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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 September 30, 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 of incorporation) (IRS Employer Identification No.)
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 November 13, 2000, there were 2,542,568 shares of BYL Bancorp Common Stock
outstanding.
1
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BYL Bancorp and Subsidiary
September 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PAGE
----
<S> <C>
Item 1 - Financial Statements
Consolidated Condensed Balance Sheet at September 30, 2000 and
December 31, 1999............................................................3
Consolidated Condensed Statement of Income for the three
months and nine months ended September 30, 2000 and 1999.....................4
Consolidated Condensed Statement of Changes in Shareholders' Equity from
January 1, 1998 through September 30, 2000...................................5
Consolidated Condensed Statement of Cash Flows for the nine months ended
September 30, 2000 and 1999..................................................6
Notes to Consolidated Financial Statements....................................7-8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................9-18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.....................19
<CAPTION>
PART II - OTHER INFORMATION
<S> <C>
Item 1 - Legal Proceedings..............................................................20
Item 2 - Changes in Securities..........................................................20
Item 3 - Defaults upon Senior Securities................................................20
Item 4 - Submission of Matters to a Vote of Security Holders............................20
Item 5 - Other Information..............................................................20
Item 6 - Exhibits and Reports on Form 8-K...............................................21
</TABLE>
2
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Item 1. Financial Statements
BYL Bancorp and Subsidiary
Unaudited Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
September 30, December 31,
2000 1999
--------- ---------
Cash and Due From Bank $ 37,092 $ 34,119
Federal Funds Sold -- --
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 37,092 34,119
Interest-Bearing Deposits -- 100
Investment Securities 17,520 21,580
Federal Home Loan Bank Stock, at Cost 619 1,113
Loans Held For Sale 34,929 69,756
Loans 178,288 198,884
Allowance for Loan Losses (2,717) (2,610)
--------- ---------
NET LOANS 175,571 196,274
Premises and Equipment 5,938 6,447
Other Real Estate Owned 767 277
Goodwill 1,234 1,324
Interest-Only Strips Receivable and Servicing Assets 13,516 15,659
Accrued Interest and Other Assets 6,788 7,087
--------- ---------
$ 293,974 $ 353,736
========= =========
Noninterest-Bearing Deposits $ 65,499 $ 66,619
Interest-Bearing Deposits 195,783 256,354
--------- ---------
TOTAL DEPOSITS 261,282 322,973
Borrowed Funds
Accrued Interest and Other Liabilities 2,392 1,563
--------- ---------
TOTAL LIABILITIES 263,674 324,536
Common Shares 12,804 12,788
Retained Earnings 17,099 15,918
Accumulated Other Comprehensive Income 397 494
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 30,300 29,200
--------- ---------
$ 293,974 $ 353,736
========= =========
3
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Item 1. Financial Statements - Continued
BYL Bancorp and Subsidiary
Unaudited Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income $ 6,885 $ 7,192 $21,534 $20,130
Interest Expense 2,445 3,053 8,059 8,419
------- ------- ------- -------
Net Interest Income 4,440 4,139 13,475 11,711
Provision for Loan Losses 200 130 400 361
------- ------- ------- -------
Net Interest Income after
Provision for Loan Losses 4,240 4,009 13,075 11,350
Noninterest Income 4,906 6,867 14,317 18,048
Noninterest Expense 7,383 9,058 25,242 25,529
------- ------- ------- -------
Income Before Taxes 1,763 1,818 2,150 3,869
Income Taxes 749 775 969 1,685
------- ------- ------- -------
Net Income $ 1,014 $ 1,043 $ 1,181 $ 2,184
======= ======= ======= =======
Per Share Data:
Net Income - Basic $ .40 $ .41 $ 0.47 $ .86
======= ======= ======= =======
Net Income - Diluted $ .40 $ .41 $ 0.47 $ .85
======= ======= ======= =======
</TABLE>
4
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Item 1. Financial Statements - Continued
BYL Bancorp
Unaudited Statement of Changes in Shareholders' Equity
(Dollar Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Accumulated
Common Shares Other
---------------------- Comprehensive Retained Comprehensive
Number Amount Income Earnings Income Total
--------- --------- ------------- --------- ------------- --------
<S> <C> <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
==========
Exercise of Stock Option 28,131 138 138
Dividends on Common Shares (467) (467)
Fractional Shares from Merger with DANB (2) (2)
--------- --------- --------- ------------- --------
