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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(3) (2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 14a-11(c) or 14a-12
BYL BANCORP
1875 North Tustin Street
Orange, California 92865
-----------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment of Filing Fee (Check the appropriate box):
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/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
Common Stock, no par value per share
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
2,542,568 shares of common stock, and 246,370 option
shares at an average exercise price of $10.195 per share
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
$39,322,328, less investment banking fees in connection
with transaction, estimated to be approximately $821,612.
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(4) Proposed maximum aggregate value of transaction:
$38,500,716
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(5) Total fee paid:
$7,700.14
----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
None
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
None
----------------------------------------------------------
(3) Filing Party:
None
----------------------------------------------------------
(4) Date Filed:
None
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<PAGE>
[PLACE ON BYL BANCORP LETTERHEAD]
, 2001
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of BYL
Bancorp ("BYL") on , , 2001 at p.m. at Yorba Linda
Community Center, Club Room, 4501 Casa Loma Avenue, Yorba Linda, California.
As you previously read, we have signed an Agreement and Plan of
Reorganization with PBOC Holdings, Inc. ("PBOC") and its subsidiary, People's
Bank of California ("People's") ("Merger Agreement") in which BYL would be
merged in two steps into PBOC, and BYL's wholly-owned subsidiary, BYL Bank
Group, would be merged into People's. In the proposed merger, you will receive
$15.00 in cash for each share of BYL common stock that you own, which may be
adjusted upward or downward as provided in the Merger Agreement.
We believe the merger is in your best interests as shareholders and we hope
you will support it. Information about the proposed merger is included in the
enclosed proxy statement. Please give these proxy materials your careful
attention.
The merger cannot be completed until shareholders of BYL approve the
proposed merger and the merger agreement. We are holding a special meeting to
vote on this proposal. YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING, PLEASE TAKE THE TIME TO VOTE BY COMPLETING AND MAILING THE
ENCLOSED PROXY CARD TO US.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER
AGREEMENT, AND RECOMMENDS THAT YOU VOTE TO APPROVE IT AS WELL.
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Sincerely,
H. Rhoads Martin Robert Ucciferri
Chairman of the Board President and Chief Executive Officer
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PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME. IF THE MERGER IS
CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK
CERTIFICATES.
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2001
Notice is hereby given that the special meeting of the shareholders of BYL
Bancorp ("BYL"), will be held at p.m. on , , 2001,
at the Yorba Linda Community Center, Club Room, 4501 Casa Loma Avenue, Yorba
Linda, California (the "meeting" or "special meeting").
At the meeting, you will be asked to consider and vote on the following:
1. A proposal to approve the principal terms of the Agreement and Plan of
Reorganization dated as of November 1, 2000 (the "merger agreement") as
well as the merger (as defined below) and the other transactions
contemplated thereby. A copy of the merger agreement is attached as
Appendix A to the proxy statement. Under the merger agreement,
- Each outstanding share of BYL will be converted into the right to
receive $15.00 in cash, which may be adjusted upward or downward as
provided in the merger agreement;
- BYL, in a series of corporate steps, will be merged with and into PBOC
Holdings, Inc., and BYL Bank Group will be merged with and into
People's Bank of California (the term "merger" includes the merger as
well as the other corporate steps of BYL being merged with and into
PBOC and BYL Bank Group being merged with and into People's Bank of
California).
2. Such other business as may properly come before the special meeting or
any adjournments or postponements thereof.
The board of directors has fixed the close of business on , 2001 as
the record date for the determination of the shareholders entitled to have
notice of and to vote at BYL's special meeting and any adjournments or
postponements thereof.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE MERGER AGREEMENT AND THE
MERGER.
YOUR VOTE IS VERY IMPORTANT. Please mark, sign, date and return your proxy
promptly, whether or not you plan to attend the meeting. Your proxy will be
revocable, either in writing or by voting in person at the meeting, at any time
prior to its exercise, by following the procedure described in the proxy
statement.
If you would like to attend the special meeting and your shares are held by
a broker, bank or other nominee, you must bring to the meeting a recent
brokerage statement or a letter from the nominee confirming your beneficial
ownership of the shares. You must also bring a form of personal identification.
In order to vote your shares at the special meeting, you must obtain from the
nominee a proxy issued in your name.
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By Order of the Board of Directors
------------------------------------------------
, 2001 John F. Meyers
Orange, California SECRETARY
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BYL Bancorp
1875 North Tustin Street
Orange, California 92865
PROXY STATEMENT
This proxy statement is furnished to the holders of outstanding shares of
common stock of BYL Bancorp ("BYL"), in connection with the solicitation of
proxies by BYL to approve and adopt an Agreement and Plan of Reorganization
involving BYL and its wholly-owned subsidiary, BYL Bank Group, PBOC
Holdings, Inc. ("PBOC") and its wholly owned subsidiary, People's Bank of
California ("People's") dated November 1, 2000 (the "merger agreement").
If the merger contemplated by the merger agreement is completed, PBOC will
pay $15.00 in cash for each share of BYL common stock you own, which may be
adjusted upward or downward, and BYL by virtue of the transactions contemplated
by the merger agreement will be merged into PBOC and cease to exist, and BYL
Bank Group ("BYL Bank") will be merged into People's and cease to exist (the
"merger").
On December 11, 2000, PBOC announced that it has executed an agreement dated
December 8, 2000 pursuant to which PBOC will be acquired by FBOP Corporation, a
$5.4 billion bank and savings holding company headquartered in Oak Park,
Illinois. FBOP Corporation owns banks located in California, Illinois and Texas.
Under the terms of the agreement between FBOP Corporation and PBOC, FBOP
Corporation will acquire PBOC, and California National Bank, a subsidiary of
FBOP Corporation, will acquire People's. It is not expected that PBOC's
transaction with FBOP Corporation will adversely affect the merger.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE MERGER.
We have scheduled a special meeting of our shareholders to vote on the
merger agreement and the merger. This meeting will be held at the Yorba Linda
Community Center, Club Room, 4501 Casa Loma Avenue, Yorba Linda, California, on
, , 2001 at p.m., local time.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE TAKE THE TIME TO VOTE
BY COMPLETING AND SIGNING THE ENCLOSED PROXY CARD AND MAILING IT TO US. IF YOU
COMPLETE, SIGN AND MAIL YOUR PROXY WITHOUT INDICATING HOW YOU WANT TO VOTE, YOUR
PROXY WILL BE COUNTED AS A VOTE IN FAVOR OF THE MERGER AGREEMENT AND THE MERGER.
IF YOU ABSTAIN OR DO NOT VOTE, THIS WILL HAVE THE EFFECT OF A VOTE AGAINST THE
MERGER AGREEMENT AND THE MERGER. THE MERGER AGREEMENT AND THE MERGER MUST BE
APPROVED BY NOT LESS THAN A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK
OF BYL. THEREFORE, YOUR VOTE IS VERY IMPORTANT.
This proxy statement provides you with detailed information about the
merger. We encourage you to read this entire document carefully.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
------------------------
This proxy statement, the accompanying notice of special meeting and the
accompanying form of proxy are first being mailed to BYL's shareholders on or
about , 2001.
<PAGE>
TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 2
The Merger................................................ 2
Information Regarding the Parties to the Merger........... 2
You Will Receive Cash for Your Shares of BYL Common Stock
in the Merger........................................... 3
The Merger Will be Taxable to You......................... 3
Our Board Recommends That You Approve the Merger.......... 3
Financial Advisor Gives its Opinion That Consideration is
Fair to You............................................. 3
Special Meeting to be Held on , 2001................ 3
Record Date Set at , 2001; Majority Vote of
Outstanding Shares Required............................. 4
Certain Shareholders Have Agreed to Vote in Favor of the
Merger.................................................. 4
You May Exercise Dissenters' Rights....................... 4
PBOC to Use Purchase Accounting Treatment................. 4
Benefits to Certain Officers and Directors in the
Merger.................................................. 4
Things We Must Do for the Merger to Occur................. 5
Regulatory Approvals We Must Obtain for the Merger........ 5
We Expect the Merger to Occur in the Second Quarter of
2001.................................................... 5
Termination of the Merger Agreement....................... 5
Termination Fees Between PBOC and BYL..................... 6
Stock Option Agreement.................................... 6
BYL SELECTED FINANCIAL DATA................................. 7
THE SPECIAL MEETING......................................... 9
General................................................... 9
Record Date; Solicitation of Proxies...................... 9
Vote Required............................................. 9
Revocability of Proxies................................... 9
Recommendation of BYL Board of Directors.................. 9
Security Ownership........................................ 10
THE MERGER.................................................. 10
General................................................... 10
Merger Consideration...................................... 10
Background and Reasons for the Merger..................... 11
Recommendation of the Board of Directors.................. 13
Opinion of BYL Bancorp's Financial Advisor................ 13
Effective Time; Closing Date.............................. 21
Exchange of Certificates by BYL's Shareholders............ 21
Dissenters' Rights........................................ 22
Accounting treatment...................................... 23
Federal Income Tax Consequences of the Merger............. 23
The Voting Agreements..................................... 24
Stock Option Agreement.................................... 25
THE MERGER AGREEMENT........................................ 27
Representations and Warranties............................ 28
Business Pending the Merger and Other Covenants........... 28
Conditions to the Merger.................................. 31
Termination............................................... 32
Expenses and Termination Fees............................. 33
Interests of Certain Persons in the Merger................ 34
SECURITY OWNERSHIP.......................................... 35
INFORMATION ABOUT BYL BANCORP AND BYL BANK GROUP............ 37
</TABLE>
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PAGE
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General................................................... 37
Focus and Operating Strategy of BYL Bank.................. 37
Securitizations........................................... 38
Restructuring............................................. 39
Regulatory Actions, Prompt Corrective Action and Capital
Restoration Plan........................................ 39
Proposed Formation of Subsidiary and Proposed
Transaction............................................. 40
Sale of B and R-3 Certificates............................ 41
Employees................................................. 41
Competition............................................... 41
Effect of Governmental Policies and Recent Legislation.... 41
Capital Standards......................................... 42
Prompt Corrective Action.................................. 43
Safety and Soundness Standards............................ 45
Premiums for Deposit Insurance............................ 45
Interstate Banking and Branching.......................... 46
Community Reinvestment Act and Fair Lending
Developments............................................ 47
Financial Modernization Legislation....................... 47
Properties................................................ 48
Legal Proceedings......................................... 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF BYL BANCORP.................. 49
Overview.................................................. 49
Distribution of Assets, Liabilities, and Shareholders'
Equity.................................................. 50
Earnings Analysis......................................... 51
Balance Sheet Analysis.................................... 56
Capital Resources......................................... 62
Effects of Inflation...................................... 63
Impact of New Accounting Pronouncements................... 63
Year 2000 Issues.......................................... 63
Quantitative and Qualitative Disclosure about Market
Risk.................................................... 64
MARKET PRICE AND DIVIDEND INFORMATION....................... 66
AUDITORS.................................................... 66
OTHER BUSINESS.............................................. 66
APPENDICES
APPENDIX A Agreement and Plan of Reorganization........... A-1
APPENDIX B Fairness Opinion of Sutro & Co. dated November
1, 2000................................................. B-1
APPENDIX C Dissenter's Rights--Chapter 13 of California
Corporations Code....................................... C-1
APPENDIX D Financial Statements--Interim Financial
Statements for September 30, 2000 and 1999 (unaudited)
and Audited Financial Statements for Years Ended
December 31, 1999, 1998 and 1997........................ D-1
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS THIS MERGER PROPOSED?
A: BYL is proposing this merger because its board of directors has concluded
that this merger is in the best interests of BYL and its shareholders.
Q: WHAT WILL I RECEIVE IN THIS MERGER?
A: Under the merger agreement, you will have the right to receive cash in the
amount of $15.00, which may be adjusted upward or downward as provided in
the merger agreement, for each share of the BYL common stock that you own.
Q: HOW DO I VOTE?
A: Simply indicate on your proxy card how you want to vote and then sign and
mail your proxy card in the enclosed return envelope as soon as possible so
that your shares may be represented at BYL's special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will not vote your shares for you unless you provide
instructions to your broker on how to vote. It is important therefore that
you follow the directions provided by your broker regarding how to instruct
your broker to vote your shares. If you fail to instruct your broker how to
vote your shares, the effect will be the same as a vote against the merger
agreement.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is voted at the
special meeting. If your shares are held in your name you may do this in one
of three ways. First, you may send a written instrument to the Secretary of
BYL revoking your proxy. Second, you may complete and submit a new proxy
card bearing a later date. If you choose either of these two methods, you
must submit your notice of revocation or your new proxy card to BYL at the
address at the top of the BYL's notice of special meeting. Third, you may
attend the meeting and vote in person if you tell the Secretary that you
want to cancel your proxy and vote in person. Simply attending the special
meeting, however, will not revoke your proxy. If you have instructed a
broker to vote your shares, you must follow directions received from your
broker to change your vote or to vote at BYL's meeting.
Q: SHOULD I SEND IN MY CERTIFICATES NOW?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q: WHEN DO YOU EXPECT THIS MERGER TO BE COMPLETED?
We are working toward completing this merger as quickly as possible. We
currently expect to complete this merger in the second quarter of 2001.
Q: WHY HAVE YOU SENT ME THIS DOCUMENT AND WHO CAN HELP ANSWER MY QUESTIONS?
A: This proxy statement contains important information regarding this proposed
merger, as well as information about PBOC and BYL. It also contains
important information about what the BYL's board of directors and management
considered in evaluating this proposed merger. We urge you to read this
proxy statement carefully, including its appendices.
If you have more questions about the merger or the meeting, you should
contact:
Mr. Barry J. Moore
Executive Vice President
BYL Bancorp
1875 North Tustin Street
Orange, California 92685
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SUMMARY
This brief summary, together with the "Questions and Answers" on the
preceding page, highlights selected information from the proxy statement. It
does not contain all of the information that is important to you. We urge you to
read carefully the entire proxy statement. Each item in this summary refers to
the page where that subject is discussed in more detail.
THE MERGER (PAGE AND APPENDIX A)
We have attached the merger agreement as Appendix A at the back of this
proxy statement. We encourage you to read the merger agreement, as it is the
legal document that governs the merger.
In the merger, People's Bank of California ("People's") will be the
surviving bank and PBOC will be the surviving corporation and remain as the
savings and loan holding company for People's. The separate existence of BYL and
BYL Bank will end with the merger.
INFORMATION REGARDING THE PARTIES TO THE MERGER (PAGE )
PBOC HOLDINGS, INC.
5900 Wilshire Boulevard, 16th Floor
Los Angeles, California 90036-5013
Phone: (323) 954-6651
PBOC is a Delaware corporation and is registered as a savings and loan
holding company under the Home Owners' Loan Act, as amended. PBOC operates
People's, which is its wholly-owned subsidiary. At September 30, 2000, PBOC had
total consolidated assets of approximately $3.3 billion, total consolidated
deposits of approximately $2.0 billion, and total consolidated shareholders'
equity of approximately $214.5 million.
People's is a federal savings and loan association headquartered in Los
Angeles California, which originally commenced operations in 1887. It currently
operates 23 banking offices primarily in Los Angeles County, as well as Orange
and Ventura counties in Southern California.
On December 11, 2000, PBOC announced that it has executed an agreement dated
December 8, 2000 pursuant to which PBOC will be acquired by FBOP Corporation, a
$5.4 billion bank holding company headquartered in Oak Park, Illinois. FBOP
Corporation owns banks located in California, Illinois and Texas. Under the
terms of the agreement between FBOP Corporation and PBOC, FBOP Corporation will
acquire PBOC, and California National Bank, a subsidiary of FBOP Corporation,
will acquire People's. It is not expected that PBOC's transaction with FBOP
Corporation will adversely affect the merger.
BYL BANCORP
1875 North Tustin Street
Orange, California 92865
Phone: (714) 685-1317
BYL is a California corporation and is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. BYL operates BYL Bank,
which is its wholly-owned subsidiary. At September 30, 2000, BYL had total
consolidated assets of approximately $294.0 million, total consolidated deposits
of approximately $261.3 million, and total consolidated shareholders' equity of
approximately $30.3 million.
BYL Bank is a California state-chartered bank headquartered in Orange,
California. BYL Bank's main office is located at 1875 North Tustin Street,
Orange, California, and operates seven full-service banking centers in its
primary market areas of Orange and Riverside counties, California. In addition
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to conducting its regular community banking activities, BYL Bank also originates
and sells non-conforming residential real estate loans and SBA guaranteed loans.
BYL Bank provides personalized quality banking products and services to small-
and medium-size businesses, including professionals. At September 30, 2000, BYL
Bank had total assets of approximately $293.9 million, total deposits of
approximately $261.4 million, and total shareholders' equity of approximately
$30.2 million.
SUBSTANTIAL INFORMATION ABOUT BYL INCLUDING FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS THEREOF, ARE INCLUDED ELSEWHERE IN THIS
PROXY STATEMENT. SEE, "INFORMATION ABOUT BYL BANCORP" AT PAGE , "BYL SELECTED
FINANCIAL DATA" AT PAGE AND "FINANCIAL STATEMENTS OF BYL BANCORP" AT
PAGE D-1.
YOU WILL RECEIVE CASH FOR YOUR SHARES OF BYL COMMON STOCK IN THE MERGER
(PAGE )
When the merger is completed, you will receive cash in the amount of $15.00
for each share of BYL common stock that you hold when the merger closes ("Merger
Consideration"). The Merger Consideration may be adjusted upward or downward as
provided in the merger agreement. In the merger, PBOC Acquisition Corp, a
wholly-owned subsidiary of PBOC to be formed as part of the merger, will merge
with and into BYL, which will then be liquidated into PBOC. This two step
transaction will be referred as the merger. Upon consummation of the merger,
there will be no further public market for BYL common stock. In addition, at the
time the merger is completed, BYL Bank will merge with and into People's.
THE MERGER WILL BE TAXABLE TO YOU (PAGE )
The merger will be taxable to BYL shareholders for federal income tax
purposes. The rates at which you will be taxed will depend upon the period of
time during which you held the stock. There will not be any corporate tax in
this transaction in order to maximize the value to the shareholders. Therefore,
the merger will be tax-free to PBOC, People's, BYL and BYL Bank for federal
income tax purposes. However, because tax matters are complicated, and tax
results may vary among shareholders, we urge you to contact your own tax advisor
to understand fully how the merger will affect you.
OUR BOARD RECOMMENDS THAT YOU APPROVE THE MERGER (PAGE )
BYL's and BYL Bank's boards of directors believe that the merger is in your
best interest and that of BYL and BYL Bank. The boards believe that BYL must
grow in order to compete with larger, more efficient financial institutions
within its marketplace. The need has become more acute with recent
consolidations in the banking industry. New regulatory requirements, the BYL and
BYL Bank regulatory enforcement actions and competition from larger banks will
make the future more difficult for relatively small financial institutions like
BYL. At this time, the boards of directors believe the merger represents a
better opportunity for the BYL shareholders than pursuing a strategy of
increasing business on its own. The boards of directors have unanimously
approved the merger agreement and recommend that you vote FOR the merger and the
merger agreement.
FINANCIAL ADVISOR GIVES ITS OPINION THAT CONSIDERATION IS FAIR TO YOU (PAGE
AND APPENDIX B)
In deciding to approve the merger, BYL's board of directors considered the
opinion of its financial advisor, Sutro & Co., dated as of November 1, 2000 and
confirmed on , 2001, as to the fairness of the merger consideration
to BYL's shareholders from a financial point of view. This opinion is attached
as Appendix B to this proxy statement. We encourage you to read this opinion
carefully. Sutro & Co. was paid for providing its opinion.
3
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SPECIAL MEETING TO BE HELD ON , 2001 (PAGE )
The special meeting of BYL's shareholders will be held at p.m. on
, , 2001, at Yorba Linda Community Center, Club Room,
4501 Casa Loma Avenue, Yorba Linda, California. At the special meeting, you will
be asked to vote to approve the merger agreement and the merger.
RECORD DATE SET AT , 2001; MAJORITY VOTE OF OUTSTANDING SHARES
REQUIRED (PAGE )
You may vote at the special meeting if you owned BYL common stock at the
close of business on , 2001. As of that date, there were 2,542,568
shares of BYL common stock outstanding and entitled to vote at the meeting.
APPROVAL OF THE MERGER AGREEMENT AND THE MERGER REQUIRES AT LEAST A MAJORITY OF
THE OUTSTANDING SHARES OF BYL COMMON STOCK VOTING IN FAVOR.
CERTAIN SHAREHOLDERS HAVE AGREED TO VOTE IN FAVOR OF THE MERGER (PAGE )
Except for Mr. Seymour Jacobs, a newly appointed director of BYL and BYL
Bank, the directors and executive officers of BYL and BYL Bank, who are entitled
to vote about % of BYL's outstanding shares of common stock, have entered
into agreements with PBOC. These agreements generally provide that the directors
will vote their shares of BYL common stock in favor of the merger agreement and
the merger.
The directors entered into these agreements in order to induce PBOC to enter
into the merger agreement. The voting agreements could discourage other
companies from trying to acquire BYL.
YOU MAY EXERCISE DISSENTERS' RIGHTS (PAGE AND APPENDIX )
Holders of BYL common stock who vote against the merger and who have fully
complied with all applicable provisions of Chapter 13 of the California
Corporations Code have the right to demand from PBOC the fair market value of
the shares provided 5% or more of the BYL common stock make such a written
demand. In order for any BYL shareholder that voted against the merger to
exercise Dissenters' Rights, a notice must be sent by such BYL shareholder and
received by BYL on or before the date of the special meeting. Failure to send
such notice and vote against the merger will result in a waiver of such
shareholder's dissenter's rights. See "The Merger--Dissenters' Rights." Further,
if more than 10% of the outstanding shares of BYL dissent, a condition of the
merger is not satisfied and PBOC can elect to terminate the transaction.
PBOC TO USE PURCHASE ACCOUNTING TREATMENT (PAGE )
PBOC will account for the merger as a purchase transaction for financial
reporting purposes.
BENEFITS TO CERTAIN OFFICERS AND DIRECTORS IN THE MERGER (PAGE )
When considering the recommendation of the BYL board of directors, you
should be aware that some BYL and BYL Bank directors and officers have interests
in the merger that differ from the interests of other BYL shareholders. These
interests include:
- certain officers and directors have stock options which are exercisable in
full prior to the merger;
- certain officers have employment, release, consulting and salary
continuation agreements; and
- directors and officers have continuing insurance protection under
directors' and officers' liability insurance, and are indemnified from
certain liability for four years from the close of the transaction.
4
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The BYL board of directors was aware of these interests and considered them
before approving the merger agreement.
THINGS WE MUST DO FOR THE MERGER TO OCCUR (PAGE )
Completion of the merger is subject to various conditions, including:
- approval of the merger agreement and the merger by the BYL shareholders;
- receipt of all governmental and other consents and approvals that are
necessary to permit completion of the merger;
- removal of the FDIC Section 8(b) Order from BYL Bank and the FRB
Memorandum of Understanding from BYL; and
- other customary conditions.
Certain of these other customary conditions to the merger may be waived by
PBOC or BYL, as applicable.
REGULATORY APPROVALS WE MUST OBTAIN FOR THE MERGER (PAGE )
We cannot complete the merger unless it is approved by the Office of Thrift
Supervision. The parties have filed an application with the Office of Thrift
Supervision seeking approval of the merger.
Although we do not know of any reason why we cannot obtain these regulatory
approvals in a timely manner, we cannot be certain when, or if, we will obtain
them. As of the date of this proxy statement all required regulatory
applications have been filed and are pending approval.
WE EXPECT THE MERGER TO OCCUR IN THE SECOND QUARTER OF 2001 (PAGE )
The merger will occur shortly after all of the conditions to its completion
have been satisfied. We currently anticipate that the merger will occur in the
second quarter of 2001 and probably on or about , 2001.
TERMINATION OF THE MERGER AGREEMENT (PAGE )
The merger agreement may be terminated at any time prior to the effective
time of the merger:
- by mutual consent of the parties;
- by any party if any material breach or default by another party is not
cured within 30 business days after notice thereof;
- by any party if any governmental or regulatory consent is not obtained or
if any governmental or regulatory authority denies or refuses to grant any
approval, consent or authorization required to be obtained to consummate
the transactions contemplated by the merger agreement or contain
conditions which are materially adverse to the economic or business
prospects of the merger in the reasonable opinion of PBOC;
- by BYL, if any of the conditions to its performance of the merger
agreement shall not have been met, or by PBOC, if any of the conditions to
its performance of the merger agreement shall not have been met;
- by any party if shareholders of BYL do not approve the merger agreement;
or
- by any party if the merger does not occur by May 1, 2001 (which may be
extended by PBOC until July 1, 2001).
5
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TERMINATION FEES BETWEEN PBOC AND BYL (PAGES )
Certain cash payments may be made under the merger agreement in the event
that a party terminates the merger agreement in certain situations.
STOCK OPTION AGREEMENT (PAGE )
We have entered into a stock option agreement in which we have granted to
PBOC an option to purchase up to 505,971 unissued shares of BYL representing
19.9% of the shares of BYL common stock for a purchase price of $10.597 per
share. The stock option agreement is exercisable under certain circumstances
involving certain events surrounding an acquisition transaction as defined in
the stock option agreement. We entered into the stock option agreement in order
to induce PBOC to enter into the merger agreement. The stock option agreement
could discourage other companies from trying to acquire BYL.
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BYL SELECTED FINANCIAL DATA
The following table present selected historical financial data, including
per share information, for BYL. The following financial data should be read in
conjunction with the financial statements of BYL, including the notes, contained
elsewhere in this proxy statement. (Dollars in thousands, except per share
data.)
<TABLE>
<CAPTION>
AT OR FOR THE
PERIOD ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income......................... $ 21,534 $ 20,130 $ 27,528 $ 24,016 $ 18,455 $ 12,642 $ 9,746
Interest Expense........................ 8,059 8,419 11,586 8,406 6,057 3,840 2,757
-------- -------- -------- -------- -------- -------- --------
Net Interest Income..................... 13,475 11,711 15,942 15,610 12,398 8,802 6,989
Provision for Loan Losses............... 400 361 694 755 778 364 262
-------- -------- -------- -------- -------- -------- --------
Net Interest Income After Provision for
Loan Losses........................... 13,075 11,350 15,248 14,855 11,620 8,438 6,727
Noninterest Income...................... 14,317 18,048 24,049 23,408 15,920 8,752 6,726
Noninterest Expense..................... 25,242 25,529 33,891 30,870 22,717 14,045 11,211
Income Before Income Taxes.............. 2,150 3,869 5,406 7,393 4,823 3,145 2,242
Income Taxes............................ 969 1,685 2,330 3,277 1,968 1,229 872
-------- -------- -------- -------- -------- -------- --------
Net Income.............................. $ 1,181 $ 2,184 $ 3,076 $ 4,116 $ 2,855 $ 1,916 $ 1,370
======== ======== ======== ======== ======== ======== ========
Dividends on Common Stock............... $ -- $ 570 $ 760 $ 467 $ 502 $ 168 $ 89
PER SHARE DATA:
Net Income--Basic....................... $ 0.47 $ 0.86 $ 1.21 $ 1.63 $ 1.19 $ 0.98 $ 0.88
Net Income--Diluted..................... $ 0.47 $ 0.85 $ 1.21 $ 1.55 $ 1.12 $ 0.96 $ 0.75
Book Value.............................. $ 11.93 $ 11.25 $ 11.51 $ 10.62 $ 9.01 $ 8.10 $ 9.26
BALANCE SHEET SUMMARY:
Total Assets............................ $293,974 $367,713 $353,736 $318,013 $238,086 $183,755 $125,872
Total Deposits.......................... 261,282 336,995 322,973 287,206 207,935 162,058 113,295
Loans Held for Sale..................... 34,929 105,080 69,756 74,598 47,150 24,363 10,186
Total Loans............................. 177,813 162,532 196,675 165,199 139,002 106,019 67,979
Allowance for Loan Losses (ALLL)........ 2,717 2,543 2,610 2,300 1,923 1,616 1,047
Total Shareholders' Equity.............. 30,300 28,505 29,200 26,882 22,550 19,434 11,273
SELECTED RATIOS:
Return on Average Assets................ 0.47% 0.85% 0.88% 1.49% 1.31% 1.23% 1.17%
Return on Average Equity................ 5.28% 10.57% 11.05% 17.03% 13.80% 12.81% 12.56%
Net Interest Margin..................... 6.31% 5.38% 5.38% 6.40% 6.46% 6.47% 6.68%
Dividend Payout Ratio--Common Stock..... 0% 25.58% 24.79% 11.04% 17.65% 9.18% 6.82%
Non-performing Loans to Total Loans..... 1.05% 0.98% 0.84% 1.23% 0.92% 1.15% 1.98%
Non-performing Assets to Total Assets... 1.02% 0.92% 0.55% 0.94% 0.93% 1.57% 1.81%
ALLL to Non-performing Loans............ 121.46% 96.07% 157.04% 113.30% 150.35% 132.68% 77.90%
Average Shareholder's Equity to Average
Assets................................ 8.87% 8.10% 8.00% 8.75% 9.49% 9.63% 9.28%
</TABLE>
On June 14, 1996, BYL Bank acquired Bank of Westminster ("BOW"), pursuant to
the terms of an Agreement and Plan of Reorganization dated January 12, 1996. BYL
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, BYL Bank also raised approximately $7.8 million in additional
equity in a firmly underwritten offering by issuing 1,073,000 shares of BYL
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
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<PAGE>
November 19, 1997, BYL 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, BYL 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 BYL's shares of common stock for each
outstanding share of DNBF's common stock, resulting in the issuance of 956,641
shares of BYL common stock to the shareholders of DNBF. The acquisition of DNBF
increased the total assets of BYL 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.
8
<PAGE>
THE SPECIAL MEETING
GENERAL
A special meeting of the shareholders of BYL will be held at the Yorba Linda
Community Center, Club Room, 4501 Casa Loma Avenue, Yorba Linda, California on
, , 2001, at p.m., local time. At the meeting, the
holders of the common stock of BYL will vote on the approval of the merger
agreement and the merger and such other business as may properly come before the
meeting or any adjournments or postponements thereof. This proxy statement is
expected to be mailed to the shareholders on or about , 2001.
RECORD DATE; SOLICITATION OF PROXIES
The close of business on , 2001 has been selected as the record
date for the determination of shareholders entitled to notice of, and to vote
at, the special meeting. At that date, there were 2,542,568 outstanding shares
of BYL common stock entitled to vote at the meeting.
In addition to soliciting proxies by mail, officers, directors and employees
of BYL, without receiving any additional compensation, may solicit proxies by
telephone, fax, in person or by other means. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries to forward proxy
solicitation materials to the beneficial owners of BYL common stock held of
record by such persons, and BYL will reimburse such brokerage firms, custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection therewith. BYL will pay all expenses related to printing and
filing this proxy statement.
VOTE REQUIRED
The affirmative vote of the holders of at least a majority of the
outstanding shares of BYL common stock is required for approval and adoption of
the merger agreement as well as the merger and the other related transactions.
Abstentions and broker non-votes will have the same effect as votes against the
proposal to approve and adopt the merger agreement and the merger. Brokers
holding shares of record for customers generally are not entitled to vote on
certain matters unless they receive voting instructions from their customers.
"Broker non-votes" means the votes that could have been cast on the agreement
and the acquisition by brokers with respect to uninstructed shares if the
brokers had received their customers' instructions.
Each holder of record of shares of common stock on the record date will be
entitled to cast one vote per share on merger agreement and the merger. This
vote may be exercised in person or by properly executed proxy.
REVOCABILITY OF PROXIES
Any holder of BYL common stock may revoke a proxy at any time before it is
voted by filing with the Secretary of BYL an instrument revoking the proxy or by
returning a duly executed proxy bearing a later date, or by attending the
meeting and voting in person. Any such filing should be made to the attention of
the Secretary, BYL Bancorp, 1875 North Tustin Street, Orange, California 92685.
Attendance at the meeting will not by itself constitute revocation of a proxy.
RECOMMENDATION OF BYL BOARD OF DIRECTORS
At the special meeting, you will be asked to approve the merger and the
merger agreement. After careful consideration, BYL's board of directors, by
unanimous vote, has determined that the merger is fair to, and in the best
interests of, the shareholders of BYL. Accordingly, BYL's board has unanimously
approved the merger and the merger agreement. Your board of directors recommends
a vote "FOR" this proposal.
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<PAGE>
SECURITY OWNERSHIP
As of the record date, directors and executive officers of BYL and BYL Bank
held in the aggregate and were entitled to vote 558,349 shares or approximately
21.96% of the common stock (see "SECURITY OWNERSHIP"). Except for Mr. Seymour
Jacobs, a newly appointed director of BYL and BYL Bank, the directors and
executive officers have agreed with PBOC that they will vote their shares in
favor of the merger (see "The MERGER--Interests of Certain Persons in the
Merger").
THE MERGER
GENERAL
The boards of directors of BYL and BYL Bank have approved the merger
agreement and the merger, which provides for the merger of BYL with and into
PBOC in a two step process. In the first step, a wholly-owned subsidiary of PBOC
will merge with BYL, with BYL being the surviving company. In the second step,
which will occur immediately after the initial merger, BYL will be liquidated
into PBOC, with PBOC being the surviving corporation. The merger and liquidation
are referred to in the Proxy Statement as the "merger". Upon completion of the
merger, the separate corporate existence of BYL will end. At the same time, BYL
Bank will also merge with and into People's, with People's being the surviving
bank, and the separate corporate existence of BYL Bank will end.
This section of the proxy statement describes certain aspects of the merger,
including the background of the merger and BYL's reasons for the merger.
MERGER CONSIDERATION
In accordance with the merger agreement, each share of BYL common stock
issued and outstanding immediately before the merger, except perfected
dissenters shares and shares owned by PBOC, will be converted into the right to
receive $15.00 in cash at the effective time of merger, subject to upward or
downward adjustments as provided in the merger agreement. If the closing of the
merger occurs between March 6, 2001 to and including June 15, 2001, the merger
consideration shall be increased by an amount for each day subsequent to
March 16, 2001 to and including the Closing Date which is equal to 8.0% per
annum on the aggregate $15.00 per share merger consideration. No additional
merger consideration shall be due on a date five days after PBOC provides BYL
with written notice that PBOC has satisfied all conditions for closing.
If BYL has not completed the transaction with CNL Commercial Finance, Inc.
("CCF") by December 31, 2000, then BYL and BYL Bank shall liquidate for cash the
amount of the second residual interest currently held by BYL Bank, and not
consummate the transactions contemplated by the CNL transaction agreements. For
a detailed description of the transaction with CCF, see "INFORMATION ABOUT BYL
BANCORP AND BYL BANK GROUP--Proposed Formation of Subsidiary and Proposed
Transaction" herein. The merger consideration shall be reduced by the after-tax
cost of the difference between $2.1 million and the sum of (i) the cash price
received for the second residual interest, plus (ii) cash payments received by
BYL Bank on the second residual interest after November 1, 2000, plus
(iii) interest earned at the rate of 5% per annum on the amount set forth in
clause (ii) from the date of the receipt to the date of sale of such second
residual interest. If the transaction with CCF is not consummated and BYL and
BYL Bank do not liquidate for cash the amount of the second residual interest by
the date of PBOC's receipt of the last required regulatory approval contemplated
by the merger agreement, then the cash price shall be deemed to be zero.
If the second residual interest has been purchased by CCF by December 31,
2000, and BYL and BYL Bank have purchased a license providing for SBA
accreditation as a non-bank participating lender, then under such circumstances
the merger consideration shall be reduced by the after-tax cost to BYL of the
acquisition by CCF of the SBA license.
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<PAGE>
At this time, because of certain issues that have arisen at the SBA, BYL
does not contemplate completing the second portion of the transaction with CCF.
BYL expects that the CNL transaction agreements will be terminated in the near
future. In addition, as of December , 2000, BYL Bank completed the sale of the
B certificate which had a book value of $ million on , 2000 at
a price equal to $ . BYL Bank is currently marketing the R-3 certificate,
and such sale is expected to be completed in the first quarter of 2001 and
before PBOC receives its regulatory approvals to complete the merger.
With respect to BYL stock options, each holder of a BYL stock option will be
provided with the opportunity to exercise such stock option prior to the
consummation of the merger. If such stock option is not exercised, such stock
options will be terminated and PBOC will pay the difference between the merger
consideration and the exercise price for each stock option.
BACKGROUND AND REASONS FOR THE MERGER
In 1998, the board of directors of BYL evaluated the banking marketplace,
the economic cycle and the historical acquisition prices being paid for
financial institutions of BYL's size. The board of directors was concerned about
the rapid changes occurring in the banking industry in southern California.
Tremendous consolidation had taken place. To effectively compete with other,
more efficient financial institutions, BYL's board of directors and management
knew that BYL had to continue to increase its core deposit base as well as its
loan portfolio and to continue to improve its efficiency in order to compete
successfully. Although the board believed that BYL was in a position to do this,
the board determined that BYL should be receptive to offers that would maximize
shareholder value.
During mid-1999 the board again considered the strategic alternatives
available to BYL. After extensive discussion, the board decided to engage a
financial advisor to assist and advise the board. The board selected Sutro & Co.
("Sutro"), which firm was engaged as BYL's financial advisor on May 28, 1999,
and amended and restated on February 24, 2000.
At the board's request, Sutro prepared a confidential memorandum which
discussed the merger environment and the strategic alternatives available to
BYL, with particular emphasis on a sale. Sutro confidentially surveyed
institutions which might have an interest in acquiring BYL. Of this number the
board and Sutro reduced the list to institutions, all of whom were
confidentially contacted by Sutro. Of this number, institutions did express
interest in BYL and offers were received from institutions. After further
discussion in the late first quarter of 2000, the offers were narrowed to two
institutions and of these, PBOC made a better final offer. Based upon this, the
board authorized Sutro and BYL's legal counsel to complete due diligence and to
negotiate the terms of a definitive agreement based upon the terms discussed. In
the following weeks, various discussions occurred between Sutro and PBOC as well
as BYL's legal counsel and PBOC's legal counsel concerning the provisions of the
merger agreement and the other related documents.
During the course of negotiations, all parties conducted due diligence of
the other parties to the transaction.
On September 13, 2000, PBOC provided BYL with a nonbinding proposal for a
cash price of $15.00 per share, subject to several conditions, including the
completion of due diligence and board of director approval, and a negotiation of
a definitive purchase agreement. Over the next several weeks, various
discussions again occurred between Sutro and PBOC, as well as BYL's and PBOC's
legal counsel concerning the terms and conditions of the merger agreement.
On October 31, 2000, the BYL's and BYL Bank's boards held a meeting to
discuss and review, with the assistance of its legal counsel and Sutro, the
draft merger agreement and the related documents. These documents included the
shareholders' agreements and stock option agreement. A representative of Sutro
reviewed financial information concerning PBOC and the proposed transaction.
11
<PAGE>
Sutro also delivered to the board of directors of BYL its oral opinion that, as
of such date, the consideration to be received by the BYL shareholders in the
merger was fair from a financial point of view, which was then confirmed in
writing. See "Appendix B, Opinion of BYL's Financial Advisor." Based upon the
review and discussion by BYL's board of the merger agreement, its terms and
conditions and the related documents, the opinion of Sutro, as well as other
relevant factors, the BYL's board, by unanimous vote of all directors,
authorized and approved the merger and the execution of the merger agreement.
The merger agreement was executed on November 1, 2000.
BYL's board believes that the terms of the merger are fair, and are in the
best interests of BYL and its shareholders and recommends that the shareholders
of BYL vote FOR approval of the merger and the merger agreement.
