-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SXNG/lW4w0s806YZC3AnO9fXADbK/oSgt+xJ3PKHiZfikV3Q5yshzRftpbC+XmwT 8CAUxICL3Gj2qHLiq7St6A== 0000912057-00-017957.txt : 20000417 0000912057-00-017957.hdr.sgml : 20000417 ACCESSION NUMBER: 0000912057-00-017957 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BYL BANCORP CENTRAL INDEX KEY: 0001039311 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 330755794 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23257 FILM NUMBER: 600772 BUSINESS ADDRESS: STREET 1: 1875 NORTH TUSTIN AVENUE CITY: ORANGE STATE: CA ZIP: 92865 BUSINESS PHONE: 7146851317 MAIL ADDRESS: STREET 1: 1875 NORTH TUSTIN AVENUE CITY: ORANGE STATE: CA ZIP: 92865 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File Number 000-23257 BYL BANCORP CALIFORNIA 33-0755794 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 1875 NORTH TUSTIN STREET, ORANGE, CALIFORNIA 92685 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (714) 685-1317 SECURITIES REGISTERED UNDER SECTION 12(b) OF EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF EXCHANGE ACT: COMMON STOCK, NO PAR VALUE (Title of Class) Check whether the issuer (1) filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ There were 2,537,102 shares of Common Stock outstanding at April 6, 2000. The aggregate market value of Common Stock held by non-affiliates at April 6, 2000 was approximately $21.1 million based upon the last known trade of $10.06 per share on April 6, 2000. Documents incorporated by reference: The proxy statement for the Annual Meeting of Shareholders of the registrant to be held in the second or third quarter of 2000. Certain information therein is incorporated by reference in Part III hereof. 1 BYL BANCORP TABLE OF CONTENTS
PAGE ---- Part I Item 1. Business......................................................................................... 3 Item 2. Properties.......................................................................................18 Item 3. Legal Proceedings................................................................................18 Item 4. Submission of Matters to a Vote of Security Holders..............................................18 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................19 Item 6. Selected Financial Data..........................................................................20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.............22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................37 Item 8. Financial Statements and Supplementary Data......................................................40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............76 Part III Item 10. Directors and Executive Officers of the Registrant...............................................76 Item 11. Executive Compensation...........................................................................76 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................76 Item 13. Certain Relationships and Related Transaction....................................................76 Part IV Item 14. Exhibits Financial Statement Schedules, and Reports on Form 8-K..................................77
2 PART I ITEM 1: BUSINESS GENERAL BYL Bancorp (hereinafter the "Company") was incorporated under the laws of the State of California in 1997 and commenced operations in November 1997 as a bank holding company of BYL Bank Group (the "Bank"), which changed its name from Bank of Yorba Linda in June 1998. Other than its investment in the Bank, the Company currently conducts no other significant business activities, although it is authorized to engage in a variety of activities which are deemed closely related to the business of banking upon prior approval of the Federal Reserve's Board of Governors, the Company's primary regulator. As of December 31, 1999, the Company had total assets of approximately $354 million, total deposits of $323 million and total shareholders' equity of $29 million. The Bank was incorporated under the laws of the State of California in 1979 and was licensed by the California State Banking Department, now known as of the California Department of Financial Institutions ("DFI") and commenced operations as a California state chartered bank on March 3, 1980. The Bank's accounts are insured by the Federal Deposit Insurance Corporation ("FDIC"), but like most banks of its size in California, is not a member of the Federal Reserve Bank. The Bank is a California commercial bank that operates from its main office in Orange, California and operates seven full-service banking centers in the Bank's primary market areas of Orange and Riverside counties, California. The Bank specializes in originating and selling non-conforming and conforming residential real estate loans and SBA guaranteed loans. The Bank's specialized loan origination divisions, non-conforming mortgages and SBA guaranteed loans, operate under the name of Bank of Yorba Linda, a division of BYL Bank Group. The