Balance at December 31, 1998 2,531,302 12,760 13,602 520 26,882
Comprehensve Income:
Net Income $ 3,076 3,076 3,076
Other Comprehensive Income-
Unrealized Gain on
Available-for-Sale Securities, Net 3 3 3
Unrealized Loss on Interest-Only
Strips, Net (29) (29) (29)
----------
Total Comprehensive Income $ 3,050
==========
Exercise of Stock Option 5,800 28 28
Dividends on Common Shares (760) (760)
--------- --------- --------- ------------- --------
Balance at December 31, 1999 2,537,102 12,788 15,918 494 29,200
Comprehensve Income:
Net Income $ 1,181 1,181 1,181
Other Comprehensive Income-
Unrealized Loss on Interest-Only
Strips, Net (97) (97) (97)
----------
Total Comprehensive Income $ 1,084
==========
Exercise of Stock Option 3,199 16 16
--------- --------- --------- ------------- --------
Balance at September 30, 2000 2,540,301 $ 12,804 $ 17,099 $ 397 $ 30,300
========= ========= ========= ============= ========
</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 Nine Months Ended
September 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,181 $ 2,184
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 1,471 1,356
Provision for Loan Losses 400 361
Net Change in Loans Held for Sale 34,827 (30,482)
Other Items - Net 3,420 (2,893)
-------- --------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 41,299 (29,474)
INVESTING ACTIVITIES
Change in Interest-Bearing Deposits 100 --
Purchases of Investment Securities (20,006) (10,101)
Maturities of Investment Securities 23,759 6,398
Proceeds from Sale of Federal Home Loan Bank Stock 573 --
Net Change in Loans 19,171 (3,044)
Purchase of Premises and Equipment (1,145) (1,964)
Other Items - Net 897 636
-------- --------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 23,349 (8,075)
FINANCING ACTIVITIES
Net Change in Deposits (61,691) 49,789
Proceeds from Exercise of Options 16 17
Dividends -- (570)
-------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (61,675) 49,236
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,973 11,687
Cash and Cash Equivalents at Beginning of Period 34,119 32,914
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 37,092 $ 44,601
======== ========
</TABLE>
6
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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 on Form 10K for the year ended
December 31, 1999.
The consolidated financial statements include BYL Bancorp and its wholly owned
subsidiary, BYL Bank Group (the "Bank").
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 and nine month periods ended
September 30, 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's 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 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
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Item 1. Financial Statements - Continued
Note 3 - Segments - Continued
The following tables summarize segment operations for the nine months ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Nine Months Ended September, 2000
------------------------------------------------
Wholesale Segments
---------------------- Retail Total
Mortgage SBA Segment Company
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Condensed Income Statement
Net Interest Income $ 1,774 $ 3,937 $ 7,764 $ 13,475
Noninterest Income 9,476 3,790 1,051 14,317
Operating Expense (9,741) (4,162) (6,290) (20,193)
--------- --------- --------- ---------
Operational Profit 1,509 3,565 2,525 7,599
Provision for Loan Losses (400)
Administrative Costs (4,959)
Goodwill Amortization (90)
Income Taxes (969)
---------
Net Income $ 1,181
=========
Loans Originated for Sale During 2000 $ 213,000 $ 76,000
Loans Sold during 2000 $ 229,000 $ 82,000
<CAPTION>
Nine Months Ended September 30, 1999
------------------------------------------------
Wholesale Segments
---------------------- Retail Total
Mortgage SBA Segment Company
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Condensed Income Statement
Net Interest Income $ 2,155 $ 2,403 $ 7,153 $ 11,711
Noninterest Income 12,306 4,449 1,293 18,048
Operating Expense (12,054) (3,252) (5,905) (21,211)
--------- --------- --------- ---------
Operational Profit 2,407 3,600 2,541 8,548
Provision for Loan Losses (361)
Administrative Costs (4,228)
Goodwill Amortization (90)
Income Taxes (1,685)
---------
Net Income $ 2,184
=========
Loans Originated for Sale During 1999 $ 428,000 $ 130,000
Loans Sold during 1999 $ 427,000 $ 85,000
</TABLE>
8
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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 SBA loan division and
a Mortgage Loan Division operate under the name of Bank of Yorba Linda. 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.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Sale of Commercial Loans
On August 11, 1999, the Bank entered into a Pooling and Servicing Agreement
dated as of September 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 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.