In reaching its conclusion, BYL's board considered information provided at
meetings of its Board of Directors, including, among other things:
- the terms of the merger agreement and other documents to be executed in
connection with the merger, including the premium over book value and the
multiple over earnings of BYL;
- the presentation of Sutro and the opinion of Sutro that the merger
consideration is fair to the shareholders of BYL from a financial point of
view;
- the prices paid and the terms of other recent comparable combinations of
banks and bank holding companies, compared to the price to be paid to the
shareholders of BYL;
- the review by BYL's board with its legal and financial advisors of
alternatives to the merger, the range of possible values to BYL's
shareholders obtainable through implementation of such alternatives and
the timing and likelihood of the same;
- the current and prospective economic environment and increasing regulatory
and competitive burdens and constraints facing community banks;
- the pro forma financial statements of the combined companies and the
capitalization of the combined companies;
- the review by BYL's board with its legal and financial advisors of other
potential merger candidates;
- the impact of the FDIC Section 8(b) Order on BYL Bank, the impact of the
Federal Reserve Bank Memorandum of Understanding on BYL, and the limited
growth prospects of BYL and BYL Bank while such regulatory actions are
effective;
- the effect on the executive officers and the employees of BYL and BYL
Bank, most of which will become officers and employees of People's;
- the uncertain prospects for completing the transaction with CNL Commercial
Finance, Inc.;
- the unprecedented consolidation currently underway in the banking industry
and increased competition from larger independent banks in California;
- the prospect for BYL and BYL Bank on a stand-alone basis and on the basis
of alternative stand-alone strategies, such as dividends, share
repurchases, restructurings and growth through acquisitions.
The foregoing discussion of the information and factors considered by BYL's
board of directors is not intended to be exhaustive, but constitutes the
material factors considered by the BYL board of directors. In reaching its
determination to approve and recommend the principal terms of the merger,
12
<PAGE>
the BYL's board did not assign relative or specific weights to the foregoing
factors and individual directors may have weighed such factors differently.
RECOMMENDATION OF THE BOARD OF DIRECTORS
FOR THE REASONS SET FORTH ABOVE, BYL'S BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AND THE MERGER AGREEMENT AS IN THE BEST INTEREST OF BYL AND
ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE BYL'S SHAREHOLDERS APPROVE
THE MERGER AND THE MERGER AGREEMENT.
OPINION OF BYL BANCORP'S FINANCIAL ADVISOR
On May 28, 1999, BYL retained Sutro & Co. ("Sutro") to advise BYL's Board of
Directors on the strategic alternatives available to BYL including the possible
sale of BYL to another financial institution. The agreement relating to this
engagement was amended and restated on February 24, 2000 (the "Engagement
Agreement"). Prior to such time, Sutro had provided BYL with strategic financial
advisory services pursuant to an agreement entered into on July 23, 1998 (the
"Advisory Agreement"). BYL retained Sutro because of:
- its experience in the valuation of banks, bank holding companies, savings
and loan associations and savings and loan association holding companies
in connection with mergers, acquisitions and other business combinations;
- its knowledge of, and experience with the California banking market and
banking organizations operating in that market;
- its knowledge of BYL due to having previously performed investment banking
services for BYL; and
- its experience with and reputation in the financial services industry.
In its capacity as BYL's financial advisor, Sutro participated in the
negotiations with respect to the pricing and other terms and conditions of the
merger, but the decision as to whether to be acquired by PBOC and the final
pricing and other financial terms of the Merger was ultimately made by BYL's
Board of Directors. Sutro rendered its opinion orally to the BYL Board of
Directors on October 31, 2000 and delivered its confirming written opinion dated
November 1, 2000 (the "Opinion") that the merger consideration was fair to BYL's
shareholders from a financial point of view, subject to the assumptions, factors
and limitations as set forth in the Opinion and as described below. No
limitations were imposed by the BYL Board of Directors upon Sutro with respect
to the investigations made or the procedures followed by Sutro in formulating
the Opinion.
THE FULL TEXT OF SUTRO'S OPINION, DATED AS OF NOVEMBER 1, 2000 IS ATTACHED
AS APPENDIX B TO THIS PROXY STATEMENT. YOU SHOULD READ THIS OPINION IN ITS
ENTIRETY. SUTRO'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL
POINT OF VIEW, TO THE SHAREHOLDERS OF BYL OF THE MERGER CONSIDERATION, AND THIS
OPINION DID NOT CONSTITUTE A RECOMMENDATION TO THE BOARD OF DIRECTORS OF BYL IN
CONNECTION WITH THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY BYL
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE
SUMMARY OF THE OPINION OF SUTRO SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED
IN IT ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. SUTRO DOES NOT
ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF THE TERM "EXPERT" AS USED IN
THE SECURITIES ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER, OR THAT
ITS OPINIONS CONSTITUTE A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11
OF THE ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
In connection with its analysis, Sutro reviewed, among other things:
- the final drafts of the merger agreement and its exhibits (which drafts
were substantially identical to the executed versions of such documents);
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<PAGE>
- BYL's Annual Report to Shareholders and Annual Report on Form 10-K for the
year 1999, and BYL's Quarterly Reports on Form 10Q for the periods ended
March 31 and June 30, 2000;
- the administrative order entered into by BYL with the FDIC effective as of
July 10, 2000, 2000 and the Memorandum of Understanding entered into by
BYL with the FRB on August 10, 2000;
- certain operating, regulatory and financial information provided to it by
the managements of BYL and CCF relating to their respective businesses and
prospects;
- the historical stock prices and trading volume of BYL's Common Stock;
- the publicly available financial data of commercial banking organizations
which Sutro deemed generally comparable to BYL; and
- the terms of recent acquisitions of commercial banking organizations which
Sutro deemed generally comparable to BYL.
In addition, Sutro reviewed certain financial projections provided by BYL
and CCF for the years 2000, 2001 and 2002 and met with certain members of BYL
and CCF's senior managements to discuss past and current business operations,
financial condition, strategic plans and future prospects, including the
likelihood and possible timing of BYL making the investment in CCF. Sutro also
performed such other analyses, studies, inquiries and examinations as it
considered appropriate.
In connection with its review, Sutro relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information regarding BYL and CCF provided to Sutro by BYL and CCF and
their representatives. In that regard, Sutro assumed that the financial
forecasts and projections provided to it reflected the best currently available
estimates and judgments of the respective managements. Sutro made adjustments to
such financial and operating forecasts which in Sutro's judgment were
appropriate under the circumstances. Sutro was not retained to nor did it make
any independent evaluation or appraisal of the assets or liabilities of BYL, CCF
or PBOC.
Sutro assumed that the Merger in all respects is, and will be, undertaken
and consummated in compliance with all laws and regulations that are applicable
to BYL and PBOC. Sutro also assumed that the Merger Agreement and related
documents would be substantially the same as the final drafts of such agreement
and documents which Sutro reviewed. Sutro further assumed, with the consent of
BYL, that the Merger will be treated as a tax-free "reorganization" for federal
income tax purposes.
The preparation of a fairness opinion on a transaction such as the Merger
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances and, therefore, the Opinion is not readily susceptible to summary
description. In arriving at its opinion, Sutro performed a variety of financial
analyses. Sutro believes that its analyses must be considered as a whole and the
consideration of portions of such analyses and the factors considered therein,
without considering all factors and analyses, could create an incomplete view of
the analyses and the process underlying Sutro's Opinion. No one of the analyses
was assigned a greater significance than any other.
These analyses were presented to the Board of Directors of BYL at its
meeting on October 31, 2000. These summaries of financial analyses include
information presented in tabular format. In order to fully understand the
financial analyses used by Sutro, the tables must be read together with the text
of each summary. These tables alone do not constitute a complete description of
the various financial analyses.
14
<PAGE>
The projections furnished to Sutro were prepared by the respective
managements of BYL and CCF. BYL and CCF do not publicly disclose internal
management projections of the type provided to Sutro in connection with the
review of the merger. Such projections were not prepared with a view towards
public disclosure. The public disclosure of such projections could be misleading
since the projections were based on numerous variables and assumptions which are
inherently uncertain, including, without limitation, factors related to general
economic and competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such projections. In its analyses, Sutro
made numerous assumptions with respect to industry performance, business,
regulatory and economic conditions, and other matters, many of which are beyond
the control of BYL or CCF. Any estimates contained in Sutro's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates of values of companies do
not purport to be appraisals nor do they necessarily reflect the prices at which
companies or their securities may actually be sold.
The following is a summary of the material financial analyses Sutro used in
reaching its opinion and does not purport to be a complete description of
Sutro's analyses.
TRANSACTION SUMMARY: Sutro reviewed the financial terms of the proposed
transaction and concluded, based upon the stipulated PBOC acquisition price of
$15.00 in cash per BYL share of common stock, subject to the adjustments as set
forth in the proposed Merger Agreement, that the maximum acquisition price per
BYL share of common stock was approximately $15.34 in cash and the minimum
acquisition price per BYL share of common stock was approximately $14.50. The
implied aggregate transaction value at the stipulated acquisition price of
$15.00 per BYL share of common stock was calculated to be approximately
$39.2 million reflecting 2,537,102 shares of BYL common stock outstanding and
the impact of outstanding options to purchase shares of common stock at less
than $14.50 per share.
ANALYTICAL METHODOLOGY: The PBOC cash offer price was compared to a range
of values for BYL based upon market parameters and the condition of and
financial prospects for BYL as of the date of the analysis on two separate
bases: (i) the probable value of BYL as an on-going, independent, stand-alone
community banking institution ("Stand-Alone Valuation"); and (ii) the probable
value of BYL as an acquisition by another banking institution ("Acquisition
Valuation"). In its analysis of the probable value of BYL under each of these
two bases, Sutro utilized two analytical methodologies: (i) an analysis of
selected publicly-traded community banking institutions deemed to be comparable
to BYL ("Peer Group Analysis"); and (ii) a discounted cash flow analysis which
derives the intrinsic value of the business of BYL based on the net present
value of the future free cash flow anticipated to be generated by BYL
("Discounted Cash Flow Analysis").
In the analysis, Sutro determined that BYL is comprised of three distinct
operational and income-generating segments, the core banking operations, the
Mortgage Division and the possible investment in a 25% economic interest in a
newly formed company, CCF, which would utilize the former personnel from the BYL
SBA Department to originate and subsequently sell or securitize commercial loans
generally secured by real property. Sutro concluded that each of these segments
was viewed by the equity markets as having separate and distinct risk/reward
characteristics, and thereby, each segment would have different valuation
parameters. After reviewing information regarding the business composition of
comparably-sized, publicly-traded commercial banking institutions headquartered
in California, Sutro determined that there were no other publicly-traded
commercial banking institutions headquartered in California with similar or
appropriately comparable lines of business structures. In recognition of the
unique composition of the BYL operations, the Peer Group Analysis for both the
Stand-Alone Valuation and the Acquisition Valuation was adjusted to reflect
Sutro's evaluation of the public equity market's perception of the risks and
returns associated with the overall mix of BYL's operations (the "Market
Discount").
15
<PAGE>
Similarly, in the Discounted Cash Flow Analysis for both the Stand-Alone
Valuation and the Acquisition Valuation, each of the three segments of BYL's
operations was valued independently utilizing discount rates and terminal year
multiples reflecting Sutro's evaluation of the returns required by the equity
market to compensate for the risk/reward characteristics of each of the business
segments. Under each of the two valuation bases, the Stand-Alone Valuation and
the Acquisition Valuation, BYL was valued utilizing the Discounted Cash Flow
Analysis methodology adjusted by the probability-weighed assessment of the
potential economic impact of the possible investment in CCF.
Based upon Sutro's discussions with the management of BYL and BYL legal
counsel which participated in the formation of CCF, it was determined that there
were two possible scenarios regarding BYL's future economic involvement with
CCF: Scenario I in which prior to the end of 2000 BYL would invest in and
thereby obtain a 25% equity participation in CCF; and Scenario II in which BYL
does not invest in CCF and thereby has no on-going economic interest in CCF. It
was further determined by Sutro in these discussions that the consensus
assessment of BYL management as to the event probabilities of each of these two
scenarios was a 10% event probability for Scenario I and 90% event probability
for Scenario II.
In order to determine the Market Discount which would be applied to the Peer
Group Analysis to adjust for the equity market's perception of the risks and
potential returns associated with BYL's mix of operations, Sutro analyzed the
core banking and Mortgage Division operations projections on two separate bases:
(1) assuming rate of return requirements of the then current equity market and
multiples of terminal year earnings which would apply to conventional,
comparably-sized community banking operations headquartered in California
operating with no regulatory orders; and (2) assuming rate of return
requirements of the then current equity market and multiples of terminal year
earnings which would reflect the diverse mix of BYL's operations and the current
regulatory orders under which BYL was operating. The mathematical relationship
of the average aggregate values obtained from the two analytical bases then
determined the Market Discount.
In the calculation of Market Discount, projections for the core banking and
the Mortgage Division as supplied by BYL were used for the first two years and
subsequently increased at a compound annual rate of 7.5% for the following three
years of the five year projection period. In the analysis of conventional,
comparably-sized community banking operations headquartered in California
operating with no regulatory orders, Sutro utilized required rates of return of
15.0%, 17.5% and 20.0% and multiples of terminal year earnings of 9.0, 10.0 and
11.0 times. The average aggregate value of the nine values thereby obtained was
$22.5 million. In the analysis of diversified community banking operations
headquartered in California operating with regulatory orders, Sutro utilized
required rates of return of 22.5%, 25.0% and 27.5% and multiples of terminal
year earnings of 7.0, 8.0 and 9.0 times. The average aggregate value of the nine
values thereby obtained was $14.1 million. Mathematically, the average aggregate
value calculated for the diversified community banking operations headquartered
in California operating with regulatory orders represented a discount of 37.3%
from the average aggregate value calculated for conventional, comparably-sized
community banking operations headquartered in California operating without
regulatory orders. Based upon this analysis, Sutro determined that the
appropriate Market Discount was 35.0%.
STAND-ALONE VALUATION: The Stand-Alone Valuation was based upon both a Peer
Group Analysis and a Discounted Cash Flow Analysis as set forth below.
Peer Group Analysis--Sutro compared BYL's financial data as of June 30, 2000
to the most recently available financial data for a peer group of twenty three
commercial banking organizations headquartered in California and traded on
Nasdaq with total assets between $200 million and
16
<PAGE>
$600 million. The table below sets forth the comparative data as of and for the
twelve months ended June 30, 2000.
<TABLE>
<CAPTION>
PEER GROUP
-------------------
BYL MEDIAN MEAN
-------- -------- --------
<S> <C> <C> <C>
Total Assets (millions)..................................... $304.4 $ 372.1 $ 386.1
Tangible Equity/Tangible Assets............................. 10.47% 7.98% 8.28%
Non-Performing Loans/Total Loans............................ 1.62% 0.43% 1.16%
Loan Loss Reserve/Total Loans............................... 1.47% 1.71% 2.09%
Non-Performing Assets/Total Assets.......................... 1.16% 0.49% 0.82%
Return on Average Assets.................................... 0.60% 1.13% 0.76%
Return on Average Equity.................................... 7.31% 13.00% 9.33%
Net Interest Margin......................................... 6.02% 5.67% 5.81%
Non-Interest Income/Average Assets.......................... 6.33% 1.06% 1.11%
Non-Interest Expense/Average Assets......................... 9.34% 4.56% 4.49%
Efficiency Ratio............................................ 82.66% 64.38% 66.79%
Price/Latest Twelve Month Earnings Per Share................ 9.68X 9.62X 10.66X
Price/Next Year Avg. Street Est. Earnings Per Share......... 7.20X 8.84X 8.86X
Price/Book Value Per Share.................................. 83.04% 112.43% 125.42%
Price/Tangible Book Value Per Share......................... 86.84% 132.38% 130.16%
</TABLE>
The median and mean multiples of both the latest twelve month earnings per
share and the estimated next year earnings per share for the peer group were
applied to BYL's earnings for such periods and the average value was $9.74 per
BYL share. The median and mean percentages of price to book value per share and
price to tangible book value per share for the peer group were applied to BYL's
book value and tangible book value and the average value was $13.99 per BYL
share. Sutro determined that the appropriate weighting of these two values to
reflect the equity market weighting of such values was 85.0% earnings and 15.0%
book value. Applying these equity market weighting percentages resulted in a
combined weighted value of $10.38 per BYL share. Sutro then discounted this
combined weighted value of $10.38 per BYL share by the Market Discount to arrive
at the Peer Group Stand-Alone Valuation of $6.75 per BYL share of common stock.
Discounted Cash Flow Analysis--Sutro determined that in order to perform the
Discounted Cash Flow Analysis to reflect the diversity of BYL's operations,
required rates of return and multiples of terminal year earnings would have to
be specified for each of BYL's three business segments and then weighted by
anticipated net income contribution and event probability to arrive at
appropriate values.
Accordingly, net income contributions from BYL's core banking operations
were deemed to have required rates of return of 17.0%, 18.5% and 20.0% and
multiples of terminal year earnings of 9.0, 10.0 and 11.0 times. Net income
contributions from BYL's Mortgage Division operations were deemed to have
required rates of return of 20.0%, 22.5% and 25.0% and multiples of terminal
year earnings of 5.0, 6.0 and 7.0 times. Sutro next determined that based upon
projections supplied by the management of BYL, of the combination of projected
net income from core banking operations and Mortgage Division operations, the
core banking operations were projected to contribute 67.0% of such combined net
income and the Mortgage Division operations were projected to contribute 33.0%
of such combined net income. Weighting the respective required rates of return
and multiples of terminal year earnings by these contribution percentages
resulted in weighted required rates of return of 18.0%, 20.0% and 22.0% and
weighted multiples of terminal year earnings of 7.0, 8.25 and 9.5 times to be
used in the discounted cash flow analysis of the combined core banking and
Mortgage Division operations.
In order to calculate the probability weighted contribution to BYL's
aggregate valuation of the possible equity investment in CCF, five year
projections of the net income of CCF as provided by the
17
<PAGE>
management of CCF were discounted using required rates of return of 25.0%, 27.5%
and 30.0% and multiples of terminal year earnings of 6.0, 7.0 and 8.0 times.
This resulted in an average value for the possible CCF equity investment of
$5.968 million which would in turn be weighted by the appropriate event
probability as discussed above.
Sutro performed a discounted cash flow analysis on the free cash flow from
the combined core banking and Mortgage Division operations of BYL utilizing the
weighted required rates of return of 18.0%, 20.0% and 22.0% and weighted
multiples of terminal year earnings of 7.0, 8.25 and 9.5 times. This analysis
resulted in aggregate values ranging from approximately $16.3 million to
$23.2 million with an average value of approximately $19.5 million. This average
value for the combined core banking and Mortgage Division operations was then
added to the event probability weighted average value for the possible CCF
equity investment. Under Scenario I in which it was assumed that there was a
10.0% event probability of BYL investing in CCF, this resulted in a range of
combined present values for BYL from approximately $21.1 million to
$30.5 million and an average value of approximately $25.5 million. Under
Scenario II in which it was assumed that there was a 90.0% event probability of
BYL not making an investment in CCF, this resulted in a range of combined
present values for BYL from approximately $16.3 million to $23.2 million and an
average value of approximately $19.5 million. Probability weighting the
calculated average values for each of the two CCF investment scenarios resulted
in an aggregate average value of BYL on a stand-alone discounted cash flow
analysis basis of approximately $20.1 million which represents approximately
$7.94 per share of BYL common stock.
Based upon the foregoing Peer Group Analysis and Discounted Cash Flow
Analysis, Sutro determined that the Stand-Alone Valuation of BYL ranged from
approximately $17.1 million to $20.1 million, or approximately $6.75 to $7.94
per BYL share of common stock, and thereby, the most likely Stand-Alone
Valuation was approximately $18.7 million or $7.35 per BYL share of common
stock.
ACQUISITION VALUATION: The Acquisition Valuation was based upon a Peer
Group Acquisition Analysis, a Discounted Cash Flow Analysis and an Acquisition
Premium Analysis as set forth below.
Peer Group Acquisition Analysis--Sutro compared data for twenty one selected
commercial banking organizations headquartered in California with total assets
of $200 million to $600 million which were acquired or to be acquired with the
announcement of the pending acquisition occurring on or after January 1, 1998.
The table below sets forth the comparative data for BYL as of or for the twelve
months ended June 30, 2000 and as of and for the latest quarter immediately
preceding the announcement of the pending acquisition for the peer group
commercial banking organizations.
<TABLE>
<CAPTION>
PEER GROUP
-------------------
BYL MEDIAN MEAN
-------- -------- --------
<S> <C> <C> <C>
Total Assets (millions)..................................... $ 304.4 $ 278.2 $ 302.1
Tangible Equity/Tangible Assets............................. 10.47% 8.60% 8.62%
Return on Average Assets.................................... 0.60% 1.10% 1.23%
Return on Average Equity.................................... 7.31% 13.24% 13.28%
Non-Performing Assets/Total Assets.......................... 1.16% 0.52% 0.73%
Deal Price/Book Value Per Share............................. 126.05% 286.39% 265.81%
Deal Price/Tangible Book Value Per Share.................... 131.35% 282.79% 273.25%
Deal Price/Latest Twelve Month Earnings Per Share........... 18.29X 21.62X 20.65X
</TABLE>
For the reasons discussed above, the peer group acquisition multiples were
adjusted to reflect the diversity of BYL's operations and the regulatory orders
under which it was operating. The median and mean multiples of the latest twelve
month earnings per share for the peer group were applied to BYL's earnings for
such period and the average value was $17.33 per BYL share. The median and mean
percentages of the deal price to book value per share and deal price to tangible
book value per share for the peer group were applied to BYL's book value and
tangible book value and the average value was $32.30 per BYL share. Sutro
determined that the appropriate weighting of these two values to
18
<PAGE>
reflect the market weighting of such values was 85.0% earnings multiple value
and 15.0% book value multiple. Applying these market weighting percentages
resulted in a combined weighted value of $19.58 per BYL share. Sutro then
discounted this combined weighted value of $19.58 per BYL share by the Market
Discount to arrive at the Peer Group Acquisition Valuation of $12.73 per BYL
share of common stock.
Discounted Cash Flow Analysis--As outlined in the Stand-Alone Valuation
Discounted Cash Flow Analysis set forth above, Sutro determined that in order to
perform the Acquisition Valuation Discounted Cash Flow analysis to reflect the
diversity of BYL's operations, required rates of return and multiples of
terminal year earnings would have to be specified for each of BYL's three
business segments and then weighted by anticipated net income contribution and
event probability to arrive at appropriate values. This produced the same
weighted values for required rates of return and multiples of terminal year
earnings as were utilized in the Stand-Alone Valuation Discounted Cash Flow
Analysis.
Accordingly, Sutro performed a discounted cash flow analysis on the free
cash flow available to a potential acquiror of BYL from the combined core
banking and Mortgage Division operations of BYL utilizing the weighted required
rates of return of 18.0%, 20.0% and 22.0% and weighted multiples of terminal
year earnings of 7.0, 8.25 and 9.5 times. The free cash flow utilized was
derived from the same projections of the core banking operations and Mortgage
Division operations supplied by the management of BYL and used in the
Stand-Alone Valuation Discounted Cash Flow Analysis adjusted for: (i) post
acquisition pre-tax synergies and expense savings of approximately $2.0 million
in the first year, $3.0 million in the second year and increasing thereafter at
the rate of 5.0% per annum; and (ii) the maintenance of a ratio of tangible
equity to tangible assets for BYL post acquisition of 9.0%. This analysis
resulted in aggregate values for the combined core banking and Mortgage Division
operations ranging from approximately $25.4 million to $35.6 million with an
average value of approximately $30.2 million. The average value of the possible
CCF equity investment by BYL remained the same $5.968 million for this
Acquisition Valuation analysis as it was in the Stand-Alone Valuation Discounted
Cash Flow Analysis and was in turn weighted by the appropriate event probability
as set forth above. Under Scenario I in which it was assumed that there was a
10.0% event probability of BYL investing in CCF, this resulted in a range of
combined present values for BYL from approximately $30.1 million to
approximately $43.0 million and an average value of approximately
$36.2 million. Under Scenario II in which it was assumed that there was a 90.0%
event probability of BYL not making an investment in CCF, this resulted in a
range of combined present values for BYL from approximately $25.4 million to
approximately $35.7 million with an average value of approximately
$30.2 million. Probability weighting the two calculated average values resulted
in an aggregate average value of BYL on an discounted cash flow acquisition
basis analysis of approximately $30.8 million which represents approximately
$12.11 per share of BYL common stock.
Acquisition Premium Analysis--Sutro compared per share acquisition premiums
paid by acquirors of fifty seven selected acquired banks with total assets of
between $200 million and $600 million for acquisition transactions announced
since January 1, 1999. Per share acquisition premiums were calculated based upon
the price of the acquired institution's market price both on the date one month
prior to the announcement of the transaction and on the day immediately
preceding the announcement of the transaction. Based upon the stock price of the
acquired institution one month prior to the announcement of the transaction, the
median premium paid was 38.28% and the mean was 42.68%. Given the approximate
price of BYL shares of common stock of approximately $9.00 per share as of the
date of the analysis, the one month prior to acquisition announcement premium
would imply a per share acquisition value for BYL of approximately $12.45 to
$12.84 per share. Based upon the stock price of the acquired institution one day
prior to the announcement of the transaction, the median premium paid was 30.04%
and the mean was 33.46%. Given the approximate price of BYL share of common
stock of approximately $9.00 per share as of the date of the analysis, the one
day prior to acquisition premium would imply a per share acquisition value for
BYL or approximately $11.70 to $12.01 per share. Sutro combined the one month
prior to announcement values and the one day prior
19
<PAGE>
to announcement values and determined that the average implied per share
acquisition value for BYL, based upon per share acquisition premiums to be
approximately $31.1 million or approximately $12.25 per BYL share of common
stock.
Based upon the foregoing Peer Group Acquisition Analysis, Discounted Cash
Flow Analysis and Acquisition Premium Analysis, Sutro determined that the
Acquisition Valuation of BYL ranged from approximately $30.8 million to
$32.3 million, or approximately $12.11 to $12.73 per BYL share of common stock,
and thereby, the most likely Acquisition Valuation was approximately
$31.3 million or $12.35 per BYL share of common stock.
Stock Trading History: Sutro reviewed the history of the reported trading
prices and volume of shares of BYL common stock and the relationship of the
movements in the price of shares of BYL common stock to movements in the Nasdaq
Index and the median performance of a composite group of twenty three community
banking organizations headquartered in California and traded on Nasdaq which
comprised the peer group utilized in the Stand-Alone Valuation (the "Comparable
Company Index"). Beginning in January of 1999, BYL common stock consistently
underperformed when compared with the Comparable Company Index and substantially
underperformed when compared with the Nasdaq Index over this period.
Additionally, the stock trading analysis indicated that shares of BYL common
stock had not traded at prices in excess of $14.50 per share since prior to
approximately April 1, 1999. In connection with this analysis, Sutro noted the
positive impact on the price of shares of BYL common stock of the public
disclosure by BYL on August 18, 2000 that it was in preliminary discussions
regarding a potential business combination with PBOC.
Based upon the analysis and procedures summarized above, Sutro determined
that the proposed acquisition price to be paid by PBOC in cash of between
approximately $14.50 and approximately $15.34 per share of BYL common stock
exceeded (i) the most likely Stand-Alone Valuation of approximately $7.35 per
BYL share of common stock; (ii) the most likely Acquisition Valuation of
approximately $12.35 per BYL share of common stock; and (iii) the current and
historical trading prices of BYL shares of common stock over the approximately
18 month period preceding the analysis.
No company or transaction used in the above described analysis is identical
to BYL, PBOC or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies involved and other factors that could affect the trading values of
the securities of the company or companies to which they are being compared.
Additionally, these analyses do not purport to be indicative of actual values or
expected values or an appraisal range of the shares of BYL common stock. Sutro
noted that the discounted cash flow analysis is a widely used valuation
methodology, but also noted that it relies on numerous assumptions, including
required rates of return, multiples of terminal year earnings, expense savings
and profit enhancements and levels of tangible capital to be retained, the
future values of which may be significantly more or less than such assumptions.
THE SUMMARY SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION,
BUT IS A BRIEF SUMMARY OF THE MATERIAL ANALYSES AND PROCEDURES PERFORMED BY
SUTRO IN THE COURSE OF ARRIVING AT ITS OPINION. SUTRO'S WRITTEN OPINION DATED AS
OF NOVEMBER 1, 2000 WAS BASED SOLELY UPON THE INFORMATION AVAILABLE TO IT AND
THE ECONOMIC, MARKET AND OTHER CIRCUMSTANCES AS THEY EXISTED AS OF THE DATE OF
SUCH OPINION. EVENTS OCCURRING AFTER THE DATE OF THE OPINION COULD MATERIALLY
AFFECT THE ASSUMPTIONS AND CONCLUSIONS CONTAINED IN SUCH OPINION. SUTRO HAS NOT
UNDERTAKEN TO REAFFIRM OR REVISE ITS OPINION OR OTHERWISE COMMENT UPON ANY
EVENTS OCCURRING AFTER THE DATE OF THE OPINION.
As set forth in the Engagement Agreement, based upon the stipulated PBOC
acquisition price of $15.00 in cash per BYL share of common stock, BYL has
agreed to pay Sutro an advisory fee in connection with the Merger of
approximately $671,000 subject to adjustment upward or downward of approximately
$6,000 given the potential adjustment of the PBOC cash acquisition price as
described herein. In addition to this advisory fee, BYL agreed to pay Sutro an
opinion fee for the Opinion of
20
<PAGE>
$150,000 which was payable upon the delivery of the Opinion to BYL on
November 1, 2000. The payment of the opinion fee to Sutro was not conditioned
upon the content of the Opinion. In addition, pursuant to the Engagement
Agreement, BYL has paid to Sutro $100,000 for rendering an opinion dated
July 12, 2000 as to the fairness, from a financial point of view, to BYL of the
financial terms of the proposed joint venture, CCF. Of the approximate $821,000
total of the advisory fee and the opinion fee to be paid to Sutro in conjunction
with the Merger, Sutro has received approximately $511,000 and will receive
$250,000 upon the approval of the Merger by the shareholders of BYL and the
balance of approximately $60,000 upon the closing of the Merger.
Sutro has had an investment banking relationship with BYL since March 1998
and has provided investment banking and financial advisory services to BYL for
which it has received fees pursuant to the Advisory Agreement. Fees paid to
Sutro pursuant to the Advisory Agreement during 1998 and 1999 aggregated
approximately $14,200.
Sutro's equity trading department is a market maker in BYL's common stock
and PBOC's common stock and, in such capacity, may from time to time own BYL
and/or PBOC securities. As of , 2001, Sutro did not have a material
position in either BYL or PBOC common stock.
EFFECTIVE TIME; CLOSING DATE
In order to consummate the first step of the merger, BYL will merge with
PBOC Acquisition Corp., a wholly-owned subsidiary of PBOC pursuant to an
agreement of merger that must be filed with the California Secretary of State.
Subsequent to the filing of the agreement of merger, an agreement and plan of
merger and liquidation of BYL shall then be completed. These filings will occur
only after the receipt of all regulatory approvals and the approval and adoption
of the merger and the merger agreement by BYL shareholders and the satisfaction
or waiver of all other conditions to the merger. See "The Merger
Agreement--Conditions to the Merger". The effective time of the merger will be
as of the filing by the California Secretary of State. The closing of the first
part of the merger will take place on the fifth business day following the
receipt of all necessary regulatory or governmental approvals and consents and
the expiration of all statutory waiting periods and is currently expected to
take place during the second quarter of 2001. The liquidation of BYL into PBOC,
and the merger of BYL Bank with and into People's, will take place on the same
day as the closing of the merger of BYL and PBOC Acquisition Corp.
EXCHANGE OF CERTIFICATES BY BYL'S SHAREHOLDERS
At the effective time of the merger, PBOC shall deposit the aggregate merger
consideration with a bank or trust company reasonably acceptable to BYL as PBOC
may select (the "exchange agent"). Within five (5) business days after the
effective time of the merger, PBOC shall cause the exchange agent to mail to
each holder of record of BYL common stock a letter of transmittal and
instructions for use in effecting the surrender of the certificate(s) in
exchange for the merger consideration in cash into which the shares represented
by the certificate(s) will have been converted in accordance with the merger
agreement. SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE
THE TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT.
Following the consummation of the merger, upon the proper surrender by a BYL
shareholder to the exchange agent of all necessary transmittal materials and the
certificate(s), the BYL shareholder will be entitled to receive a check for the
merger consideration to which the shareholder is entitled and the certificate(s)
will be canceled. No interest will be paid or will accrue on any cash payment
payable to a holder of BYL's stock certificate(s). Payment may be made to a
person other than the person in whose name a surrendered certificate is
registered only if the certificate is properly endorsed or accompanied by an
appropriate instrument of transfer and otherwise in proper form for transfer
together with appropriate documentation demonstrating the payment of all
required taxes, if necessary.
21
<PAGE>
After the effective time of the merger, there will be no transfer on the
stock transfer books of BYL of shares of common stock issued and outstanding
immediately before the effective time of the merger.
Until properly surrendered, each outstanding certificate formerly
representing shares of BYL common stock will be deemed to evidence solely the
right to receive the merger consideration to which the shareholder is entitled
under the merger agreement, without interest. If any certificate evidencing the
common stock has been lost, stolen or destroyed, the shareholder must submit to
the exchange agent an affidavit of lost, stolen or destroyed certificate and
post a bond in an amount the exchange agent determines to be reasonably
necessary as indemnity against claims that may be made against that certificate.
The exchange agent will issue in exchange for the foregoing the applicable
merger consideration.
Any portion of the merger consideration held by the exchange agent for
payment to BYL's shareholders which remains unclaimed for six months after the
effective time of the merger will be paid by the exchange agent to PBOC, after
which time any holder of certificate(s) who has not delivered the certificate(s)
to the exchange agent will look only to PBOC for payment of the merger
consideration payable for that shareholder's shares of common stock, without
interest.
DISSENTERS' RIGHTS
Because BYL common stock is traded on the Nasdaq market, dissenters' rights
will be available to BYL Shareholders only if the holders of five percent (5%)
or more of BYL common stock make a written demand upon BYL for the purchase of
dissenting shares in accordance with Chapter 13 of the California Corporations
Code. If this condition is satisfied and the merger is consummated, BYL
shareholders who dissent from the merger by complying with the procedures set
forth in Chapter 13 may be entitled to receive an amount equal to the fair
market value of their shares as of November 1, 2000, the day before the public
announcement of the merger. The high, low and closing sales prices for BYL
common stock on November 1, 2000 were $10.375, $10.125 and $10.125,
respectively. A copy of Chapter 13 of the California Law is attached hereto as
Appendix C and should be read for more complete information concerning
dissenters' rights. THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA LAW MUST BE FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST.
The information set forth below is a general summary of dissenters' rights as
they apply to BYL shareholders and is qualified in its entirety by reference to
Appendix C.
In order to be entitled to exercise dissenters' rights, a BYL shareholder
must vote "Against" the merger. Thus, any BYL shareholder who wishes to dissent
and executes and returns a proxy in the accompanying form must specify that his
or her shares are to be voted "Against" the merger. If a BYL shareholder returns
a proxy without voting instructions or with instructions to vote "For" the
merger, his or her shares will automatically be voted in favor of the merger and
the BYL shareholder will lose any dissenters' rights. In addition, if the BYL
shareholder abstains from voting his or her shares, the BYL shareholder will
lose his or her dissenters' rights.
Furthermore, in order to preserve his or her dissenters' rights, a BYL
shareholder must make a written demand upon BYL for the purchase of dissenting
shares and payment to such BYL shareholder of their fair market value,
specifying the number of shares held of record by such BYL shareholder and a
statement of what the BYL shareholder claims to be the fair market value of
those shares as of November 1, 2000. Such demand must be addressed to BYL
Bancorp, 1875 North Tustin Street, Orange, California 92865; Attention: Barry J.
Moore, and must be received by BYL not later than the date of the BYL special
meeting. A vote "Against" the merger does not constitute such written demand.
22
<PAGE>
If the holders of five percent (5%) or more of the outstanding shares of BYL
common stock have submitted a written demand for BYL to purchase their shares,
these demands are received by BYL on or before the date of the BYL special
meeting and the merger is approved by the BYL shareholders, BYL will have ten
days after such approval to send to those BYL shareholders who have voted
against the approval of the merger written notice of such approval accompanied
by a copy of Chapter 13 of the California General Corporation Law, a statement
of the price determined by BYL to represent the fair market value of the
dissenting shares as of November 1, 2000, and a brief description of the
procedure to be followed if a BYL shareholder desires to exercise dissenters'
rights. Within 30 days after the date on which the notice of the approval of the
merger is mailed, the dissenting shareholder must surrender to BYL, at the
office designated in the notice of approval, the certificates representing the
dissenting shares to be stamped or endorsed with a statement that they are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. Any shares of BYL common stock that are
transferred prior to their submission for endorsement lose their status as
dissenting shares.
If BYL and the dissenting shareholder agree that the surrendered shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of the agreement. Payment of the fair
market value of the dissenting shares shall be made within 30 days after the
amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the merger have been agreed upon or 30 days after any
statutory or contractual conditions to the merger have been satisfied, whichever
is later, subject to the surrender of the certificates therefor, unless provided
otherwise by agreement.
If BYL denies that the shares surrendered are dissenting shares, or BYL and
the dissenting shareholder fail to agree upon a fair market value of such shares
of BYL common stock, then the dissenting shareholder of BYL must, within six
months after the notice of approval is mailed, file a complaint at the Superior
Court of the proper county requesting the court to make such determinations or
intervene in any pending action brought by any other dissenting shareholder. If
the complaint is not filed or intervention in a pending action is not made
within the specified six-month period, the dissenters' rights are lost. If the
fair market value of the dissenting shares, is at issue, the court will
determine, or will appoint one or more impartial appraisers to determine, such
fair market value.
A dissenting shareholder may not withdraw his or her dissent or demand for
payment unless BYL consents to such withdrawal.
It is a condition to the merger that no more than 10% of the outstanding
shares of BYL common stock on the date of the special meeting dissent in this
manner.
ACCOUNTING TREATMENT
It is intended that the merger will be accounted for under the purchase
method of accounting in accordance with generally accepted accounting
principles. Currently, under the purchase method of accounting, the excess of
purchase price paid over the fair market value of assets and liabilities
acquired (goodwill) is recorded as an intangible asset and such asset is
amortized as an expense over the period estimated to be benefited. Under the
purchase method of accounting, the reported income of PBOC will include the
results of operations of BYL only as of and from the effective date of the
merger.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
THE FOLLOWING IS A SUMMARY DESCRIPTION OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. THIS SUMMARY IS NOT A COMPLETE DESCRIPTION OF ALL
THE CONSEQUENCES OF THE MERGER. EACH SHAREHOLDER'S INDIVIDUAL CIRCUMSTANCES MAY
AFFECT THE TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER. IN ADDITION, NO
INFORMATION IS PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE
MERGER UNDER APPLICABLE FOREIGN,
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STATE OR LOCAL LAWS. CONSEQUENTLY, EACH BYL SHAREHOLDER IS ADVISED TO CONSULT
HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
ACQUISITION.
Neither BYL nor PBOC has requested or will receive an advance ruling for the
Internal Revenue Service or a tax opinion as to the tax consequences of the
merger. However, PBOC and BYL believe that the contemplated transactions will
not result in income tax liability to BYL, BYL Bank, PBOC and People's by
operation of Section 368 of the Internal Revenue Code of 1986, as amended
("Code"), and comparable provisions of state law.
In regards to the BYL shareholders, the exchange of shares of BYL common
stock for cash in the merger will be treated as a sale of those shares for
federal income tax purposes. Each shareholder will realize gain or loss measured
by the difference between (i) the shareholder's adjusted tax basis in the shares
exchanged in the merger and (ii) the amount of cash received therefore. Gain or
loss realized by each shareholder from the merger will be reportable in full in
the taxable year of the shareholder in which the merger occurs and will be
capital gain or loss assuming that the shares exchanged are capital assets in
the hands of the shareholder. The capital gain or loss will be long-term with
respect to those shares that are held by the shareholder as of the effective
time of the merger for more than one year and short-term with respect to those
shares that are held for one year or less.
The discussion assumes that each stockholder holds shares of common stock as
a capital asset within the meaning of Section 1221 of the Code. However,
shareholders who are directors of BYL may not be entitled to treat cash payments
in lieu of options which they may have acquired from BYL as capital assets and,
as such, they will be required to report any such gain as ordinary compensation
income.