Bank's principal office is located at 1875 North Tustin Avenue, Orange, California. The Bank's Mortgage Division is currently located in Tustin, California. The Bank's SBA Loan Division is currently located in Mission Viejo, California. The Bank also has mortgage origination offices in Colorado, Indiana, Florida, Kansas, Northern California, Nevada, Utah and Washington state. On March 26, 1999, the Bank closed its Laguna Hills office and relocated the branch's assets and liabilities to its Costa Mesa office. On May 20, 1999, the Bank closed its Riverside branch office and relocated the branch's assets and liabilities to its De Anza office. FOCUS AND OPERATING STRATEGY The primary focus of the Bank is to provide personalized quality banking products and services to small- and medium-size businesses, including professionals, to originate primarily conforming and nonconforming mortgages in California and various other states and selling such loans in the secondary market, and to originate and sell SBA guaranteed loans, with the objective of building a balanced community loan and investment portfolio mix. Management believes that a local market focus, accompanied by strategic placement of bank branches and personnel, enables the Bank to attract and retain low cost core deposits which provide substantially all of the Bank's funding requirements. 3 Historically, the Bank engaged in traditional community banking activities, including originating commercial, consumer and real estate construction loans, and gathering local deposits to fund these activities. With the employment of Mr. Robert Ucciferri as the Bank's President and Chief Executive Officer in late 1990 and other senior officers in early 1991, the Bank's operating strategy changed to emphasize the origination and sale of nonconforming residential mortgage loans and SBA loans. In part, because of the portfolio turnover and resultant gains on sales of such loans, such activities typically provide greater returns than more traditional community bank activities. From 1990 to 1999, the Bank's operating strategy emphasized: (i) expansion of its programs for originating and selling mortgage loans and SBA guaranteed loans; (ii) continued focus upon providing personalized quality banking products to small to medium-size businesses, professionals, general retail clients and the local community; and (iii) continued expansion of the Bank, primarily in Orange County and Riverside County, California, through internal growth and, when favorable, through selective acquisitions of, or mergers with, healthy, distressed or failed institutions or the selective acquisition of branches of such institutions; however, the Bank has no written or oral agreements regarding any such activities at this time. RESTRUCTURING However, during the fourth quarter of 1999, the Company determined that the maximum potential value of the Bank's commercial loan originations would be realized through the retention of these loans in the Bank's loan portfolio. This decision was based upon the current and anticipated returns obtainable from either the sale or securitization of these commercial loan originations and the proposed increased capital requirements on loan securitzations. The shift in the Bank's strategy from loan sales or securitizations to portfolio retention will require increasing levels of capital in order to maximize the value of the Bank's ability to generate commercial loans at premium yields. In order to conserve the Bank's capital to implement this strategic change, the Board of Directors suspended the quarterly cash dividend for the fourth quarter of 1999. The Bank is currently evaluating various possible alternatives of increasing capital, including the issuance of various kinds of securities and the divestiture or closing of those operations which were expected to continue to provide rates of return below the Bank's targeted ROI. On February 4, 2000, the Bank completed the sale of its automobile loan portfolio of approximately $38 million and closed its automobile division. On February 22, 2000, the Bank completed the sale of its Diamond Bar Mortgage Division, an originator of Agency conforming residential mortgages. As a result of this restructuring, the Company expects to report a loss for the first quarter 2000 of approximately $500,000. The Company also suspended quarterly dividends effective January 1, 2000. The Company continues to explore various means to increase capital and shareholder value, including the raising of additional capital, the formation of a holding company subsidiary that would house many of the Bank's current lending activities, and forming strategic alliances with other well-positioned financial institutions. 