Restructuring
During the fourth quarter of 1999 the Bank evaluated 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 ROA.
Also, 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 securitizations. 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.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Restructuring - Continued
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 reported a loss for the first quarter 2000 of
approximately $260,000. 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 firms or institutions.
Regulatory Actions, Prompt Corrective Action and Capital Restoration Plan
During late 1999 the FDIC completed an examination of the books and records of
the Bank. In connection with this exam the FDIC notified the Bank that it had
incorrectly calculated the risk-weighted capital requirements of the assets
retained in the Bank's 1998 and 1999 securitizations. The FDIC also challenged
the assumptions and financial model used by the Bank in valuing these residual
assets. Based on the assumptions deemed acceptable by the FDIC, the FDIC
believed the Bank's residual assets were overstated by $2.6 million. Although
the Bank disagrees with the assumptions recommended by the FDIC, it has agreed
to reflect this adjustment in its Quarterly Call Reports, primarily for
regulatory capital purposes and also to engage an independent third-party to
review the assumptions used by the Bank as well as design a financial model to
more accurately measure the value of residual assets in future reporting
periods.
Primarily due to these items, the Bank has been classified as undercapitalized.
As a result, the Bank filed a capital restoration plan with the FDIC, which
provided that the Bank expects to be adequately capitalized by March 31, 2000.
As of March 31, 2000, the Bank was adequately capitalized. The capital
restoration plan also provides for increasing levels of capital every quarter
until the Bank is well capitalized in 2001. 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.
As of September 30, 2000, Bank management believes the Bank is adequately
capitalized, as the Bank's Tier 1 Capital Ratio was 8.99% and the Total Risk
Based Capital Ratio was 9.60% as of September 30, 2000.
The Bank has now amended its call reports in order to reflect the proper
computation of risk-weighted capital for residual assets and for the $2.6
million adjustment to these residual assets pursuant to the Bank's agreement
with the FDIC. All call reports from December 31, 1998 through March 31, 2000
have been restated, also pursuant to the agreement with the FDIC.
11
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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
In addition, as a result of the recent FDIC examination, for the purpose of
cooperating with the FDIC and without admitting or denying any allegations,
effective July 10, 2000, the Bank stipulated to an administrative action with
the FDIC that requires the Bank, among other items, to retain qualified
management; have and maintain certain Tier 1 capital and total risk based
capital ratios; eliminate from its books certain assets classified loss; revise
policies concerning the Bank's asset securitization activities; obtain a model
to more adequately value its retained interests related to securitized assets;
and adopt and implement certain other policies relating to profitability,
liquidity and funds management, sensitivity to interest rate risk; revise
certain reports to the FDIC; and correct all alleged violations of law. The
order became effective July 10, 2000.
In order to comply with the FDIC Order, the Bank has engaged
PricewaterhouseCoopers ("PWC") to assist the Bank in determining 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. The Bank
has now received the cash flow model from PWC for the 1999-1 Securitization and
is in the process of running the model under various assumptions. The Company
and the Bank will account for any adjustments generated utilizing these new
assumptions as a change in estimates and adjust its financial statements in
accordance with the results obtained from the model for both securitizations. As
a result of the new model and assumptions the assets for the 1999-1
securitization were written down $800,000 as a permanent decline in value during
the quarter ended June 30, 2000. Management does not anticipate a significant
write down of the 1998-1 securitization.