For non-corporate taxpayers, the tax rate on long-term capital gains depends
on the type of asset sold. If the asset is stock, other than small business
stock under Section 1202 of the Code, the rate is generally 20%. However the
maximum tax rate on ordinary income and short-term capital gains is 39.6%.
Taxpayers may be limited in their ability to deduct net capital losses, which
may be deducted in full against capital gains, against ordinary income. For
corporate taxpayers, net capital gains, which is the excess of net long-term
capital gain over net short-term capital loss, and ordinary income are taxed at
the same rate.
The receipts of cash for shares of common stock may be subject to backup
withholding at the rate of 31% unless the holder:
- is a corporation or comes within other exempt categories; or
- provides a certified taxpayer identification number and otherwise complies
with the back-up withholding rules.
Back-up withholding is not an additional tax; any amounts withheld may be
credited against the federal income tax liability of the person subject to the
withholding. There is no assurance that applicable tax laws will not change
after the date of this proxy statement.
The foregoing discussion of the expected federal income tax consequences of
the merger is based on current authorities. There is no assurance that
legislative or administrative changes or court decisions may not be forthcoming
that would significantly change these expected consequences. Any such changes
may or may not be retroactive with respect to transactions prior to the date of
such changes.
THE VOTING AGREEMENTS
Except for Mr. Seymour Jacobs, a newly appointed director of BYL and BYL
Bank, PBOC has entered into agreements with each of BYL's and BYL Bank's
directors and executive officers, simultaneous with the execution of the merger
agreement. Each individual is a shareholder, and a
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current director and/or an executive officer of BYL and/or BYL Bank. These
shareholders have the power in the aggregate to direct the voting of % of the
issued and outstanding shares of BYL common stock as of the record date. Each of
these shareholders has agreed, as a condition to PBOC and People's entering into
the merger agreement, to vote or to cause to be voted, or to execute a written
consent with respect to, all of the shares of BYL common stock with respect to
which such shareholder has the power to direct the voting of, in favor of
adoption and approval of the merger agreement and the merger, against any
competing takeover proposals, or similar transactions, at the special meeting
and at every adjournment or postponement of the special meeting and in
connection with every proposal to take action by written consent with respect to
the merger agreement and the merger. Each of the shareholders has agreed not to
sell or otherwise transfer such shares of BYL to any other person pursuant to a
tender offer, exchange offer or other proposal, or to any person known by such
person to seek control of BYL.
The voting agreements will terminate upon the earlier to occur of the
completion of the merger or the date on which the merger agreement is terminated
in accordance with its terms.
The voting agreements bind the actions of the signatories to the voting
agreements only in their capacity as BYL shareholders. Those directors of BYL
who signed voting agreements are not and could not be contractually bound to
abrogate their fiduciary duties as directors of BYL. Accordingly, while the
shareholders/directors are, under the voting agreements executed by them,
contractually bound to vote as a BYL shareholder in favor of the merger and
against other acquisition proposals (should any be presented), their fiduciary
duties as BYL directors nevertheless require them to act in their capacity as
directors in the best interest of BYL when they decide to approve the merger. In
addition, the shareholders/directors will continue to be bound by their
fiduciary duties as BYL directors with respect to and decisions they may make in
the future in connection with the merger or otherwise.
STOCK OPTION AGREEMENT
As an inducement and condition to PBOC entering into the merger agreement,
BYL entered into a stock option agreement with PBOC. Pursuant to the stock
option agreement, BYL granted to PBOC an unconditional and irrevocable option,
exercisable only under certain limited and specifically defined circumstances,
none of which, to the best knowledge of BYL and PBOC has occurred as of the date
hereof, to purchase up to 505,971 authorized but unissued shares of BYL common
stock, representing 19.9% of the shares of BYL common stock, for a purchase
price of $10.597 per share, subject to adjustment in certain circumstances. The
purchase BYL common stock pursuant to the stock option agreement is subject to
compliance with applicable law, including receipt of any necessary regulatory
approvals.
The option can be exercised after the occurrence of both an initial
triggering event and a subsequent triggering event which shall have occurred
prior to an exercise termination event. An exercise termination event is
generally the following:
- the effective time of the merger;
- termination of the merger agreement in accordance with the provisions
thereof prior to the occurrence of an initial triggering event, except for
a breach by BYL; or
- the passage of 15 months after termination of the merger agreement if
termination follows the occurrence of an initial triggering event or a
termination by BYL as result of a breach by BYL;
An initial triggering event shall mean any of the following:
- BYL enters into an agreement to engage in an acquisition transaction (as
defined below) or the board of directors of BYL recommends that
shareholders of BYL approve or accept an acquisition transaction other
than with PBOC;
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- any person other than PBOC shall have acquired beneficial ownership or the
right to acquire beneficial ownership of 10% of more of the outstanding
shares of common stock of BYL;
- any person shall have made a bona fide proposal to BYL or its stockholders
by public announcement or written communication that becomes subject of
public disclosure to engage in an acquisition transaction;
- the board of the directors of BYL shall have withdrawn or modified its
recommendation that stockholders of BYL approve the transactions
contemplated by the merger agreement in anticipation of engaging in an
acquisition transaction;
- any person shall have filed with the Securities and Exchange Commission
the registration statement or tender offer materials with respect to a
potential exchange or tender offer that would constitute an acquisition
transaction;
- after an overture is made by any person to BYL or its stockholders to
engage in an acquisition transaction, BYL shall have breached any covenant
or obligation contained in the merger agreement that would entitle PBOC to
terminate the merger agreement and shall have not have been cured within
the notice period; or
- any person other than PBOC shall have filed an application or notice from
any federal or state bank regulatory or antirust authority for approval to
engage in an acquisition transaction.
For purposes of the stock option agreement, an acquisition transaction shall
mean any of the following:
- a merger, consolidation or similar transaction involving BYL or BYL Bank;
- purchase, lease or other acquisition of all or a substantial part of the
assets or deposits of BYL or BYL Bank;
- purchase or other acquisition of securities representing 10% or more of
the voting power of BYL or BYL Bank; or
- any substantially similar transaction.
A subsequent triggering event shall mean any of the following:
- the acquisition by any person of beneficial ownership of 25% or more of
the outstanding shares of BYL; or
- BYL enters into an agreement to engage in an acquisition transaction or
the board of directors of BYL recommends that shareholders of BYL approve
or accept an acquisition transaction other than with PBOC, and the
purchase or other acquisition of securities represents 20% or more of the
voting power of BYL or BYL Bank.
The stock option agreement is intended to increase the likelihood that the
merger will be consummated according to the terms set forth in the merger
agreement, and may be expected to discourage offers by third parties to acquire
BYL prior to the merger.
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THE MERGER AGREEMENT
The merger agreement provides that PBOC will acquire BYL in a two step
process. In the first step, PBOC will form PBOC Acquisition Corp., a California
corporation which will be a wholly-owned subsidiary of PBOC, which will merge
with and into BYL. In the second step, which will occur immediately after the
effectiveness of the first step, BYL will be liquidated into PBOC, with PBOC
being the surviving corporation. The merger and liquidation are referred to
collectively herein as the "merger."
As part of the merger, BYL Bank will be merged directly with and into
People's, with People's being the surviving bank.
At the effective time of merger, each share of common stock of BYL (except
for dissenters' shares, if any, which shall then or thereafter constitute
perfected dissenting shares within the meaning of Chapter 13 of the California
Corporations Code, or shares owned by PBOC) shall be converted into the right to
receive $15.00 per share in cash. The cash amount may be adjusted upward or
downward under certain circumstances. If the closing of the merger occurs in the
period commencing March 6, 2001 to and including June 15, 2001, the merger
consideration shall be increased by an amount for each day subsequent to
March 6, 2001 to and including the closing date which is equivalent to 8% per
annum on the aggregate $15.00 per share merger consideration. However, no
additional merger consideration shall be due on the date which is five days
after the date that PBOC provides BYL with notice that PBOC has satisfied all
conditions for closing and is prepared to close the transactions contemplated by
the merger agreement.
The aggregate merger consideration shall be reduced by the after-tax cost of
the difference between $2.1 million and the sum of (i) the cash price received
for the second residual interest in the CNL transaction, (ii) plus cash payments
received by BYL on the second residual interest after the date of the merger
agreement, plus (iii) interest earned at the rate of 5% per annum on the amount
set forth in clause (ii). Further, to the extent that the second residual
interest has been purchased by CNL Commercial Finance, Inc. by December 31, 2000
and BYL has acquired through purchase a licensee providing for SBA accreditation
as a non-bank participating lender, then under such circumstances, the merger
consideration shall be reduced by the after-tax cost to BYL of the acquisition
of the SBA license. If the transaction with CCF is not consummated and BYL and
BYL Bank do not liquidate for cash the amount of the second residual interest by
the date of PBOC's receipt of the last required regulatory approval contemplated
by the merger agreement, then the cash price shall be deemed to be zero.
At this time, because of certain issues that have arisen at the SBA, BYL
does not contemplate completing the second portion of the transaction with CCF.
BYL expects that the CNL transaction agreements will be terminated in the near
future. In addition, as of December , 2000, BYL Bank completed the sale of the
B certificate which had a book value of $ million on , 2000 at
a price equal to $ . BYL Bank is currently marketing the R-3 certificate,
and such sale is expected to be completed in the first quarter of 2001 and
before PBOC receives its regulatory approvals to complete the merger.
Each BYL stock option that is outstanding and unexercised immediately prior
to the Effective Time shall be terminated and each optionee shall be entitled to
receive an amount in cash computed by multiplying (i) the difference between the
merger consideration and the per share exercise price applicable for such BYL
stock option, by (ii) the number of such shares of BYL common stock subject to
such BYL option.
The merger was structured as a two-step process as described above for tax
reasons (i.e. to avoid the corporate level tax that would result if BYL were
merged directly into PBOC).
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REPRESENTATIONS AND WARRANTIES
The parties made representations and warranties to each other in the merger
agreement customary for this type of a transaction. In addition, BYL has made
certain representations and warranties to PBOC concerning the transaction with
CNL Commercial Finance, Inc. As the transaction is a cash merger, more extensive
representations and warranties were required of BYL than of PBOC. For a detailed
presentation of the respective representations and warranties of the parties see
Article III and Article IV of the merger agreement (attached as Appendix A).
It is a condition of the closing that each party's representations and
warranties in the merger agreement or any related documents be true and correct
as of the date of the merger agreement and also as of the effective time,
subject to conditions in the merger agreement, including that the condition
shall be deemed to have been satisfied even if such representations and
warranties are not true and correct unless the failure of any of the
representations and warranties to be true and correct would have, or could
reasonably expected to have, individually or in the aggregate, a material
adverse effect on BYL and its subsidiaries on the ability of any party to
consummate the transaction contemplated by the merger agreement. As of the date
of this proxy statement, BYL, BYL Bank, PBOC or People's do not have any
knowledge that this condition will not be satisfied as of the effective time.
BUSINESS PENDING THE MERGER AND OTHER COVENANTS
The merger agreement provides that until the effective time of the merger,
BYL and BYL Bank shall carry on their respective businesses in the ordinary
course consistent with past practice. BYL and BYL Bank have also agreed that
they shall use all reasonable efforts to:
- preserve their respective business organizations intact;
- keep available to itself and PBOC and People's the present services of the
employees of BYL and BYL Bank; and
- preserve for itself and PBOC and People's the goodwill of the customers of
BYL and BYL Bank and others with whom business relationships exist.
BYL and BYL Bank have also agreed that, pending the closing date, and
without the prior written consent of PBOC, they will not:
- declare or pay any dividend or make any distribution on BYL common stock;
- issue or sell any additional shares of capital stock except pursuant to
existing stock options or issue, grant or modify any options or other
securities or effect any recapitalization, reclassification, stock
dividend, stock split or other change in the capital structure of BYL or
BYL Bank;
- amend the articles of incorporation or bylaws, or impose or suffer the
imposition on any share of stock held by BYL of any material lien, charge
or encumbrance, or waive or release any material right or cancel or
compromise any material debt or claim;
- increase the rate of compensation of any of its directors, executive
officers or employees, or pay or agree to pay any bonus or severance to,
or provide any new employee benefit or incentive to, any of its directors,
officers or employees, except as may be required pursuant to binding
commitments existing on the date of the merger agreement, except that no
increases shall be made to officers with contracts, and that merit salary
increases only may otherwise be paid up to a maximum of 4% of base salary;
- enter into or modify any pension, retirement, stock option, deferred
compensation, consulting or other employee benefit with respect to any of
its directors, officers or employees, or make
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contribution to BYL's employee benefit plans except as required pursuant
to binding commitments, as determined by the BYL board of directors, up to
a 4% maximum contribution;
- enter into any agreement not made in the ordinary course of business, or
any agreement relating the borrowing of money or guarantee of any such
obligation, any agreement relating to the employment of or severance of
any officer, employee or consultant, or any agreement with a labor union;
- change its methods of accounting, or change any of its methods of
reporting income and deductions for federal income tax purposes, except as
required by changes in laws or regulations;
- purchase or sell any assets or incur any liabilities other than in the
ordinary course of business consistent with past practice and policies;
- make any capital expenditures other than pursuant to binding commitments
and other than expenditures necessary to maintain existing assets in good
repair, provided that in no event may the capital expenditures exceed
$40,000 in the aggregate;
- file any application or make any contract with respect to branching or an
existing branch office;
- acquire any business or entity;
- engage in any transaction with an affiliate other than in the ordinary
course of business consistent with past practice and which are in
compliance with the requirements of applicable laws and regulations;
- enter into any futures, option, interest rate caps or other agreements for
purposes of hedging interest rates;
- discharge or satisfy any material lien or encumbrance or pay any material
obligation or liability other than at scheduled maturity or in the
ordinary course of business;
- grant any preferential right to purchase any assets;
- invest in any investment securities other than in United States government
agencies with a term of one year or less, or federal funds;
- make any loan which pursuant to its underwriting guidelines would have a
quality grade rated "C" or worse, except pursuant to any outstanding
commitments as of the date of the merger agreement;
- take any action that will result in any representation or warranty of BYL
or BYL Bank in the merger agreement not to be true and correct as of the
effective time or that could materially delay the consummation of the
merger; or
- enter into any agreement to do any of the foregoing.
The merger agreement also provides that BYL and BYL Bank shall not authorize
any director, officer, employee or agent to directly or indirectly solicit,
initiate or encourage any inquiries relating to an acquisition transaction or,
except to the extent legally required for the discharge of the fiduciary duties
of the BYL board of directors:
- recommend or endorse an acquisition transaction;
- participate in any discussions or negotiations regarding an acquisition
transaction, or
- provide any third party with any non-public information in connection with
any inquiry or proposal relating to an acquisition transaction.
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An acquisition transaction means:
- a merger or consolidation involving BYL or BYL Bank;
- a purchase, lease or other acquisition of a substantial portion of the
assets or liabilities of BYL or BYL Bank; or
- purchase or other acquisition of more than 10% of any class or series of
equity securities at BYL or BYL Bank.
BYL has agreed to take all necessary action to prepare the proxy statement
and have a meeting of its shareholders to consider and approve the merger. The
board has agreed to recommend approval of the transaction subject to its
fiduciary duties. The parties have also agreed to cooperate with each other and
promptly prepare and file all necessary documentation and regulatory
applications and obtain as promptly as practical all regulatory permits and
approvals which are necessary to consummate the transactions contemplated by the
merger agreement. In addition, BYL and BYL Bank have agreed to permit PBOC and
its representatives reasonable access to its properties, personnel, books,
papers and records relating to BYL's and BYL Bank's assets, stock ownership,
properties and liabilities. PBOC and BYL shall agree with each other as to the
form and substance of any press release related to the merger agreement. BYL and
BYL Bank have also agreed to confer with PBOC at the request of PBOC on a
periodic basis regarding BYL's and BYL Bank's financial condition, operations,
business and prospects in matters relating to the completion of the transactions
contemplated by the merger agreement. BYL shall also provide to PBOC regular and
periodic financial reports filed by BYL with its regulatory agencies. PBOC has
also agreed to provide to BYL regular and periodic financial reports filed by
PBOC with its regulatory agencies.
PBOC has also agreed that as soon as practicable after the effective time,
PBOC shall take all reasonable action so that retained employees of BYL and BYL
Bank shall be entitled to participate in the PBOC employee benefit plans. PBOC
and People's have also agreed to assume:
- the employment agreements as amended with Mr. Barry J. Moore, Ms. Gloria
Van Kampen, Mr. Michael Mullarky and Mr. Gary Strachn;
- the executive salary continuation agreements and any necessary amendments
with Mr. Robert Ucciferri, Mr. Barry J. Moore, Mr. Michael Mullarky and
Ms. Gloria Van Kampen; and
- the consulting agreement with Mr. Robert Ucciferri.
PBOC anticipates that most employees of BYL and BYL Bank as of the effective
time shall become employees of People's as of the effective time, although PBOC
shall have no obligation to continue the employment of any BYL or BYL Bank
employee.
From the effective time of the merger agreement and four years thereafter,
PBOC and People's agree to indemnify and hold harmless each present director,
officer or employee of BYL and BYL Bank against any and all costs and expenses
of any judgements, losses, claims, damages or liabilities incurred in connection
with any claim, action, suit, proceeding or investigation arising out of matters
existing or occurring at or prior to the effective time, only and to the fullest
extent to which BYL and BYL Bank is or was required by law or their respective
bylaws to indemnify such party. BYL shall also be permitted to maintain its
directors and officers liability insurance coverage, and to purchase an
extension of the claims reporting period for a period of four years following
the effective time.
In the event that any of the parties determines that a condition to
consummate the transactions contemplated by the merger agreement can not be
fulfilled, it will promptly notify the other party or parties.
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CONDITIONS TO THE MERGER
The obligation of BYL, BYL Bank, PBOC and People's to consummate the merger
is subject to the satisfaction or waiver on or before the effective time of,
among other things, the following conditions:
- the merger agreement and the transactions contemplated thereby will have
received all requisite approvals of the boards of directors of BYL, BYL
Bank, PBOC and People's, and of the shareholders of BYL;
- all approvals or consents of any applicable governmental agency will have
been obtained or granted for the merger and the transactions contemplated
for the merger agreement and the applicable waiting period under all laws
will have expired and no approvals by any governmental agency shall
contain any conditions or requirements which would materially reduce the
economic or business benefits of the merger in the reasonable opinion of
PBOC and People's;
- no statute, rule, regulation, order, injunction or decree shall have been
enacted, entered or enforced by any governmental entity which prohibits,
restricts or makes illegal the merger in the form contemplated by the
merger agreement.
The obligations of BYL and BYL Bank to consummate the merger are also
subject to fulfillment of certain other conditions, including the following:
- PBOC's and People's representations and warranties in the merger agreement
or any related documents must be true and correct as of the date of the
merger agreement and also as of the effective time, subject to conditions
in the merger agreement, including that the condition shall be deemed to
have been satisfied even if such representations and warranties are not
true and correct unless the failure of any of the representations and
warranties to be true and correct would have, or could reasonably expected
to have, individually or in the aggregate, a material adverse effect on
the ability of PBOC or People's to consummate the transaction contemplated
by the merger agreement;
- PBOC and People's performed all material obligations and covenants to be
performed by them on or prior to the effective time, provided that if the
Office of Thrift Supervision or any other regulatory agency having
jurisdiction over PBOC or People's disapproves or fails to approve or
consent to the assumption of the employment and other agreements of the
BYL and BYL Bank executive officers, then PBOC or People's shall be under
no obligation to honor such agreements so long as PBOC or People's is
prohibited from doing so by such regulatory agencies, and that such
actions shall not be a basis for BYL or BYL Bank to terminate the
transactions contemplated by the merger agreement;
- there shall not be pending any proceeding initiated by any governmental
entity to seek an order, injunction or decree which prevents consummation
of the merger; and
- delivery by PBOC to the exchange agent of the merger consideration.
The obligations of PBOC and People's to consummate the merger are also
subject to the fulfillment of certain other conditions, including the following:
- BYL's and BYL Bank's representations and warranties in the merger
agreement or any related documents must be true and correct as of the date
of the merger agreement and also as of the effective time, subject to
conditions in the merger agreement, including that the condition shall be
deemed to have been satisfied even if such representations and warranties
are not true and correct unless the failure of any of the representations
and warranties to be true and correct would have, or could reasonably
expected to have, individually or in the aggregate, a material
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adverse effect on BYL and its subsidiaries or on the ability of any party
to consummate the transaction contemplated by the merger agreement;
- BYL and BYL Bank shall have performed all material obligations and
covenants required to be performed by it on or prior to the effective
time;
- the receipt of all approvals, consents or waivers required in connection
with the transactions contemplated by the merger agreement shall have been
obtained, except those consents or approvals for which failure to obtain
would not have a material adverse effect on BYL and its subsidiaries or on
the ability of PBOC and People's to consummate the merger;
- there shall not be pending any proceeding initiated by any governmental
entity to seek an order, injunction or decree which prevents consummation
of the merger;
- the aggregate number of dissenting shares under Chapter 13 of the
California Corporations Code shall constitute less than 10% of BYL's
shares entitled to vote at the meeting;
- the FDIC shall have terminated the Section 8(b) Order against BYL Bank
dated June 29, 2000, and the Federal Reserve Bank shall have terminated
the Memorandum of Understanding dated August 10, 2000 with BYL, or the
FDIC and/or the FRB shall have otherwise provided assurances with respect
to the termination of such regulatory actions which are applicable to PBOC
and People's in their reasonable sole discretion.
Additionally, the consummation of the merger is subject to the performance
of covenants, the execution and delivery of certain ancillary documents, the
accuracy of representations and warranties and the receipt of various legal
opinions, third-party consents, officers' certificates and other documents.
If these and other conditions are not satisfied or waived, the merger
agreement may be terminated. The merger agreement may also be terminated upon
the occurrence of certain other events.
As of the date of this proxy statement, all required regulatory applications
have been filed and are pending.
TERMINATION
The merger agreement may be terminated at any time prior to the effective
time of the merger:
- by mutual consent of the parties;
- by any party if a material breach or default by any other party is not
cured within 30 business days after notice thereof, and in the case of
PBOC and People's, would have, or could reasonably be expected to have, a
material adverse effect on BYL and its subsidiaries or on the ability of
PBOC and People's, as applicable, to consummate the transactions
contemplated by the merger agreement;
- by any party if any governmental or regulatory authority denies or refuses
to grant any approval, consent or authorization required to be obtained to
consummate the transactions contemplated by the merger agreement, however
no such approval shall be deemed to have been received if it includes any
condition or requirement that would materially reduce the economic and
business benefits of the transactions contemplated by the merger agreement
to PBOC and People's that had such condition or requirement been known,
PBOC and People's, in their reasonable judgement, would not have entered
into the merger agreement;
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- by any party if the shareholders of BYL do not approve the merger
agreement unless the failure to approve the merger agreement shall be due
to the failure of the parties seeking to terminate to perform or observe
in any material respect its agreements set forth in the merger agreement
to be performed by such party at or before such meeting of shareholders;
- by any party if the effective time has not occurred by the close of
business on May 1, 2001, which may be extended by PBOC in its sole
discretion until July 1, 2001, provided that this right to terminate shall
not be available to any party whose failure to perform an obligation under
the merger agreement has been the cause of the failure of the transactions
contemplated by the merger agreement to be consummated by such date.
EXPENSES AND TERMINATION FEES
In the event of termination of the merger agreement as a result of a breach
of a representation, warranty, covenant or undertaking, the party committing
such breach shall be liable for $2 million to the other party plus the expenses
of the other party. PBOC shall pay BYL $2 million plus its expenses to the
extent that PBOC has elected to extend the date for termination of the
transaction to July 1, 2001 and the transaction has not closed by such date for
any reason other than any breach by BYL or BYL Bank, the failure of BYL or BYL
Bank to secure any required regulatory approvals or to the extent that the
failure to close the transaction is due to BYL's and BYL Bank's actions or
failure to take certain actions pursuant to the terms of the merger agreement.
In addition, BYL will pay PBOC $2 million upon the occurrence of a termination
event prior to a fee termination event. A fee termination event is the first to
occur of the following:
- the effective time of the merger agreement;
- 15 months after termination of the merger agreement following the
occurrence of a preliminary termination event;
- termination of the merger agreement other than as a result of a willful
breach of any representation, warranty, covenant or agreement by BYL or
BYL Bank; or
- 15 months after the termination of this agreement by PBOC as a result of a
willful breach of any representation, warranty, covenant or agreement by
BYL or BYL Bank.
A termination event shall mean any of the following events:
- BYL shall have entered into an agreement to engage in an acquisition
transaction other than with PBOC or People's, or the board of directors of
BYL shall have recommended that the shareholders of BYL approve or accept
any acquisition transaction with any other person;
- any person shall have acquired beneficial ownership of 25% or more of the
aggregate voting power of BYL common stock; or
- one or more of the BYL and BYL Bank directors or executive officers shall
have breached their obligation pursuant to the shareholders agreement
which materially adversely affects the ability of BYL to obtain the
approval of the holders of BYL common stock of the merger agreement.
A preliminary termination event is any of the following events:
- any person shall have commenced or filed a registration statement under
the Securities Act for any offer or purchase of shares of BYL common stock
such that upon consummation of such offer, such person would own or
control 10% or more of BYL common stock;
- the holders of BYL common stock shall not have approved the agreement at a
meeting of the shareholders held for the purpose of voting on the merger
agreement, or such meeting shall not have been held or have been cancelled
prior to termination of the merger agreement, or BYL's board or directors
shall have withdrawn or modified in any manner adverse to PBOC the
recommendation of BYL's board of directors with respect to the merger
agreement after any person shall have made or disclosed an intention to
make a bona fide proposal to BYL or its
33
<PAGE>
shareholders to engage in an acquisition transaction, commence a tender
offer, file a registration statement with respect to an exchange offer, or
file an application with an appropriate regulatory authority for approval
to engage in an acquisition transaction; or
- BYL or BYL Bank shall have breached any representation, warranty, covenant
or obligation in the merger agreement and such breach would entitle PBOC
to terminate the merger agreement after any person shall have made or
disclosed an intention to make a bona fide proposal to BYL or its
shareholders to engage in an acquisition transaction, commence the tender
offer or filed a registration statement under the Securities Act with
respect to an exchange offer or file an application with the appropriate
regulatory authorities for approval to engage in an acquisition
transaction.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
PBOC has agreed to provide employees of BYL and BYL Bank who are retained by
PBOC and become employees of People's after the effective time of the merger
with the types and levels of employee benefits maintained by PBOC for similarly
situated employees. BYL and BYL Bank employees will participate in PBOC's
benefit plans giving all of the continuing BYL and BYL Bank employees full
credit for all "years of service" for eligibility and vesting purposes.
Employees of BYL and BYL Bank, other than the executive officers, who do not
continue to be employed by People's, will receive severance compensation equal
to one week for each year of service at BYL or BYL Bank.
PBOC and People's, as appropriate, shall assume the following agreements:
- the employment agreements, as amended, with Mr. Barry J. Moore,
Ms. Gloria Van Kampen, Mr. Michael Mullarky and Mr. Gary Strachn;
- the executive salary continuation agreements, as amended, with Mr. Robert
Ucciferri, Mr. Barry J. Moore, Mr. Michael Mullarky and Ms. Gloria Van
Kampen; and
- the consulting agreement with Mr. Robert Ucciferri.
BYL Bank has filed an application with the FDIC to enter into a first
amendment of the employment agreements with Messrs. Moore, Mullarky and Strachn,
and Ms. Van Kampen, in order to provide for certain constructive termination
provisions in the event such individuals are terminated by PBOC or People's. In
addition, effective upon the effective time or, if the merger agreement is
terminated, by March 31, 2001, BYL Bank has also filed an application with the
FDIC to enter into a mutual release, an amended salary continuation agreement
and a consulting agreement with Mr. Ucciferri in which Mr. Ucciferri would
receive payments of $64,700 per year under the consulting agreement, and upon
reaching age 67, will receive $64,700 in annual payments under his salary
continuation agreement, as amended.
The directors, officers and employees of BYL and BYL Bank will be entitled
to certain indemnification by PBOC and People's on claims made after the
consummation of the merger. Finally, BYL will purchase director and officer
insurance for each of its directors and officers currently covered by directors'
and officers' liability insurance policy maintained by BYL Bank and to purchase
an extension of the claims reporting period for the policy providing for a
period of four years following the effective time which is intended to provide
coverage after the closing for actions taken or omitted to be taken before the
closing. The cost of such coverage may not exceed $31,000.
The directors, officers and employees of BYL and BYL Bank held stock options
covering an aggregate of 374,936 shares of common stock as of the date of the
merger agreement. The merger agreement provides that upon the consummation of
the merger all outstanding stock options not exercised prior thereto will
terminate and each optionee shall be entitled to receive, in lieu of each share
of BYL common stock that would have otherwise been issuable upon exercise
thereof, an amount in cash computed by multiplying (i) the difference between
the merger consideration and the per share exercise price applicable to such BYL
stock option, by (ii) the number of shares of BYL common stock
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<PAGE>
subject to such BYL stock option. The 374,936 stock options have an average
exercise price of $12.76 per share.
SECURITY OWNERSHIP
The following table sets forth information as of , 2001
pertaining to beneficial ownership of BYL's common stock by persons known to BYL
to own five percent (5%) or more of such stock, current directors and Executive
Officers of BYL, and all directors and Executive Officers(1) of BYL and BYL Bank
as a group. The information contained herein has been obtained from BYL's
records and from information furnished directly by the individual or entity to
BYL. All shares are held with shared voting and investment power except as
otherwise indicated. All addresses of directors and Executive Officers are in
care of BYL at 1875 North Tustin Street, Orange, California.
The table should be read with the understanding that more than one
(l) person may be the beneficial owner or possess certain attributes of
beneficial ownership with respect to the same securities. In addition, shares of
common stock issuable pursuant to options which may be exercised within sixty
(60) days of , 2001 are deemed to be issued and outstanding and have
been treated as outstanding in calculating the percentage ownership of those
individuals possessing such interest.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(2)
OF COMMON STOCK ON
, 2001
------------------------
NAME TITLE SHARES PERCENT
---- ----- ------------ ---------
<S> <C> <C> <C>
Henry E. Cox II(3)................... Director 117,388(4) 4.62%
Eddie R. Fischer(5).................. Director 78,417(6) 3.08%
Neil F. Hatcher(7)................... Director 108,876(8) 4.28%
Seymour M. Jacobs(9)................. Director 125,400(10) 4.93%
H. Rhoads Martin..................... Director 15,749(11) 0.62%
Barry J. Moore....................... Senior Executive Vice President and
Chief Operating Officer of BYL Bank;
Executive Vice President and Chief
Financial Officer of BYL 44,201(12) 1.74%
Michael H. Mullarky.................. Executive Vice President and Chief
Credit Officer of BYL Bank 29,834(13) 1.17%
</TABLE>
------------------------
(2) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship,
or otherwise has or shares; (a) voting power which includes the power to
vote, or to direct the voting of such security; and/or the investment
power, which includes the power to dispose, or to direct the disposition,
of such security. Beneficial owner also includes any person who has the
right to acquire beneficial ownership of such security as defined above
within sixty (60) days of , 2001.
(3) Mr. Cox was appointed to the Board of Directors of BYL and BYL Bank upon
the merger of DNB Financial with BYL on May 29, 1998.
(4) Includes 300 shares of common stock which may be acquired by Mr. Cox upon
exercise of stock options.
(5) Mr. Fischer was appointed to the Board of Directors of BYL and BYL Bank
upon the merger of DNB Financial with BYL on May 29, 1998.
------------------------
(1) As used throughout this Proxy Statement, the term "officer" or "executive
officer" refers to President and Chief Executive Officer and Executive Vice
President of BYL, and the President and Chief Executive Officer, the Senior
Executive Vice President/Chief Operating Officer, the Executive Vice
President/Chief Credit Officer, the Executive Vice President/Chief
Administrative Officer and the Senior Vice President/Chief Financial Officer
of BYL Bank.
35
<PAGE>
(6) Includes 300 shares of common stock which may be acquired by Mr. Fischer
upon exercise of stock options.
(7) Mr. Hatcher was appointed to the Board of Directors of BYL and BYL Bank
upon the merger of DNB Financial with BYL on May 29, 1998.
(8) Includes 300 shares of common stock which may be acquired by Mr. Hatcher
upon exercise of stock options.
(9) Following the receipt of all necessary regulatory approvals or
non-objections, Mr. Jacobs was appointed to the Board of Directors of BYL
on November 21, 2000, and to the Board of Directors of BYL Bank on
October 31, 2000 pursuant to an agreement dated September 7, 2000.
(10) Mr. Jacobs is a principal of Jacobs Asset Management, LLC and a principal
of JAM Managers, LLC, the general partner of JAM Partners, LP. Mr. Jacobs
holds 8,500 shares of BYL in his own name, with 116,900 shares of BYL held
by JAM Partners, LP.
(11) Includes 8,200 shares of common stock which may be acquired by Mr. Martin
upon exercise of stock options.
(12) Includes 43,701 shares of common stock which may be acquired by Mr. Moore
upon exercise of stock options.
(13) Includes 4,167 shares held in the Joseph W. Mullarky Testamentary Trust
dated January 5, 1987, and Mr. Michael Mullarky acts as sole trustee.
Includes 14,835 shares of Common Stock which may be acquired by
Mr. Mullarky upon exercise of stock options.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(2)
OF COMMON STOCK ON
, 2001
------------------------
NAME TITLE SHARES PERCENT
---- ----- ------------ ---------
<S> <C> <C> <C>
John F. Myers........................ Director, Secretary 16,066(14) 0.63%
Gary Strachn(15)..................... Senior Vice President and Chief
Financial Officer of BYL Bank 2,000(16) 0.08%
Robert Ucciferri..................... President, Chief Executive Officer and
Director of BYL and BYL Bank 75,378(17) 2.96%
Gloria J. Van Kampen(18)............. Executive Vice President/Chief
Administrative Officer of BYL Bank 48,071(19) 1.89%
Brent W. Wahlberg.................... Director 17,471(20) 0.69%
All Directors and Executive Officers
as a Group (12 in number).......... 678,851(21) 26.70%
</TABLE>
------------------------
(14) Includes 6,600 shares of common stock which may be acquired by Mr. Myers
upon exercise of stock options.
(15) Mr. Strachn is not on the Board of BYL or BYL Bank, but was appointed as
Senior Vice President/Chief Financial Officer of its wholly-owned
subsidiary on September 22, 1999.
(16) Includes 0 shares of common stock which may be acquired by Mr. Strachn
upon exercise of stock options.
(17) Includes 38,066 shares of common stock which may be acquired by
Mr. Ucciferri upon exercise of stock options.
(18) Ms. Van Kampen is not on the Board of BYL or BYL Bank, but was appointed
an Executive Vice President/Chief Administrative Officer of its
wholly-owned subsidiary upon the merger of DNBF Financial with BYL on
May 29, 1998.
(19) Includes 1,600 shares of common stock which may be acquired by Ms. Van
Kampen upon exercise of stock options.
(20) Includes 6,600 shares of common stock which may be acquired by
Mr. Wahlberg upon exercise of stock options.
(21) Includes 120,502 shares of common stock which may be acquired upon
exercise of stock options.
36
<PAGE>
INFORMATION ABOUT BYL BANCORP AND BYL BANK GROUP
GENERAL
For purposes of this section captioned "INFORMATION ABOUT BYL BANCORP AND
BYL BANK GROUP" references to "we" or "our" refer only to BYL and BYL Bank, and
not to PBOC or People's.
BYL 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,
which changed its name from Bank of Yorba Linda in June 1998. Other than its
investment in BYL Bank, BYL currently conducts no other significant business
activities. As of September 30, 2000, BYL had total consolidated assets of
approximately $294.0 million, total consolidated deposits of $261.3 million and
total consolidated shareholders' equity of $30.3 million.
BYL 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, and commenced operations as a
California state-chartered bank on March 3, 1980. BYL Bank's accounts are
insured by the FDIC, but like most banks of its size in California, BYL Bank is
not a member of the Federal Reserve Bank.
BYL Bank is a California commercial bank that operates from its main office
in Orange, California and operates seven full-service banking centers in BYL
Bank's primary market areas of Orange and Riverside counties, California. In
addition to conducting its regular community banking activities, BYL Bank also
originates and sells non-conforming residential real estate loans and SBA
guaranteed loans. BYL Bank's principal office is located at 1875 North Tustin
Street, Orange, California. BYL Bank's Mortgage Division is currently located in
Tustin, California. BYL Bank also has mortgage origination offices in the states
of Colorado, Indiana, Florida, Kansas, Northern California, Nevada, Utah and
Washington.
FOCUS AND OPERATING STRATEGY OF BYL BANK
The primary focus of BYL Bank is to provide personalized quality banking
products and services to small- and medium-size businesses, including
professionals. BYL Bank originates nonconforming mortgages in California and
various other states and sells such loans in the secondary market, and
originates and sells SBA guaranteed loans, with the objective of building a
balanced community loan portfolio mix. Management believes that a local market
focus, accompanied by strategic placement of bank branches and personnel,
enables BYL Bank to attract and retain low-cost core deposits which provide
substantially all of BYL Bank's funding requirements.
In furtherance of its focus in operating strategy, following the receipt of
all necessary regulatory approvals, BYL Bank completed the acquisition of the
Bank of Westminster on June 14, 1996. The aggregate purchase price of the Bank
of Westminster was $6.17 million. In conjunction with the acquisition of the
Bank of Westminster, BYL Bank completed an offering of new primary stock
underwritten on a firm commitment basis by Ryan, Beck & Co.
Following receipt of all necessary regulatory approvals, BYL completed the
acquisition of DNB Financial on May 29, 1998 in which each share of DNB
Financial was converted into the right to receive 4.1162 shares of BYL common
stock, resulting in the issuance of 956,641 shares of BYL common stock to the
shareholders of DNB Financial.
We have not engaged in any material research activities relating to the
development of new services or the improvement of our existing services. We have
no present plans regarding "a new line of business" requiring the investment of
a material amount of total assets.
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<PAGE>
Most of our business originates from the Orange and Riverside counties and
there is no emphasis on foreign sources and application of funds. Our business,
based upon performance to date, does not appear to be seasonal. We are not
dependent upon a single customer or group of related customers for a material
portion of our deposits. We are unaware of any material effect upon our capital
expenditures, earnings or competitive position as a result of federal, state or
local environmental regulation.
SECURITIZATIONS
SALE OF UNGUARANTEED INTERESTS IN SBA LOANS
On December 10, 1998, BYL Bank entered into a Pooling and Servicing
Agreement dated as of October 1, 1998 (the "SBA Pooling Agreement") between BYL
Bank, as Servicer and Master Servicer, and Marine Midland Bank, as Trustee (the
"Trustee") whereby BYL 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 certificates 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 SBA Loan-Backed Adjustable Rate
Certificates, Series 1998-1, Class A ("Class A Certificate"), $6.02 million
aggregate principal amount of BYL Bank SBA Loan-Backed Adjustable Rate
Certificates, Series 1998-1, Class M. ("Class M Certificate") and $2.58 million
aggregate principal amount of BYL Bank SBA Loan-Backed Adjustable Rate
Certificates, Series 1998-1, Class B ("Class B Certificate").
The Class A and Class B 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
Certificates were retained by BYL 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 NON-SBA COMMERCIAL LOANS
On August 11, 1999, BYL Bank entered into a Pooling and Servicing Agreement
dated as of June 30, 1999 (the "SBL Business Loan Pooling Agreement") among BYL
Bank, as seller and master servicer, HSBC Bank USA, as Trustee, and Bankers
Trust (Delaware) as Delaware Trustee, whereby BYL Bank has transferred a pool of
SBL Loans to a newly-created trust (the "SBLTrust") for the benefit of the
holders of certificates representing interests in such SBL Trust. The SBL Trust
consists of the SBL Loans that are subject to the SBL Pooling Agreement, and the
SBL Trust has issued three (3) classes of certificates representing certain
fractional undivided ownership interests in the SBL Trust. The aggregate
principal amount of the Business Loans delivered to the SBL Trust on August 11,
1999 equaled approximately $47.1 million.