4 SALE OF UNGUARANTEED INTERESTS IN SBA LOANS On December 10, 1998, the Bank entered into a Pooling and Servicing Agreement dated as of October 1, 1998 (the "SBA Pooling Agreement") between the Bank, as Servicer and Master Servicer, and Marine Midland Bank, as Trustee (the "Trustee") whereby the Bank transferred certain unguaranteed interests (the "Unguaranteed Interests") in loans (the "SBA Loans") partially guaranteed by the U.S. Small Business Administration ("SBA") to a newly-created trust (the "Trust") for the benefit of the SBA and the holders of certificate representing interests in such Trust. The Trust consists of the Unguaranteed Interests in such SBA Loans that are subject to the Pooling Agreement, and the Trust has issued three (3) classes of certificates representing certain fractional undivided ownership interests in the Trust. The Aggregate principal amount of the Unguaranteed Interests delivered to the Trust on October 31, 1998 equaled approximately $38.1 million. Pursuant to the SBA Pooling Agreement, the Trust issued $34.4 million aggregate principal amount of BYL Bank Group SBA Loan-Backed Adjustable Rate Certificate, Series 1998-1, Class A ("Class A Certificate"), $6.02 million aggregate principal amount of BYL Bank Group SBA Loan-Backed Adjustable Rate Certificate, Series 1998-1, Class M. ("Class M Certificate") and $2.58 million aggregate principal amount of BYL Bank Group SBA Loan-Back Adjustable Rate Certificates, Series 1998-1, Class B ("Class B Certificate"). The Class A and Class M Certificates were sold to a limited number of "Qualified Institutional Buyers" as defined in Rule 144A under the Securities Act of 1933, and institutional "Accredited Investors" as defined in Rule 501 under the Securities Act. Pursuant to the requirements of the SBA, the Class B Certificate were retained by the Bank and are subordinate to the Class A and Class M Certificates. The Class M Certificates are subordinate to the Class A Certificates. SALE OF COMMERCIAL LOANS On August 11, 1999, the Bank entered into a Pooling and Servicing Agreement dated as of June 30, 1999 (the "Business Loan Pooling Agreement") among the Bank, as seller and master servicer, HSBC Bank USA, as Trustee, and Bankers Trust (Delaware) as Delaware Trustee, whereby the Bank has transferred a pool of business loans to a newly-created trust (the "Business Loan Trust") for the benefit of the holders of certificates representing interests in such Business Loan Trust. The Business Loan Trust consists of the Business Loans that are subject to the Business Loan Pooling Agreement, land the Business Loan Trust has issued three (3) classes of certificates representing certain fractional undivided ownership interests in the Business Loan Trust. The aggregate principal amount of the Business Loans delivered to the Business Loan Trust on August 11, 1999 equaled approximately $47.1 million. Pursuant to the Business Loan Pooling Agreement, the Trust issued $16 million aggregate principal amount of BYL Bank Group Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class A-1 ("Class A-1 Certificates"), $12 million aggregate principal amount of BYL Bank Group Business Loan-Backed Pass Through Certificates, Series 1999-1, Class A-2 Certificates ("Class A-2 Certificates"); $27.2 million aggregate principal amount of BYL Bank Group Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class A-3 Certificates ("Class A-3 Certificates"); $4.8 million aggregate principal amount of BYL Bank Group Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class B Certificates ("Class B-1 Certificates"); and BYL Bank Group Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class R Certificates ("Class R Certificates"). 5 The Class A Certificates were sold to a limited number of "Qualified Institutional Buyers" as defined in Rule 144A under the Securities Act of 1933, and institutional "Accredited Investors" as defined in Rule 501 under the Securities Act. The Class B-1 Certificates and the Class R Certificates were retained by the Bank and are subordinate to the Class A-1 Certificates, the Class A-2 Certificates and the Class A-3 Certificates. REGULATORY ACTIONS, PROMPT CORRECTIVE ACTION AND CAPITAL RESTORATION PLAN The two securitization transactions described above were accounted for as sales in accordance with Generally Accepted Accounting Principles. However, as a result of a recent FDIC examination, the FDIC has indicated that such transactions are considered to be with recourse, that the Bank did not adequately support the assumptions utilized to project the value assigned to various residual assets retained in the securitizations completed in 1998 and 1999, that the FDIC has advised the Bank it believes these assets are overstated $2.7 million on a pre-tax basis, that the Bank's Total Risk Based Capital Ratio has been recalculated to 7.99%, which does not include the FDIC's perceived overstatement, and that the Bank is considered to be undercapitalized for purposes of Prompt Corrective Action (see "-Prompt Corrective Action" below) because the Bank's Total Risk Based Capital Ratio as calculated by the FDIC was 0.01% less than being adequately capitalized. The Bank also believes that the FDIC may issue a formal enforcement action in the near future. As a result, the Bank has filed a