Further, as a result of a recent FRB examination of the Company, the Company has
executed a Memorandum of Understanding with the FRB. The FRB MOU requires that
the Company, among other items, refrain from declaring dividends without the
prior written approval of the FRB, develop and submit a written capital plan,
submission to the FRB of a statement concerning the steps the Board proposes to
take to improve the condition of the Bank and the consolidated organization,
refrain from increasing debt or renewing existing debt without prior approval of
the FRB, and submit written progress reports to the FRB.
Formation of Subsidiary and Proposed Transaction
As a result of the recent FDIC examination, the Company has determined that it
would be in the best interests of the Company and the Bank to transfer the
retained assets, including the strips, residuals, servicing rights and other
retained interests in the 1999 securitization, as well as most of the personnel
of the SBA Department, to a minority-owned subsidiary of the Company.
12
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Formation of Subsidiary and Proposed Transaction - Continued
The Company and the Bank executed a definitive agreement dated July 12, 2000,
that describes the terms of a proposed joint venture for a Delaware limited
liability company to be called CNL Commercial Finance, LLC. The Company and its
joint venture partner, CNL Commercial Funding, LP("CFL"), have changed the
corporate structure of the subsidiary to a C Corporation to be called CNL
Commercial Finance, Inc. ("CCF"). The purpose of the joint venture is to
originate, service and securitize commercial loans, some of which are to be
guaranteed by the Small Business Administration, which are detailed below. The
subsidiary, CCF, would have a total $10 million in equity capital. The Company
would have a 25% equity and voting interest in the subsidiary. The Company would
execute a note for its $2.5 million contribution, and CFL would hold a 75%
ownership interest in the subsidiary.
Under the amended definitive agreement, the cash price will be at least equal to
the Bank's book value of the strips, residuals, servicing rights and other
retained interests that are being transferred from the 1999-1 securitization, as
well as other assets, but will not include one certificate that is rated
investment grade Baa.
Possible Buyout of the Company's Interest
CFL has the option to purchase all of the Company's interest in the subsidiary
if any banking, credit law, regulation or regulatory decision arising directly
from the Company's ownership interest in the subsidiary should significantly
impair the subsidiary's profitability. In addition, the CCF Stockholder's
Agreement also describes a buyout that could occur as a result of the Company's
unwillingness or inability to meet a capital call for additional funds because
of expansion or because of insufficient earnings or inadequate credit
performance. The Stockholders' Agreement also describes a buyout that could
occur if the Company does not agree with major decisions of CCF, CCF decided to
enter into a new activity not previously approved by the Federal Reserve Bank,
or if the Company is subject to criticism, which will have negative economic
consequences for the Company.
Business of the Subsidiary
The subsidiary's business will include the following:
o originating, warehousing and securitizing SBA loans under various SBA
programs;
o originating, warehousing, selling and securitizing SBL loans or loan
pools;
o servicing loan pools, including the servicing of the Bank's 1999
securitized SBL loans though either (1) the assignment of BYL Bank's
servicing rights with the approval of 51% of the certificate holders in
the securitization and the appropriate rating agencies, or (2) the
execution of a sub-servicing agreement by and between BYL Bank and the
subsidiary; and
o providing lending-related services to SBA and SBL borrowers.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Management
The current managers of the SBA Division of the Bank will manage the subsidiary.
In addition, the policies and procedures currently in effect in the SBA and SBL
Departments of the Bank are intended to become the policies and procedures at
the subsidiary.
Regulatory Applications
The Company is currently seeking approval from the FRB pursuant to Section
4(c)(8) of the Federal Reserve Act with this application in order to make its
proposed investment in the subsidiary. The subsidiary has obtained a Finance
Lenders Law License from the California Department of Corporations in order to
conduct the activities described herein. The Company is also discussing the type
of applications that may be necessary with the SBA.
Completion of First Phase of Transaction
On September 14, 2000, the Company and the Bank completed the first phase of the
transaction with CCF, in which the Bank sold certain assets and transferred
certain personnel of the SBA Division. The Bank also sold 59% of its retained
interest in the 1999-1 Securitization. The Bank realized cash in the amount of
$3.223 million as a result of the completion of the first phase of the CCF
transaction. Following receipt of all necessary regulatory approvals, the
Company and the Bank desire to complete the second phase of the transaction
which will involve the transfer of the remaining 41% of the retained interest in
the 1999-1 Securitization, except for the investment rated security. At that
time, the Company intends to execute the $2.5 million note as described above.