Pursuant to the SBL Pooling Agreement, the Trust issued $16 million
aggregate principal amount of BYL Bank Business Loan-Backed Pass-Through
Certificates, Series 1999-1, Class A-1 ("Class A-1 Certificates"), $12 million
aggregate principal amount of BYL Bank 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 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 Business
Loan-Backed Pass-Through Certificates, Series 1999-1, Class B Certificates
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<PAGE>
("Class B-1 Certificates"); and BYL Bank 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 BYL 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, BYL 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 BYL Bank's targeted ROA.
As a result of such evaluations, BYL determined that the maximum potential value
of BYL Bank's commercial loan originations would be realized through the
retention of these loans in BYL 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
regulatory capital requirements on loan securitizations. The shift in BYL Bank's
strategy from loan sales or securitizations to portfolio retention requires
increasing levels of capital in order to maximize the value of BYL Bank's
ability to generate commercial loans at premium yields.
On February 4, 2000, BYL Bank completed the sale of its automobile loan
portfolio of approximately $38 million and closed its indirect automobile
division. On February 22, 2000, BYL Bank completed the sale of its Diamond Bar
Mortgage Division, an originator of conforming residential mortgages. As a
result of this restructuring, BYL reported a loss for the first quarter 2000 of
approximately $260,000. BYL also suspended quarterly dividends effective
January 1, 2000.
REGULATORY ACTIONS, PROMPT CORRECTIVE ACTION AND CAPITAL RESTORATION PLAN
During late 1999 the FDIC completed an examination of the books and records
of BYL Bank. In connection with this examination the FDIC notified BYL Bank that
it had incorrectly calculated the risk-weighted capital requirements of the
assets retained in BYL Bank's 1998 and 1999 securitizations. The FDIC also
challenged the assumptions and financial model used by BYL Bank in valuing these
residual assets. Based on the assumptions deemed acceptable by the FDIC, the
FDIC believed BYL Bank's residual assets were overstated by $2.6 million.
Although BYL Bank disagreed with the assumptions recommended by the FDIC, it has
reflected this adjustment in its quarterly call reports for regulatory capital
purposes, engaged an independent third-party to review the assumptions used by
BYL 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, BYL Bank was classified as undercapitalized.
As a result, BYL Bank filed a capital restoration plan with the FDIC, which
provided that BYL Bank expects to be adequately capitalized by March 31, 2000.
As of March 31, 2000, June 30, 2000 and September 30, 2000, BYL Bank was
adequately capitalized. The capital restoration plan also provides for
increasing levels of capital every quarter until BYL Bank is well capitalized in
2001. BYL Bank has eliminated asset securitizations from its business plan. BYL
Bank will continue operations of all traditional retail banking activities
through BYL Bank's existing branch system. As of September 30, 2000, BYL Bank's
management believes BYL Bank is adequately capitalized, as BYL Bank's Tier 1
Capital Ratio was 8.99% and the Total Risk Based Capital Ratio was 9.60% as of
September 30, 2000.
BYL 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
39
<PAGE>
pursuant to BYL 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.
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, BYL
Bank stipulated to an administrative action with the FDIC that requires BYL
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 BYL 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 administrative action, BYL Bank engaged
PricewaterhouseCoopers ("PWC") to assist BYL 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. BYL and BYL
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. Management believes that BYL Bank is in compliance with the FDIC
administrative action.
Further, as a result of a recent FRB examination, BYL has executed a
Memorandum of Understanding with the FRB. The FRB MOU requires that BYL, among
other items, refrain from declaring dividends without the prior written approval
of the FRB, refrain from certain transactions without FRB approval, develop and
submit a written capital plan, submit a statement concerning the steps the Board
proposes to take to improve the condition of BYL 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.
Management believes that BYL is in compliance with the FRB MOU.
PROPOSED FORMATION OF SUBSIDIARY AND PROPOSED TRANSACTION
As a result of the recent FDIC examination, BYL had determined that it would
be in the best interests of BYL and BYL 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 proposed minority-owned subsidiary of BYL.
BYL and BYL 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. BYL and its joint venture
partner, CNL Commercial Funding, LP ("CFL"), 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. BYL would have a 25% equity and
voting interest in the subsidiary. BYL 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 BYL 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.
40
<PAGE>
On September 14, 2000, BYL and BYL Bank completed the first phase of the
transaction with CCF, in which BYL Bank sold certain assets and transferred
certain personnel of the SBA Division. BYL Bank also sold 59% of its retained
interest in the 1999-1 Securitization. BYL 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, BYL and
BYL Bank intended to complete the second phase of the transaction which would
have involved the transfer of the remaining 41% of the retained interest in the
1999-1 Securitization, except for the investment rated security. At that time,
BYL intended to execute the $2.5 million note as described above. If the
transaction with CCF is not consummated and BYL and BYL Bank do not liquidate
for cash the amount of the second residual interest by the date of PBOC's
receipt of the last required regulatory approval contemplated by the merger
agreement, then the cash price shall be deemed to be zero. At this time, because
of certain issues that have arisen at the SBA, BYL does not contemplate
completing the second portion of the transaction with CCF. BYL expects that the
CNL transaction agreements will be terminated in the near future.
SALE OF B AND R-3 CERTIFICATES
On December , 2000, BYL Bank executed an agreement with Sutro in order to
liquidate the BYL Bank R-3 certificates. On December , 2000, BYL Bank
completed the sale of the B certificate, which had a book value of $
million on , 2000, at a price equal to $ . BYL Bank is currently
marketing the R-3 certificate, and such sale is expected to be completed in the
first quarter of 2001 and before PBOC receives its regulatory approval to
complete the merger.
EMPLOYEES
As of September 30, 2000, we had a total of 234 full-time equivalent
employees. We believe that our employee relations are satisfactory.
COMPETITION
The banking and financial services business in California generally, and in
our market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial service providers. We compete for loans and
deposits with other commercial banks, savings and loan associations, securities
and brokerage companies, mortgage companies, insurance companies, finance
companies, money market funds, credit unions and other nonbank financial service
providers. Many of these competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader array
of financial services than we do. In order to compete with the other financial
service providers, we principally rely on local promotional activities, personal
relationships established by officers, directors and employees with our
customers and specialized services tailored to meet our customers' needs.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate we pay on our deposits and our other
borrowings and the interest rate we receive on loans extended to our customers
and securities held in our portfolio comprise the major portion of our earnings.
These rates are highly sensitive to many factors that are beyond our control.
Accordingly, our earnings and growth are subject to the influence of domestic
and foreign economic conditions, including inflation, recession and
unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory
41
<PAGE>
agencies, particularly the Board of Governors of the Federal Reserve System
("FRB"). The FRB implements national monetary policies (with objectives such as
curbing inflation and combating recession) by its open-market operations in U.S.
Government securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
FRB in these areas influence the growth of our loans, investments and deposits
and also affects interest rates charged on loans and paid on deposits. The
nature and impact of any future changes in monetary policies cannot be
predicted.
CAPITAL STANDARDS
The Federal Reserve Board and FDIC have adopted risk-based minimum capital
guidelines (for bank holding companies and insured non-member state banks,
respectively) intended to provide a measure of capital that reflects the degree
of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long-term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of BYL 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.
42
<PAGE>
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 BYL Bank to grow and could restrict the amount of profits,
if any, available for the payment of dividends. Under applicable regulatory
guidelines, BYL Bank was considered "Undercapitalized" at December 31, 1998, but
is considered adequately capitalized at March 31, 2000, June 30, 2000 and
September 30, 2000. See REGULATORY ACTION, PROMPT CORRECTIVE ACTION AND CAPITAL
RESTORATION PLAN.
On January 1, 1998, new legislation became effective which, among other
things, gave the power to the California Department of Financial Institutions to
take possession of the business and properties of a bank in the event that the
tangible shareholders' equity of a bank is less than the greater of (i) 3% of a
bank's total assets or (ii) $1,000,000.
PROMPT CORRECTIVE ACTION
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
<TABLE>
<CAPTION>
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
------------------ ------------------------
<S> <C>
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%.
</TABLE>
43
<PAGE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is limited
to the lesser of (a) an amount equal to 5% of the depository institution's total
assets at the time the institution became undercapitalized or (b) the amount
which is necessary to bring the institution into compliance with all capital
standards applicable to such institution as of the time the institution fails to
comply with its capital restoration plan. Finally, the appropriate federal
banking agency may impose any of the additional restrictions or sanctions that
it may impose on significantly undercapitalized institutions if it determines
that such action will further the purpose of the prompt correction action
provisions. An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced acquisition;
(ii) restrictions on transactions with affiliates; (iii) further limitations on
interest rates paid on deposits; (iv) further restrictions on growth or required
shrinkage; (v) modification or termination of specified activities;
(vi) replacement of directors or senior executive officers; (vii) prohibitions
on the receipt of deposits from correspondent institutions; (viii) restrictions
on capital distributions by the holding companies of such institutions;
(ix) required divestiture of subsidiaries by the institution; or (x) other
restrictions as determined by the appropriate federal banking agency. Although
the appropriate federal banking agency has discretion to determine which of the
foregoing restrictions or sanctions it will seek to impose, it is required to
force a sale of voting shares or merger, impose restrictions on affiliate
transactions and impose restrictions on rates paid on deposits unless it
determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval of
the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in which
the institution became undercapitalized.
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
44
<PAGE>
undercapitalized. Most importantly, however, except under limited circumstances,
the appropriate federal banking agency, not later than 90 days after an insured
depository institution becomes critically undercapitalized, is required to
appoint a conservator or receiver for the institution. The board of directors of
an insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of a
receiver or conservator or to an acquisition or merger as required by the
regulator.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
SAFETY AND SOUNDNESS STANDARDS
Effective in 1995 the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (AFDICIA). These standards
are designed to identify potential safety and soundness concerns and ensure that
action is taken to address those concerns before they pose a risk to the deposit
insurance fund. The standards relate to (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and
benefits. If a federal banking agency determines that an institution fails to
meet any of these standards, the agency may require the institution to submit to
the agency an acceptable plan to achieve compliance with the standard. In the
event the institution fails to submit an acceptable plan within the time allowed
by the agency or fails in any material respect to implement an accepted plan,
the agency must, by order, require the institution to correct the deficiency.
Effective October 1, 1996, the federal banking agencies promulgated safety and
soundness regulations and accompanying interagency compliance guidelines on
asset quality and earnings standards. These new guidelines provide six standards
for establishing and maintaining a system to identify problem assets and prevent
those assets from deteriorating. The institution should (i) conduct periodic
asset quality reviews to identify problem assets; (ii) estimate the inherent
losses in those assets and establish reserves that are sufficient to absorb
estimated losses; (iii) compare problem asset totals to capital; (iv) take
appropriate corrective action to resolve problems assets; (v) consider the size
and potential risks of material asset concentrations; and (vi) provide periodic
asset reports with adequate information for management and the board of
directors to assess the level of risk. These new guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by Bank Insurance Fund ("BIF") administered by the FDIC. The
FDIC is authorized to borrow up to $30 billion from the United States Treasury;
up to 90% of the fair market value of assets of institutions acquired by the
FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The FDIC also has authority to impose special assessments
against insured deposits.
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
45
<PAGE>
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 BYL 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.
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
BYL Bank, pay 0.64 cents per $100 in domestics deposits.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-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.
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 BYL intends to operate, although it is difficult
to assess the impact that such increased competition may have on BYL's
operations. The Interstate Act may increase competition in BYL'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
BYL's operations.
46
<PAGE>
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
BYL 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." BYL Bank has consistently been rated
"satisfactory" and was examined most recently during the fourth quarter of 1998.
The final report of examination has been received, and BYL Bank received a
"satisfactory" rating.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act, or GLB Act, which significantly changed the regulatory structure and
oversight of the financial services industry. The GLB Act revises the Bank
Holding Company Act of 1956 and repeals the affiliation provisions of the
Glass-Steagall Act of 1933, permitting a qualifying holding company, called a
financial holding company, to engage in a full range of financial activities,
including banking, insurance, and securities activities, as well as merchant
banking and additional activities that are "financial in nature" or
"complementary" to such financial activities. The GLB Act thus provides expanded
financial affiliation opportunities for existing bank holding companies and
permits various non-bank financial services providers to acquire banks by
allowing bank holding companies to engage in activities such as securities
underwriting, and underwriting and brokering of insurance products. The GIB Act
also expands passive investments by financial holding companies in any type of
company, financial or nonfinancial, through merchant banking and insurance
company investments: In order for a bank holding company to qualify as a
financial holding company, its subsidiary depository institutions must be
"well-capitalized" and "well-managed" and have at least a "satisfactory"
Community Reinvestment Act rating.
The GLB Act also reforms the regulatory framework of the financial services
industry. Under the GLB Act, financial holding companies are subject to primary
supervision by the FRB while current federal and state regulators of financial
holding company regulated subsidiaries such as insurers, broker-dealers,
investment companies and banks generally retain their jurisdiction and
authority. In order to implement its underlying purposes, the GIB Act preempts
state laws restricting the establishment of financial affiliations authorized or
permitted under the GLB Act, subject to specified exceptions for state insurance
regulators. With regard to securities laws, the GLB Act removes the current
blanket exemption for banks from the broker-dealer registration requirements
under the Securities Exchange Act of 1934, amends the Investment Company Act of
1940 with respect to bank
47
<PAGE>
common trust fund and mutual fund activities, and amends the Investment Advisers
Act of 1940 to require registration of banks that act as investment advisers for
mutual funds.
The GLB Act also includes provisions concerning subsidiaries of banks,
permitting a bank to engage in most financial activities through a financial
subsidiary, provided that BYL Bank and its depository institution affiliates are
"well capitalized" and "well managed" and meet certain other qualification
requirements relating to total assets, subordinated debt, capital, risk
management, and affiliate transactions. With respect to subsidiaries of state
banks, new activities as "principal" would be limited to those permissible for a
bank financial subsidiary. The GLB Act requires a state bank with a financial
subsidiary permitted under the GLB Act as well as its depository institution
affiliates to be "well capitalized," and also subjects BYL Bank to the same
capital, risk management and affiliate transaction rules as applicable to banks.
The provisions of the GLB Act relating to financial holding companies became
effective 120 days after its enactment excluding the federal preemption
provisions, which became effective on the date of enactment.
The GLB Act will likely increase competition in the markets in which BYL
operates, although it is difficult to assess the impact that such increased
competition may have on BYL's operations.
PROPERTIES
BYL currently maintains an administrative facility in Orange, California,
which is utilized by BYL and BYL Bank. BYL Bank also maintains seven full
service branches, two regional loan centers and six loan production offices. BYL
Bank owns three of its branch locations and leases all of its other facilities.
BYL believes that all of its properties are appropriately maintained and
suitable for their respective present needs and operations.
LEGAL PROCEEDINGS
There are no proceedings adverse to BYL or BYL Bank to which any director,
officer, affiliate or 5% shareholder of BYL or BYL Bank or any associate of any
such director, officer, or shareholder of BYL or BYL Bank is a party, and none
of the above persons has a material interest adverse to BYL or BYL Bank.
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF BYL BANCORP
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 nine months ended September 31, 2000 and 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, a decrease of $1.0 million or 24.4%,
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.
For the first nine months of 2000, BYL reported net income of $1.2 million
compared to $2.2 million for the same period 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 BYL closed the Diamond Bar Mortgage
Division and the Indirect Auto Division. BYL sold the indirect auto loan
portfolio and incurred a $1.6 million loss on sale. During the second quarter of
2000 BYL wrote down the 1999-1 securitization assets by $800,000 as a result of
a new valuation model being implemented. During the third quarter of 2000 BYL
closed the SBA department and sold, at carrying value, 59% or $3.0 million in
residual assets from the 1999-1 securitization.
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.
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.
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<PAGE>
The following table sets forth several key operating ratios:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Return on Average Assets............................. 0.47% 0.85% 0.88% 1.49% 1.31%
Return on Average Equity............................. 5.28% 10.57% 11.05% 17.03% 13.80%
Average Shareholder's Equity to Average Total
Assets............................................. 8.87% 8.10% 8.00% 8.75% 9.49%
</TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY
The following table presents, for the periods 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 NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
AVERAGE AVERAGE
INTEREST YIELD OR INTEREST YIELD OR
AVERAGE EARNED RATE AVERAGE EARNED RATE
BALANCE OR PAID PAID BALANCE OR PAID PAID
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities............ $ 25,240 $ 1,261 6.66% $ 20,653 $ 1,011 6.53%
Federal Funds Sold............... 18,165 817 6.00% 23,054 807 4.67%
Other Earning Assets............. 174 8 6.13% 192 8 5.56%
Loans............................ 241,005 19,448 10.76% 246,215 18,304 9.91%
-------- ------- -------- -------
Total Interest-Earning Assets...... 284,584 21,534 10.09% 290,114 20,130 9.25%
Cash and Due From Banks............ 23,777 24,439
Premises and Equipment............. 6,193 6,431
Other Real Estate Owned............ 522 858
Accrued Interest and Other
Assets........................... 22,804 22,593
Allowance for Loan Losses.......... (2,664) (2,422)
-------- --------
Total Assets....................... $335,216 $342,013
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-Bearing Liabilities:
Money Market and NOW............. $ 74,163 1,827 3.28% $ 73,735 2,041 3.69%
Savings.......................... 64,419 1,884 3.90% 88,783 3,104 4.66%
Time Deposits under $100,000..... 54,241 2,423 5.96% 37,228 1,692 6.06%
Time Deposits of $100,000 or
More........................... 41,785 1,863 5.94% 37,383 1,509 5.38%
Other............................ 1,425 62 5.80% 1,971 73 4.94%
-------- ------- -------- -------
Total Interest-Bearing
Liabilities...................... 236,033 8,059 4.55% 239,100 8,419 4.69%
------- -------
Noninterest-Bearing Liabilities:
Demand Deposits.................. 66,059 68,772
Other Liabilities................ 3,374 6,447
Shareholders' Equity............. 29,750 27,694
-------- --------
Total Liabilities and Shareholders'
Equity........................... $335,216 $342,013
======== ========
Net Interest Income................ $13,475 $11,711
======= =======
Net Yield on Interest-Earning
Assets........................... 6.31% 5.38%
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
INTEREST YIELD OR INTEREST YIELD OR INTEREST YIELD OR
AVERAGE EARNED RATE AVERAGE EARNED RATE AVERAGE EARNED RATE
BALANCE OR PAID PAID BALANCE OR PAID PAID BALANCE OR PAID PAID
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities........ $ 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>
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
51
<PAGE>
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>
NINE MONTHS ENDED SEPTEMBER 30, 2000
VERSUS
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------
INCREASE (DECREASE) DUE
TO CHANGE IN
------------------------------------------
VOLUME RATE TOTAL
-------- -------- --------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment Securities...................... $ 229 $ 21 $ 250
Federal Funds Sold......................... (257) 267 10
Other Earning Assets....................... (1) 1 --
Loans...................................... (600) 1,744 1,144
----- ------ ------
TOTAL INTEREST INCOME...................... (629) 2,033 1,404
INTEREST-BEARING LIABILITIES:
Money Market and NOW....................... 20 (234) (214)
Savings.................................... (764) (456) (1,220)
Time Deposits under $100,000............... 780 (49) 731
Time Deposits $100,000 or More............. 188 166 354
Other...................................... (28) 17 (11)
----- ------ ------
TOTAL INTEREST EXPENSE..................... 196 (556) (360)
----- ------ ------
NET INTEREST INCOME........................ $(825) $2,589 $1,764
===== ====== ======
</TABLE>
<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>
52
<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.
2000 COMPARED TO 1999
Net interest income for the nine months ended September 30, 2000 was
$13.5 million, an increase of 15.1% compared to the $11.7 million reported for
the same period in 1999. This increase was primarily due to the 175 basis point
increase in prime rate since July of 1999.
53
<PAGE>
Interest income for the first nine months of 2000 was $21.5 million, a
$1.4 million or a 7% increase over the $20.1 million recorded for the same
period in 1999. The increased rates accounted for all of the increase in
interest income as the loan totals declined during the first nine months of
2000. The decline in loan totals is as a result of closing the Diamond Bar
Mortgage Division and the sell of the indirect auto loan portfolio.
Interest expense declined from $8.4 million in 1999 to $8.1 million for the
same nine months ended September 30, 2000. The decline is due to the reduction
of interest rates on interest bearing deposits and reduced deposit totals for
interest bearing deposits.
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 unguaranteed portion of 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.
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 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>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits.......................... 5.36% 6.05% 5.72% 7.11% 6.46%
Occupancy Expenses...................................... .63 .67 .65 .60 .62
Furniture and Equipment................................. .74 .76 .80 .74 .64
Professional Fees and Outside
Services.............................................. .73 .56 .56 .65 .65
OREO Expenses........................................... .05 .07 .06 .10 .08
Commission and Loan Expenses............................ .93 .49 .47 .38 .29
Office Expenses......................................... .49 .59 .58 .55 .60
Other................................................... 1.10 .76 .90 1.04 1.08
----- ---- ---- ----- -----
10.03% 9.95% 9.74% 11.17% 10.42%
===== ==== ==== ===== =====
</TABLE>
54
<PAGE>
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.
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 is primarily
incentive-based, therefore, significant increases in volume of loan
originations, and resulting gains, result in significant increases in salaries
and incentive payments. Other expense categories increased in total amount but
were consistent as a percentage of total assets. Included in other in 1998 was
$542,000 of acquisition related expenses.
Noninterest expense was $25.2 million for the first nine months of 2000
compared to $25.5 million for the same period in 1999. Noninterest expense for
the nine months ended September 30, 2000 included a $1.6 million loss on sale of
the Bank's indirect auto loan portfolio during the first quarter of 2000.
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.
Income tax expense was $1.0 and $1.7 million for the nine months ended
September 30, 2000 and 1999, respectively. These expenses resulted in an
effective tax rate of 45.1% in 2000 and 43.6% in 1999.
55
<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 September 30, 2000 (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------------------
2000 1999 1998 1997
------------------------------ ------------------- ------------------- -------------------
WEIGHTED
BOOK MARKET AVERAGE BOOK MARKET BOOK MARKET BOOK MARKET
VALUE VALUE YIELD VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
-------------------------------
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..... 6,346 6,346 8.73% 6,597 6,868 2,305 2,570 -- --
------- ------- ------- ------- ------- ------- ------- -------
TOTAL AVAILABLE-FOR-SALE
SECURITIES................. $ 6,346 $ 6,346 8.73% $ 6,597 $ 6,868 $ 5,305 $ 5,570 $ 9,629 $ 9,612
======= ======= ======= ======= ======= ======= ======= =======
HELD-TO-MATURITY SECURITIES
-------------------------------
U.S. TREASURIES:
Within One Year.............. $ -- $ -- $ 500 $ 501 $ 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.............. 997 994 6.24% 3,013 2,987 994 1,001 -- --
One to Five Years............ 10,000 9,866 5.60% 10,995 10,755 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.......... 10,997 10,860 5.65% 14,008 13,742 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..... 177 175 6.80% 204 202 316 318 60 56
------- ------- ------- ------- ------- ------- ------- -------
TOTAL HELD-TO-MATURITY
SECURITIES................. $11,174 $11,035 5.67% $14,712 $14,445 $10,844 $10,874 $12,950 $12,996
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Securities may be pledged to meet security requirements imposed as a
condition to receipt of deposits of public funds and other purposes. At
December 31, 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. At September 30, 2000 the carrying value of securities pledged to
secure public deposits was $11.2 million.
LOANS HELD FOR SALE
We originate mortgage 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, decreased to $69.8 million
56
<PAGE>
at December 31, 1999 and decreased to $34.9 million at September 30, 2000.
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, BYL 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 1999 Consolidated Financial Statements for additional
information on loans held for sale and key assumptions used to value retained
interest in securitizations.
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,
SEPTEMBER 30, ------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
LOANS
Commercial........................ $ 29,715 $104,719 $ 56,244 $ 36,359 $ 24,512 $13,706
Real Estate--Construction......... 12,549 5,524 4,411 2,867 4,149 3,478
Real Estate--Other................ 131,203 45,976 82,235 84,792 71,799 46,885
Consumer.......................... 4,346 40,456 22,309 14,984 5,559 3,910
-------- -------- -------- -------- -------- -------
Total Loans..................... 177,813 196,675 165,199 139,002 106,019 67,979
Net Deferred Loan Costs (Fees).... 475 2,209 1,255 471 173 (102)
Allowance for Loan Losses......... (2,717) (2,610) (2,300) (1,923) (1,616) (1,047)
-------- -------- -------- -------- -------- -------
Net Loans....................... $175,571 $196,274 $164,154 $137,550 $104,576 $66,830
======== ======== ======== ======== ======== =======
COMMITMENTS
Standby Letters of Credit......... $ 446 $ 839 $ 360 $ 371 $ 203 $ 398
Undisbursed Loans and Commitments
to Grant Loans.................. 27,809 28,060 21,627 18,521 14,843 10,014
-------- -------- -------- -------- -------- -------
Total Commitments............... $ 28,255 $ 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
57
<PAGE>
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.
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
September 30, 2000:
<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>
$154,967.. $9,244 $19,747 $27,022 $210,980
======== ====== ======= ======= ========
Loans on Non-Accrual............... 2,237
--------
Total Loans, including Loans Held
for Sale........................... $213,217
========
</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
NINE MONTHS
ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------- ----------------------------------------------------------------
2000 1999 1998 1997 1996 1995
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loans 90 Days Past Due and Still
Accruing........................ $ -- $ 120 $ 223 $ -- $ 122 $ 149
Nonaccrual Loans.................. 2,237 1,542 1,807 1,279 1,096 1,195
------- ------- ------- ------- ------ ------
Total Nonperforming Loans......... 2,237 1,662 2,030 1,279 1,218 1,344
Other Real Estate Owned........... 767 277 971 924 1,661 930
------- ------- ------- ------- ------ ------
Total Nonperforming Assets........ $ 3,004 $ 1,939 $ 3,001 $ 2,203 $2,879 $2,274
======= ======= ======= ======= ====== ======
Nonperforming Loans as a
Percentage of Total Loans....... 1.05% 0.84% 1.22% 1.21% 1.79% 1.97%
Allowance for Loan Loss as a
Percentage of Nonperforming
Loans........................... 121.46% 157.04% 113.30% 126.35% 85.96% 71.43%
Nonperforming Assets as a
Percentage of Total Assets...... 1.02% 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.
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, $778,000 in 1997
and $400,000 for the nine months ended September 30, 2000.
58
<PAGE>
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 NINE
MONTHS
ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------- ----------------------------------------------------------------
2000 1999 1998 1997 1996 1995
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING LOANS:
Average for the Year...... $241,005 $253,771 $209,080 $155,588 $102,145 $68,052
End of the Year........... $177,813 $196,675 $165,199 $139,002 $106,019 $67,979
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of
Year...................... $ 2,610 $ 2,300 $ 1,923 $ 1,616 $ 1,047 $ 960
Actual Charge-Offs:
Commercial................ 45 102 175 486 318 133
Consumer.................. 106 118 252 29 21 24
Real Estate............... 240 298 101 20 192 162
-------- -------- -------- -------- -------- -------
Total Charge-Offs........... 391 518 528 535 531 319
Less Recoveries:
Commercial................ 67 123 140 33 19 18
Consumer.................. 16 10 7 7 11 3
Real Estate............... 15 1 3 24 6 123
-------- -------- -------- -------- -------- -------
Total Recoveries............ 98 134 150 64 36 144
-------- -------- -------- -------- -------- -------
Net Loans Charged-Off....... 293 384 378 471 495 175
Provision for Loan Losses... 400 694 755 778 364 262
Allowance on Loans Acquired
from BOW.................. -- -- -- -- 700 --
-------- -------- -------- -------- -------- -------
Balance at End of Year...... $ 2,717 $ 2,610 $ 2,300 $ 1,923 $ 1,616 $ 1,047
======== ======== ======== ======== ======== =======
RATIOS:
Net Loans Charged-Off to
Average Loans........... 0.12% 0.15% 0.18% 0.30% 0.48% 0.26%
Allowance for Loan Losses
to Total Loans.......... 1.53% 1.33% 1.39% 1.38% 1.87% 1.54%
Net Loans Charged-Off to
Beginning Allowance for
Loan Losses............. 11.23% 16.70% 19.66% 29.15% 47.28% 18.23%
Net Loans Charged-Off to
Provision for Loan
Losses.................. 73.25% 55.33% 50.07% 60.54% 135.99% 66.79%
Allowance for Loan Losses
to Nonperforming Loans.. 121.46% 157.04% 113.30% 150.35% 132.68% 77.90%
</TABLE>
59
<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,
SEPTEMBER 30, -----------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
LOAN LOAN LOAN
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial................................... $ 871 16.7% $ 960 53.2% $ 854 34.1%
Construction................................. 249 7.1% 134 2.8% 100 2.7%
Real Estate.................................. 1,327 73.8% 1,034 23.4% 1,049 49.8%
Consumer..................................... 94 2.4% 267 20.6% 55 13.5%
Unallocated.................................. 176 n/a 215 n/a 242 n/a
------ ----- ------ ----- ------ -----
$2,717 100.0% $2,610 100.0% $2,300 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
LOAN LOAN LOAN
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial................................... $ 657 26.2% $ 806 23.1% $ 522 20.2%
Construction................................. 33 2.1% 65 3.9% 42 5.1%
Real Estate.................................. 873 61.0% 569 67.7% 368 69.0%
Consumer..................................... 139 10.8% 50 5.2% 32 5.8%
Unallocated.................................. 221 n/a 126 n/a 83 n/a
------ ----- ------ ----- ------ -----
$1,923 100.0% $1,616 99.9% $1,047 100.1%
====== ===== ====== ===== ====== =====
</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. At September 30,
2000, we had a deposit mix of 49.2% in time and savings deposits, 25.7% in money
market and NOW deposits, and 25.1% in noninterest-bearing demand deposits. Our
net interest income is enhanced by our percentage of noninterest-bearing
deposits.
60
<PAGE>
The following table summarizes the distribution of average deposits and the
average rates paid for the period indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED DECEMBER 31,
ENDED ---------------------------------------------------------------
SEPTEMBER 30, 2000 1999 1998 1997
------------------- ------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market and NOW
Accounts................... $ 74,163 3.28% $ 74,797 3.70% $ 53,640 3.01% $ 48,414 2.73%
Savings Deposits............. 64,419 3.90% 87,566 4.65% 39,308 4.13% 26,164 3.52%
TCD Less than $100,000....... 54,241 5.96% 42,386 5.11% 51,997 5.43% 37,866 5.49%
TCD $100,000 or More......... 41,785 5.94% 39,963 6.27% 38,120 5.92% 28,923 5.74%
-------- -------- --------
Total Interest-Bearing
Deposits................... 234,608 4.55% 244,712 4.70% 183,065 4.54% 141,367 4.23%
Noninterest-Bearing Demand
Deposits................... 66,059 n/a 68,632 n/a 62,771 n/a 51,664 n/a
-------- -------- -------- --------
Total Average Deposits....... $300,667 3.55% $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 September 30, 2000, were as follows (dollar amounts in
thousands):
<TABLE>
<S> <C>
Three Months or Less........................................ $11,612
Over Three Months to One Year............................. 23,266
Over One Year to Three Years.............................. 2,337
-------
$37,215
=======
</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.
61
<PAGE>
The table below sets forth the interest rate sensitivity of the our
interest-earning assets and interest-bearing liabilities as of September 30,
2000, 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................... $ -- $ -- $ -- $ -- $ --
Investment Securities and FHLB Stock........ 1,776 997 10,000 4,747 17,520
Gross Loans................................. 154,967 9,244 19,747 27,022 210,980
-------- -------- ------- ------- --------
$156,743 $ 10,241 $29,747 $31,769 $228,500
======== ======== ======= ======= ========
INTEREST-BEARING LIABILITIES:
Money Market and NOW Deposits............... $ 67,149 $ -- $ -- $ -- $ 67,149
Savings..................................... 49,184 -- -- -- 49,184
Time Deposits............................... 21,284 52,227 5,939 -- 79,450
Other Borrowings............................ -- -- -- -- --
-------- -------- ------- ------- --------
$137,617 $ 52,227 $ 5,939 $ -- $195,783
======== ======== ======= ======= ========
Interest Rate Sensitivity Gap............... $ 19,126 $(41,986) $23,808 $31,769 $ 32,717
Cumulative Interest Rate Sensitivity Gap.... $ 19,126 $(22,860) $ 948 $32,717 $ 65,434
Ratios Based on Total Assets:
Interest Rate Sensitivity Gap............. 6.51% (14.28%) 8.10% 10.81% 11.13%
Cumulative Interest Rate Sensitivity
Gap..................................... 6.51% (7.78%) 0.32% 11.13%
</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.
Shareholders' equity at September 30, 2000 was $30.3 million, which
represents a 3.8% increase from $29.2 million at December 31, 1999.
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
62
<PAGE>
regulations issued by the FDIC. The Bank's risk-based capital ratios, shown
below as of September 30, 2000 and December 31, 1999, have been computed in
accordance with regulatory accounting policies (Our capital ratios are
comparable to the Bank's).
<TABLE>
<CAPTION>
MINIMUM SEPTEMBER 30, DECEMBER 31,
REQUIREMENTS 2000 1999
------------ ------------- ------------
<S> <C> <C> <C>
Tier 1 Capital............................. 4.00% 8.99% 7.40%
Total Capital.............................. 8.00% 9.60% 7.99%
Leverage Ratio............................. 4.00% 8.73% 7.28%
</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 1999 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 BYL's
financial statements.
YEAR 2000 ISSUES
During the periods leading up to January 1, 2000, BYL addressed the
potential problems associated with the possibility that the computers that
control or operate BYL'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.
BYL 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 BYL's primary market areas. Because BYL's
loan portfolio is highly diversified with regard to individual borrowers and
types of business, BYL does not expect, and to date has not realized, any
significant or prolonged difficulties that will affect net earnings or cash
flow.
63
<PAGE>
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, BYL 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 BYL 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, BYL 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.
There is market risk relating to BYL's fixed rate or term liabilities as
well as its assets. For liabilities, the adverse exposure to market risk is to
lower rates because BYL 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 compared to
6.46% in 1997 and 6.31% for the nine months ended September 30, 2000.
The following is a summary of the carrying amounts and estimated fair values
of selected BYL 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 BYL'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. BYL has a large portion of its loan portfolio tied to
64
<PAGE>
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 BYL 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 BYL 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, BYL will adjust the interest
rates on the certificates and loans to try to match up demand. BYL 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.
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>
BYL 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, BYL 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. BYL has made an effort to minimize concentrations in certain types of
assets and liabilities.
65
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
The equity securities of BYL consist of one class of common stock, of which
there were shares outstanding, held by approximately 800 shareholders of
record on , 2001. The common stock of BYL is listed on Nasdaq
National Market system under the symbol "BOYL."
Management of BYL 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 BYL 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>
<S> <C> <C>
1998
------------------------------------------------------------
First Quarter............................................... 21.875 23.125
Second Quarter.............................................. 23.250 23.500
Third Quarter............................................... 21.500 21.500
Fourth Quarter.............................................. 18.000 18.500
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
2000
------------------------------------------------------------
First Quarter............................................... 10.063 10.500
Second Quarter.............................................. 10.500 10.938
Third Quarter............................................... 12.188 12.375
</TABLE>
AUDITORS
The financial statements of BYL as of December 31, 1999 and 1998, and for
each of the years in the two-year period ended December 31, 1999, have been
included herein in reliance upon the report of Vavrinek, Trine,
Day & Co. LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
OTHER BUSINESS
We are not aware of any business to come before the special meeting other
than those matters described in this proxy statement. However, if any other
matters should properly come before the meeting, it is intended that the proxies
solicited hereby will be voted with respect to those other matters in accordance
with the special judgment of the persons voting the proxies.
66
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
PBOC HOLDINGS, INC.,
PEOPLE'S BANK OF CALIFORNIA,
BYL BANCORP
AND
BYL BANK GROUP
DATED AS OF NOVEMBER 1, 2000
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I DEFINITIONS................................................. A-1
ARTICLE II THE MERGER.................................................. A-4
2.1 The Merger.................................................. A-4
2.2 Effect of the Merger........................................ A-5
2.3 Articles of Incorporation and Bylaws........................ A-5
2.4 Directors and Officers...................................... A-5
2.5 Effective Time.............................................. A-5
2.6 Effect on Outstanding Shares................................ A-6
2.7 Shareholder Rights; Stock Transfers......................... A-7
2.8 Dissenting Shares........................................... A-7
2.9 Exchange Procedures......................................... A-7
2.10 Options..................................................... A-8
2.11 Withholding Rights.......................................... A-8
2.12 Additional Actions.......................................... A-8
2.13 Interim Shares.............................................. A-9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BYL AND BYL BANK.......... A-9
3.1 Capital Structure of BYL and BYL Bank....................... A-9
3.2 Organization, Standing and Authority of BYL................. A-9
3.3 Subsidiaries................................................ A-10
3.4 Reserved.................................................... A-10
Authorized and Effective Agreement; Consents and
3.5 Approvals................................................... A-10
3.6 Securities Documents and Regulatory Reports................. A-11
3.7 Financial Statements........................................ A-11
3.8 Material Adverse Change..................................... A-12
3.9 Environmental Matters....................................... A-12
3.10 Tax Matters................................................. A-13
3.11 Legal Proceedings........................................... A-13
3.12 Compliance with Laws........................................ A-13
3.13 Certain Information......................................... A-14
3.14 Employee Benefit Plans...................................... A-14
3.15 Certain Contracts........................................... A-15
3.16 Brokers and Finders......................................... A-16
3.17 Insurance................................................... A-16
3.18 Properties.................................................. A-16
3.19 Labor....................................................... A-17
3.20 Transactions with Affiliates................................ A-17
3.21 Nonperforming and Classified Assets......................... A-17
Required Vote; Inapplicability of Antitakeover Statutes;
3.22 Fairness Opinion............................................ A-17
3.23 Proposed Transaction with CNL Commercial Finance, Inc....... A-18
3.24 Disclosures................................................. A-19
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PBOC AND THE BANK......... A-19
4.1 Organization, Standing and Authority of PBOC................ A-19
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Organization, Standing, Authority and Ownership of the PBOC
4.2 Subsidiaries................................................ A-19
Authorized and Effective Agreement; Consents and
4.3 Approvals................................................... A-19
4.4 Securities Documents........................................ A-21
4.5 Financial Statements........................................ A-21
4.6 Access to Funds............................................. A-21
4.7 Legal Proceedings........................................... A-21
4.8 Certain Information......................................... A-22
4.9 Disclosures................................................. A-22
ARTICLE V COVENANTS................................................... A-22
5.1 Reasonable Best Efforts..................................... A-22
5.2 Shareholder Meeting......................................... A-22
5.3 Regulatory Matters.......................................... A-22
5.4 Investigation and Confidentiality........................... A-23
5.5 Press Releases.............................................. A-23
5.6 Business of BYL and the Bank................................ A-23
5.7 Current Information......................................... A-26
5.8 Benefit Plans and Arrangements.............................. A-26
5.9 Indemnification; Insurance.................................. A-27
5.10 Disclosure Supplements...................................... A-28
5.11 Failure to Fulfill Conditions............................... A-28
ARTICLE VI CONDITIONS PRECEDENT........................................ A-28
6.1 Conditions Precedent--All Parties........................... A-28
6.2 Conditions Precedent--BYL and BYL Bank...................... A-28
6.3 Conditions Precedent--PBOC and the Bank..................... A-29
ARTICLE VII TERMINATION, WAIVER AND AMENDMENT........................... A-30
7.1 Termination................................................. A-30
7.2 Effect of Termination....................................... A-31
7.3 Survival of Representations, Warranties and Covenants....... A-31
7.4 Waiver...................................................... A-31
7.5 Amendment or Supplement..................................... A-32
ARTICLE VIII MISCELLANEOUS............................................... A-32
8.1 Expenses; Termination Fee................................... A-32
8.2 Entire Agreement............................................ A-34
8.3 Assignment; Successors...................................... A-34
8.4 Notices..................................................... A-34
8.5 Alternative Structure....................................... A-35
8.6 Interpretation.............................................. A-35
8.7 Counterparts................................................ A-35
8.8 Governing Law............................................... A-35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Exhibit A Form of Stockholder Agreement
Exhibit B Form of Agreement of Merger
Exhibit C Form of Agreement of Merger and Liquidation
Exhibit D Form of Articles of Combination and Agreement of Merger
Exhibit E Matters to be covered by opinion of counsel to PBOC
Exhibit F Intentionally Omitted
Exhibit G Matters to be covered by opinion of counsel to BYL
Exhibit H Form of Stock Option Agreement
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of November 1, 2000
("Agreement") among PBOC Holdings, Inc. ("PBOC"), a Delaware corporation,
People's Bank of California (the "Bank"), a federally-chartered savings bank and
wholly-owned subsidiary of PBOC, BYL Bancorp ("BYL"), a California corporation
and BYL Bank Group ("BYL Bank"), a California-chartered commercial bank and
wholly-owned subsidiary of BYL.