capital restoration plan with the FDIC, which provides that as a result of the sale of the Bank's $38 million auto portfolio, the closing of the Indirect Auto division and the sale of the Diamond Bar Mortgage Division, the Bank expects to be adequately capitalized by March 31, 2000. The capital restoration plan also provides for increasing levels of capital every quarter until the Bank is well capitalized in 2001. Further, the Bank has eliminated asset securitizations from its business plan. The Bank will continue operations of all traditional retail banking activities through the Bank's existing branch system. Management strongly disagrees with the FDIC conclusions in this matter and intends to appeal the FDIC findings. In connection with this appeal, the Bank has engaged a reputable third-party consultant to evaluate the assumptions used in the valuation of these assets as well as design a new valuation model for ongoing measurement of the changes in valuation of these assets. COMPLETION OF THE ACQUISITION OF DNB FINANCIAL Following the receipt of all necessary regulatory approvals, the Company completed the acquisition of DNB Financial ("DNBF") on May 29, 1998 pursuant to the terms of the Agreement and Plan of Reorganization dated January 29, 1998 in which DNBF was merged with and into the Company, and De Anza National Bank, the wholly-owned subsidiary of DNBF, was merged with and into the Bank. The transaction was structured as a pooling of interests through a tax-free exchange of the Company's shares of common stock for all outstanding shares of DNBF's common stock. As a result of the calculations required by the Agreement, each share of DNBF common stock was converted into the right to receive 4.1162 shares of the Company common stock, resulting in the issuance of 956,641 shares of Company common stock to the shareholders of DNBF. The acquisition of DNBF by the Company increased the total assets of the Company and its subsidiaries to approximately $270 million and total shareholders' equity to approximately $23 million as of the consummation of the transaction. 6 COMPLETION OF ACQUISITION OF BANK OF WESTMINSTER Following the receipt of all necessary regulatory approvals, the Bank completed the acquisition of Bank of Westminster ("BOW") on June 14, 1996 pursuant to the terms of the Agreement and Plan of Reorganization dated January 12, 1996 in which the Bank organized and established BYL Merger Corporation as a wholly-owned subsidiary of the Bank for the sole purpose of facilitating the merger of BOW with the Bank. BYL Merger Corporation was consolidated with BOW under the name and charter of BOW (the "Consolidation"), and, immediately thereafter, the consolidated corporation was merged with and into the Bank (the "Merger"). The aggregate purchase price of BOW was $6.17 million or $6.52 per share. The Bank acquired 100% of the outstanding common stock of BOW for $6,174,000 in cash. BOW had total assets of approximately $54,923,000. The acquisition was accounted for using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations". Under this method of accounting, the purchase price was allocated to the assets acquired and deposits and liabilities assumed based on their fair values as of the acquisition date. The financial statements include the operations of BOW from the date of the acquisition. Goodwill arising from the transaction totaled approximately $1,717,000 and is being amortized over fifteen years on a straight-line basis. SECONDARY STOCK OFFERING During 1996, the Bank completed a secondary stock offering underwritten on a firm commitment basis by Ryan, Beck & Co. In connection with this offering, the Bank issued 805,000 shares of common stock generating $7.8 million in additional capital (net of underwriting discounts and transaction costs of $1.1 million). Proceeds from this offering were used, in part, to fund the acquisition of BOW. SUPERVISION AND REGULATION THE COMPANY The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is registered as such with, and subject to the supervision of, the Federal Reserve Board. The Company is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may conduct examinations of bank holding companies and their subsidiaries. The Company will be required to obtain the approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than 5% of the voting shares of such bank. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company. 