY ACTIONS, PROMPT CORRECTIVE ACTION AND CAPITAL RESTORATION PLAN-
CONTINUED
The Company 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 Company's targeted ROI. 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 alliance with other well-positioned financial institutions.
ACQUISITIONS
On May 29, 1998, the Company completed the acquisition with DNB Financial
("DNBF"), parent company of De Anza National Bank on a pooling-of-interests
basis , and, accordingly, the Company's historical consolidated results have
been restated. Under the terms of the Agreement and Plan of Reorganization, each
share of DNBF Common Stock was exchanged for 4.12 shares of the Company's Common
Stock. A total of 956,641 shares of the Company's Common Stock was issued to
DNBF shareholders. Also, on May 29, 1998, De Anza National Bank, DNBF's only
subsidiary, merged with and into BYL Bank Group.
On June 13, 1996, the Bank acquired 100% of the outstanding common stock of Bank
of Westminster (BOW) for $6,174,000 in cash. BOW had total assets of
approximately $54,923,000. The acquisition was accounted for using the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16. "Business Combinations". Under this method of accounting, the purchase price
was allocated to the assets acquired and deposits and liabilities assumed based
on their fair values as of the acquisition date. The financial statements
include the operations of BOW from the date of the acquisition. Goodwill arising
from the transaction totaled approximately $1,717,000 and is being amortized
over fifteen years on a straight-line basis.
OVERVIEW
For the three months ended March 31, 2000, the Company reported net loss of
$260,000, or $(0.10) per share compared to a net income of $459,000, or $0.18
per share for the same three month period in 1999. The annualized return (loss)
on average assets was (0.29)% for 2000 compared to .54% in 1999. Annualized
return on shareholders equity was (3.63)% in 2000 compared to 6.79% in 1999.
During the first quarter of 2000 the Company closed the Diamond Bar Mortgage
Division and the Indirect Auto Division. The Company sold the indirect auto loan
portfolio and incurred a $1.6 million loss on sale.
FINANCIAL CONDITION
Total assets as of March 31, 2000, increased 0.54% to $355.6 million in
comparison to total assets of $353.7 million as of December 31, 1999. The
majority of this asset growth was centered in investment securities which
increased by $19.9 million. This growth was funded by a $2.0 million increase in
deposits
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
ASSET QUALITY
The following table sets forth the components of non-performing assets and
related ratios: (dollar amounts in thousands)
<TABLE>
<CAPTION>
March 31,
------------------------------------- December 31,
2000 1999 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Loans 90 day past due and still accruing $ - $ 130 $ 120
Loans on nonaccrual 1,851 2,648 1,542
---------------- ---------------- ----------------
Nonperforming Loans 1,851 2,778 1,662
Other real estate owned (OREO) 468 792 277
---------------- ---------------- ----------------
Nonperforming Assets $ 2,319 $ 3,570 $ 1,939
================ ================ ================
Nonperforming Loans as a Percent
of Total Loans 1.03% 1.77% 0.84%
Allowance for Loan Losses as a Percent
of Nonperforming Loans 140.84% 87.98% 157.04%
Nonperforming Assets as a Percent
of Total Assets 0.65% 1.05% 0.55%
</TABLE>
The Company's asset quality has declined slightly in 2000 as evidenced by a
increase in the ratio of nonperforming loans to total loans which increased to
1.03% at March 31, 2000 from 0.84% at December 31, 1999. The Company added
$50,000 to the ALLL for the three months ended March 31, 2000 as compared to
$180,000 for the same period in 1999. The ALLL at March 31, 2000 was 1.45% of
total loans and 140.84% of non-performing loans compared to 1.31% and 157.04%,
respectively, at December 31, 1999.
LIQUIDITY
The Bank's liquidity is impacted significantly by the origination and sale of
its wholesale loan products. The loan to deposit ratio at March 31, 2000 was
70.3%. Had the Bank actually sold all of the loans it held for sale, this ratio
would have declined to 55.4%.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
CAPITAL RESOURCES
Total shareholders equity at March 31, 2000 totaled $28.9 million, which
represents a 1.0% decrease from $29.2 million at December 31, 1999.
The Company and its bank subsidiary are subject to risk-based capital
regulations adopted by the federal banking regulators. These guidelines are used
to evaluate capital adequacy and are based upon an institution's risk profile
and off-balance sheet exposures, such as unused loan commitments and letters of
credit. At March 31, 2000, the Bank's Tier 1 leverage capital ratio was 7.03%
compared to 7.40% at December 31, 1999.
<TABLE>
<CAPTION>
March 31, December 31,
Ratio 2000 1999
--------------- --------------- ----------------
<S> <C> <C> <C>
Tier 1 Capital (to Average Assets) 4.00% 7.03% 7.40%
Tier 1 Capital (to Risk Weighted Assets) 4.00% 7.66% 7.28%
Total Capital (to Risk Weighted Assets) 8.00% 8.46% 7.99%
</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.