W I T N E S S E T H:
WHEREAS, the Boards of Directors of PBOC, the Bank, BYL and BYL Bank have
determined that it is in the best interests of their respective companies and
their shareholders to consummate the business combination transactions provided
for herein; and
WHEREAS, the parties desire to provide for certain undertakings, conditions,
representations, warranties and covenants in connection with the transactions
contemplated hereby; and
WHEREAS, as a condition and inducement to PBOC's willingness to enter into
this Agreement, certain stockholders of BYL are concurrently entering into a
Stockholder Agreement with PBOC (the "Stockholder Agreement"), in substantially
the form attached hereto as Exhibit A, pursuant to which, among other things,
such stockholders agree to vote their shares of BYL Common Stock in favor of
this Agreement and the Agreement of Merger (as defined herein) and the
transactions contemplated hereby and thereby.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements herein contained, the
parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
"Acquisition Transaction" shall have the meaning set forth in
Section 5.6(b) hereof.
"Affiliate" shall have the meaning set forth in Section 3.20 hereof.
"Agreement of Merger" shall mean the agreement of merger between BYL and
Interim, the form of which is attached hereto as Exhibit B.
"Agreement and Plan of Merger and Liquidation" shall mean the agreement
between BYL and PBOC, the form of which is attached hereto as Exhibit C.
"Articles of Combination and Agreement of Merger" shall mean the agreement
between BYL Bank and People's Bank of California, the form of which is attached
hereto as Exhibit D.
"Bank" shall mean People's Bank of California.
"BYL" shall mean BYL Bancorp.
"BYL Bank" shall mean BYL Bank Group.
"BYL Common Stock" shall mean the common stock of BYL.
"BYL Financial Statements" shall mean (i) the consolidated statements of
financial condition (including related notes and schedules, if any) of BYL as of
December 31, 1999 and 1998 and the consolidated statements of income, changes in
shareholders' equity and cash flows (including related notes and schedules, if
any) of BYL for each of the three years ended December 31, 1999, 1998 and 1997,
as well as the unaudited consolidated statement of financial condition of BYL as
of June 30, 2000 and the unaudited consolidated statements of income, changes in
shareholders' equity and cash flows
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for the six months ended June 30, 2000 and 1999 and (ii) the consolidated
statements of financial condition of BYL (including related notes and schedules,
if any) and the consolidated statements of income (including related notes and
schedules, if any) of BYL included in the Security Documents filed by BYL with
respect to the quarterly and annual periods ended subsequent to June 30, 2000
and delivered to PBOC pursuant to Section 5.7 hereof.
"BYL Option Plan" shall mean the BYL Stock Option Plan.
"BYL Options" shall mean options to purchase shares of BYL Common Stock
granted pursuant to the BYL Option Plan.
"BYL Preferred Stock" shall mean the preferred stock of BYL.
"CGCL" shall mean the California General Corporation Law.
"CNL Transaction Agreements" shall mean the Agreement Pertaining to the
Ownership and Operation of CNL Commercial Finance, LLC by and between CNL
Commercial Funding LP, BYL, BYL Bank and CNL Commercial Finance LLC dated
July 12, 2000; the First Amendment thereto dated August 15, 2000, with CNL
Commercial Finance, Inc ("CCF") as successor to CNL Commercial Finance, LLC
(collectively, the "CNL Operations Agreement"); the Stockholders' Agreement of
CNL Commercial Finance, Inc. between CNL Commercial Funding, LP, CCF and BYL,
dated August 16, 2000; and each of the additional agreements referred to
therein.
"Closing" shall have the meaning set forth in Section 2.5 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Confidentiality Agreement" shall have the meaning set forth in
Section 5.4(b) hereof.
"CRA" shall mean the Community Reinvestment Act of 1977, as amended.
"Department" shall mean the State of California Department of Financial
Institutions.
"DGCL" shall mean the General Corporation Law of Delaware.
"Dissenting Shares" shall have the meaning set forth in Section 2.8 hereof.
"DOJ" shall mean the United States Department of Justice.
"Effective Time" shall mean the time specified pursuant to Section 2.5
hereof as the effective time of the Merger.
"Environmental Claim" means any written notice from any governmental
authority or third party alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on, or resulting from the
presence, or release into the environment, of any Materials of Environmental
Concern.
"Environmental Laws" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface or subsurface soil, plant and animal
life or any other natural resource), and/or (2) the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of Materials of Environmental Concern. The term
Environmental Laws includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
Section9601, ET SEQ; the Resource Conservation and Recovery Act, as
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amended, 42 U.S.C. Section2901, ET SEQ; the Clean Air Act, as amended, 42 U.S.C.
Section7401, ET SEQ; the Federal Water Pollution Control Act, as amended, 33
U.S.C. Section1251, ET SEQ; the Toxic Substances Control Act, as amended, 15
U.S.C. Section9601, ET SEQ; the Emergency Planning and Community Right to Know
Act, 42 U.S.C. Section11001, ET SEQ; the Safe Drinking Water Act, 42 U.S.C.
Section300f, ET SEQ; (2) all comparable state and local laws including but not
limited to, the Air Quality Monitoring Devices Act (California Health and Safety
Code Section42700 ET SEQ.); the Porter-Cologne Water Control Act (California
Water Code Section13200 ET SEQ.); the Carpenter-Presley-Tanner Hazardous
Substance Control Act (California Health and Safety Code Section25300 ET SEQ.);
the Clean Waters Act (California Fish and Game Code Section5650 ET SEQ.); and
the Hazard Communications Act (8 CCR 5194) and any similar, implementing or
successor law, and any amendment, rule, regulation, order, or directive issued
thereunder; and (3) any common law (including without limitation common law that
may impose strict liability) that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Materials of Environmental Concern.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation, or any
successor thereto.
"FRB" means the Board of Governors of the Federal Reserve System.
"Governmental Entity" shall mean any federal or state court, administrative
agency or commission or other governmental authority or instrumentality.
"HOLA" shall mean the Home Owner's Loan Act, as amended.
"Interim" shall have the meaning set forth in Section 2.1 hereof.
"Material Adverse Effect" shall mean any effect that (i) is material and
adverse to the financial condition, results of operations or business of BYL and
BYL Bank, either individually or considered as one enterprise or
(ii) materially impairs the ability of BYL and/or BYL Bank to consummate the
transactions contemplated by this Agreement and the Agreement of Merger,
provided, however, that Material Adverse Effect shall not be deemed to include
(i) the impact of changes in (a) laws, regulations, or policies of any
Government Entity or interpretations thereof; or (b) generally accepted
accounting principles, that in each case are generally applicable to the banking
industry, or (ii) actions taken or to be taken by BYL upon the written request
of PBOC pursuant to this Agreement or the Agreement of Merger.
"Materials of Environmental Concern" means pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other materials
regulated under Environmental Laws.
"Merger" shall have the meaning set forth in Section 2.1 hereof.
"Merger Consideration" shall have the meaning set forth in Section 2.6(c)
hereof.
"OTS" shall mean the Office of Thrift Supervision of the U.S. Department of
the Treasury, or any successor thereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor
thereto.
"PBOC Financial Statements" shall mean (i) the consolidated statements of
financial condition (including related notes and schedules, if any) of PBOC as
of December 31, 1999 and 1998 and the consolidated statements of income,
shareholders' equity and cash flows (including related notes and schedules, if
any) of PBOC for each of the three years ended December 31, 1999, 1998 and 1997,
as well as the unaudited consolidated statement of financial condition as of
June 30, 2000 and the
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unaudited consolidated statements of income, shareholders' equity and cash flows
for the six months ended June 30, 2000 and 1999 and (ii) the consolidated
balance sheets of PBOC (including related notes and schedules, if any) and the
consolidated statements of income, shareholders' equity and cash flows
(including related notes and schedules, if any) of PBOC included in the
Securities Documents filed by PBOC with respect to the quarterly and annual
periods subsequent to June 30, 2000, 1999 and delivered to BYL pursuant to
Section 5.7 hereof.
"Previously Disclosed" shall mean disclosed in (i) a letter dated the date
hereof delivered from the disclosing party to the other party specifically
referring to the appropriate section of this Agreement and describing in
reasonable detail the matters contained therein or (ii) a letter dated after the
date hereof from the disclosing party specifically referring to this Agreement
and describing in reasonable detail the matters contained therein and delivered
by the other party pursuant to Section 5.10 hereof. The inclusion of any matter
in information Previously Disclosed shall not be deemed an admission or
otherwise to imply that any such matter is material for purposes of this
Agreement.
"Proxy Statement" shall mean the proxy statement to be delivered by BYL to
its shareholders in connection with the solicitation of their approval of this
Agreement and the Agreement of Merger and the transactions contemplated hereby
and thereby, including any amendment or supplement thereto.
"Rights" shall mean warrants, options, rights, convertible securities and
other arrangements or commitments which obligate an entity to issue or dispose
of any of its capital stock or other ownership interests.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Documents" shall mean all reports, offering circulars, proxy
statements, registration statements and all similar documents filed, or required
to be filed, pursuant to the Securities Laws.
"Securities Laws" shall mean the Securities Act, the Exchange Act and the
rules and regulations of the Commission promulgated thereunder.
"Stockholder Agreement" means the agreement dated the date hereof between
certain of the stockholders of BYL and PBOC, the form of which is attached
hereto as Exhibit A.
"Stock Option Agreement" means the agreement dated the date hereof between
PBOC and BYL, the form of which is attached hereto as Exhibit H.
"Subsidiary" and "Significant Subsidiary" shall have the meanings set forth
in Rule 1-02 of Regulation S-X of the Commission.
Other terms used herein are defined in the preamble and elsewhere in this
Agreement.
ARTICLE II
THE MERGER
2.1 THE MERGER
Subject to the terms and conditions of this Agreement and subject to and in
accordance with an Agreement of Merger, the form of which is attached hereto as
Exhibit B (the "Agreement of Merger"), between BYL and PBOC Acquisition Corp., a
California corporation and wholly-owned subsidiary of PBOC ("Interim") to be
formed in connection with the transactions contemplated hereby, at the Effective
Time (as defined in Section 2.5 hereof), Interim shall be merged with and into
BYL in accordance with Section 1100 ET SEQ. of the CGCL (the "Merger"), with BYL
as the surviving corporation (hereinafter sometimes called the "Surviving
Corporation"). Simultaneously with or as soon as practicable after the Merger,
the Surviving Corporation shall be merged with and liquidated into
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PBOC (the "Liquidation") in accordance with an Agreement and Plan of Merger and
Liquidation, the form of which is attached hereto as Exhibit C.
2.2 EFFECT OF THE MERGER
(a) As of the Effective Time (as defined in Section 2.5 hereof), the
Surviving Corporation shall be considered the same business and corporate entity
as each of BYL and Interim and thereupon and thereafter, all the property,
rights, powers and franchises of each of BYL and Interim shall vest in the
Surviving Corporation and the Surviving Corporation shall be subject to and be
deemed to have assumed all of the debts, liabilities, obligations and duties of
each of BYL and Interim and shall have succeeded to all of each of their
relationships, fiduciary or otherwise, as fully and to the same extent as if
such property rights, privileges, powers, franchises, debts, obligations, duties
and relationships had been originally acquired, incurred or entered into by the
Surviving Corporation. In addition, any reference to either of BYL and Interim
in any contract or document, whether executed or taking effect before or after
the Effective Time, shall be considered a reference to the Surviving Corporation
if not inconsistent with the other provisions of the contract or document; and
any pending action or other judicial proceeding to which either of BYL and
Interim is a party, shall not be deemed to have abated or to have discontinued
by reason of the Merger, but may be prosecuted to final judgment, order or
decree in the same manner as if the Merger had not been made; or the Surviving
Corporation may be substituted as a party to such action or proceeding, and any
judgment, order or decree may be rendered for or against it that might have been
rendered for or against either of BYL and Interim if the Merger had not
occurred. At the Effective Time, the directors and officers of the Surviving
Corporation shall be the persons designated in Section 2.4.
(b) Following consummation of the Liquidation, PBOC shall cause BYL Bank to
merge with and into the Bank, with the Bank as the resulting institution in
accordance with the terms of the Articles of Combination and Agreement of
Merger, the form of which is attached hereto as Exhibit D.
2.3 ARTICLES OF INCORPORATION AND BYLAWS
As of the Effective Time, the Article of Incorporation and Bylaws of BYL
shall be the Articles of Incorporation and Bylaws of the Surviving Corporation
until otherwise amended as provided by law.
2.4 DIRECTORS AND OFFICERS
As of the Effective Time, the directors and officers of Interim shall become
the directors and officers of the Surviving Corporation.
2.5 EFFECTIVE TIME
The Merger shall become effective upon the occurrence of the filing of an
Agreement of Merger with the Secretary of State of the State of California,
unless a later date and time is specified as the effective time in such
Agreement of Merger ("Effective Time"). A closing (the "Closing") shall take
place immediately prior to the Effective Time at 10:00 a.m., on the fifth
business day following the receipt of all necessary regulatory or governmental
approvals and consents and the expiration of all statutory waiting periods in
respect thereof and the satisfaction or waiver, to the extent permitted
hereunder, of the conditions to the consummation of the Merger specified in
Article VI of this Agreement (other than the delivery of certificates and other
instruments and documents to be delivered at the Closing), at the offices of
PBOC or at such other place, at such other time, or on such other date as the
parties may mutually agree upon. At the Closing, there shall be delivered to the
parties hereto the certificates and other documents required to be delivered
under Article VI hereof.
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2.6 EFFECT ON OUTSTANDING SHARES
Subject to the provisions of this Agreement, at the Effective Time,
automatically by virtue of the Merger and without any action on the part of a
holder of shares of BYL Common Stock:
(a) each share of BYL Common Stock issued and outstanding at the Effective
Time (other than (i) Dissenting Shares and (ii) shares of BYL Common Stock owned
by BYL or PBOC or any of its wholly-owned subsidiaries, other than shares held
in a fiduciary capacity or in satisfaction of a debt previously contracted)
shall become and be converted into the right to receive in cash without interest
the Merger Consideration, determined in accordance with Sections 2.6(c) and
(d) hereof; and
(b) each share of BYL Common Stock owned by BYL, PBOC or any of PBOC's
wholly-owned Subsidiaries at the Effective Time (other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted) shall be
canceled and retired and shall not represent capital stock of the Surviving
Corporation, and no exchange or payment shall be made with respect thereto.
(c) Subject to Section 2.6(d), the Merger Consideration for purposes of
Section 2.6(a) shall be $15.00; provided, however, that if the Closing occurs
(i) in the period commencing March 6, 2001 to and including June 15, 2001, the
Merger Consideration shall be increased by an amount for each day subsequent to
March 6, 2001 to and including the Closing Date which is equivalent to 8.0% per
annum on the aggregate $15.00 per share Merger Consideration (the "Additional
Merger Consideration"). Notwithstanding the foregoing, for purposes of computing
the amount of Additional Merger Consideration, if any, which PBOC is obligated
to pay hereunder, no Additional Merger Consideration shall be due on the date
which is five days after the date that PBOC provides BYL with written notice
that it has satisfied all conditions for Closing and is prepared to close the
transactions contemplated by this Agreement.
(d)(i) To the extent that the SBA Commencement Assets (as defined in the
CNL Operations Agreement) have not been purchased by CCF by December 31, 2000,
PBOC and the Bank acknowledge that BYL and BYL Bank shall liquidate for cash the
Second Residual Interest (as defined in the CNL Operations Agreement) and not
consummate the transactions contemplated by the CNL Transaction Agreements.
Under such circumstances, notwithstanding anything herein to the contrary, the
aggregate Merger Consideration shall be reduced by the after tax cost (utilizing
BYL's applicable tax rate) of the difference between $2,104,002 and the sum of
(i) the cash price received for the Second Residual Interest, plus (ii) cash
payments received by BYL on the Second Residual Interest after the date of this
Agreement, plus (iii) interest earned at the rate of 5.0% per annum on the
amounts set forth in clause (ii) of this sentence from the date of receipt to
the date of sale of such Second Residual Interest, as evidenced by a payment
schedule which shall be satisfactory to PBOC. To the extent that the Second
Residual Interest has not been liquidated by the date of PBOC's receipt of the
last required regulatory approval of the transactions contemplated by this
Agreement, then for purposes of clause (i) in the immediately preceding
sentence, the cash price received for the Second Residual Interest shall be
deemed to be zero.
(ii) To the extent that the SBA Commencement Assets (as defined in the
CNL Operations Agreement) have been purchased by CCF by December 31, 2000, but,
as part of the closing of the transactions contemplated by the CNL Transaction
Agreements, BYL and BYL Bank has had to cause CCF to acquire through purchase a
license providing for Small Business Administration ("SBA") accreditation as a
non-bank participating lender, then under such circumstances and notwithstanding
anything herein to the contrary, the Merger Consideration shall be reduced by
the after tax cost (utilizing BYL's applicable tax rate) to BYL of the
acquisition by CCF of the SBA license.
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2.7 SHAREHOLDER RIGHTS; STOCK TRANSFERS
Except as provided in Section 2.8 hereof, at the Effective Time, holders of
BYL Common Stock shall cease to be and shall have no rights as shareholders of
BYL, other than to receive the aggregate Merger Consideration to which such
holders are entitled pursuant to Section 2.6 hereof. After the Effective Time,
there shall be no transfers on the stock transfer books of BYL or the Surviving
Corporation of shares of BYL Common Stock.
2.8 DISSENTING SHARES
Each outstanding share of BYL Common Stock the holder of which has perfected
his right to dissent under Section 1300 ET SEQ. of the CGCL and has not
effectively withdrawn or lost such right as of the Effective Time (the
"Dissenting Shares") shall not be converted into or represent a right to receive
the Merger Consideration specified in Section 2.6 hereof, and the holder thereof
shall be entitled only to such rights as are granted by Section 1301 of the
CGCL. If any holder of Dissenting Shares shall fail to perfect or shall have
effectively withdrawn or lost the right to dissent, the Dissenting Shares held
by such holder shall thereupon be treated as though such Dissenting Shares had
been converted into the right to receive the aggregate Merger Consideration to
which such holder would be entitled pursuant to Section 2.6 hereof. BYL shall
give PBOC prompt notice upon receipt by BYL of any such written demands for
payment of the fair value of shares of BYL Common Stock and of withdrawals of
such demands and any other instruments provided pursuant to Section 1301 of the
CGCL. Any payments made in respect of Dissenting Shares shall be made by the
Surviving Corporation.
2.9 EXCHANGE PROCEDURES
(a) At and after the Effective Time, each certificate (each a "Certificate")
previously representing shares of BYL Common Stock, other than Dissenting
Shares, shall represent only the right to receive the aggregate Merger
Consideration specified in Section 2.6 hereof.
(b) As of the Effective Time, PBOC shall deposit, or shall cause to be
deposited, with such bank or trust company reasonably acceptable to BYL as PBOC
may select (the "Exchange Agent"), the aggregate Merger Consideration to be paid
to the holders of shares of BYL Common Stock pursuant to Section 2.6 hereof in
exchange for outstanding shares of BYL Common Stock.
(c) Within five business days after the Effective Time, PBOC shall cause the
Exchange Agent to mail to each holder of record of a Certificate or Certificates
the following: (i) a letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, which shall be in a form and
contain any other provisions as PBOC and BYL may determine; and
(ii) instructions for use in effecting the surrender of Certificates in exchange
for the aggregate Merger Consideration to which such holder is entitled pursuant
to Section 2.6 hereof. Upon the proper surrender of a Certificate to the
Exchange Agent, together with a properly completed and duly executed letter of
transmittal, the holder of such Certificate shall be entitled to receive in
exchange therefor a check representing the aggregate Merger Consideration which
such holder has the right to receive in respect of the Certificate surrendered
pursuant to Section 2.6 hereof, and the Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on the Merger
Consideration. In the event of a transfer of ownership of any shares of BYL
Common Stock not registered in the transfer records of BYL, a check for the
aggregate Merger Consideration to which the holder thereof is entitled pursuant
to Section 2.6 hereof may be issued to the holder if the Certificate
representing such BYL Common Stock is presented to the Exchange Agent,
accompanied by documents sufficient, in the reasonable discretion of PBOC and
the Exchange Agent, (i) to evidence and effect such transfer and (ii) to
evidence that all applicable stock transfer taxes have been paid.
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(d) Any portion of the aggregate Merger Consideration or the proceeds of any
investments thereof that remains unclaimed by the shareholders of BYL for six
months after the Effective Time shall be repaid by the Exchange Agent to PBOC.
Any shareholders of BYL who have not theretofore complied with this Section 2.9
shall thereafter look only to PBOC for payment of the Merger Consideration
deliverable in respect of each share of BYL Common Stock such shareholder holds
as determined pursuant to Section 2.6 of this Agreement without any interest
thereon. If outstanding Certificates are not surrendered or the payments for
them are not claimed prior to the date on which such payments would otherwise
escheat to or become the property of any Governmental Entity, the unclaimed
items shall, to the extent permitted by abandoned property and any other
applicable law, become the property of PBOC (and to the extent not in its
possession shall be paid over to it), free and clear of all claims or interest
of any person previously entitled to such claims. Notwithstanding the foregoing,
none of PBOC, the Surviving Corporation, the Exchange Agent or any other person
shall be liable to any former holder of BYL Common Stock for any amount
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(e) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by PBOC or the
Exchange Agent, the posting by such person of a bond in such amount as the
Exchange Agent may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the aggregate Merger
Consideration deliverable in respect thereof pursuant to Section 2.3 of this
Agreement.
2.10 OPTIONS
At the Effective Time, each BYL Option which is outstanding and unexercised
immediately prior to the Effective Time shall be terminated and each grantee
thereof shall be entitled to receive, in lieu of each share of BYL Common Stock
that would otherwise have been issuable upon the exercise thereof, an amount in
cash computed by multiplying (i) the difference between (x) the Merger
Consideration and (y) the per share exercise price applicable to such BYL Option
by (ii) the number of such shares of BYL Common Stock subject to such BYL
Option. BYL agrees to take or cause to be taken all action necessary to provide
for such termination and payment effective at or before the Effective Time. BYL
agrees to provide each holder of a BYL Option granted pursuant to a BYL Option
Plan with any applicable notice and otherwise to take such actions as may be
required to ensure that outstanding BYL Options are terminated in the manner set
forth in this Section 2.10.
2.11 WITHHOLDING RIGHTS
PBOC (through the Exchange Agent, if applicable) shall be entitled to deduct
and withhold from any amounts otherwise payable pursuant to this Agreement to
any holder of BYL Common Stock or BYL Options such amounts as PBOC is required
under the Code or any provision of state, local or foreign tax law to deduct and
withhold with respect to the making of such payment. Any amounts so withheld and
paid to the applicable taxing authority shall be treated for all purposes of
this Agreement as having been paid to the holder of BYL Common Stock or BYL
Options, as applicable, in respect of which such deduction and withholding was
made by PBOC.
2.12 ADDITIONAL ACTIONS
If, at any time after the Effective Time, the Surviving Corporation shall
consider that any further assignments or assurances in law or any other acts are
necessary or desirable to (i) vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation its rights, title or interest in, to or under any
of the rights, properties or assets of BYL acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger, or
(ii) otherwise carry out the purposes of this Agreement, each of the BYL and its
proper officers and directors shall be deemed to have granted to
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the Surviving Corporation an irrevocable power of attorney to execute and
deliver all such proper deeds, assignments and assurances in law and to do all
acts necessary or proper to vest, perfect or confirm title to and possession of
such rights, properties or assets in the Surviving Corporation and otherwise to
carry out the purposes of this Agreement; and the proper officers and directors
of the Surviving Corporation are fully authorized in the name of BYL or
otherwise to take any and all such action.
2.13 INTERIM SHARES
Each outstanding share of common stock of Interim, $.01 par value per share
("Interim Common Stock"), on the Effective Time shall be converted automatically
and without any action on the part of the holder thereof into an equal number of
shares of the Surviving Corporation, which shall constitute all of the
outstanding common stock of the Surviving Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BYL AND BYL BANK
Except as Previously Disclosed, BYL and BYL Bank represent and warrant to
PBOC and the Bank as follows:
3.1 CAPITAL STRUCTURE OF BYL AND BYL BANK
The authorized capital stock of BYL consists of 50,000,000 shares of BYL
Common Stock and 25,000,000 shares of Preferred Stock. As of the date hereof,
(i) there are 2,542,568 shares of BYL Common Stock issued and outstanding, no
shares of BYL Preferred Stock issued and outstanding and no shares of BYL Common
Stock are held as treasury shares. All outstanding shares of BYL Common Stock
have been duly authorized and validly issued and are fully paid and
nonassessable and none of the outstanding shares of BYL Common Stock has been
issued in violation of the preemptive rights of any person, firm or entity. BYL
has Previously Disclosed each BYL Option outstanding as of the date hereof,
including the number of shares covered by each such BYL Option and the exercise
price thereof. Except for the option to purchase BYL Common Stock granted to
PBOC pursuant to the Stock Option Agreement and BYL Options to purchase 377,203
shares of BYL Common Stock as of the date hereof, there are no Rights
authorized, issued or outstanding with respect to the BYL Common Stock.
The authorized capital stock of BYL Bank consists of 6,666,666 shares of
common stock and 1,000,000 shares of preferred stock. As of the date hereof,
(i) there are 100 shares of BYL Bank common stock issued and outstanding, no
shares of BYL Bank preferred stock issued and outstanding and no shares of BYL
Bank common stock are held as treasury shares. All outstanding shares of BYL
Bank common stock have been duly authorized and validly issued and are fully
paid and nonassessable and are owned by BYL.
3.2 ORGANIZATION, STANDING AND AUTHORITY OF BYL
BYL is a corporation duly organized, validly existing and in good standing
under the laws of the State of California. BYL has the corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted and is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good standing would
not have a Material Adverse Effect. BYL is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. BYL has heretofore
delivered to PBOC true and complete copies of the Articles of Incorporation and
Bylaws of BYL as in effect as of the date hereof.
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3.3 SUBSIDIARIES
The only direct or indirect subsidiary of BYL is BYL Bank. BYL Bank (i) is
duly organized and is validly existing under the laws of the State of
California, (ii) has the corporate power and authority to own or lease all of
its properties and assets and to conduct its business as it is now being
conducted, and (iii) is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary, except where the failure to
be so licensed, qualified or in good standing would not have a Material Adverse
Effect. Except as Previously Disclosed, each of BYL and BYL Bank has satisfied
in all material respects all commitments, financial or otherwise, as may have
been agreed upon with their appropriate bank regulatory agencies. Except as
Previously Disclosed, BYL and/or BYL Bank do not own or have the right to
acquire, directly or indirectly, any outstanding capital stock or other voting
securities or ownership interests of any corporation, bank, savings association,
partnership, joint venture or other organization.
3.4 RESERVED.
3.5 AUTHORIZED AND EFFECTIVE AGREEMENT; CONSENTS AND APPROVALS
(a) BYL and BYL Bank have all requisite corporate power and authority to
enter into this Agreement and (subject to receipt of all necessary governmental
approvals and the approval of BYL's shareholders of this Agreement) to perform
all of their obligations under this Agreement. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action in respect
thereof on the part of BYL and BYL Bank, except for the approval of this
Agreement by BYL's shareholders. This Agreement has been duly and validly
executed and delivered by BYL and BYL Bank and constitutes legal, valid and
binding obligations of BYL and BYL Bank which are enforceable against BYL and
BYL Bank in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, and except that the availability of
equitable remedies (including, without limitation, specific performance) is
within the discretion of the appropriate court.
(b) Subject to the approval of this Agreement by the stockholders of BYL,
BYL has full corporate power and authority to execute and deliver the Agreement
of Merger and to consummate the transactions contemplated thereby in accordance
with the terms thereof. The execution and delivery of the Agreement of Merger by
BYL and the consummation of the transactions contemplated thereby have been duly
and validly approved by the Board of Directors of BYL. The Agreement of Merger,
upon its execution and delivery by BYL, will constitute a valid and binding
obligation of BYL, enforceable against it in accordance with and subject to its
terms, except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally, and
except that the availability of equitable remedies (including, without
limitation, specific performance) is within the discretion of the appropriate
court.
(c) None of the execution and delivery of this Agreement by BYL and BYL
Bank, the execution and delivery of the Agreement of Merger by BYL, the
consummation by BYL and BYL Bank of the transactions contemplated hereby in
accordance with the terms hereof, the consummation by BYL of the transactions
contemplated by the Agreement of Merger in accordance with the terms thereof,
compliance by BYL and BYL Bank with any of the terms or provisions hereof or
compliance by BYL with any terms or provisions of the Agreement of Merger, will
(i) violate any provision of the Articles of Incorporation or Bylaws of BYL or
BYL Bank; (ii) assuming that the consents and approvals set forth herein are
duly obtained, violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to BYL or BYL Bank or any of their
respective properties or
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assets, or (iii) violate, conflict with, result in a breach of any provisions
of, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or other encumbrance upon any of the properties or
assets of BYL or BYL Bank under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which BYL or BYL Bank are a party, or by which
any of their respective properties or assets may be bound or affected, except,
with respect to (ii) and (iii) above, such as individually or in the aggregate
will not have a Material Adverse Effect and which will not prevent or delay the
consummation of the transactions contemplated hereby. Except for consents and
approvals of or filings or registrations with or notices to the FRB, the FDIC,
the Department, the OTS, the Secretary of State of the State of Delaware, the
Secretary of State of the State of California and the stockholders of BYL, no
consents or approvals of or filings or registrations with or notices to any
Governmental Entity are required on behalf of BYL or BYL Bank in connection with
(a) the execution and delivery of this Agreement by BYL and BYL Bank or the
execution and delivery of the Agreement of Merger by BYL, and (b) the completion
by BYL and BYL Bank of the transactions contemplated hereby or the completion by
BYL of the transactions contemplated by the Agreement of Merger.
(d) Except as Previously Disclosed, as of the date hereof, neither BYL nor
BYL Bank is aware of any reasons relating to BYL or BYL Bank why all consents
and approvals shall not be procured from all regulatory agencies having
jurisdiction over the transactions contemplated by this Agreement as shall be
necessary for consummation of the transactions contemplated by this Agreement.
3.6 SECURITIES DOCUMENTS AND REGULATORY REPORTS
(a) BYL has previously delivered or made available to PBOC a complete copy
of all Securities Documents filed by BYL pursuant to the Securities Laws or
mailed by BYL to its shareholders as a class since January 1, 1995. BYL has
timely filed with the Commission all Securities Documents required by the
Securities Laws and such Securities Documents complied in all material respects
with the Securities Laws and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, provided that information as of a
later date shall be deemed to modify information as of an earlier date.
(b) Since January 1, 1995, BYL and BYL Bank have duly filed with the
appropriate regulatory authorities, in correct form the monthly, quarterly and
annual reports required to be filed under applicable laws and regulations and
such reports were in all material respects complete and accurate and in
compliance with the requirements of applicable laws and regulations, and BYL and
BYL Bank have previously delivered or made available to PBOC accurate and
complete copies of all such reports. In connection with the most recent
examinations of BYL and BYL Bank by the appropriate regulatory authorities,
neither BYL nor BYL Bank were required to correct or change any action,
procedure or proceeding which BYL and BYL Bank believe in good faith has not
been now corrected or changed, other than corrections or changes which, if not
made, either individually or in the aggregate, would not have a Material Adverse
Effect. The most recent regulatory rating given to BYL Bank as to compliance
with the CRA is "satisfactory." To the best knowledge of BYL and BYL Bank, since
its last regulatory examination of CRA compliance, BYL Bank has not received any
complaints as to CRA compliance.
3.7 FINANCIAL STATEMENTS
(a) BYL has previously delivered or made available to PBOC accurate and
complete copies of the BYL Financial Statements for all periods ended prior to
the date hereof, which in the case of the consolidated statement of financial
condition of BYL as of December 31, 1999 and 1998 and the consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years
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ended December 31, 1999, 1998 and 1997 are accompanied by the audit report of
Vavrinek, Trine, Day & Co., independent public accountants with respect to BYL,
as well as the unaudited consolidated statement of financial condition of BYL as
of June 30, 2000 and the unaudited consolidated statements of income, changes in
shareholders' equity and cash flows for the six months ended June 30, 2000 and
1999. The BYL Financial Statements referred to herein, as well as the BYL
Financial Statements to be delivered pursuant to Section 5.7 hereof, fairly
present or will fairly present, as the case may be, the consolidated financial
condition of BYL as of the respective dates set forth therein, and the
consolidated results of operations, changes in shareholders' equity and cash
flows of BYL for the respective periods or as of the respective dates set forth
therein.
(b) Each of the BYL Financial Statements has been or will be, as the case
may be, prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved, except as stated therein, and
except that unaudited BYL Financial Statements may not include all footnote
disclosures required by generally accepted accounting principles. The audits of
BYL have been conducted in accordance with generally accepted auditing
standards. The books and records of BYL and BYL Bank are being maintained in
material compliance with applicable legal and accounting requirements, and such
books and records accurately reflect in all material respects all dealings and
transactions in respect of the business, assets, liabilities and affairs of BYL
and BYL Bank.
(c) Except to the extent (i) reflected, disclosed or provided for in the
consolidated statement of financial condition of BYL as of June 30, 2000
(including related notes) and (ii) of liabilities incurred since such date in
the ordinary course of business, BYL and BYL Bank have no liabilities, whether
absolute, accrued, contingent or otherwise, material to the financial condition,
results of operations or business of BYL and BYL Bank.
3.8 MATERIAL ADVERSE CHANGE
Since June 30, 2000, (i) BYL and BYL Bank have conducted their businesses in
the ordinary and usual course and (ii) no event has occurred or circumstances
arisen that, individually or in the aggregate, has had or is reasonably likely
to have a Material Adverse Effect.
3.9 ENVIRONMENTAL MATTERS
(a) To the knowledge of BYL and BYL Bank, BYL and BYL Bank are in compliance
with all Environmental Laws, except for any violations of any Environmental Law
which would not, individually or in the aggregate, have a Material Adverse
Effect. Neither BYL nor BYL Bank have received any communication alleging that
BYL and/or BYL Bank is not in such compliance and, to the knowledge of BYL and
BYL Bank, there are no present circumstances that would prevent or interfere
with the continuation of such compliance.
(b) To the knowledge of BYL and BYL Bank, none of the properties owned,
leased or operated by BYL and BYL Bank has been or is in violation of or liable
under any Environmental Law, except any such violations or liabilities which
would not individually or in the aggregate have a Material Adverse Effect.
(c) To the knowledge of BYL and BYL Bank, there are no past or present
actions, activities, circumstances, conditions, events or incidents that could
reasonably form the basis of any Environmental Claim or other claim or action or
governmental investigation that could result in the imposition of any liability
arising under any Environmental Law against BYL or BYL Bank or against any
person or entity whose liability for any Environmental Claim BYL or BYL Bank has
or may have retained or assumed either contractually or by operation of law,
except such which would not, individually or in the aggregate, have a Material
Adverse Effect.
(d) BYL and BYL Bank have Previously Disclosed any environmental studies
conducted by it with respect to any properties directly or indirectly owned or
leased by it as of the date hereof.
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3.10 TAX MATTERS
(a) BYL and BYL Bank have timely filed all federal, state and local (and, if
applicable, foreign) income, franchise, bank, excise, real property, personal
property and other tax returns required by applicable law to be filed by them
(including, without limitation, estimated tax returns, income tax returns,
information returns and withholding and employment tax returns) and have paid,
or where payment is not required to have been made, have set up an adequate
reserve or accrual for the payment of, all taxes required to be paid in respect
of the periods covered by such returns and, as of the Effective Time, will have
paid, or where payment is not required to have been made, will have set up an
adequate reserve or accrual for the payment of, all taxes for any subsequent
periods ending on or prior to the Effective Time. Neither BYL nor BYL Bank will
have any material liability for any such taxes in excess of the amounts so paid
or reserves or accruals so established.
(b) All federal, state and local (and, if applicable, foreign) income,
franchise, bank, excise, real property, personal property and other tax returns
filed by BYL and BYL Bank are complete and accurate in all material respects.
Neither BYL nor BYL Bank are delinquent in the payment of any material tax,
assessment or governmental charge, and has not requested any extension of time
within which to file any tax returns in respect of any fiscal year or portion
thereof which have not since been filed. Except as Previously Disclosed, the
federal, state and local income tax returns of BYL and BYL Bank have been
examined by the applicable tax authorities (or are closed to examination due to
the expiration of the applicable statute of limitations) and no deficiencies for
any tax, assessment or governmental charge have been proposed, asserted or
assessed (tentatively or otherwise) against BYL or BYL Bank as a result of such
examinations or otherwise which have not been settled and paid. There are
currently no agreements in effect with respect to BYL or BYL Bank to extend the
period of limitations for the assessment or collection of any tax. As of the
date hereof, no audit, examination or deficiency or refund litigation with
respect to any such return is pending or, to the knowledge of BYL or BYL Bank,
threatened.
(c) BYL (i) is not a party to any agreement providing for the allocation or
sharing of taxes, (ii) is not required to include in income any adjustment
pursuant to Section 481(a) of the Code by reason of a voluntary change in
accounting method initiated by it (nor does BYL or BYL Bank have any knowledge
that the Internal Revenue Service has proposed any such adjustment or change of
accounting method) and (iii) has not filed a consent pursuant to Section 341(f)
of the Code or agreed to have Section 341(f)(2) of the Code apply.
3.11 LEGAL PROCEEDINGS
BYL and BYL Bank have Previously Disclosed all existing or, to the knowledge
of BYL and BYL Bank, threatened, legal, administrative, arbitral or other
proceedings, claims, actions, controversies or governmental investigations of
any nature against or involving BYL, BYL Bank or their respective officers,
directors, employees or agents. Neither BYL nor BYL Bank is a party to any
order, judgment or decree which has or could reasonably be expected to have a
Material Adverse Effect.
3.12 COMPLIANCE WITH LAWS
(a) BYL and BYL Bank have all permits, licenses, certificates of authority,
orders and approvals of, and has made all filings, applications and
registrations with, federal, state, local and foreign governmental or regulatory
bodies that are necessary in order to permit them to carry on their business as
it is presently being conducted and the absence of which could reasonably be
expected to have a Material Adverse Effect; all such permits, licenses,
certificates of authority, orders and approvals are in full force and effect;
and to the knowledge of BYL and BYL Bank, no suspension or cancellation of any
of the same is threatened.