7 The Company is prohibited by the Bank Holding Company Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging, directly or indirectly, in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company, and any subsidiaries which it may acquire or organize, are deemed to be "affiliates" of the Company within the meaning of that term as defined in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans by it subsidiaries to affiliates, and (b) on investments by its subsidiaries in affiliates' stock as collateral for loans to any borrower. The Company and its subsidiary are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities. The Company and its subsidiary are prohibited from engaging in certain tie-in arrangements in connection with an extension of credit, sale or lease of property or furnishing of services. Section 106(b) of the Bank Holding Company Act Amendments of 1970 generally prohibits a bank from tying a product or service to another product or service offered by its subsidiaries, or by any of its affiliates. Further, the Company and its subsidiary is required to maintain certain levels of capital. See, "Effect of Governmental Policies and Recent Legislation Capital Standards." The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates when the Federal Reserve Board determines that the activity or the control or the subsidiary or affiliates constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company is required to file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the Federal Reserve Board's regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe and unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. THE BANK The Bank is extensively regulated under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. 8 The Bank is chartered under the laws of the State of California and its deposits are insured by the FDIC to the extent provided by law. The Bank is subject to the supervision of, and is regularly examined by, the DFI and the FDIC. Such supervision and regulation include comprehensive reviews of all major aspects of the Bank's business and condition. Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and locations of branch offices. Further, the Bank is required to maintain certain levels of capital. California law and regulations of the DFI authorize California licensed banks, subject to applicable limitations and approvals of the DFI to (1) provide real estate appraisal services, management consulting and advice services, and electronic data processing services; (2) engage directly in real property investment or acquire and hold voting stock of one or more corporations, the primary activities of which are engaging in real property investment; (3) organize, sponsor, operate or render investment advice to an investment company or to underwrite, distribute or sell securities in California; and (4) invest in the capital stock, obligations or other securities of corporations not acting as insurance companies, insurance agents or insurance brokers. In November 1988, Proposition 103 was adopted by California voters. The DFI has established certain procedures to be followed by banks desiring to engage in certain insurance activities. CAPITAL STANDARDS The Federal Reserve Board and FDIC have adopted risk-based minimum capital guidelines (for bank holding companies and insured non-member state banks, respectively) intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, long-term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. 9 In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. In June 1996, the federal banking agencies adopted a joint agency policy statement to provide guidance on managing interest rate risk. These agencies indicated that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposures are critical factors in the agencies' evaluation of the Bank's capital adequacy. A bank with material weaknesses in its risk management process or high levels of exposure relative to its capital will be directed by the agencies to take corrective action. Such actions will include recommendations or directions to raise additional capital, strengthen management expertise, improve management information and measurement systems, reduce levels of exposure, or some combination thereof depending upon the individual institution's circumstances. The federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. Federally supervised banks and savings associations are currently required to report deferred tax assets in accordance with SFAS No. 109. The federal banking agencies recently issued final rules governing banks and bank holding companies, which became effective April 1, 1995, which limit the amount of deferred tax assets that are allowable in computing an institutions regulatory capital. The standard has been in effect on an interim basis since March 1993. Deferred tax assets that can be realized for taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. Deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit would be excluded from Tier 1 Capital and total assets and regulatory capital calculations. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends. Under applicable regulatory guidelines, the Bank is considered to be "Undercapitalized" at December 31, 1999. See REGULATORY ACTIONS, PROMPT CORRECTIVE ACTION AN CAPITAL RESTORATION PLAN. On January 1, 1998, new legislation became effective which, among other things, gave the power to the DFI to take possession of the business and properties of a bank in the event that the tangible shareholders' equity of the Bank is less than the greater of (i) 3% of the Bank's total assets or (ii) $1,000,000. 10 PROMPT CORRECTIVE ACTION Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An insured depository institution generally will be classified in the following categories based on capital measures indicated below: "WELL CAPITALIZED" "ADEQUATELY CAPITALIZED" 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%.