Subsidiary Will Act As Sub-Servicer for Bank
The only relationship between the Bank and the subsidiary would be a
sub-servicer relationship in which the subsidiary would service the loans
serviced by the Bank under the 1999-1 securitization. The Bank will be retaining
a sufficient number of employees from the SBA Department in order to perform the
Bank's requirements under the 1998 Securitization.
Mergers and Acquisitions by the Company
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
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Mergers and Acquisitions by the Company- Continued
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.
Proposed Acquisition by PBOC Holdings, Inc.
On November 2, 2000, the Company and PBOC Holdings, Inc. ("PBOC"), parent
company of People's Bank of California, announced the signing of an Agreement
and Plan of Reorganization (the "Agreement") dated November 1, 2000, attached to
a Current Report on Form 8-K filed on November 3, 2000, pursuant to which PBOC
will acquire the Company and BYL Bank Group. Upon consummation of the
transaction, PBOC will become the surviving corporation, and People's Bank of
California will become the surviving bank. Consummation of the Agreement is
subject to a number of conditions, including, but not limited to, the approval
of the Agreement by the shareholders of the Company and the receipt of requisite
regulatory approvals
Under the terms of the transaction, the holders of Company Common Stock will
receive $15.00 in cash for each share of Company Common Stock owned. The cash
amount may be adjusted upward or downward under certain circumstances which are
set forth in the Agreement.
Concurrently with the execution and delivery of the Agreement, the directors and
certain executive officers of the Company entered into a form of letter
agreement with PBOC pursuant to which among other things, such persons agreed to
vote their shares of Company common stock in favor of approval of the Agreement.
A copy of the form of letter agreement was attached to the Form 8-K.
In connection with the Agreement, PBOC and the Company entered into a Stock
Option Agreement, also attached to the Form 8-K, dated as of November 1, 2000,
pursuant to which the Company granted PBOC an option to purchase up to 505,971
shares of the Company's common stock (subject to adjustment as set forth
therein), which represents 19.9% of the Company's outstanding shares of common
stock, at a purchase price of $10.597 per share (subject to adjustment as set
forth therein). The option will become exercisable upon the occurrence of
certain events, as specified in the Stock Option Agreement, none of which has
occurred as of the date hereof.
The transactions are expected to close during the first half of calendar 2001
pending receipt of all necessary regulatory approvals and approval by the
Company's shareholders.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Overview
For the three months ended September 30, 2000, the Company reported net income
of $1.0 million, or $0.40 per share compared to a net income of $1.0 million, or
$0.41 per share for the same three month period in 1999.
For the first nine months of 2000, the Company reported net income of $1.2
million compared to $2.2 million in 1999. The annualized return on average
assets was .47% for 2000 compared to .85% in 1999. Annualized return on
shareholders equity was 5.28% in 2000 compared to 10.57% 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. During the second quarter of
2000 the Company wrote down the 1999-1 secruitization assets by $800,000 as a
result of a new valuation model being implemented. During the third quarter of
2000 the Company closed the SBA department and sold, at carrying value, 59% or
$3.0 million in residual assets from the 1999-1 securitization.
Financial Condition
Total assets as of September 30, 2000, decreased 16.89% to $294.0 million in
comparison to total assets of $353.7 million as of December 31, 1999. The
majority of this decrease was centered in loans held for sale and portfolio
loans, which decreased by $35 million and $21 million, respectively. The
reduction in assets resulted in the reduction of interest-bearing deposits by
$61 million.