(b) Except as Previously Disclosed, neither BYL nor BYL Bank is in violation
of its Articles of Incorporation or Bylaws, or of any applicable federal, state
or local law or ordinance or any order, rule
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or regulation of any federal, state, local or other Governmental Entity
(including, without limitation, all banking, securities, municipal securities,
safety, health, environmental, zoning, anti-discrimination, antitrust, and wage
and hour laws, ordinances, orders, rules and regulations), or in default with
respect to any order, writ, injunction or decree of any court, or in default
under any order, license, regulation or demand of any Governmental Entity, any
of which violations or defaults could reasonably be expected to have a Material
Adverse Effect; and neither BYL nor BYL Bank has received any notice or
communication from any Governmental Entity asserting that either BYL or BYL Bank
is in violation of any of the foregoing which could reasonably be expected to
have a Material Adverse Effect. Except as Previously Disclosed, neither BYL nor
BYL Bank is subject to any regulatory or supervisory cease and desist order,
agreement, written directive, memorandum of understanding or written commitment,
and neither BYL nor BYL Bank has received any written communication from a
Governmental Entity requesting that it enter into any of the foregoing.
3.13 CERTAIN INFORMATION
The Proxy Statement, as of the date such Proxy Statement is mailed to
shareholders of BYL and up to and including the date of the meeting of
shareholders to which such Proxy Statement relates, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading (excluding any information relating specifically to PBOC
which is expressly provided by PBOC to BYL for inclusion therein).
3.14 EMPLOYEE BENEFIT PLANS
(a) BYL and BYL Bank have Previously Disclosed all stock option, employee
stock purchase and stock bonus plans, qualified pension or profit-sharing plans,
any deferred compensation, bonus or group insurance contract or any other
incentive, welfare or employee benefit plan, as defined in Section 3(3) of
ERISA, or agreement, understanding, practice or commitment, formal or informal,
sponsored, maintained or contributed to by BYL or BYL Bank for the benefit of
the current or former directors, officers, employees or independent contractors
of BYL and BYL Bank (the "BYL Employee Plans"). BYL and BYL Bank have previously
furnished or made available to PBOC accurate and complete copies of the BYL
Employee Plans together with (i) the most recent actuarial and financial reports
prepared with respect to any such plans that are qualified plans, (ii) the most
recent annual reports filed with any Governmental Entity with respect to each
such plan and (iii) all rulings and determination letters and any open requests
for rulings or letters that pertain to any such plan that is a qualified plan.
(b) None of BYL, BYL Bank, any pension plan maintained by them and qualified
under Section 401 of the Code or, to the knowledge of BYL and BYL Bank, any
fiduciary of such plan has incurred any liability to the PBGC, the Department of
Labor or the Internal Revenue Service with respect to the coverage of any
employees of BYL and BYL Bank under any BYL Employee Plan that has not been
satisfied in full and that would have a Material Adverse Effect. To the
knowledge of BYL and BYL Bank, no reportable event under Section 4043(b) of
ERISA has occurred with respect to any BYL Employee Plan that is a pension plan.
(c) BYL and BYL Bank do not participate in nor has BYL or BYL Bank incurred
any liability under Section 4201 of ERISA for a complete or partial withdrawal
from a multi-employer plan (as such term is defined in ERISA).
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(d) A favorable determination letter has been issued by the Internal Revenue
Service with respect to each BYL Employee Plan that is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) (a "BYL Pension Plan") which
is intended to qualify under Section 401 of the Code to the effect that
(i) such plan is qualified under Section 401 of the Code and (ii) the trust
associated with such employee pension plan is tax exempt under Section 501 of
the Code. No such letter has been revoked or, to the knowledge of BYL and BYL
Bank, is threatened to be revoked and BYL does not know of any ground on which
such revocation may be based. Neither BYL nor BYL Bank has any material
liability under any such plan that is not reflected on the balance sheet of BYL
at December 31, 1999 included in the BYL Financial Statements, other than
liabilities incurred in the ordinary course of business in connection therewith
subsequent to the date thereof.
(e) No prohibited transaction (which shall mean any transaction prohibited
by Section 406 of ERISA and not exempt under Section 408 of ERISA or
Section 4975 of the Code) has occurred with respect to any BYL Employee Plan
which would result in the imposition, directly or indirectly, of a material
excise tax on BYL under Section 4975 of the Code or otherwise have a Material
Adverse Effect.
(f) Full payment has been made (or proper accruals have been established to
the extent required by generally accepted accounting principles) of all
contributions which are required for periods prior to the date hereof, and full
payment will be so made (or proper accruals will be so established to the extent
required by generally accepted accounting principles) of all contributions which
are due and payable after the date hereof and prior to the Effective Time, under
the terms of each BYL Employee Plan or ERISA; no accumulated funding deficiency
(as defined in Section 302 of ERISA or Section 412 of the Code), whether or not
waived, exists with respect to any BYL Pension Plan, and there is no "unfunded
current liability" (as defined in Section 412 of the Code) with respect to any
BYL Pension Plan.
(g) The BYL Employee Plans have been operated in compliance in all material
respects with the applicable provisions of ERISA, the Code, all regulations,
rulings and announcements promulgated or issued thereunder and all other
applicable governmental laws and regulations.
(h) There are no pending or, to the knowledge of BYL and BYL Bank,
threatened claims (other than routine claims for benefits) by, on behalf of or
against any of the BYL Employee Plans or any trust related thereto or any
fiduciary thereof.
3.15 CERTAIN CONTRACTS
(a) Except as Previously Disclosed, neither BYL nor BYL Bank is a party to,
is bound or affected by, receives or is obligated to pay, benefits under
(i) any agreement, arrangement or commitment, including without limitation any
agreement, indenture or other instrument, relating to the borrowing of money by
BYL or BYL Bank (other than in the case of deposits, federal funds purchased and
securities sold under agreements to repurchase in the ordinary course of
business) or the guarantee by BYL or BYL Bank of any obligation; (ii) any
agreement, arrangement or commitment relating to the employment of a consultant
or the employment, election or retention in office of any present or former
director, officer or employee of BYL or BYL Bank, other than any agreement,
arrangement or commitment terminable at will and without the payment of any
penalty by BYL or BYL Bank, or the termination of which otherwise would not have
a Material Adverse Effect; (iii) any agreement, arrangement or understanding
pursuant to which any payment (whether of severance pay or otherwise) became or
may become due to any director, officer or employee of BYL or BYL Bank upon
execution of this Agreement or upon or following consummation of the
transactions contemplated by this Agreement (either alone or in connection with
the occurrence of any additional acts or events); (iv) any agreement,
arrangement or understanding pursuant to which BYL or BYL Bank is obligated to
indemnify any director, officer, employee or agent of BYL or BYL Bank; (v) any
agreement,
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arrangement or understanding to which BYL or BYL Bank is a party or by which
either of the same is bound which limits the freedom of BYL or BYL Bank to
compete in any line of business or with any person or entity; (vi) any
supervisory agreement, memorandum of understanding, consent order, cease and
desist order or condition of any regulatory order or decree with or by an
applicable federal or state regulatory agency; (vii) any lease of real or
personal property requiring payments of annual rental in excess of $5,000,
whether as lessor or lessee; or (viii) any other agreement, arrangement or
understanding which involves an annual payment of more than $5,000. A copy of
each such agreement, arrangement or understanding has been made available to
PBOC or, if oral, has been described in writing and Previously Disclosed.
(b) Neither BYL nor BYL Bank is in default or in non-compliance, which
default or non-compliance could reasonably be expected to have a Material
Adverse Effect, under any contract, agreement, commitment, arrangement, lease,
insurance policy or other instrument to which they are a party or by which their
assets, business or operations may be bound or affected, whether entered into in
the ordinary course of business or otherwise and whether written or oral, and
there has not occurred any event that with the lapse of time or the giving of
notice, or both, would constitute such a default or non-compliance.
3.16 BROKERS AND FINDERS
Except as Previously Disclosed, neither BYL, BYL Bank nor any of their
directors, officers, employees or agents, has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions or finder's fees, and no broker or finder has acted directly or
indirectly for BYL or BYL Bank in connection with this Agreement or the
transactions contemplated hereby.
3.17 INSURANCE
BYL and BYL Bank believe that each of BYL and BYL Bank is insured, and
during each of the past three calendar years has been insured, for reasonable
amounts with financially sound and reputable insurance companies against such
risks as companies engaged in a similar business would, in accordance with good
business practice, customarily be insured and has maintained all insurance
required by applicable laws and regulations. BYL and BYL Bank has Previously
Disclosed to PBOC a list identifying all insurance policies maintained by it as
of the date hereof and any claims pending thereunder. All of the policies and
bonds maintained by BYL and BYL Bank are in full force and effect and all claims
thereunder have been filed in a due and timely manner and no such claim has been
denied.
3.18 PROPERTIES
All real and personal property owned by BYL and BYL Bank or presently used
by them in their business are in condition (ordinary wear and tear excepted)
sufficient to carry on the business of BYL and BYL Bank in the ordinary course
of business consistent with their past practices. BYL and BYL Bank have good and
marketable title free and clear of all liens, encumbrances, charges, defaults or
equities (other than equities of redemption under applicable foreclosure laws or
of lessors respecting any leased property) to all of the material properties and
assets, real and personal, reflected on the balance sheet as of December 31,
1999 included in the BYL Financial Statements or acquired after such date, other
than properties sold by BYL or BYL Bank in the ordinary course of business,
except (i) liens for current taxes not yet due or payable, (ii) pledges to
secure deposits and other liens incurred in the ordinary course of its banking
business and (iii) such imperfections of title, easements and encumbrances, if
any, as are not material in character, amount or extent. All real and personal
property which is material to BYL and BYL Bank business and leased or licensed
by BYL and BYL Bank are held pursuant to leases or licenses which are valid and
enforceable in accordance with their
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respective terms and such leases will not terminate or lapse prior to the
Effective Time. BYL and BYL Bank have Previously Disclosed a description of each
real property owned or leased by BYL and BYL Bank and used in the conduct of
their business.
3.19 LABOR
No work stoppage involving BYL and BYL Bank is pending or, to the knowledge
of BYL and BYL Bank, threatened. Neither BYL nor BYL Bank is involved in, or to
the knowledge of BYL and BYL Bank threatened with or affected by, any labor
dispute, arbitration, lawsuit or administrative proceeding involving the
employees of BYL or BYL Bank which could reasonably be expected to have a
Material Adverse Effect. Employees of BYL and BYL Bank are not represented by
any labor union nor are any collective bargaining agreements otherwise in effect
with respect to such employees, and to the knowledge of BYL and BYL Bank, there
have been no efforts to unionize or organize any employees of BYL or BYL Bank.
3.20 TRANSACTIONS WITH AFFILIATES
Except as Previously Disclosed, there are no existing or pending
transactions, nor are there any agreements or understandings, with any
directors, officers or employees of BYL or BYL Bank or any person or entity
affiliated with it (collectively, "Affiliates"), relating to, arising from or
affecting BYL and BYL Bank, including, without limitation, any transactions,
arrangements or understandings relating to the purchase or sale of goods or
services, the lending of monies or the sale, lease or use of any assets of BYL
or BYL Bank.
3.21 NONPERFORMING AND CLASSIFIED ASSETS
(a) Each loan on the books and records of BYL Bank, including unfunded
portions of outstanding lines of credit and loan commitments, was made and has
been serviced in all material respects in accordance with customary lending
standards in the ordinary course of business, is evidenced in all material
respects by appropriate and sufficient documentation and, to the knowledge of
BYL and BYL Bank, constitutes the legal, valid and binding obligation of the
obligor named therein, subject to bankruptcy, insolvency, fraudulent conveyance
and other laws of general applicability relating to or affecting creditor's
rights and to general equity principles.
(b) BYL and BYL Bank have Previously Disclosed as of September 30, 2000:
(i) any written or, to BYL's and BYL Bank's knowledge, oral loan or similar
agreement under the terms of which the obligor is 60 or more days delinquent in
payment of principal or interest, or to the knowledge of BYL and BYL Bank, in
default of any other provision thereof; (ii) each loan or similar agreement
which has been classified as "substandard," "doubtful" or "loss" or designated
"special mention" by BYL Bank or an applicable regulatory authority; and
(iii) a listing of the real estate owned or acquired by BYL Bank by foreclosure
or by deed-in-lieu thereof.
3.22 REQUIRED VOTE; INAPPLICABILITY OF ANTITAKEOVER STATUTES; FAIRNESS OPINION
(a) This Agreement and the transactions contemplated hereby are required to
be approved on behalf of BYL by the affirmative vote of the holders of at least
a majority of the outstanding shares of the BYL Common Stock.
(b) No "control share acquisition," "business combination moratorium," "fair
price" or other form of antitakeover statute or regulation is applicable to this
Agreement and the transactions contemplated hereby.
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(c) BYL has received a written opinion of Sutro & Co., dated the date hereof
with respect to the fairness of the Merger Consideration to be received by the
shareholders of BYL pursuant to this Agreement from a financial point of view.
3.23 PROPOSED TRANSACTION WITH CNL COMMERCIAL FINANCE, INC.
(a) BYL and BYL Bank have executed the CNL Transaction Agreements. BYL and
BYL Bank had all requisite corporate power and authority to enter into the CNL
Transaction Agreements and (subject to receipt of all necessary governmental
approvals) to perform all of their obligations under the CNL Transaction
Agreements. The execution and delivery of the CNL Transaction Agreements and the
consummation of the transactions contemplated thereby have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
BYL and BYL Bank. The CNL Transaction Agreements have been duly and validly
executed and delivered by BYL and BYL Bank and constitute legal, valid and
binding obligations of BYL and BYL Bank which are enforceable against BYL and
BYL Bank in accordance with their terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, and except that the availability of
equitable remedies (including, without limitation, specific performance) is
within the discretion of the appropriate court.
(b) None of the execution and delivery of the CNL Transaction Agreements by
BYL and BYL Bank, the consummation by BYL and BYL Bank of the transactions
contemplated thereby in accordance with the terms thereof, nor compliance by BYL
and BYL Bank with any of the terms or provisions thereof, will (i) violate any
provision of the Articles of Incorporation or Bylaws of BYL or BYL Bank;
(ii) assuming that the consents and approvals set forth therein are duly
obtained, violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to BYL or BYL Bank or any of their
respective properties or assets, or (iii) violate, conflict with, result in a
breach of any provisions of, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, result in
the termination of, accelerate the performance required by, or result in the
creation of any lien, security interest, charge or other encumbrance upon any of
the properties or assets of BYL or BYL Bank under any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which BYL or BYL Bank are
a party, or by which any of their respective properties or assets may be bound
or affected, except, with respect to (ii) and (iii) above, such as individually
or in the aggregate will not have a Material Adverse Effect and which will not
prevent or delay the consummation of the transactions contemplated hereby.
Except for consents and approvals of or filings or registrations with or notices
to the Government Entities referred to in the CNL Transaction Agreements, no
consents or approvals of or filings or registrations with or notices to any
Governmental Entity are required on behalf of BYL or BYL Bank in connection with
(a) the execution and delivery of the CNL Transaction Agreements by BYL and BYL
Bank and (b) the completion by BYL and BYL Bank of the transactions contemplated
thereby.
(c) The representations and warranties of BYL and BYL Bank set forth in the
CNL Transaction Agreements shall be true and correct as of the date which is the
month end prior to the date of this Agreement and as of the date which is the
month end prior to the date of the Effective Time as though made on and as of
the Effective Time (or on the date when made in the case of any representation
and warranty which specifically relates to an earlier date).
(d) Any release obtained by BYL or BYL Bank from an employee in connection
with the Commencement Date (as defined in the CNL Transaction Agreements) remain
in full force and effect and no action has been taken by such employees to
rescind such agreements.
(e) To the extent that the regulatory approvals required by Section 4.01 of
the CNL Operations Agreement are not obtained by the Regulatory Approval
Deadline, as defined therein, the sole
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recourse of the parties thereto against BYL, BYL Bank or any successor to BYL's
interest shall be as set forth in Section 4.04 of the CNL Operations Agreement.
3.24 DISCLOSURES
None of the representations and warranties of BYL or BYL Bank or any of the
written information or documents which are furnished by BYL or BYL Bank to PBOC
pursuant to this Agreement or in connection with the transactions contemplated
hereby, when considered as a whole, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
required to be stated or necessary to make any such information or document, at
the time and in light of the circumstances (including without limitation the
nature and scope of the information described in the representation, warranty,
information or document), not misleading. Copies of all documents Previously
Disclosed or made available to PBOC pursuant to this Article III are true,
correct and complete copies thereof and include all amendments, supplements and
modifications thereto and all waivers thereunder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PBOC AND THE BANK
PBOC and the Bank represents and warrants to BYL and BYL Bank as follows:
4.1 ORGANIZATION, STANDING AND AUTHORITY OF PBOC
PBOC is a corporation duly organized and validly existing under the laws of
the State of Delaware with full corporate power and authority to own or lease
all of its properties and assets and to carry on its business as now conducted
and is duly licensed or qualified to do business and is in good standing in each
jurisdiction in which its ownership or leasing of property or the conduct of its
business requires such licensing or qualification, except where the failure to
be so licensed, qualified or in good standing would not have a material adverse
effect on the ability of PBOC to consummate the transactions contemplated
hereby. PBOC is duly registered as a savings and loan holding company under the
HOLA and the regulations of the OTS thereunder.
4.2 ORGANIZATION, STANDING, AUTHORITY AND OWNERSHIP OF THE PBOC SUBSIDIARIES
(a) Each PBOC Subsidiary which is a Significant Subsidiary (i) is duly
organized and validly existing under the laws of the jurisdiction of its
incorporation; (ii) except as Previously Disclosed, has full power and authority
to own or lease all of its properties and assets and to carry on its business as
now conducted; and (iii) is duly licensed or qualified to do business and is in
good standing in each jurisdiction in which its ownership or leasing of property
or the conduct of its business requires such qualification, except where the
failure to be so licensed, qualified or in good standing would not have a
material adverse effect on the ability of the PBOC and the Bank to consummate
the transactions contemplated by this Agreement.
(b) Interim will be at the Effective Time an interim stock corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Interim will not engage in any business other than in connection
with the transactions contemplated by this Agreement and the Agreement of Merger
and Interim will have no material obligations or liabilities other than its
obligations hereunder.
4.3 AUTHORIZED AND EFFECTIVE AGREEMENT; CONSENTS AND APPROVALS
(a) PBOC and the Bank have all requisite corporate power and authority to
enter into this Agreement and (subject to receipt of all necessary governmental
approvals) to perform all of their obligations under this Agreement. The
execution and delivery of this Agreement and the consummation
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of the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action in respect thereof on the part of PBOC and the
Bank. This Agreement has been duly and validly executed and delivered by PBOC
and the Bank and constitutes legal, valid and binding obligations of PBOC and
the Bank which are enforceable against PBOC and the Bank in accordance with its
terms, except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally, and
except that the availability of equitable remedies (including, without
limitation, specific performance) is within the discretion of the appropriate
court.
(b) At the Effective Time, Interim will have full corporate power and
authority to execute and deliver the Agreement of Merger and to consummate the
transactions contemplated thereby in accordance with the terms thereof. At the
Effective Time, the execution and delivery of the Agreement of Merger by Interim
and the consummation of the transactions contemplated thereby will have been
duly and validly approved by the Board of Directors of Interim and by PBOC as
the sole stockholder of Interim, and no other corporate proceedings on the part
of Interim are necessary to consummate the transactions so contemplated. The
Agreement of Merger, upon its execution and delivery by Interim, will constitute
a valid and binding obligation of Interim, enforceable against it in accordance
with and subject to its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally, and except that the availability of equitable
remedies (including, without limitation, specific performance) is within the
discretion of the appropriate court.
(c) None of the execution and delivery of this Agreement by PBOC and the
Bank, the execution and delivery of the Agreement of Merger by Interim, the
consummation by PBOC and the Bank of the transactions contemplated hereby in
accordance with the terms hereof, the consummation by Interim of the
transactions contemplated by the Agreement of Merger, compliance by PBOC or the
Bank with any of terms or provisions hereof or compliance by Interim with any
terms or provisions of the Agreement of Merger, will (i) violate any provision
of the Certificate of Incorporation or other governing instrument or Bylaws of
PBOC, the Bank or Interim, (ii) assuming that the consents and approvals set
forth herein are duly obtained, violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to PBOC, the
Bank or Interim or any of their respective properties or assets, or
(iii) violate, conflict with, result in a breach of any provisions of,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or other encumbrance upon any of the respective properties or
assets of PBOC, the Bank or Interim under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which PBOC, the Bank or
Interim is a party, or by which any of their respective properties or assets may
be bound or affected except as Previously Disclosed, except, with respect to
(ii) and (iii) above, such as individually or in the aggregate will not have a
material adverse effect on the business, operations, assets or financial
condition of PBOC and the Bank taken as a whole and which will not prevent or
delay the consummation of the transactions contemplated hereby. Except as
Previously Disclosed and except for consents and approvals of or filings or
registrations with or notices to the Secretary of State of the State of
Delaware, the Secretary of State of the State of California, the Department, the
FRB and the OTS, no consents or approvals of or filings or registrations with or
notices to any federal, state, municipal or other governmental or regulatory
commission, board, agency or non-governmental third party are required on behalf
of PBOC, the Bank and Interim in connection with (a) the execution and delivery
of this Agreement by PBOC and the Bank or the execution and delivery of the
Agreement of Merger by Interim and (b) the completion by PBOC and the Bank of
the transactions contemplated hereby or the completion by Interim of the
transactions contemplated by the Agreement of Merger.
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(d) As of the date hereof, neither PBOC nor the Bank is aware of any reasons
relating to PBOC or the Bank why all consents and approvals shall not be
procured from all regulatory agencies having jurisdiction over the transactions
contemplated by this Agreement as shall be necessary for consummation of the
transactions contemplated by this Agreement.
4.4 SECURITIES DOCUMENTS
PBOC has previously delivered or made available to BYL a complete copy of
all Securities Documents filed by PBOC pursuant to the Securities Laws or mailed
by PBOC to its shareholders as a class since May 31, 1998. PBOC has timely filed
with the Commission all Securities Documents required by the Securities Laws and
such Securities Documents complied in all material respects with the Securities
Laws and did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, at the time and in light of the circumstances under
which they were made, not misleading.
4.5 FINANCIAL STATEMENTS
PBOC has previously delivered or made available to BYL accurate and complete
copies of the PBOC Financial Statements for all periods ended prior to the date
hereof, which in the case of the consolidated statement of financial condition
of PBOC as of December 31, 1999 and 1998 and the consolidated statements of
income, shareholders' equity and cash flows for each of the years ended
December 31, 1999, 1998 and 1997 are accompanied by the audit report of KPMG
Peat Marwick LLP, independent public accountants with respect to PBOC, as well
as the unaudited consolidated statement of financial condition as of June 30,
2000 and the unaudited consolidated statements of income, shareholders' equity
and cash flows for the six months ended June 30, 2000 and 1999. The PBOC
Financial Statements fairly present or will fairly present, as the case may be,
the consolidated financial condition of PBOC as of the respective dates set
forth therein, and the consolidated results of operations, shareholders' equity
and cash flows of PBOC for the respective periods or as of the respective dates
set forth therein. Each of the PBOC Financial Statements has been or will be, as
the case may be, prepared in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as stated
therein. Except to the extent (i) reflected, disclosed or provided for in the
consolidated balance sheet of PBOC as of June 30, 2000 (including related notes)
and (ii) of liabilities incurred since such date in the ordinary course of
business, neither PBOC nor any PBOC Subsidiary has any liabilities, whether
absolute, accrued, contingent or otherwise, which would have a material adverse
effect on the ability of PBOC to fulfill its obligations to pay for shares of
BYL Common Stock in accordance with the terms of Section 2.6 hereof.
4.6 ACCESS TO FUNDS
PBOC has, or on the date of the Closing will have, all funds necessary to
consummate the Merger and pay the aggregate Merger Consideration to holders of
BYL Common Stock pursuant to Section 2.6 hereof.
4.7 LEGAL PROCEEDINGS
There are no existing or, to the best knowledge of PBOC, threatened, legal,
administrative, arbitral or other proceedings, claims, actions, controversies or
governmental investigations of any nature against or involving PBOC or any PBOC
Subsidiary which could reasonably be expected to have a material adverse effect
on the ability of PBOC to consummate the transactions contemplated by this
Agreement.
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4.8 CERTAIN INFORMATION
None of the information relating to PBOC supplied or to be supplied by PBOC
to BYL expressly for inclusion in the Proxy Statement, as of the date such Proxy
Statement is mailed to shareholders of BYL and up to and including the date of
the meeting of shareholders to which such Proxy Statement relates, will contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
4.9 DISCLOSURES
None of the representations and warranties of PBOC or any of the written
information or documents furnished by PBOC to BYL pursuant to this Agreement or
in connection with the transactions contemplated hereby, when considered as a
whole, contains or will contain any untrue statement of a material fact, or
omits or will omit to state any material fact required to be stated or necessary
to make any such information or document, at the time and in light of the
circumstances (including without limitation the nature and scope of the
information described in the representation, warranty, information or document),
not misleading.
ARTICLE V
COVENANTS
5.1 REASONABLE BEST EFFORTS
Subject to the terms and conditions of this Agreement, each party to this
Agreement shall use its reasonable best efforts in good faith to take, or cause
to be taken, all actions, and to do, or cause to be done, all things necessary
or advisable under applicable laws and regulations so as to permit consummation
of the Merger (including, without limitation, satisfaction of the conditions to
consummation of the Merger specified in Article VI of this Agreement) on or
before November 30, 2000 or, in the event that requisite regulatory and other
approvals have not yet been obtained, as promptly as practicable thereafter, and
to otherwise enable consummation of the transactions contemplated hereby, and
shall cooperate fully with the other party or parties hereto to that end.
5.2 SHAREHOLDER MEETING
BYL shall take all action necessary to have its shareholders consider this
Agreement and the transactions contemplated hereby at a special meeting of
shareholders which is called for the purpose as promptly as practicable after
the date hereof. Except to the extent legally required for the discharge by the
Board of Directors of its fiduciary duties, as advised by counsel, the Board of
Directors of BYL will recommend that the shareholders of BYL approve this
Agreement and the transactions contemplated hereby. The parties hereto shall
promptly cooperate with each other in the preparation of the Proxy Statement,
which shall contain such information as is mutually agreeable to the parties.
5.3 REGULATORY MATTERS
(a) The parties hereto shall cooperate with each other and use their best
efforts to promptly prepare and file all necessary documentation, to effect all
applications, notices, petitions and filings, and to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all
Governmental Entities and third parties which are necessary or advisable to
consummate the transactions contemplated by this Agreement. PBOC and BYL shall
have the right to review in advance, and to the extent practicable each will
consult with the other on, in each case subject to applicable laws relating to
the exchange of information, all the information which appears in any filing
made with or written materials submitted to, any third party or any Governmental
Entity in connection with the transactions contemplated by this Agreement. In
exercising the foregoing right, each of the parties hereto shall act reasonably
and as promptly as practicable. The parties hereto agree that they
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will consult with each other with respect to the obtaining of all permits,
consents, approvals and authorizations of all third parties and Governmental
Entities necessary or advisable to consummate the transactions contemplated by
this Agreement and each party will keep the other apprised of the status of
matters relating to completion of the transactions contemplated herein.
(b) PBOC and BYL shall, upon request, furnish each other with all
information concerning themselves, their directors, officers and shareholders
and such other matters as may be reasonably necessary or advisable in connection
with the Proxy Statement or any other statement, filing, notice or application
made by or on behalf of PBOC, or BYL to any Governmental Entity in connection
with the transactions contemplated by this Agreement.
(c) PBOC and BYL shall promptly furnish each other with copies of written
communications received by, PBOC or BYL, as the case may be, from or delivered
by any of the foregoing to, any Governmental Entity in respect of the
transactions contemplated by this Agreement.
5.4 INVESTIGATION AND CONFIDENTIALITY
(a) BYL and BYL Bank shall permit PBOC and its representatives reasonable
access to the properties and personnel, and shall disclose and make available to
PBOC all books, papers and records relating to the assets, stock ownership,
properties, operations, obligations and liabilities of BYL and BYL Bank
including, but not limited to, all books of account (including the general
ledger), tax records, minute books of meetings of boards of directors (and any
committees thereof) and shareholders, organizational documents, bylaws, material
contracts and agreements, filings with any regulatory authority, accountants'
work papers, litigation files, loan files, plans affecting employees, and any
other business activities or prospects in which PBOC may have a reasonable
interest, provided that such access shall be reasonably related to the
transactions contemplated hereby and not unduly interfere with normal
operations, shall not violate any law or agreement or constitute the waiver of
any privilege. In the event that either BYL or BYL Bank is prohibited by law or
agreement from providing any of the access referred to in the preceding sentence
to PBOC, it shall use its reasonable best efforts to obtain promptly waivers
thereof so as to permit such access. BYL and BYL Bank shall make each of their
directors, officers, employees and agents and authorized representatives
(including counsel and independent public accountants) available to confer with
PBOC and its representatives, provided that such access shall be reasonably
related to the transactions contemplated by this Agreement and not unduly
interfere with normal operations.
(b) All information furnished to PBOC or its representatives by BYL or BYL
Bank previously in connection with the transactions contemplated by this
Agreement or pursuant hereto shall be held in confidence to the extent required
by, and in accordance with, the confidentiality agreement, dated January 6,
2000, between BYL and PBOC (the "Confidentiality Agreement").
5.5 PRESS RELEASES
PBOC and BYL shall agree with each other as to the form and substance of any
press release related to this Agreement or the transactions contemplated hereby,
and consult with each other as to the form and substance of other public
disclosures which may relate to the transactions contemplated by this Agreement,
provided, however, that nothing contained herein shall prohibit either party,
following notification to the other party, from making any disclosure which it
determines in good faith is required by law or regulation.
5.6 BUSINESS OF BYL AND THE BANK
(a) During the period from the date of this Agreement and continuing until
the Effective Time, except as expressly contemplated or permitted by this
Agreement or with the prior written consent of PBOC, BYL and BYL Bank shall
carry on their respective businesses in the ordinary course consistent with past
practice, (including but not limited to the amount and types of loans originated
as of the date
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hereof in the case of BYL Bank). BYL and BYL Bank shall use all reasonable
efforts to (x) preserve their respective business organizations intact,
(y) keep available to itself and PBOC and the Bank the present services of the
employees of BYL and BYL Bank and (z) preserve for itself and PBOC and the Bank
the goodwill of the customers of BYL and BYL Bank and others with whom business
relationships exist. Without limiting the generality of the foregoing, except
with the prior written consent of PBOC or as expressly contemplated hereby,
between the date hereof and the Effective Time, BYL and BYL Bank shall not (to
the extent applicable):
(i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of the BYL Common Stock;
(ii) issue any shares of its capital stock (except upon the exercise of
BYL Options presently outstanding), or issue, grant, modify or authorize any
Rights or effect any recapitalization, reclassification, stock dividend,
stock split or like change in capitalization;
(iii) amend its Articles of Incorporation or Bylaws or equivalent
documents; impose, or suffer the imposition, on any share of stock held by
BYL of any material lien, charge or encumbrance or permit any such lien to
exist; or waive or release any material right or cancel or compromise any
material debt or claim;
(iv) increase the rate of compensation of any of its directors,
executive officers or employees, or pay or agree to pay any bonus or
severance to, or provide any other new employee benefit or incentive to, any
of its directors, officers or employees, except as may be required pursuant
to binding commitments existing on the date hereof and Previously Disclosed,
and except as otherwise Previously Disclosed; provided, however, that no
increases shall be made to contract officers, and that merit salary
increases only may otherwise be paid up to a maximum of 4 percent of base
salary, which shall exclude overtime, shift differential, bonus,
commissions, car allowance and any other payments which may be included in
overall compensation. For purposes of the preceding sentence, any and all
merit salary increases must be paid in accordance with BYL's or BYL Bank's
normal and customary practices consistently applied over time; provided,
however, notwithstanding the foregoing, the Mortgage Division employees only
shall be eligible for a review and merit salary increases on or before
December 31, 2000. For purposes of this provision, no bonuses or commissions
shall be paid by BYL or BYL Bank except those to which BYL or BYL Bank are
contractually obligated and which have been Previously Disclosed;
(v) enter into or, except as may be required by law, modify any pension,
retirement, stock option, stock purchase, stock appreciation right, savings,
profit sharing, deferred compensation, supplemental retirement, consulting,
bonus, group insurance or other employee benefit, incentive or welfare
contract, plan or arrangement, or any trust agreement related thereto, in
respect of any of its directors, officers or employees; or make any
contributions to BYL's Employee Plans, except as required pursuant to
binding commitments with respect to qualified benefit plans, as determined
by the BYL Board of Directors up to a 4% maximum contribution;
(vi) enter into (w) any agreement, arrangement or commitment not made in
the ordinary course of business, except as provided in this
Section 5.6(a)(xviii), (x) any agreement, indenture or other instrument
relating to the borrowing of money (other than in the case of deposits,
federal funds purchased and securities sold under agreements to repurchase
in the ordinary course of business) or guarantee of any such obligation,
(y) any agreement, arrangement or commitment relating to the employment of,
or severance of, an officer, employee or consultant or amend any such
existing agreement, except that an individual may be employed in the
ordinary course of business if the employment of such employee is terminable
at will without liability, other than as required by law, or (z) any
contract, agreement or understanding with a labor union;
(vii) change its method of accounting in effect for the year ended
December 31, 1999, except as required by changes in laws or regulations or
generally accepted accounting principles concurred in by its and PBOC's
independent public accountants, or change any of its methods of reporting
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income and deductions for federal income tax purposes from those employed in
the preparation of its federal income tax return for the year ended
December 31, 1999, except as required by changes in laws or regulations;
(viii) purchase or otherwise acquire, or, except as provided in this
Section 5.6(a)(xviii), sell or otherwise dispose of, any assets or incur any
liabilities other than in the ordinary course of business consistent with
past practice and policies;
(ix) make any capital expenditures, other than pursuant to binding
commitments existing on the date hereof and which are Previously Disclosed
and other than expenditures necessary to maintain existing assets in good
repair, provided that in no event may capital expenditures exceed $40,000 in
the aggregate;
(x) file any applications or make any contract with respect to
branching, site location or relocation or closing of a branch;
(xi) acquire in any manner whatsoever (other than to realize upon
collateral for a defaulted loan) any business or entity;
(xii) engage in any transaction with an Affiliate, other than
transactions in the ordinary course of business consistent with past
practice and which are in compliance with the requirements of applicable
laws and regulations;
(xiii) enter into any futures contract, option contract, interest rate
caps, interest rate floors, interest rate exchange agreement or other
agreement for purposes of hedging the exposure of its interest-earning
assets and interest-bearing liabilities to changes in market rates of
interest;
(xiv) discharge or satisfy any material lien or encumbrance or pay any
material obligation or liability (absolute or contingent) other than at
scheduled maturity or in the ordinary course of business;
(xv) enter or agree to enter into any agreement or arrangement granting
any preferential right to purchase any of its assets or, except as provided
in this Section 5.6(a)(xviii), rights or requiring the consent of any party
to the transfer and assignment of any such assets or rights;
(xvi) invest in any investment securities other than United States
government agencies with a term of one (1) year or less or federal funds;
(xvii) make any loan which, pursuant to the Underwriting Guidelines of BYL
Bank, would have a Quality Grade rated C or worse, except pursuant to
outstanding commitments as of the date of this Agreement which have been
Previously Disclosed;
(xviii) take any action that would result in any of the representations
and warranties contained in this Agreement not to be true and correct in any
material respect at the Effective Time or that could reasonably result in
any material delay in consummation of the transactions contemplated hereby;
or
(xix) agree to do any of the foregoing.
(b) BYL and BYL Bank shall not authorize or permit any of their respective
directors, officers, employees or agents to directly or indirectly solicit,
initiate or encourage any inquiries relating to, or the making of any proposal
which constitutes, an Acquisition Transaction (as defined below), or, except to
the extent legally required for the discharge of the fiduciary duties of the
Board of Directors of BYL, as advised by counsel, (i) recommend or endorse an
Acquisition Transaction, (ii) participate in any discussions or negotiations
regarding an Acquisition Transaction or (iii) provide any third party (other
than PBOC or the Bank) with any nonpublic information in connection with any
inquiry or proposal relating to an Acquisition Transaction. BYL will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations previously conducted with any parties other than PBOC or the Bank
with respect to any of the foregoing, and will take all actions necessary or
advisable to inform the appropriate individuals or entities referred to in the
first sentence hereof of the
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obligations undertaken in this Section 5.6(b). BYL will notify PBOC immediately
if any inquiries or proposals relating to an Acquisition Transaction are
received by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, BYL or BYL Bank, and
BYL will promptly inform PBOC in writing of all of the relevant details with
respect to the foregoing. As used in this Agreement, "Acquisition Transaction"
shall mean (i) a merger or consolidation, or any similar transaction, involving
BYL or BYL Bank, (ii) a purchase, lease or other acquisition of a substantial
portion of the assets or liabilities of BYL or BYL Bank or (iii) a purchase or
other acquisition (including by way of share exchange, tender offer, exchange
offer or otherwise) of more than 10% of any class or series of equity securities
of BYL or BYL Bank.
5.7 CURRENT INFORMATION
(a) During the period from the date of this Agreement to the Effective Time,
BYL and BYL Bank shall, upon the request of PBOC, cause one or more of its
designated representatives to confer on a monthly or more frequent basis with
representatives of PBOC regarding its financial condition, operations, business
and prospects and matters relating to the completion of the transactions
contemplated by this Agreement. Concurrently with the filing thereof, BYL will
deliver to PBOC copies of the regular and periodic reports filed by BYL and BYL
Bank with their banking regulators. As soon as reasonably available, but in no
event more than 25 days after the end of each calendar quarter ending after the
date of this Agreement (other than the last quarter of each calendar year ending
December 31), BYL will deliver to PBOC an unaudited consolidated statement of
financial condition and a consolidated statement of income for such quarter and
the same quarter in the preceding year prepared in accordance with generally
accepted accounting principles, and, as soon as reasonably available, but in no
event more than 90 days after the end of each calendar year, BYL will deliver to
PBOC audited consolidated financial statements which are comparable in nature
and scope to the audited BYL Financial Statements.
(b) As soon as reasonably available, but in no event more than 25 days after
the end of each calendar quarter ending after the date of this Agreement (other
than the last quarter of each calendar year ending December 31), PBOC will
deliver to BYL an unaudited consolidated statement of financial condition and a
consolidated statement of income for such quarter and the same quarter in the
preceding year prepared in accordance with generally accepted accounting
principles, and, as soon as reasonably available, but in no event more than
90 days after the end of each calendar year, PBOC will deliver to BYL audited
consolidated financial statements which are comparable in nature and scope to
the audited PBOC Financial Statements.
5.8 BENEFIT PLANS AND ARRANGEMENTS
(a) As soon as administratively practicable after the Effective Time, PBOC
shall take all reasonable action so that employees of BYL and BYL Bank who are
retained by PBOC and become Bank employees shall be entitled to participate in
the PBOC employee benefit plans of general applicability. For purposes of
determining eligibility to participate in and the vesting of benefits under the
PBOC employee benefit plans (other than PBOC's defined benefit pension plan),
PBOC shall recognize years of service with BYL and BYL Bank prior to the
Effective Time.
(b) PBOC and the Bank, as appropriate, shall assume: (i) the employment
agreements Previously Disclosed with Mr. Barry J. Moore, Ms. Gloria Van Kampen,
Mr. Michael Mullarky and Mr. Gary Strachn; (ii) the Executive Salary
Continuation Agreements Previously Disclosed with Mr. Robert Ucciferri,
Mr. Barry J. Moore, Mr. Michael Mullarky and Ms. Gloria Van Kampen and
(iii) the consulting agreement with Mr. Robert Ucciferri set forth in
Schedule 5.8(b) hereto.
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(c) PBOC anticipates that most employees of BYL and BYL Bank as of the
Effective Time shall become employees of the Bank as of the Effective Time,
provided that PBOC shall have no obligation to continue the employment of any
BYL or BYL Bank employee and nothing contained in this Agreement shall give any
employee of BYL or BYL Bank a right to continuing employment with PBOC or the
Bank after the Effective Time. Except for BYL or BYL Bank officers who are
listed in Section 5.8(b) hereof, any BYL or BYL Bank employee shall be entitled
to receive one week severance payment of each year of service at BYL or BYL
Bank. All of such BYL or BYL Bank employees shall become subject to PBOC's
severance policies with respect to employment services performed after the
Effective Time for PBOC or the Bank.