ANALYSIS OF NET INTEREST INCOME AND MARGIN
Net interest income was $4.6 million for the first quarter of 2000 compared to
$3.7 million for the same period in 1999. These increases are primarily the
result of increases in interest rates and average interest-earning assets as
shown by the following table (in thousands):
<TABLE>
<CAPTION>
Quarter Quarter Year Ended
Ended Ended December 31,
March 31, 2000 March 31, 1999 1999
------------------ ------------------- -------------------
<S> <C> <C> <C>
Interest Income $ 7,547 $ 6,492 $ 27,528
Interest Expense 2,990 2,798 11,586
------------------ ------------------- -------------------
Net Interest Income $ 4,557 $ 3,694 $ 15,942
================== =================== ===================
Average Earning Assets $ 310,097 $ 293,864 $ 296,128
Net Interest Margin 5.88% 5.03% 5.38%
</TABLE>
Net interest margin was 5.88% for the first quarter of 2000 compared to 5.03%
for the same period in 1999. The increases are primarily the result of a 100
basis point increase in interest rates during the third and fourth quarters of
1999.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
PROVISION FOR LOAN LOSSES
BYL Bancorp made a $50,000 contribution to the allowance for loan losses for the
three months ended March 31, 2000 compared to $180,000 for the three ended March
31, 1999. Management believes that the allowance, which equals 1.45% of total
loans at March 31, 2000, is adequate to cover future losses.
Changes in the allowance for loan losses for the quarter ended March 31, 2000
and 1999 are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Allowance, Beginning of Period $ 2,610 $ 2,300
Provision for Loan Losses 50 180
Loans Charged Off - net of Recoveries (53) (36)
------------ ------------
Allowance, End of Period $ 2,607 $ 2,444
============ ============
</TABLE>
NONINTEREST INCOME
Noninterest income was $5.1 million for the quarter ended March 31, 2000
compared to $6.0 million for the same period in 1999. This decrease is
attributable to the contraction of the Bank's wholesale loan divisions by
closing the Diamond Bar Mortgage Division.
NONINTEREST EXPENSE
Noninterest expense was $10.0 million for the quarter ended March 31, 2000
compared to $8.7 million for the same period in 1999. The majority of the
increase was attributable to the $1.6 million loss on sale of the Bank's
indirect auto loan portfolio.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
In Management's opinion there has not been a material change in BYL Bancorp's
market risk profile during the three months ended March 31, 2000. Market risk is
the risk of loss in a financial instrument arising from adverse changes in
market prices and rates, foreign currency exchange rates, commodity prices and
equity prices. BYL Bancorp's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities and market risk in
loans originated for sale as a result of changes in interest rates. To that end,
management actively monitors and manages its inherent rate risk exposure. BYL
Bancorp manages its interest rate sensitivity by matching the repricing
opportunities on its earning assets to those on its funding liabilities.
Management uses various asset/liability strategies to manage the repricing
characteristics of its assets and liabilities to ensure that exposure to
interest rate fluctuations is limited within BYL Bancorp's guidelines of
acceptable levels of risk-taking.
At March 31, 2000, BYL Bancorp had $208 million of assets and $244 million of
liabilities repricing within one year. Therefore, $36 million more in interest
rate sensitive liabilities than interest rate sensitive assets will change to
the then current rate (changes occur due to the instruments being at a variable
rate or because the maturity of the instrument requires its replacement at the
then current rate). Generally, if rates were to fall during this period,
interest income would decline by a lesser amount than interest expense and net
income would increase. Conversely, if rates were to rise, the reverse would
apply, and BYL Bancorp's net income would decrease.
YEAR 2000 RISK
The Year 2000 issue is the result of computer programs being written using two
digits rather that four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date using "00" as the
year 1900 rather than the year 2000.
This could result in a system failure or other disruption of operations and
impede normal business activities. In June 1996, the Federal Financial
Institutions Examination Council ("FFIEC") alerted the banking industry of the
serious challenges that would be encountered with Year 2000 issues. The FDIC has
also implemented a plan to require compliance with Year 2000 issues and
regularly examines out progress.
In accordance with FDIC guidelines, the Company developed a comprehensive plan
which management believes will result in timely and adequate modifications of
Company's systems and technology to address Year 2000 issues, which contemplates
all system conversions and testing to be substantially completed by December 31,
1999. Management has completed a top-down assessment of all mission-critical and
other systems for Year 2000 compliance and are currently in the third and fourth
of the five phases for compliance, "renovation and validation", as defined by
the FFIEC. Management has also tested non-information technology systems, such
as microprocessors controlling environmental and alarm systems, and found them
to be Year 2000 compliant.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - CONTINUED
YEAR 2000 RISK - CONTINUED
The Company expended approximately $113,000 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of the banking business, the Subsidiary Bank is at
times party to various legal actions; all such actions are of a
routine nature and arise in the normal course of business of the
Subsidiary Bank.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
16
<PAGE>
Item 6. 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, as amended in 1998 (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 (G)
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)
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.
(G) Filed on an Exhibit to the Annual Report on Form 10-K as of December 31,
1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities and 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
Date: May 12, 2000 /s/Robert Ucciferri
------------------------------
Robert Ucciferri
President and
Chief Executive Officer
Date: May 12, 2000 /s/Barry J. Moore
------------------------------
Barry J. Moore
Chief Operating Officer and
Senior Executive Vice President
18
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> DEC-31-2000
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0
0
<COMMON> 12,788
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<INCOME-PRETAX> (389)
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<LOANS-NON> 1,851
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