Asset Quality
The following table sets forth the components of non-performing assets and
related ratios: (dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30,
---------------- December 31,
2000 1999 1999
------ ------ ------------
<S> <C> <C> <C>
Loans 90 day past due and still accruing $ -- $ 49 $ 120
Loans on nonaccrual 2,237 2,598 1,542
------ ------ ------
Nonperforming Loans 2,237 2,647 1,662
Other real estate owned (OREO) 767 744 277
------ ------ ------
Nonperforming Assets $3,004 $3,391 $1,939
====== ====== ======
Nonperforming Loans as a Percent
of Total Loans 1.05% 0.98% 0.84%
Allowance for Loan Losses as a Percent
of Nonperforming Loans 121.46% 96.07% 157.04%
Nonperforming Assets as a Percent
of Total Assets 1.02% 0.92% 0.55%
</TABLE>
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Asset Quality - Continued
The Company's asset quality has declined in 2000 as evidenced by an increase in
the ratio of nonperforming loans to total loans which increased to 1.05% at
September 30, 2000 from .84% at December 31, 1999. The allowance for loan losses
as a percent of nonperforming loans decreased to 121.46% at September 30, 2000,
down from 157.04% at December 31, 1999. A portion of this decline in asset
quality is due to the increase in nonaccrual loans and OREO. The ALLL at
September 30, 2000 was 1.52% of total loans compared to 1.31% at December 31,
1999. At September 30, 2000, the Company had eight properties of OREO with a
total book value of $767,000. The Company believes all properties will be
liquidated without any significant losses.
Liquidity
The origination and sale of its wholesale loan products impact the Bank's
liquidity significantly. The loan to deposit ratio at September 30, 2000 was
81.6%. Had the Bank actually sold all of the loans it held for sale, this ratio
would have declined to 68.2%.
Capital Resources
Total shareholders equity at September 30, 2000 totaled $30.3 million, which
represents a 3.8% increase 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 September 30, 2000, the Bank's Tier 1 leverage capital ratio was
8.99% compared to 7.40% at December 31, 1999.
<TABLE>
<CAPTION>
September 30, December 31,
Ratio 2000 1999
----------- ------------- ------------
<S> <C> <C> <C>
Tier 1 Capital (to Average Assets) 4.00% 8.99% 7.40%
Tier 1 Capital (to Risk Weighted Assets) 4.00% 8.73% 7.28%
Total Capital (to Risk Weighted Assets) 8.00% 9.60% 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.
Effective July 10, 2000, the Bank stipulated to an administrative action with
the FDIC which requires the Bank to have Tier 1 Capital Ratio of 7.75% by
September 30, 2000, Tier 1 Capital Ratio of 8.00% and Total Risk Based Capital
Ratio of 9.5% by December 31, 2000, Total Risk Based Capital Ratio of 10.25% by
September 30, 2001 and Total Risk Based Capital Ratio of 11.00% by December 31,
2001.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Analysis of Net Interest Income and Margin
Net interest income is the amount by which the interest and amortization of fees
generated from loans and other earning assets exceeds the cost of funding those
assets, usually deposit account interest expense. Net interest income depends on
the difference (the "interest rate spread") between gross interest and fees
earned on the loans and investment portfolios and the interest rates paid on
deposits and borrowings. Net interest income was $4.4 million for the quarter
ended September 30, 2000, compared to $4.1 million for the quarter ended
September 30, 1999 and $13.5 million for the nine months ended September 30,
2000 compared to $11.7 million for the nine months ended September 30, 1999.
The following table sets forth the components of net interest income, average
earning assets and net interest margin: (in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, Year Ended
-------------------- -------------------- December 31,
2000 1999 2000 1999 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest Income $ 6,885 $ 7,192 $ 21,534 $ 20,130 $ 27,528
Interest Expense 2,445 3,053 8,059 8,419 11,586
-------- -------- -------- -------- --------
Net Interest Income $ 4,440 $ 4,139 $ 13,475 $ 11,711 $ 15,942
======== ======== ======== ======== ========
Average Earning Assets $262,930 $290,808 $284,584 $290,114 $296,128
Net Interest Margin 6.75% 5.69% 6.31% 5.38% 5.38%
</TABLE>
The net interest margin increased in 2000 compared to the same periods in 1999
due to a 175 basis point increase in prime rate since July of 1999.
Provision for Loan Losses
BYL Bancorp made a $200,000 and $400,000 contribution to the allowance for loan
losses for the three and nine months ended September 30, 2000 compared to
$130,000 and $361,000 for the three and nine months ended September 30, 1999.