5.9 INDEMNIFICATION; INSURANCE
(a) From and after the Effective Time through the fourth anniversary of the
Effective Time, PBOC and the Bank (each an "Indemnifying Party" and together the
"Indemnifying Parties"), agrees to indemnify and hold harmless each present
director, officer or employee of BYL or BYL Bank, determined as of the Effective
Time (the "Indemnified Parties"), against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, only and to the
fullest extent to which BYL or BYL Bank is or was required by law or their
respective Bylaws to indemnify such Indemnified Parties and in the manner to
which it could indemnify such parties under the Bylaws of BYL and BYL Bank, in
each case as in effect on the date hereof, provided, however, that all rights to
indemnification in respect of any claim asserted or made within such period
shall continue until the final disposition of such claim.
(b) Any Indemnified Party wishing to claim indemnification under
Section 5.9(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the appropriate Indemnifying Party thereof,
but the failure to so notify shall not relieve the Indemnifying Party of any
liability it may have to such Indemnified Party if such failure does not
materially prejudice the Indemnifying Party. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) the Indemnifying Party shall have the right to assume the
defense thereof and the Indemnifying Party shall not be liable to such
Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection with
the defense thereof, except that if the Indemnifying Party elects not to assume
such defense or counsel for the Indemnified Parties advises that there are
issues which raise conflicts of interest between the Indemnifying Party and the
Indemnified Parties, the Indemnified Parties may retain counsel which is
reasonably satisfactory to the Indemnifying Party, and the Indemnifying Party
shall pay, promptly as statements therefor are received, the reasonable fees and
expenses of such counsel for the Indemnified Parties (which may not exceed one
firm in any jurisdiction); (ii) the Indemnified Parties will cooperate in the
defense of any such matter; (iii) the Indemnifying Party shall not be liable for
any settlement effected without its prior written consent; and (iv) the
Indemnifying Party shall have no obligation hereunder in the event that a
federal or state banking agency or a court of competent jurisdiction shall
determine that indemnification of an Indemnified Party in the manner
contemplated hereby is prohibited by applicable laws and regulations.
(c) BYL shall be permitted to maintain up to $3.0 million in aggregate
directors' and officers' liability insurance coverage for acts or omissions
occurring prior to the Effective Time by persons who are currently covered by
the directors' and officers' liability insurance policy maintained by BYL and to
purchase an extension of the claims reporting period for the policy providing
such coverage for a period of four years following the Effective Date. The total
premium for the four-year extension of the claims reporting period shall not
exceed $31,000.
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5.10 DISCLOSURE SUPPLEMENTS
From time to time prior to the Effective Time, each party shall promptly
supplement or amend any materials Previously Disclosed and delivered to the
other party pursuant hereto with respect to any matter hereafter arising which,
if existing, occurring or known at the date of this Agreement, would have been
required to be set forth or described in materials Previously Disclosed to the
other party or which is necessary to correct any information in such materials
which has been rendered inaccurate thereby; no such supplement or amendment to
such materials shall be deemed to have modified the representations, warranties
and covenants of a party for the purposes of determining whether the conditions
set forth in Article VI hereof have been satisfied.
5.11 FAILURE TO FULFILL CONDITIONS
In the event that any of the parties hereto determines that a condition to
its respective obligations to consummate the transactions contemplated hereby
cannot be fulfilled on or prior to the termination of this Agreement pursuant to
Section 7.1, it will promptly notify the other party or parties. Each party will
promptly inform the other party or parties of any facts applicable to it that
would be likely to prevent or materially delay approval of the Merger and the
transactions contemplated hereby by any Governmental Entity or third party or
which would otherwise prevent or materially delay completion of the Merger and
the transactions contemplated hereby.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS PRECEDENT--ALL PARTIES
The respective obligations of all of the parties hereto to effect the
transactions contemplated by this Agreement shall be subject to satisfaction of
the following conditions at or prior to the Effective Time.
(a) All corporate action necessary to authorize the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby and
thereby shall have been duly and validly taken by all of the parties hereto,
including approval by the requisite vote of the shareholders of BYL of this
Agreement.
(b) All approvals, consents and waivers from any Governmental Entity the
approval, consent or waiver of which is required for the consummation of the
transactions contemplated by this Agreement shall have been received and all
statutory waiting periods in respect thereof shall have expired, provided,
however, that no approval, consent or waiver referred to in this Section 6.1(b)
shall be deemed to have been received if it shall include any condition or
requirement that, individually or in the aggregate, would so materially reduce
the economic or business benefits of the transactions contemplated by this
Agreement to PBOC and the Bank that had such condition or requirement been
known, PBOC and the Bank, in their reasonable judgment, would not have entered
into this Agreement.
(c) None of the parties hereto shall be subject to any statute, rule,
regulation, order, injunction or decree which shall have been enacted, entered,
promulgated or enforced by any Governmental Entity which prohibits, restricts or
makes illegal consummation of the transactions contemplated by this Agreement
and the Agreement of Merger.
6.2 CONDITIONS PRECEDENT--BYL AND BYL BANK
The obligations of BYL and BYL Bank to effect the transactions contemplated
by this Agreement shall be subject to satisfaction of the following conditions
at or prior to the Effective Time unless waived by BYL and BYL Bank pursuant to
Section 7.4 hereof.
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(a) The representations and warranties of PBOC and the Bank set forth in
Article IV hereof shall be true and correct as of the date of this Agreement and
as of the Effective Time as though made on and as of the Effective Time (or on
the date when made in the case of any representation and warranty which
specifically relates to an earlier date), provided, however, that
notwithstanding anything herein to the contrary, this Section 6.2(a) shall be
deemed to have been satisfied even if such representations and warranties are
not true and correct unless the failure of any of the representations and
warranties to be so true and correct would have, or could reasonably be expected
to have, individually or in the aggregate, a material adverse effect on the
ability of PBOC or the Bank to consummate the transactions contemplated by this
Agreement.
(b) PBOC and the Bank shall have performed all material obligations and
covenants required to be performed by it on or prior to the Effective Time,
provided that to the extent that the OTS or any regulatory agency having
jurisdiction over PBOC and/or the Bank, in connection with their review of the
applications filed in connection with the transactions contemplated by this
Agreement, disapproves or fails to approve or consent (as applicable) to the
assumption of the agreements set forth in Section 5.8(b) hereof, the parties
hereto recognize that PBOC or the Bank, as the case may be, shall be under no
obligation to honor such agreements so long as PBOC or the Bank is prohibited
from doing so by such regulatory agencies and agree that such actions shall not
be a basis for BYL or BYL Bank to terminate the transactions contemplated by
this Agreement.
(c) PBOC and the Bank shall have delivered to BYL and BYL Bank a
certificate, dated the date of the Closing and signed by its Chief Executive
Officer and Chief Financial Officer, to the effect that the conditions set forth
in Sections 6.2(a) and 6.2(b) have been satisfied.
(d) BYL and BYL Bank shall have received an opinion of Elias, Matz,
Tiernan & Herrick L.L.P., Washington, D.C., dated the date of the Closing, that
collectively address the matters set forth in Exhibit E hereto.
(e) There shall not be pending any proceeding initiated by any Governmental
Entity to seek an order, injunction or decree which prevents consummation of the
transactions contemplated by this Agreement.
(f) PBOC and the Bank shall have furnished BYL and BYL Bank with such
certificates of its respective officers or others and such other documents to
evidence fulfillment of the conditions set forth in Sections 6.1 and 6.2 as such
conditions relate to PBOC as BYL may reasonably request.
6.3 CONDITIONS PRECEDENT--PBOC AND THE BANK
The obligations of PBOC and the Bank to effect the transactions contemplated
by this Agreement shall be subject to satisfaction of the following conditions
at or prior to the Effective Time unless waived by PBOC and the Bank pursuant to
Section 7.4 hereof.
(a) The representations and warranties of BYL and BYL Bank set forth in
Article III hereof shall be true and correct as of the date of this Agreement
and as of the Effective Time as though made on and as of the Effective Time (or
on the date when made in the case of any representation and warranty which
specifically relates to an earlier date), provided, however, that
notwithstanding anything herein to the contrary, this Section 6.3(a) shall be
deemed to have been satisfied even if such representations and warranties are
not true and correct unless the failure of any of the representations and
warranties to be so true and correct would have, or could reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect or on the
ability of the parties hereto to consummate the transactions contemplated by
this Agreement.
(b) BYL and BYL Bank shall have performed all material obligations and
covenants required to be performed by it on or prior to the Effective Time.
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(c) Intentionally Omitted.
(d) BYL and BYL Bank shall have delivered to PBOC a certificate, dated the
date of the Closing and signed by its Chief Executive Officer and Chief
Financial Officer, to the effect that the conditions set forth in Sections
6.3(a) and 6.3(b) have been satisfied.
(e) PBOC and the Bank shall have received an opinion of Knecht & Hansen,
dated the date of the Closing, that collectively address the matters set forth
in Exhibit G hereto.
(f) The consent, approval or waiver of each person (other than the
Governmental Entities referred to in Section 6.1(b) hereof) whose consent,
approval or waiver shall be required in connection with the transactions
contemplated by this Agreement under any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement or instrument to which
BYL and BYL Bank is a party or is otherwise bound shall have been obtained,
except those consents or approvals for which failure to obtain would not,
individually or in the aggregate, have a Material Adverse Effect or materially
adversely affect the ability of PBOC and the Bank to consummate the transactions
contemplated by this Agreement.
(g) There shall not be pending any proceeding initiated by any Governmental
Entity to seek an order, injunction or decree which prevents consummation of the
transactions contemplated by this Agreement.
(h) Holders of a number of shares of outstanding BYL Common Stock which
represents 10.0% or more of the BYL Common Stock shall not have elected to
exercise dissenters' or appraisal rights under Section 1301 of the CGCL.
(i) BYL and BYL Bank shall have furnished PBOC and the Bank with such
certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in Sections 6.1 and 6.3 as such
conditions relate to BYL and BYL Bank as PBOC and the Bank may reasonably
request.
(j) Not later than in connection with the Closing, the FDIC shall have
terminated the Order to Cease and Desist dated as of June 29, 2000 and the FRB
shall have terminated the Memorandum of Understanding dated as of August 10,
2000, in each instance, or the FDIC and/or the FRB, as the case may be, shall
have otherwise provided assurances with respect to the termination of such
agreements which are acceptable to PBOC and the Bank in their reasonable sole
discretion.
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
7.1 TERMINATION
This Agreement may be terminated:
(a) at any time on or prior to the Effective Time, by the mutual consent in
writing of the parties hereto;
(b) at any time on or prior to the Effective Time, by PBOC and the Bank in
writing if BYL and BYL Bank have, or by BYL and BYL Bank in writing if PBOC or
the Bank has, in any material respect, breached (i) any material covenant or
undertaking contained herein, or (ii) any representation or warranty contained
herein which in the case of BYL and BYL Bank would have, or could reasonably be
expected to have, a Material Adverse Effect and in the case of PBOC and the Bank
would have, or could reasonably be expected to have, a material adverse effect
on the ability of PBOC and the Bank, as applicable, to consummate the
transactions contemplated by this Agreement, in any case if such breach has not
been cured following written notice of such breach by the earlier of 30 days
after the
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date on which such written notice of such breach is given to the party
committing such breach or the Effective Time;
(c) at any time, by any party hereto in writing, if any of the applications
for prior approval referred to in Section 5.3 hereof are denied or are approved
in a manner which does not satisfy the requirements of Section 6.1(b) hereof,
and the time period for appeals and requests for reconsideration has run, unless
the failure of such occurrence shall be due to the failure of the party seeking
to terminate to perform or observe in any material respect its agreements set
forth herein to be performed or observed by such party at or before the
Effective Time;
(d) at any time, by any party hereto in writing, if the shareholders of BYL
do not approve this Agreement in the required manner by a vote taken thereon at
a meeting duly called for such purpose (including any adjournments thereof)
unless the failure of such occurrence shall be due to the failure of the party
seeking to terminate to perform or observe in any material respect its
agreements set forth herein to be performed or observed by such party at or
before such meeting of shareholders; and
(e) by any party hereto in writing, if the Effective Time has not occurred
by the close of business on May 1, 2001 (which may be extended by PBOC in its
sole discretion until July 1, 2001), provided that this right to terminate shall
not be available to any party whose failure to perform an obligation under this
Agreement has been the cause of, or resulted in, the failure of the transactions
contemplated by this Agreement and the Agreement of Merger to be consummated by
such date.
7.2 EFFECT OF TERMINATION
In the event that this Agreement is terminated pursuant to Section 7.1
hereof, this Agreement shall become void and have no effect, except that
(i) Section 8.1 hereof shall survive any such termination and (ii) a termination
pursuant to Section 7.1(b), (c), (d) or (e) hereof shall not relieve the
breaching party from liability for willful breach of any covenant, undertaking,
representation or warranty giving rise to such termination.
7.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants in this Agreement or in any
instrument delivered pursuant hereto shall expire on, and be terminated and
extinguished at, the Effective Time other than covenants that by their terms are
to be performed after the Effective Time, provided that no such representations,
warranties or covenants shall be deemed to be terminated or extinguished so as
to deprive the parties hereto (or any director, officer or controlling person
thereof) of any defense at law or in equity which otherwise would be available
against the claims of any person, including, without limitation, any shareholder
or former shareholder of either PBOC or BYL.
7.4 WAIVER
Each party hereto by written instrument signed by an executive officer of
such party, may at any time (whether before or after approval of this Agreement
by the shareholders of BYL) extend the time for the performance of any of the
obligations or other acts of the other party hereto and may waive (i) any
inaccuracies of the other party in the representations or warranties contained
in this Agreement or any document delivered pursuant hereto, (ii) compliance
with any of the covenants, undertakings or agreements of the other party or, to
the extent permitted by law, satisfaction of any of the conditions precedent to
its obligations contained herein or (iii) the performance by the other party of
any of its obligations set forth herein, provided that any such waiver granted,
or any amendment or supplement pursuant to Section 7.5 hereof executed, after
shareholders of BYL have approved this Agreement shall not modify either the
amount or form of the Merger Consideration or otherwise materially adversely
affect any of such shareholders without the approval of the shareholders.
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7.5 AMENDMENT OR SUPPLEMENT
This Agreement may be amended or supplemented at any time by mutual
agreement of the parties hereto, subject to the proviso to Section 7.4 hereof.
Any such amendment or supplement must be in writing and approved by all of the
parties' respective Boards of Directors.
ARTICLE VIII
MISCELLANEOUS
8.1 EXPENSES; TERMINATION FEE
(a) (i) Each party hereto shall bear and pay all costs and expenses incurred
by it in connection with the transactions contemplated by this Agreement,
including fees and expenses of its own financial consultants, accountants and
counsel, provided that in the event of a termination of this Agreement resulting
from a breach of a representation, warranty, covenant or undertaking, the party
committing such breach shall be liable for $2.0 million to the other party, plus
the expenses of the other party without prejudice to any other rights or
remedies as may be available to the non-breaching party, including without
limitation any rights under Section 8.1(b) hereof.
(ii) PBOC shall pay BYL $2.0 million plus its expenses to the extent that
PBOC has elected to extend the date for termination of the transaction to
July 1, 2001 pursuant to Section 7.1(e) hereof and the transaction has not
closed by such date, for any reason other than a breach of any representation,
warranty, covenant or undertaking by BYL or BYL Bank, a failure of BYL or BYL
Bank to secure any required regulatory approvals or consents or to the extent
the failure to close the transaction is due to BYL or BYL Bank's actions or
failure to take certain actions pursuant to the terms of this Agreement.
(b) Notwithstanding any provision in this Agreement to the contrary, in
order to induce PBOC and the Bank to enter into this Agreement and as a means of
compensating PBOC and the Bank for the substantial direct and indirect monetary
and other damages and costs incurred and to be incurred in connection with this
Agreement in the event the transactions contemplated hereby do not occur as a
result of a Termination Event (as defined herein), BYL agrees to pay PBOC, and
PBOC shall be entitled to payment of, a fee (the "Fee") of $2.0 million upon the
occurrence of a Termination Event so long as the Termination Event occurs prior
to a Fee Termination Event (as defined herein). The parties hereto acknowledge
that the actual amount of such damages and costs would be impracticable or
extremely difficult to determine, and that the sum of $2.0 million constitutes a
reasonable estimate by the parties under the circumstance existing as of the
date of this Agreement of such damages and costs. Such payment shall be made to
PBOC in immediately available funds within five business days after the
occurrence of a Termination Event. A Fee Termination Event shall be the first to
occur of the following: (i) the Effective Time, (ii) 15 months after termination
of this Agreement in accordance with its terms following the first occurrence of
a Preliminary Termination Event (as defined herein), (iii) termination of this
Agreement in accordance with the terms hereof prior to the occurrence of a
Termination Event or a Preliminary Termination Event (other than a termination
of this Agreement by PBOC pursuant to Section 7.1(b) hereof as a result of a
willful breach of any representation, warranty, covenant or agreement of BYL or
BYL Bank) or (iv) 15 months after the termination of this Agreement by PBOC
pursuant to Section 7.1(b) hereof as a result of a willful breach of any
representation, warranty, covenant or agreement of BYL or BYL Bank.
(c) For purposes of this Agreement, a "Termination Event" shall mean any of
the following events:
(i) BYL, without having received PBOC's prior written consent, shall
have entered into an agreement to engage in an Acquisition Transaction with
any person (the term "person" for purposes of this Agreement having the
meaning assigned thereto in Sections 3(a)(9) and 13(d)(3)
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of the Exchange Act, and the rules and regulations thereunder), other than
PBOC or a Subsidiary of PBOC, or the Board of Directors of BYL shall have
recommended that the shareholders of BYL approve or accept any Acquisition
Transaction with any person other than PBOC or a Subsidiary of PBOC;
(ii) any person, other than PBOC or the Bank, shall have acquired
beneficial ownership (as such term is defined in Rule 13d-3 promulgated
under the Exchange Act) of or the right to acquire beneficial ownership, or
any "group" (as such term is defined in Section 13(d)(3) of the Exchange
Act) shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the aggregate voting power
represented by the outstanding BYL Common Stock; or
(iii) one or more BYL shareholders shall have breached his or her
obligations pursuant to the Shareholder Agreement in a manner which
materially adversely affects the ability of BYL to obtain the approval of
the holders of BYL Common Stock of this Agreement or otherwise materially
adversely affects the ability of the parties hereto to consummate the
transactions contemplated hereby.
(d) For purposes of this Agreement, a "Preliminary Termination Event" shall
mean any of the following events:
(i) any person (other than PBOC or Subsidiary of PBOC) shall have
commenced (as such term is defined in Rule 14d-2 under the Exchange Act), or
shall have filed a registration statement under the Securities Act with
respect to, a tender offer or exchange offer to purchase any shares of BYL
Common Stock such that, upon consummation of such offer, such person would
own or control 10% or more of BYL Common Stock outstanding (such an offer
being referred to herein as a "Tender Offer" and an "Exchange Offer,"
respectively);
(ii) (A) the holders of BYL Common Stock shall not have approved this
Agreement at the meeting of such shareholders held for the purpose of voting
on this Agreement, (B) such meeting shall not have been held or shall have
been canceled prior to termination of the Agreement or (C) BYL's Board of
Directors shall have withdrawn or modified in a manner adverse to PBOC the
recommendation of BYL's Board of Directors with respect to the Agreement, in
each case after any person (other than PBOC or the Bank) shall have
(x) made, or disclosed an intention to make, a bona fide proposal to BYL or
its shareholders to engage in an Acquisition Transaction, (y) commenced a
tender offer or filed a registration statement under the Securities Act with
respect to an exchange offer or (z) filed an application or given notice,
whether in draft or final form, with the appropriate regulatory authorities
for approval to engage in an Acquisition Transaction; or
(iii) BYL or BYL Bank shall have breached any representation, warranty,
covenant or obligation contained in this Agreement and such breach would
entitle PBOC to terminate this Agreement under Section 7.1(b) hereof
(without regard to the cure period provided for therein unless such cure is
promptly effected without jeopardizing consummation of the Merger pursuant
to the terms of this Agreement) after any person (other than PBOC or the
Bank) shall have (x) made, or disclosed an intention to make, a bona fide
proposal to BYL or its shareholders to engage in an Acquisition Transaction,
(y) commenced a tender offer or filed a registration statement under the
Securities Act with respect to an exchange offer or (z) filed an application
or given notice, whether in draft or final form, with the appropriate
regulatory authorities for approval to engage in an Acquisition Transaction.
(e) BYL shall promptly notify PBOC in writing of the occurrence of any
Preliminary Termination Event or Termination Event.
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8.2 ENTIRE AGREEMENT
This Agreement (including the Stockholder Agreement and the Stock Option
Agreement) and the Confidentiality Agreement contains the entire agreement among
the parties with respect to the transactions contemplated hereby and supersede
all prior arrangements or understandings with respect thereto, written or oral.
8.3 ASSIGNMENT; SUCCESSORS
None of the parties hereto may assign any of its rights or obligations under
this Agreement to any other person without the prior written consent of the
other party or parties. The terms and conditions of this Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
successors. Except as provided in Section 5.9 hereof, nothing in this Agreement,
expressed or implied, is intended to confer upon any party, other than the
parties hereto, and their respective successors, any rights, remedies,
obligations or liabilities. In the event that PBOC or any of its successors,
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then, and in each such case, proper provision shall be made so that the
successors shall assume the obligations set forth in Section 5.9 hereof, which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each person covered thereby.
8.4 NOTICES
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent by
overnight express or by registered or certified mail, postage prepaid, addressed
as follows:
If to PBOC or the Bank:
PBOC Holdings, Inc.
5900 Wilshire Boulevard, 16th Floor
Los Angeles, California 90036-5013
Attn: Rudolf P. Guenzel
President and Chief Executive Officer
With a required copy to:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
Attn: Norman B. Antin, Esq.
Jeffrey D. Haas, Esq.
If to BYL or BYL Bank:
BYL Bancorp
1875 N. Tustin Avenue
Orange, California 92865
Attn: Robert Ucciferri
President and Chief Executive Officer
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With a required copy to:
Knecht & Hansen
1301 Dove Street
Suite 900
Newport Beach, California 92660
Attn: Loren P. Hansen, Esq.
8.5 ALTERNATIVE STRUCTURE
Notwithstanding any provision of this Agreement to the contrary, PBOC and
the Bank may elect, subject to the filing of all necessary applications and the
receipt of all required regulatory approvals, to modify the structure of the
acquisition of BYL set forth herein, provided that (i) the consideration to be
paid to the holders of BYL Common Stock is not thereby changed in kind or
reduced in amount as a result of such modification or alters the taxation of any
amounts to be received by the holders of BYL Common Stock and (ii) such
modification will not materially delay or jeopardize receipt of any required
regulatory approvals or any other condition to PBOC's or the Bank's obligations
set forth in Sections 6.1 and 6.3 hereof.
8.6 INTERPRETATION
The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. The phrases "the date of this Agreement," "the
date hereof" and terms of similar import herein, unless the context otherwise
requires, shall be deemed to be the date first above written on page one
(1) hereof.
8.7 COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
8.8 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and entirely to be
performed within such jurisdiction except to the extent federal law may be
applicable.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
<TABLE>
<S> <C> <C>
PBOC HOLDINGS, INC.
Attest:
/s/ J. MICHAEL HOLMES By:
------------------------------------------- /s/ RUDOLF P. GUENZEL
J. Michael Holmes -----------------------------------------
SENIOR EXECUTIVE VICE PRESIDENT, Rudolf P. Guenzel
CHIEF FINANCIAL OFFICER AND PRESIDENT AND CHIEF EXECUTIVE
SECRETARY OFFICER
PEOPLE'S BANK OF CALIFORNIA, INC.
Attest:
/s/ DOREEN J. BLAUSCHILD By: /s/ RUDOLF P. GUENZEL
------------------------------------------- -----------------------------------------
Doreen J. Blauschild Rudolf P. Guenzel
SENIOR VICE PRESIDENT, GENERAL PRESIDENT AND CHIEF EXECUTIVE
COUNSEL AND SECRETARY OFFICER
BYL BANCORP
Attest:
/s/ JOHN J. MYERS By: /s/ ROBERT UCCIFERRI
------------------------------------------- -----------------------------------------
John "Jack" Myers Robert Ucciferri
SECRETARY PRESIDENT AND CHIEF EXECUTIVE
OFFICER
BYL BANK GROUP
Attest:
/s/ JOHN J. MYERS By: /s/ ROBERT UCCIFERRI
------------------------------------------- -----------------------------------------
John "Jack" Myers Robert Ucciferri
SECRETARY PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
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EXHIBIT A
November 1, 2000
PBOC Holdings, Inc.
5900 Wilshire Boulevard,
16th Floor
Los Angeles, CA 90036-5013
Gentlemen:
The undersigned director and/or executive officer of BYL Bancorp ("BYL")
understands that PBOC Holdings, Inc. ("PBOC") and its wholly-owned subsidiary,
People's Bank of California (the "Bank") are about to enter into an Agreement
and Plan of Reorganization (the "Agreement") with BYL and BYL Bank Group. The
Agreement provides for the merger of BYL with and into PBOC (the "Merger") and
the conversion of outstanding shares of Common Stock of BYL into cash in
accordance with the terms therein set forth.
In order to induce PBOC and the Bank to enter into the Agreement, and
intending to be legally bound hereby, the undersigned represents, warrants and
agrees that at the meeting of BYL's shareholders contemplated by Section 5.2 of
the Agreement and any adjournment thereof the undersigned will, in person or by
proxy, vote or cause to be voted in favor of the Agreement the shares of BYL
Common Stock beneficially owned by the undersigned individually or, to the
extent of the undersigned's proportionate voting interest, jointly with other
persons, as well as (to the extent of the undersigned's proportionate voting
interest) any other shares of BYL Common Stock over which the undersigned may
hereafter acquire beneficial ownership (collectively, the "Shares"). Subject to
the final paragraph of this agreement, the undersigned further agrees that he
will use his best efforts to cause any other shares of BYL Common Stock over
which he has or shares voting power to be voted in favor of the Agreement.
The undersigned represents and warrants that he has or shares the beneficial
ownership of the number of shares of BYL Common Stock set forth opposite his
name on Schedule I hereto.
The undersigned further represents, warrants and agrees that until the
earlier of (i) the consummation of the transactions contemplated by the
Agreement or (ii) the termination of the Agreement in accordance with its terms,
the undersigned will not, directly or indirectly:
(a) vote any of the Shares, or cause or permit any of the Shares to be
voted, in favor of any other merger, consolidation, plan of liquidation,
sale of assets, reclassification or other transaction involving BYL which
would have the effect of any person, other than PBOC or an affiliate of
PBOC, acquiring control over BYL or any substantial portion of the assets of
BYL. As used herein, the term "control" means (1) the ability to direct the
voting of 10% or more of the outstanding voting securities of a person
having ordinary voting power in the election of directors or in the election
of any other body having similar functions or (2) the ability to direct the
management and policies of a person, whether through ownership of
securities, through any contract, arrangement or understanding or otherwise.
(b) sell or otherwise transfer any of the Shares, or cause or permit any
of the Shares to be sold or otherwise transferred (i) pursuant to any tender
offer, exchange offer or similar proposal made by any person, other than
PBOC or an affiliate of PBOC, (ii) to any person known by the undersigned to
be seeking to obtain control of BYL or any substantial portion of the assets
of BYL
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or to any other person, other than PBOC or an affiliate of PBOC, under
circumstances where such sale or transfer may reasonably be expected to
assist a person seeking to obtain such control or (iii) for the principal
purpose of avoiding the obligations of the undersigned under this agreement.
It is understood and agreed that this agreement relates solely to the
capacity of the undersigned as a shareholder or other beneficial owner of the
Shares and is not in any way intended to affect the exercise by the undersigned
of the undersigned's responsibilities as a director or officer of BYL. It is
further understood and agreed that this agreement is not in any way intended to
affect the exercise by the undersigned of any fiduciary responsibility which the
undersigned may have in respect of any Shares as of the date hereof.
Use of the masculine gender herein shall be considered to represent the
masculine, feminine or neuter gender whenever appropriate.
<TABLE>
<S> <C> <C>
Very truly yours,
---------------------------------------------
Name
</TABLE>
Name
Accepted and Agreed to:
<TABLE>
<S> <C> <C>
PBOC HOLDINGS, INC.
-------------------------------------------
Rudolf P. Guenzel
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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<PAGE>
Schedule I
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
OF BYL COMMON
NAME OF SHAREHOLDER STOCK (1)
------------------- ------------------
<S> <C>
Henry C. Cox II............................................. 117,088
Eddie R. Fisher............................................. 78,117
Neil F. Hatcher............................................. 108,576
H. Rhoads Martin, Jr........................................ 7,549
Barry J. Moore.............................................. 500
Michael H. Mullarky......................................... 14,999
John F. Myers............................................... 9,466
Robert Ucciferri............................................ 37,312
Gloria J. VanKampen......................................... 46,471
Brent W. Wahlberg........................................... 10,871
Gary Strachn................................................ 2,000
</TABLE>
------------------------
(1) Does not include options to purchase shares of BYL Common Stock.
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<PAGE>
EXHIBIT B
AGREEMENT OF MERGER
AGREEMENT OF MERGER, dated as of , 2001, by and between PBOC
Acquisition Corp. ("Interim"), a California corporation formed by PBOC
Holdings, Inc. ("Company"), a Delaware corporation, solely to facilitate the
transactions contemplated by the Reorganization Agreement, defined below, and
BYL Bancorp ("BYL"), a California corporation. Interim and BYL are hereinafter
sometimes collectively referred to as the "Merging Corporations."
This Agreement of Merger is being entered into pursuant to an Agreement and
Plan of Reorganization, dated as of November 1, 2000 (the "Reorganization
Agreement") by and among the Company, People's Bank of California (the "Bank"),
BYL and BYL Bank Group ("BYL Bank").
In consideration of the premises, and the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth below
shall have the following meanings:
1.1 "BYL Common Stock" shall mean the common stock of BYL.
1.2 "Effective Time" shall mean the time at which the Merger contemplated by
this Plan of Merger becomes effective as provided in Section 2.5 of the
Reorganization Agreement.
1.3 "Interim Common Stock" shall mean the common stock, par value $.01 per
share, of Interim owned by the Company.
1.4 The "Merger" shall refer to the merger of Interim with and into BYL as
provided in Section 2.1 of this Plan of Merger and Section 2.1 of the
Reorganization Agreement.
1.5 "Surviving Corporation" shall refer to BYL as the surviving corporation
of the Merger.
ARTICLE II
TERMS OF THE MERGER
2.1 THE MERGER. Subject to the terms and conditions set forth in the
Reorganization Agreement, at the Effective Time, Interim shall be merged with
and into BYL pursuant and subject to the California Corporations Code. BYL shall
be the Surviving Corporation of the Merger and shall continue to be governed by
the laws of the State of California. At the Effective Time, the Surviving
Corporation shall be considered the same business and corporate entity as each
of the Merging Corporations and thereupon and thereafter, all the property,
rights, powers, and franchises of each of the Merging Corporations shall vest in
the Surviving Corporation and the Surviving Corporation shall be subject to and
be deemed to have assumed all of the debts, liabilities, obligations and duties
of each of the Merging Corporations and shall have succeeded to all of each of
their relationships, fiduciary or otherwise, as fully and to the same extent as
if such property, rights, privileges, powers, franchises, debts, obligations,
duties and relationships had been originally acquired, incurred or entered into
by the Surviving Corporation. In addition, any reference to either of the
Merging Corporations in any contract or document, whether executed or taking
effect before or after the Effective Time, shall be considered a reference to
the Surviving Corporation if not inconsistent with the other provisions of the
contract or document; and any pending action or other judicial proceeding to
which either of the Merging Corporations is a party, shall not be deemed to have
abated or to have discontinued by reason of the Merger, but may be prosecuted to
final judgment, order or decree in the same manner as if the Merger
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had not been made; or the Surviving Corporation may be substituted as a party to
such action or proceeding, and any judgment, order or decree may be rendered for
or against it that might have been rendered for or against either of the Merging
Corporations if the Merger had not occurred.
2.2 ARTICLES OF INCORPORATION AND BYLAWS. As of the Effective Time, the
Articles of Incorporation and Bylaws of BYL shall be the Articles of
Incorporation and Bylaws of the Surviving Corporation until otherwise amended as
provided by law.
2.3 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors and
officers of Interim shall become the directors and officers of the Surviving
Corporation as of the Effective Time, each to hold office in accordance with the
Articles of Incorporation and Bylaws of the Surviving Corporation.
ARTICLE III
CONVERSION OF SHARES
3.1 CONVERSION OF BYL COMMON STOCK.
As of the Effective Time, each share of BYL Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares held by
BYL (including treasury shares) or the Company or the Bank other than in a
fiduciary capacity, which shares shall be cancelled) shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive the Merger Consideration as set forth in the
Reorganization Agreement.
3.2 EXCHANGE OF SHARES.
The obligations of the Company to effectuate the exchange of the Merger
Consideration for the shares of BYL Common Stock shall be as set forth in
Section 2.9 of the Reorganization Agreement.
3.3 INTERIM COMMON STOCK. Each share of Interim Common Stock which is
issued and outstanding immediately prior to the Effective Time shall be
converted automatically and without any action on the part of the holder thereof
into an equal number of issued and outstanding shares of common stock of the
Surviving Corporation.
ARTICLE IV
MISCELLANEOUS
4.1 CONDITIONS PRECEDENT. The respective obligations of each party under
this Plan of Merger shall be subject to the satisfaction, or waiver by the party
permitted to do so, of the conditions set forth in Article VI of the
Reorganization Agreement.
4.2 TERMINATION. This Plan of Merger shall be terminated upon the
termination of the Reorganization Agreement in accordance with Articles VII and
VIII thereof.
4.3 AMENDMENTS. To the extent permitted by law and the Reorganization
Agreement, this Plan of Merger may be amended by a subsequent writing signed by
all of the parties hereto upon the approval of the Board of Directors of each of
the parties hereto.
4.4 SUCCESSORS. This Plan of Merger shall be binding on the successors of
Interim and BYL.
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<PAGE>
IN WITNESS WHEREOF, Interim and BYL have caused this Plan of Merger to be
executed by their duly authorized officers and their corporate seals to be
hereunto affixed as of the date first above written.
PBOC ACQUISITION CORP.
Attest:
---------------------------- By:
----------------------------
Rudolf Guenzel
President and Chief Executive Officer
BYL BANCORP
Attest:
---------------------------- By:
----------------------------
Robert Ucciferri
President and Chief Executive Officer
A-B-3
<PAGE>
EXHIBIT C
FORM OF
AGREEMENT AND PLAN OF MERGER AND LIQUIDATION OF
BYL BANCORP
BY PBOC HOLDINGS, INC.
AGREEMENT AND PLAN OF MERGER AND LIQUIDATION agreed to this day of
2001, between PBOC Holdings, Inc., a Delaware corporation ("Company"), and BYL
Bancorp, a California corporation ("BYL").
WHEREAS, the Company owns all of the issued and outstanding capital stock of
BYL; and
WHEREAS, the Company wishes to approve, authorize, and consent to (i) the
merger of BYL with and into the Company pursuant to the Delaware General
Corporation Law ("DGCL") and the California Corporations Code and (ii) the
voluntary liquidation of BYL in accordance with Section 332 of the Internal
Revenue Code of 1986, as amended ("Code") and pursuant to an Agreement and Plan
of Reorganization, dated as of November 1, 2000; and
WHEREAS, PBOC Acquisition Corp., a Delaware corporation and former
subsidiary of the Company, previously has merged with and into BYL.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company approves, authorizes, and consents to the merger and
liquidation of BYL.
2. Following the consummation of this Agreement and Plan of Merger and
Liquidation, BYL shall be liquidated in accordance with the provisions of
Section 332 of the Internal Revenue Code of 1986, as amended.
3. The officers of BYL are authorized and directed to distribute BYL's
assets (subject to its liabilities) within one year in cancellation of its stock
to the Company, as owner of all of its issued and outstanding stock.
4. The officers of BYL are further authorized and directed to take all
appropriate and necessary actions to liquidate BYL in accordance with the Code.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan
of Merger and Liquidation to be executed by their respective duly authorized
officers as of the day and year first above written.
<TABLE>
<S> <C> <C>
Attest: PBOC HOLDINGS, INC.
By:
------------------------------------------- -----------------------------------------
Rudolf P. Guenzel
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Attest: BYL BANCORP
By:
------------------------------------------- -----------------------------------------
Robert Ucciferri
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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<PAGE>
EXHIBIT D
ARTICLES OF COMBINATION
AND AGREEMENT OF MERGER
People's Bank of California, Los Angeles, California ("People's Bank"), a
federally-chartered savings bank, and BYL Bank Group, a California chartered
commercial bank ("BYL Bank"), hereby agree and certify as follows pursuant to 12
C.F.R.SectionSection 552.13 (f) and 552.13(j):
WITNESSETH:
WHEREAS, an Agreement and Plan of Reorganization, dated as of November 1,
2000 (the "Agreement"), by and among People's Bank, its parent holding company,
PBOC Holdings, Inc. ("PBOC"), BYL Bank and BYL Bancorp ("BYL"), the holding
company of BYL Bank, has been approved;
WHEREAS, PBOC, People's Bank, BYL and BYL Bank intend to comply with
Section 2.2(b) of the Agreement to effectuate the merger of BYL Bank with and
into People's Bank (the "Bank Merger"); and
WHEREAS, BYL Bank and People's Bank (the "Constituent Banks") desire to
provide for the terms and conditions of the Bank Merger.
NOW, THEREFORE, BYL Bank and People's Bank hereby agree as follows:
1. The Bank Merger shall become effective upon receipt of all necessary
approvals or non-objections from the Office of Thrift Supervision ("OTS") and
the Commissioner of Financial Institutions of the State of California and on the
date specified in the endorsement of these Articles of Combination and Agreement
of Merger relating to the Bank Merger by the Secretary of the OTS pursuant to 12
C.F.R. Section 552.13(k), or any successor thereto (the "Effective Time").
2. People's Bank shall be the resulting institution ("Resulting
Institution") of the Bank Merger.
3. The name of the Resulting Institution shall be "People's Bank of
California."
4. Upon the Effective Time, all offices of BYL Bank shall be offices of
People's Bank. As of the Effective Time, the home office of People's Bank shall
remain at 5900 Wilshire Blvd., Los Angeles, CA 90036 and the locations of the
offices of People's Bank shall be:
<TABLE>
<S> <C>
Bank of Hollywood--A Division of People's COSTA MESA
Bank of California 1700 Adams Avenue, Suite 100
6930 Hollywood Blvd. Costa Mesa, 92626
Los Angeles, CA 90028
Bank of Hollywood--A Division of People's DE ANZA
Bank of California 7710 Limonite Avenue
10100 Riverside Drive Riverside, CA 92509
Toluca Lake, CA 91602
NORTH HOLLYWOOD HUNTINGTON BEACH
6350 Laurel Canyon Blvd. 16900 Goldenwest Street
North Hollywood, CA 91606 Huntington Beach, CA 92647
LONG BEACH MIRA LOMA
525 East Ocean Blvd. 11010 Limonite Avenue
Long Beach, CA 90802 Mira Loma, CA 91752
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
BEVERLY HILLS ORANGE
9100 Wilshire Blvd. 1875 North Tustin Avenue
Beverly Hills, CA 90212 Orange, CA 92865
ORANGE ORANGE REGIONAL LOAN CENTER
216 Chapman Ave. 18206 Imperial Highway
Orange, CA 92866-1506 Yorba Linda, CA 92886
PACIFIC PALISADES INLAND REGION LOAN CENTER**
15305 Sunset Blvd. 7710 Limonite, Suite M
Pacific Palisades, CA 90272 Riverside, CA 92509
MONTEBELLO WESTMINSTER
1300 W. Beverly Blvd. 8251 Westminster Blvd.
Montebello, CA 90640 Westminster, CA 92683
GARDEN GROVE YORBA LINDA
12112 Valley View 18206 Imperial Highway
Garden Grove, CA 92845-1796 Yorba Linda, CA 92886
SIMI VALLEY CONSTRUCTION FINANCE DIVISION**
1445 Los Angeles 18206 Imperial Highway
Simi Valley, CA 93065 Yorba Linda, CA 92886
SYLMAR MORTGAGE DIVISION -- TUSTIN**
13831 Foothill Blvd. 18302 Irvine Blvd.
Sylmar, CA 91342 Tustin, CA 92680
BUENA PARK SBA/CAL CAP DIVISION
5470 Beach Blvd. 26137 La Paz Road, Suite 102
Buena Park, CA 90621 Mission Viejo, CA 92691
BEVERLY / SERRANO
4500 W. Beverly Blvd.
Los Angeles, CA 90004
TARZANA
19500 Ventura Blvd.
Tarzana, CA 91356
BURBANK
240 North San Fernando Road
Burbank, CA 91502
NORTH IRVINE
4860 Irvine Blvd.
Irvine, CA 92620
SANTA CLARITA
26425 Sierra Highway
Santa Clarita, CA 91321
VENTURA
996 South Seaward Ave.
Ventura, CA 93001
CALABASAS
23642 Calabasas Rd., Bldg 2
Calabasas, CA 91302
</TABLE>
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<TABLE>
<S> <C>
IRVINE
15475 Jeffrey Road
Irvine, CA 92620-4102
FAIRFAX
145 South Fairfax Avenue
Los Angeles, CA 90036
SAN PEDRO
28110 South Western Ave.
San Pedro, CA 90732
LOS ANGELES
5900 Wilshire Blvd.
Los Angeles, CA 90036
WESTMINSTER
15555 Brookhurst St.
Westminster, CA 92683
ENCINO*
16820 Ventura Blvd.
Encino, CA 91436
WOODLAND HILLS*
21919 Erwin Street
Woodland Hills, CA 91367
</TABLE>
------------------------
* Universal Branch Acquisition--tentatively approved as of 12/31/00.
** Non-Depository division.
5. Upon consummation of the Bank Merger, People's Bank shall be considered
the same business and corporate entity as each of the Constituent Banks and
thereupon and thereafter all the property, rights, powers and franchises of each
of the Constituent Banks shall vest in People's Bank and People's Bank shall be
subject to and be deemed to have assumed all of the debts, liabilities,
obligations and duties of each of the Constituent Banks and shall have succeeded
to all of each of their relationships, fiduciary or otherwise, as fully and to
the same extent as if such property, rights, privileges, powers, franchises,
debts, obligations, duties and relationships had been originally acquired,
incurred or entered into by People's Bank. In addition, any reference to either
of the Constituent Banks in any contract, will or document, whether executed or
taking effect before or after the Effective Time, shall be considered a
reference to People's Bank if not inconsistent with the other provisions of the
contract, will or document; and any pending action or other judicial proceedings
to which either of the Constituent Banks is a party shall not be deemed to have
abated or to have been discontinued by reason of the Bank Merger, but may be
prosecuted to final judgment, order or decree in the same manner as if the Bank
Merger had not occurred or People's Bank may be substituted as a party to such
action or proceeding, and any judgment, order or decree may be rendered for or
against it that might have been rendered for or against either of the
Constituent Banks if the Bank Merger had not occurred.
6. On and after the Effective Time, the Charter of People's Bank as in
effect immediately prior to the Effective Time shall be the Charter of the
Resulting Institution until amended in accordance with the terms thereof and
applicable law.
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<PAGE>
On and after the Effective Time, the Bylaws of People's Bank as in effect
immediately prior to the Effective Time shall be the Bylaws of the Resulting
Institution until amended in accordance with the terms thereof and applicable
law.
7. Upon and after the Effective Time, until changed in accordance with the
Charter and Bylaws of People's Bank and applicable law, the number of directors
of the Resulting Institution authorized by the Charter shall be nine (9) (which
includes one vacancy). The names of those persons who, upon and after the
Effective Time, shall be directors of the Resulting Institution are set forth
below. Each such director shall serve for the term which expires at the annual
meeting of stockholders of the Resulting Institution in the year set forth after
his respective name, and until his or her successor is elected and qualified.
<TABLE>
<CAPTION>
NAME TERM EXPIRES
---- ------------
<S> <C>
Rudolf P. Guenzel 2001
J. Michael Holmes 2001
C. Stephen Mansfield 2001
Richard Delaney 2001
John F. Davis 2002
Murray Kalis 2002
Robert MacDonald 2003
Carl Lo Bue 2003
</TABLE>
The address of each such director is c/o People's Bank, 5900 Wilshire Blvd.,
Los Angeles, CA 90036.
8. OUTSTANDING SHARES AND VOTING.
(a) PEOPLE'S BANK. The number of issued and outstanding shares of common
stock, par value $0.01 per share, of People's Bank is 100,000, all of which were
voted in favor of these Articles of Combination and Agreement of Merger pursuant
to the unanimous written consent (in lieu of a meeting) of PBOC as the sole
stockholder of People's Bank dated as of , 2001.
(b) BYL BANK. The number of issued and outstanding shares of common stock,
par value $ per share, of BYL Bank is 100, all of which were voted in favor
of these Articles of Combination and Agreement of Merger pursuant to the
unanimous written consent (in lieu of a meeting) of BYL Bancorp as the sole
stockholder of BYL Bank dated as of , 2001.
A-D-4
<PAGE>
IN WITNESS WHEREOF, each party hereto has caused these Articles of
Combination and Agreement of Merger to be executed by their duly authorized
officers as of the day of 2001.
<TABLE>
<S> <C> <C>
PEOPLE'S BANK OF CALIFORNIA
Attest:
By:
-------------------------------------------
Doreen J. Blauschild -----------------------------------------
SENIOR VICE PRESIDENT, GENERAL COUNSEL Rudolf P. Guenzel
AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
BYL BANK GROUP
Attest:
By:
------------------------------------------- -----------------------------------------
Name: Robert Ucciferri
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
A-D-5
<PAGE>
ENDORSEMENT
These Articles of Combination and Agreement of Merger were filed with the
Secretary of the Office of Thrift Supervision in the Department of Treasury and
endorsed pursuant to 12 C.F.R. Section 552.13(j), effective at , Eastern
Time, on , 2001.
Signed: ________________________________________
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<PAGE>
VERIFICATIONS
I, Rudolf P. Guenzel, President and Chief Executive Officer of People's Bank
of California ("People's Bank"), having read the foregoing Articles of
Combination and Agreement of Merger, hereby verify that the statements contained
therein are true and correct as to People's Bank.
<TABLE>
<S> <C> <C>
By: -----------------------------------------
Rudolph P. Guenzel
</TABLE>
I, Robert Ucciferri, President and Chief Executive Officer of BYL Bank Group
("BYL Bank"), having read the foregoing Articles of Combination and Agreement of
Merger, hereby verify that the statements contained therein are true and correct
as to BYL Bank.
<TABLE>
<S> <C> <C>
By: -----------------------------------------
Robert Ucciferri
</TABLE>
A-D-7
<PAGE>
EXHIBIT E
Matters to be covered in Opinion(s) of Counsel to be delivered to BYL and BYL
Bank pursuant to Section 6.2(d) of the Agreement
(a) Each of PBOC and the Bank is duly incorporated and validly existing
under the laws of the State of Delaware and the United States, respectively.
(b) The Agreement has been duly authorized, executed and delivered by PBOC
and the Bank and constitutes a valid and binding obligation of PBOC and the Bank
and enforceable in accordance with its terms, except that the enforceability of
the obligations of PBOC and the Bank may be limited by (i) bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the rights of
creditors, (ii) equitable principles limiting the right to obtain specific
performance or other similar equitable relief and (iii) considerations of public
policy, and except that certain remedies may not be available in the case of a
nonmaterial breach of the Agreement.
(c) All corporate and shareholder actions required to be taken by PBOC and
the Bank by law and their Certificate of Incorporation, Federal Stock Charter
and Bylaws to authorize the execution and delivery of the Agreement and
consummation of the transactions contemplated thereby have been taken.
(d) All permits, consents, waivers, clearances, approvals and authorizations
of any Governmental Entity or third party which are necessary to be obtained by
PBOC and the Bank to permit the execution, delivery and performance of the
Agreement and consummation of the transactions contemplated thereby have been
obtained.
In rendering their opinion, such counsel may rely, to the extent such
counsel deems such reliance necessary or appropriate, upon certificates of
governmental officials and, as to matters of fact, certificates of officers of
PBOC and the Bank. The opinion of such counsel need refer only to matters of
Delaware law and may add other qualifications and explanations of the basis of
their opinion as may be reasonably acceptable to BYL and BYL Bank.
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<PAGE>
EXHIBIT F
INTENTIONALLY OMITTED
A-F-1
<PAGE>
EXHIBIT G
Matters to be covered in Opinion of Counsel to be delivered to PBOC and the Bank
pursuant to Section 6.3(d) of the Agreement
(a) BYL and BYL Bank are duly incorporated and validly existing under the
laws of their jurisdiction of incorporation.
(b) The authorized capital stock of BYL and BYL Bank is as set forth in
Section 3.1 of the Agreement. As of the date hereof, there are 2,542,568 shares
of BYL Common Stock issued and outstanding and no shares of BYL Preferred Stock
issued or outstanding. All of the outstanding shares of BYL Common Stock have
been duly authorized and validly issued and are fully paid and nonassessable,
and the shareholders of BYL have no preemptive rights with respect to any shares
of BYL Common Stock. To such counsel's knowledge, except for BYL Options to
purchase 377,203 shares of BYL Common Stock, there are no Rights authorized,
issued or outstanding with respect to the capital stock of BYL. BYL owns all of
the outstanding Common Stock of BYL Bank, free and clear of any Liens or other
attachments or encumbrances.
As of the date hereof, there are 100 shares of BYL Bank common stock issued
and outstanding, no shares of BYL Bank preferred stock issued and outstanding
and no shares of BYL Bank common stock are held as treasury shares. All
outstanding shares of BYL Bank common stock have been duly authorized and
validly issued and are fully paid and nonassessable and are owned by BYL.
(c) The Agreement has been duly authorized, executed and delivered by BYL
and BYL Bank and constitutes a valid and binding obligation of BYL and BYL Bank
enforceable in accordance with their terms, except that the enforceability of
the obligations of BYL and BYL Bank may be limited by (i) bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the rights of
creditors, (ii) equitable principles limiting the right to obtain specific
performance or other similar equitable relief and (iii) considerations of public
policy, and except that certain remedies may not be available in the case of a
nonmaterial breach of the Agreement.
(d) All corporate and shareholder actions required to be taken by BYL and
BYL Bank by law and the Articles of Incorporation and Bylaws of BYL and BYL Bank
to authorize the execution and delivery of the Agreement and consummation of the
transactions contemplated thereby have been taken.
(e) All permits, consents, waivers, clearances, approvals and authorizations
of any Governmental Entity or third party which are necessary to be obtained by
BYL and BYL Bank to permit the execution, delivery and performance of the
Agreement and consummation of the transactions contemplated thereby have been
obtained.
(f) To such counsel's knowledge, except as Previously Disclosed, there are
no material legal or governmental proceedings pending to which BYL and BYL Bank
is a party or to which any property of BYL and BYL Bank are subject and no such
proceedings are threatened by governmental authorities or by others.
In rendering their opinion, such counsel may rely, to the extent such
counsel deems such reliance necessary or appropriate, upon certificates of
governmental officials and, as to matters of fact, certificates of officers of
BYL and BYL Bank. The opinion of such counsel need refer only to matters of
California and federal law and may add other qualifications and explanations of
the basis of their opinion as may be reasonably acceptable to PBOC and the Bank.
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<PAGE>
EXHIBIT H
STOCK OPTION AGREEMENT
Stock Option Agreement, dated as of November 1, 2000, between PBOC
Holdings, Inc., a Delaware corporation ("Grantee"), and BYL Bancorp, a
California corporation ("Issuer").
W I T N E S S E T H:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Reorganization of even date herewith (the "Merger Agreement"), providing for,
among other things, the merger of Issuer with and into a wholly-owned subsidiary
of Grantee (the "Merger");
WHEREAS, as a condition and an inducement to Grantee to enter into the
Merger Agreement, Issuer has agreed to grant Grantee the Option (as hereinafter
defined); and
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option
(the "Option") to purchase, subject to the terms hereof, up to an aggregate of
505,971 fully paid and nonassessable shares (the "Option Shares") of common
stock of Issuer (the "Common Stock") at a price per share equal to $10.597 (the
"Option Price"); provided, however, that in no event shall the number of shares
for which this Option is exercisable exceed 19.9% of the issued and outstanding
shares of Common Stock without giving effect to any shares subject to or issued
pursuant to the Option. The number of shares of Common Stock that may be
received upon the exercise of the Option and the Option Price are subject to
adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are issued or
otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement and other than pursuant to an event described in
Section 5(a) hereof), including, without limitation, pursuant to stock option or
other employee plans or as a result of the exercise of conversion rights, the
number of shares of Common Stock subject to the Option shall be increased so
that, after such event, such number equals 19.9% of the number of shares of
Common Stock then issued and outstanding without giving effect to any shares
subject to or issued pursuant to the Option. Nothing contained in this
Section l(b) or elsewhere in this Agreement shall be deemed to authorize Issuer
to issue shares in breach of any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, and from time to time, if, but only if, both an Initial
Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined), provided that the Holder shall have
sent the written notice of the first exercise (as provided in paragraph (e) of
this Section 2) within 90 days following the first Subsequent Triggering Event
to occur (or such later period as provided in Section 7). Each of the following
shall be an Exercise Termination Event: (i) the Effective Time (as defined in
the Merger Agreement); (ii) termination of the Merger Agreement in accordance
with the provisions thereof if such termination occurs prior to the occurrence
of an Initial Triggering Event, except a termination by Grantee pursuant to
Section 7.1(b) of the Merger Agreement (unless the breach by Issuer giving rise
to such right of termination was non-volitional); or (iii) the passage of
15 months after termination of the Merger Agreement if such termination follows
the occurrence of an Initial Triggering Event or is a termination by Grantee
pursuant to Section 7.1(b) of the Merger Agreement (unless the breach by Issuer
giving rise to such right of termination is non-volitional), provided that if an
Initial Triggering Event continues or occurs beyond such termination and prior
to the passage of such 15-month-period, the Exercise Termination Event shall be
15 months from the expiration of the Last Triggering Event but in no event more
than 18 months after such termination. The term "Last Triggering Event" shall
mean the last "Initial Triggering Event" to expire, and the term "Holder" shall
mean the holder or holders of the Option pursuant to this Agreement.
Notwithstanding anything to the contrary contained herein, the Option may not be
exercised at any time when Grantee shall be in willful material breach
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of any of its covenants or agreements contained in the Merger Agreement such
that Issuer shall be entitled to terminate the Merger Agreement pursuant to
Section 7.1(b) thereof as a result of such a willful material breach.
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring on or after the date hereof:
(i) Issuer or any Subsidiary of Issuer (an "Issuer Subsidiary"),
without having received Grantee's prior written consent, shall have entered into
an agreement to engage in an Acquisition Transaction (as hereinafter defined)
with any person (the term "person" for purposes of this Agreement having the
meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations
thereunder), other than Grantee or any Subsidiary of Grantee (a "Grantee
Subsidiary") or the Board of Directors of Issuer (the "Issuer Board") shall have
recommended that the shareholders of Issuer approve or accept any Acquisition
Transaction with any person other than Grantee or a Grantee Subsidiary. For
purposes of this Agreement, (a) "Acquisition Transaction" shall mean (w) a
merger or consolidation, or any similar transaction, involving Issuer or any
Issuer Subsidiary (other than mergers, consolidations or similar transactions
(i) involving solely Issuer and/or one or more wholly-owned Subsidiaries of
Issuer, provided any such transaction is not entered into in violation of the
terms of the Merger Agreement, or (ii) in which the shareholders of Issuer
immediately prior to the completion of such transaction own at least 50% of the
Common Stock of Issuer (or the resulting or surviving entity in such
transaction) immediately after completion of such transaction, provided any such
transaction is not entered into in violation of the terms of the Merger
Agreement), (x) a purchase, lease or other acquisition of all or any substantial
part of the assets or deposits of Issuer or any Issuer Subsidiary, (y) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 10% or more of the voting
power of Issuer or any Issuer Subsidiary or (z) any substantially similar
transaction; and (b) "Subsidiary" shall have the meaning set forth in
Rule 12b-2 under the 1934 Act;
(ii) Any person, other than Grantee or a Grantee Subsidiary, shall
have acquired beneficial ownership or the right to acquire beneficial ownership
of 10% or more of the outstanding shares of Common Stock (the term "beneficial
ownership" for purposes of this Agreement having the meaning assigned thereto in
Section 13(d) of the 1934 Act, and the rules and regulations thereunder);
(iii) Any person, other than Grantee or a Grantee Subsidiary, shall
have made a bona fide proposal to Issuer or its stockholders by public
announcement or written communication that is or becomes the subject of public
disclosure to engage in an Acquisition Transaction;
(iv) The Issuer Board, without having received Grantee's prior
written consent, shall have withdrawn or modified, or publicly announced its
interest to withdraw or modify in any manner adverse in any respect to Grantee,
its recommendation that the stockholders of Issuer approve the transactions
contemplated by the Merger Agreement in anticipation of engaging in an
Acquisition Transaction, or Issuer or any Issuer Subsidiary shall have
authorized, recommended or proposed, or publicly announced its intention to
authorize, recommend or propose, an agreement to engage in an Acquisition
Transaction with any person other than Grantee or a Grantee Subsidiary;
(v) Any person other than Grantee or a Grantee Subsidiary shall have
filed with the Securities and Exchange Commission ("SEC") a registration
statement or tender offer materials with respect to a potential exchange or
tender offer that would constitute an Acquisition Transaction (or filed a
preliminary proxy statement with the SEC with respect to a potential vote by its
stockholders to approve the issuance of shares to be offered in such an exchange
offer);
(vi) After an overture is made by any person, other than Grantee or a
Grantee Subsidiary, to Issuer or its stockholders to engage in an Acquisition
Transaction, Issuer shall have
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breached any covenant or obligation contained in the Merger Agreement and such
breach (x) would entitle Grantee to terminate the Merger Agreement (whether
immediately or after the giving of notice or passage of time or both) and
(y) shall not have been cured prior to the Notice Date (as defined below); or
(vii) Any person other than Grantee or a Grantee Subsidiary shall
have filed an application or notice with any federal or state bank regulatory or
antitrust authority, which application or notice has been accepted for
processing, for approval to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person (other than Grantee or any Grantee
Subsidiary) of beneficial ownership of 25% or more of the then outstanding
Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
clause (i) of subsection (b) of this Section 2, except that the percentage
referred to in clause (y) of the second sentence thereof shall be 20%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
any Initial Triggering Event or Subsequent Triggering Event (together, a
"Triggering Event") of which it has notice, it being understood that the giving
of such notice by Issuer shall not be a condition to the right of the Holder to
exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option (or any portion thereof), it shall send to Issuer a written notice (the
date of which being herein referred to as the "Notice Date") specifying (i) the
total number of shares of Common Stock it will purchase pursuant to such
exercise and (ii) a place and date not earlier than three business days nor
later than 60 business days from the Notice Date for the closing of such
purchase (the "Closing"); provided that if prior notification to or approval of
any regulatory or antitrust agency is required in connection with such purchase,
the Holder shall promptly file the required notice or application for approval,
shall promptly notify Issuer of such filing and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto. The term
"business day" for purposes of this Agreement means any day, excluding
Saturdays, Sundays and any other day that is a legal holiday in the State of
California or a day on which banking institutions in the State of California are
authorized by law or executive order to close.
(f) At a Closing, the Holder shall (i) pay to Issuer the aggregate
purchase price for the shares of Common Stock purchased pursuant to the exercise
of the Option in immediately available funds by wire transfer to a bank account
designated by Issuer, and (ii) present and surrender this Agreement to Issuer at
its principal executive offices, provided that the failure or refusal of the
Issuer to designate such a bank account or accept surrender of this Agreement
shall not preclude the Holder from exercising the Option.
(g) At a Closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder, and the Holder
shall deliver to Issuer a copy of this Agreement and a letter agreeing that the
Holder will not offer to sell or otherwise dispose of such shares in violation
of applicable law or the provisions of this Agreement.
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(h) Certificates for Common Stock delivered at a Closing hereunder may be
endorsed (in the sole discretion of Issuer) with a restrictive legend that shall
read substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the registered
holder hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on file
at the principal office of Issuer and will be provided to the holder
hereof without charge upon receipt by Issuer of a written request
therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the Holder shall have delivered to Issuer a copy of a letter from the staff
of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the 1933 Act; (ii) the reference to the provisions of this Agreement
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference in the reasonable opinion of counsel to
the Holder; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under paragraph (e) of this Section 2, the
tender of the applicable purchase price in immediately available funds and the
tender of a copy of this Agreement to Issuer, the Holder shall be deemed,
subject to the receipt of any necessary regulatory approvals, to be the holder
of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be closed or
that certificates representing such shares of Common Stock shall not then be
actually delivered to the Holder. Issuer shall pay all expenses, and any and all
United States federal, state and local taxes and other charges that may be
payable in connection with the preparation, issue and delivery of stock
certificates under this Section 2 in the name of the Holder or its assignee,
transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock;
(ii) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; (iii) promptly to take all action as may from time to time be required
(including without limitation (x) complying with all applicable premerger
notification, reporting and waiting period requirements specified in 15 U.S.C.
Section 18a and regulations promulgated thereunder and (y) in the event, under
the Change in Bank Control Act of 1978, as amended, or any state or other
federal banking law, prior approval of or notice to any state or federal
regulatory authority is necessary before the Option may be exercised, cooperate
fully with the Holder in connection with the preparation of such applications or
notices and providing such information to such state or federal regulatory
authority as they may require) in order to permit the Holder to exercise the
Option and Issuer duly and effectively to issue shares of Common Stock pursuant
hereto; and (iv) promptly to take all action provided herein to protect the
rights of the Holder against dilution.
4. This Agreement and the Option granted hereby are exchangeable, without
expense, at the option of the Holder, upon presentation and surrender of this
Agreement at the principal office of Issuer, for other Agreements providing for
Options of different denominations entitling the holder
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<PAGE>
thereof to purchase on the same terms and subject to the same conditions as are
set forth herein in the aggregate the same number of shares of Common Stock
purchasable hereunder. The terms "Agreement" and "Option" as used herein include
any Stock Option Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, subject to the
aforementioned indemnification, if applicable, whether or not the Agreement so
lost, stolen, destroyed or mutilated shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of Option Shares purchasable upon the exercise of the
Option and the Option Price shall be subject to adjustment from time to time as
provided in this Section 5.
(a) In the event of any change in, or distributions in respect of, the
Common Stock by reason of stock dividend, split-up, merger, recapitalization,
combination, subdivision, conversion, exchange of shares, distribution on or in
respect of the Common Stock or similar transaction, the type and number of
Option Shares shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction, so that Grantee shall receive
upon exercise of the Option the number and class of Option Shares that Grantee
would have held immediately after such event if the Option had been exercised
immediately prior to such event, or the record date therefor, as applicable.
(b) Whenever the number of Option Shares is adjusted as provided in this
Section 5, the Option Price shall be adjusted by multiplying the Option Price by
a fraction, the numerator of which shall be equal to the number of Option Shares
purchasable prior to the adjustment and the denominator of which shall be equal
to the number of Option Shares purchasable after the adjustment.
6. Upon the occurrence of a Subsequent Triggering Event that occurs prior
to an Exercise Termination Event, Issuer shall, at the request of Grantee
delivered within six months (or such later period as provided in Section 10)
following such Subsequent Triggering Event (whether on its own behalf or on
behalf of any subsequent holder of this Option (or part thereof) or any of the
Option Shares issued pursuant hereto), promptly prepare, file and keep current,
with respect to the Option and the Option Shares, a registration statement under
the 1933 Act and qualify such Option and Option Shares for resale or other
disposition under applicable state securities laws, in each case in accordance
with any plan of disposition requested by Grantee. Issuer will use all
reasonable efforts to cause such registration statement promptly to become
effective and then to remain effective for such period not in excess of
180 days from the day such registration statement first becomes effective or
such shorter time as may be reasonably necessary to effect such sales or other
dispositions. Grantee shall have the right to demand two such registrations. The
Issuer shall bear the costs of such registrations (including, but not limited
to, Issuer's attorneys' fees, printing costs and filing fees, except for
underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Grantee's counsel related thereto). The foregoing
notwithstanding, if, at the time of any request by Grantee for registration of
the Option or Option Shares as provided above, Issuer is in registration with
respect to an underwritten public offering by Issuer of shares of Common Stock,
and if in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering, the inclusion of the Option and/or Option Shares would interfere with
the successful marketing of the shares of Common Stock offered by Issuer, the
number of shares represented by the Option and/or the number of Option Shares
otherwise to be covered in the registration statement contemplated hereby may be
reduced; provided, however, that after any such required reduction the number of
shares represented by the Option and/or the number of Option Shares to be
included in
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such offering for the account of the Holder shall constitute at least 25% of the
total number of shares to be sold by the Holder and Issuer in the aggregate; and
provided further, however, that if such reduction occurs, then Issuer shall
file a registration statement for the balance as promptly as practicable
thereafter as to which no reduction pursuant to this Section 6 shall be
permitted or occur. Each such Holder shall provide all information reasonably
requested by Issuer for inclusion in any such registration statement to be filed
hereunder. If requested by any such Holder in connection with such registration,
Issuer shall become a party to any underwriting agreement relating to the sale
of such shares, but only to the extent of obligating itself in respect of
representations, warranties, indemnities and other agreements customarily
included in secondary offering underwriting agreements. Upon receiving any
request under this Section 6 from any Holder, Issuer agrees to send a copy
thereof to any other person known to Issuer to be entitled to registration
rights under this Section 6, in each case by promptly mailing the same, postage
prepaid, to the address of record of the persons entitled to receive such
copies. Notwithstanding anything to the contrary contained herein, in no event
shall the number of registrations that Issuer is obligated to effect be
increased by reason of the fact that there shall be more than one Holder as a
result of any assignment or division of this Agreement.
7. The 90-day or 6-month periods for exercise of certain rights under
Sections 2, 6, and 9 shall be extended: (i) to the extent necessary to obtain
all regulatory approvals for the exercise of such rights (for so long as the
Holder is using its reasonable best efforts to obtain such regulatory
approvals), and for the expiration of all statutory waiting periods;
(ii) during the pendency of any temporary restraining order, injunction or other
legal bar to exercise of such rights; and (iii) to the extent necessary to avoid
liability under Section 16(b) of the 1934 Act by reason of such exercise.
8. (a) Issuer hereby represents and warrants to Grantee as follows:
(i) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Issuer Board and no other corporate proceedings on the part of Issuer are
necessary to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly and validly executed and delivered by
Issuer and is a valid and legally binding obligation of Issuer, enforceable
against Issuer in accordance with its terms, except that enforcement thereof may
be limited by the receivership, conservatorship and supervisory powers of bank
regulatory agencies generally as well as bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting enforcement of creditors rights
generally and except that enforcement thereof may be subject to general
principles of equity (regardless of whether enforcement is considered in a
proceeding in equity or at law) and the availability of equitable remedies.
(ii) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant thereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests and not subject to any preemptive rights.
(b) Grantee hereby represents and warrants to Issuer that:
(i) Grantee has full corporate power and authority to execute and
deliver this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee and no other corporate proceedings on the part of Grantee are
necessary to authorize
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this Agreement or to consummate the transactions so contemplated. This Agreement
has been duly executed and delivered by Grantee and is a valid and legally
binding obligation of Grantee.
(ii) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Act.
9. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder within six months
following such Subsequent Triggering Event; provided, however, that until the
date 15 days following the date on which the applicable federal or state bank
regulatory authority approves an application by Grantee to acquire the shares of
Common Stock subject to the Option, Grantee may not assign its rights under the
Option except in (i) a widely dispersed public distribution, (ii) a private
placement in which no one party acquires the right to purchase in excess of 2%
of the voting shares of Issuer, (iii) an assignment to a single party (e.g., a
broker or investment banker) for the sole purpose of conducting a widely
dispersed public distribution on Grantee's behalf or (iv) any other manner
approved by the applicable federal or state bank regulatory authority.
10. Each of Grantee and Issuer will use all reasonable efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including, without limitation, applying to the applicable
federal or state bank regulatory authority for approval to acquire the shares
issuable hereunder and applying for listing or quotation of such shares on any
exchange or quotation system on which the Common Stock is then listed or quoted.
11. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
12. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire the full number of shares of Common
Stock provided in Section l(a) hereof (as adjusted pursuant to Section l(b) or
Section 5 hereof), it is the express intention of Issuer to allow the Holder to
acquire such lesser number of shares as may be permissible, without any
amendment or modification hereof.
13. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
fax, telecopy or by registered or certified mail (postage prepaid, return
receipt requested) at the respective addresses of the parties set forth in the
Merger Agreement.
14. This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, without regard to the conflict of law principles
thereof.
15. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
16. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated
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hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
17. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
permitted assigns any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided herein.
18. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
IN WITNESS WHEREOF, Grantee and Issuer have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
<TABLE>
<S> <C>
PBOC HOLDINGS, INC.
Attest:
By:
Name: J. Michael Holmes Name: Rudolf P. Guenzel
Title: Senior Executive Vice President, Title: President and Chief Executive
Chief Financial Officer and Officer
Secretary
BYL BANCORP
Attest:
By:
Name: John "Jack" Myers Name: Robert Ucciferri
Title: Secretary Title: President and Chief Executive
Officer
</TABLE>
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APPENDIX B
FAIRNESS OPINION OF SUTRO & CO.
DATED NOVEMBER 1, 2000
<PAGE>
November 1, 2000
The Board of Directors
BYL Bancorp
1875 North Tustin Avenue
Orange, CA 92865
Gentlemen:
You have requested our opinion (the "Opinion") as to the fairness, from a
financial point of view, to the shareholders of BYL Bancorp (the "Company"), of
the Merger Consideration as defined in Section 2.6 of the Agreement and Plan of
Reorganization dated November 1, 2000 by and among the Company, PBOC
Holdings, Inc. ("PBOC"), People's Bank of California, a federal savings bank,
and BYL Bank Group, a California state bank (the "Agreement"), in the proposed
acquisition of the Company by PBOC (the "Acquisition"). As set forth in the
Agreement, the financial terms of the Acquisition call for, among other things,
the payment of cash equal to: (i) $15.00 for each outstanding share of common
stock of the Company; and (ii) the difference between $15.00 and the exercise
price of shares of common stock of the Company subject for all outstanding and
unexercised options, all subject to adjustment as described in the Agreement. As
more fully described in the Agreement, at the effective time of the acquisition,
the Company will merge with and into a wholly-owned subsidiary of PBOC (the
"Surviving Corporation") and subsequently the Surviving Corporation will be
merged with and liquidated into PBOC.
In arriving at our Opinion, we have reviewed and analyzed the financial terms of
the Acquisition as set forth in the Agreement as well as certain publicly
available business and financial information relating to the Company and PBOC.
We have also reviewed certain internal financial projections provided to us by
the Company and have met with management of the Company to review and discuss
such information as well as the Company's business, operations, regulatory
status, assets, liabilities, financial condition and future prospects. In
addition, we have compared certain financial and securities data of the Company
with various other companies engaged in commercial banking, reviewed historical
prices and trading volumes of the common stock of the Company, reviewed the
financial terms of other business combinations in the commercial banking
industry and conducted such other analyses, studies, investigations and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate for purposes of this Opinion.
In our review and analysis and in formulating this Opinion, we have assumed,
with your consent, and relied, without independent verification, upon the
accuracy and completeness of all the financial and other information publicly
available or furnished to or otherwise reviewed by or discussed with us. We have
assumed, with your consent, that the financial projections provided to us by the
Company were prepared in good faith and on bases reflecting the best currently
available judgments and estimates of the management of the Company. This Opinion
does not constitute an appraisal of the stock or assets of the Company nor does
it constitute an opinion as to any matter related to or arising from the
Acquisition other than the Merger Consideration.
We have relied as to all legal matters on counsel to the Company. We have made
no independent investigation of any legal matters affecting the Company or PBOC.
We have assumed the correctness of the legal advice given to the Board of
Directors of the Company by its counsel and the satisfaction by the Company of
all legal, regulatory sad other obligations relating to the Acquisition. We have
assumed that upon the consummation of the Acquisition, each company shall have
all the appropriate approvals, licenses and permits to conduct its business as
proposed. For purposes of this Opinion, we have assumed
B-1
<PAGE>
Board of Directors
BYL Bancorp
November 1, 2000
Page 3 of 3
that the final form of the Acquisition will not differ in any material respect
from that set forth in the Agreement.
We have been retained to act as a financial advisor to the Board of Directors of
the Company in connection with the Acquisition described above, and we will
receive a fee for our services including a fee contingent upon the consummation
of the Acquisition. We have, within the past two years, provided financial
advisory, investment banking and other services to the Company and have received
customary fees for the rendering of such services. In addition, in the ordinary
course of our securities business, we may actively trade equity securities of
the Company and PBOC and their respective affiliates for our account and the
account of our customers, and therefore, we may, from time to time, have a long
or short position in such securities.
Sutro & Co. Incorporated ("Sutro"), as part of its investment banking business,
is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations. Our Opinion is
necessarily based on economic, market, financial, precedent transactions and
other conditions as they exist and can be evaluated as of the date of this
letter and any change in such conditions would require a reevaluation of this
Opinion. We disclaim any obligation to update, revise or reaffirm this Opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. We have
advised the Board of Directors that our entire analysis must be considered as a
whole and that selecting portions of the analyses and the factors considered by
us without considering all analyses and factors, could create an incomplete view
of the evaluation process underlying our Opinion.
It is understood that this letter is solely for the benefit and use of the Board
of Directors of the Company in its consideration of the Acquisition and may not
be relied upon by any other person, used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, is any manner or for any
purpose without our prior written consent. This Opinion is not intended to be
and does not constitute a recommendation to the Board of Directors or any
shareholder as to how such shareholder should vote in connection with the
proposed Acquisition. This Opinion may not be published or otherwise used or
referred to, nor shall any public reference to Sutro be made, other than in
connection with the filings required to be made by the Company with the
Securities and Exchange Commission pursuant to the Securities Act of 1933 or the
Securities Exchange Act of 1934 and in materials delivered to the shareholders,
without Sutro's prior written approval, which approval shall not be unreasonably
withheld.
Based upon and subject to the foregoing and such other factors as we deemed
relevant, it is our opinion that, as of the date hereof, the Merger
Consideration as set forth in the Agreement is fair to the shareholders of the
Company, from a financial point of view.
Sincerely,
SUTRO & CO. INCORPORATED
B-2
<PAGE>
APPENDIX C
DISSENTER'S RIGHTS--CHAPTER 13 OF CALIFORNIA CORPORATIONS CODE
<PAGE>
CALIFORNIA CORPORATIONS CODE
CHAPTER 13
DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short--form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-term merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision
(o) of Section 25100 or (B) listed on the National Market System of
the NASDAQ Stock Market, and the notice of meeting of shareholders to
act upon the reorganization summarizes this section and Sections
1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply
to any class of shares described in subparagraph (A) or (B) if
demands for payment are filed with respect to 5 percent or more of
the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of reorganization or, (B) if described in subparagraph
(A) or (B) of paragraph (1) (without regard to the provisos in that
paragraph), were voted against the reorganization, or which were held
of record on the effective date of a short-form merger; provided,
however, that subparagraph (A) rather than subparagraph (B) of this
paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with
Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require
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<PAGE>
the corporation to purchase their shares for cash, such corporation shall mail
to each such shareholder a notice of the approval of the reorganization by its
outstanding shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the procedure
to be followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates or appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
C-2
<PAGE>
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
C-3
<PAGE>
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
C-4
<PAGE>
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of transaction except upon 10 days' prior
notice to the corporation and upon a determination by the court that clearly no
other remedy will adequately protect the complaining shareholder or the class of
shareholders of which such a shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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<PAGE>
APPENDIX D
FINANCIAL STATEMENTS--INTERIM FINANCIAL STATEMENTS FOR
SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
AND AUDITED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 1999, 1998 AND
1997
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
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
======== ========
</TABLE>
D-1
<PAGE>
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 FOR THE NINE
MONTHS ENDED 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>
D-2
<PAGE>
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>
D-3
<PAGE>
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>
D-4
<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 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.
D-5
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED 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
------------------- 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
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER, 2000
-----------------------------------------
WHOLESALE SEGMENTS
------------------- 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>
D-6
<PAGE>
CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL
STATEMENTS................................................ D-8
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................. D-9 and D-10
Consolidated Statements of Income....................... D-11
Consolidated Statement of Changes in Shareholders'
Equity................................................ D-12
Consolidated Statements of Cash Flows................... D-13
Notes to Consolidated Financial Statements.............. D-14 through D-37
</TABLE>
D-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of BYL Bancorp and Subsidiary
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.
Vavrinek, Trine, Day & Co., LLP
Laguna Hills, California
February 11, 2000
D-8
<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
======== ========
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.
D-9
<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.
D-10
<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.
D-11
<PAGE>
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
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.
D-12
<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.
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.
D-13
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR SALE
Mortgage, SBA loans and other loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
LOANS
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
For impairment recognized in accordance with Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("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.
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
D-14
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
D-15
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
D-16
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since the
balance sheet date and, therefore, current estimates of fair value may differ
significantly from the amounts presented in the accompanying Notes.
EARNINGS PER SHARES (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
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.
D-17
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS 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.
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.
D-18
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS AMOUNTS IN THOUSANDS)
NOTE B--INVESTMENT SECURITIES (CONTINUED)
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.
D-19
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS 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.
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.
D-20
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS AMOUNTS IN THOUSANDS)
NOTE C--LOANS HELD FOR SALE (CONTINUED)
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.
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.
D-21
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS AMOUNTS IN THOUSANDS)
NOTE D--LOANS (CONTINUED)
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>
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.
D-22
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS 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>
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>
D-23
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
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.
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>
D-24
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE H--INCOME TAXES (CONTINUED)
A comparison of the federal statutory income tax rates to the Company's
effective income tax rates for the years ended December 31 follows:
<TABLE>
<CAPTION>
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>
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.
D-25
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
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.
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 creditworthiness 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.
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>
D-26
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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>
D-27
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M--STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about fixed options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
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>
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
D-28
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash, short-term investments, due from customers on
acceptances, and Bank acceptances outstanding are considered to approximate fair
value. Short-term investments include federal funds sold, securities purchased
under agreements to resell, and interest-bearing deposits with Banks. The fair
values of investment securities, including available-for-sale, are generally
based on quoted market prices. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand, commercial
paper, and other borrowed funds are considered to approximate fair value. For
fixed maturity deposits, fair value is estimated by discounting estimated future
cash flows using currently offered rates for deposits of similar remaining
maturities. The fair value of long-term debt is based on rates currently
available to the Bank for debt with similar terms and remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit
is estimated using the fees currently charged to enter into similar agreements.
The fair value of these financial instruments is not material.
D-29
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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).
D-30
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS AMOUNTS IN THOUSANDS)
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.
D-31
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS 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>
D-32
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS 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>
D-33
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS 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>
D-34
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 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
CONDENSED INCOME STATEMENT MORTGAGE SBA SEGMENT COMPANY
-------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
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>
D-35
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE R--SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998
-----------------------------------------
WHOLESALE SEGMENTS
------------------- RETAIL TOTAL
CONDENSED INCOME STATEMENT MORTGAGE SBA SEGMENT COMPANY
-------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
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........................................ (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
CONDENSED INCOME STATEMENT MORTGAGE SBA SEGMENT COMPANY
-------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
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>
D-36
<PAGE>
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(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.
D-37