Management believes that the allowance, which equals 1.52% of total loans at
September 30, 2000, is adequate to cover future losses.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Provision for Loan Losses - Continued
Changes in the allowance for loan losses for the quarter and nine months ended
September 30, 2000 and 1999 are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Allowance, Beginning of Period $ 2,639 $ 2,458 $ 2,610 $ 2,300
Provision for Loan Losses 200 130 400 361
Loans Charged Off - net of Recoveries (122) (45) (293) (118)
------- ------- ------- -------
Allowance, End of Period $ 2,717 $ 2,543 $ 2,717 $ 2,543
======= ======= ======= =======
</TABLE>
Noninterest Income
Noninterest income was $4.9 million for the quarter ended September 30, 2000
compared to $6.9 million for the same period in 1999. Similarly for the first
nine months of 2000, noninterest income was $14.3 million compared to $18.0
million for the same period in 1999. This decrease is attributable to the
closing of the Diamond Bar Mortgage Division and the $800,000 write-down of the
assets retained in the 1999-1 securitization.
Noninterest Expense
Noninterest expense was $7.4 million for the quarter ended September 30, 2000
and $25.2 million for the first nine months of 2000 compared to $9.1 million and
$25.5 million for the same periods in 1999. The decline in noninterest expense
for the quarter is attributable to the closing of the Diamond Bar Mortgage
Division. Noninterest expense for the nine months has not declined due to the
$1.6 million loss on sale of the Bank's indirect auto loan portfolio during the
first quarter of 2000.
19
<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 September 30, 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 September 30, 2000, BYL Bancorp had $167 million of assets and $190 million
of liabilities repricing within one year. Therefore, $23 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
Overview
The Year 2000 issue is the result of computer programs being written using two
digits rather that four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date using "00" as the
year 1900 rather than the year 2000.
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.
20
<PAGE>
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
On September 27, 2000, the Company held its annual meeting. At the
annual meeting, shareholders of the Company elected the four
directors nominated by the Company's Board of Directors.
Item 5 - Other Information
None
21
<PAGE>
PART II - OTHER INFORMATION -Continued
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits
Exhibit No. Exhibit
----------- -------
2.1 Plan of Reorganization and Merger Agreement - Annex I of Proxy
Statement/Prospectus incorporated by reference (A)
2.2 Agreement and Plan of Reorganization, and ancillary documents,
among BYL Bancorp, BYL Bank Group, PBOC Holdings, Inc. and
People's Bank of California dated November 1, 2000 (J)
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 Statement 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)
10.7.1 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)
10.14 Agreements, as amended, for formation of CNL Financial
Services, Inc. (H)
10.15 Agreement by and among BYL Bancorp, BYL Bank Group, JAM
Partners, L.P., Sy Jacobs, Everest Partners Limited
Partnership, Everest Managers, L.L.C., David M. W. Harvey and
Nick Becker dated September 7, 2000 (I)
B) Reports on Form 8-K
(a) Form 8-K filed on July 13, 2000 regarding CNL transaction and
Administrative Actions.
(b) Form 8-K filed on September 8, 2000 regarding Agreement by and
among BYL Bancorp, BYL Bank Group, JAM Partners, L.P., Sy
Jacobs, Everest Partners Limited Partnership, Everest
Managers, L.L.C., David M. W. Harvey and Nick Becker.
(c) Form 8-K filed on November 3, 2000 regarding Agreement and
Plan of Reorganization and related documents, among BYL
Bancorp, BYL Bank Group, PBOC Holdings, Inc. People's Bank of
California dated November 1, 2000.
22
<PAGE>
---------------------------------
(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.
(H) Filed as an Exhibit to Form 10-Q on August 17, 2000.
(I) Filed as an Exhibit to Form 8-K filed on September 8, 2000
(J) Filed as Exhibits to Form 8-K filed on November 3, 2000
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: November 13, 2000 /s/ Robert Ucciferri
---------------------
Robert Ucciferri
President and
Chief Executive Officer
Date: November 13, 2000 /s/ Barry J. Moore
---------------------
Barry J. Moore
Senior Executive Vice President
Chief Operating Officer and
23