An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is 11 necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt correction action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced acquisition; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. 12 SAFETY AND SOUNDNESS STANDARDS Effective in 1995 the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by the Federal Deposit Insurance Corporation Improvement Act of 1991 (AFDICIA). These standards are designed to identify potential safety and soundness concerns and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance fund. The standards relate to (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits. If a federal banking agency determines that an institution fails to meet any of these standards, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. In the event the institution fails to submit an acceptable plan within the time allowed by the agency or fails in any material respect to implement an accepted plan, the agency must, by order, require the institution to correct the deficiency. Effective October 1, 1996, the federal banking agencies promulgated safety and soundness regulations and accompanying interagency compliance guidelines on asset quality and earnings standards. These new guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. The institution should (i) conduct periodic asset quality reviews to identify problem assets; (ii) estimate the inherent losses in those assets and establish reserves that are sufficient to absorb estimated losses; (iii) compare problem asset totals to capital; (iv) take appropriate corrective action to resolve problems assets; (v) consider the size and potential risks of material asset concentrations; and (vi) provide periodic asset reports with adequate information for management and the board of directors to assess the level of risk. These new guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. PREMIUMS FOR DEPOSIT INSURANCE Federal law has established several mechanisms to increase funds to protect deposits insured by Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. The FDIC also has authority to impose special assessments against insured deposits. The FDIC has adopted final regulations implementing a risk-based premium system required by federal law. Under the regulations, which cover the assessment periods commencing on and after January 1, 1994, insured depository institutions are required to pay insurance premiums within a range of 23 cents per $100 of deposits to 31 cents per $100 of deposits depending on their risk classification. The FDIC, effective September 15, 1995, lowered assessments from their rates of $.23 to $.31 per $100 of insured deposits to rates of $.04 to $.31, depending on the health of the Bank, as a result of the recapitalization of the BIF. On November 15, 1995, the FDIC voted to drop its premiums for well capitalized banks to zero effective January 1, 1996. Other banks will be charged risk-based premiums up to $.27 per $100 of deposits. 13 Congress passed in 1996 and the President signed into law, provisions to strengthen the Savings and Loan Insurance Fund ("SAIF") and to repay outstanding bonds that were issued to recapitalize the SAIF as a result of payments made due to the insolvency of savings and loan associations and other federally insured savings institutions in the late 1980s and early 1990s. The new law requires saving and loan associations to be bear the cost of recapitalizing the SAIF and, after January 1, 1997, banks will contribute towards paying off the financing bonds, including interest. Effective January 1, 1997, SAIF-insured institutions pay 3.2 cents per $100 in domestic deposits, and BIF-insured institutions, like the Bank, pay 0.64 cents per $100 in domestics deposits. In 2000, the banking industry will share on a more equal basis in the bulk of the payments. FINANCIAL MODERNIZATION LEGISLATION On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the "Gramm Act"). The Gramm Act is expected to have a major impact on cross-industry mergers, customer privacy and lending to lower-income communities. The Gramm Act repeals the Glass Steagall Act of 1937 that separated commercial and investment banking, and eliminates the Bank Holding Company Act's prohibition on insurance underwriting activities. The Gramm Act allows both holding company subsidiaries and national bank operating subsidiaries to offer a wide range of new financial services, including insurance or securities sales. However, real estate development and insurance underwriting would be restricted to affiliates and can not be performed by bank operating subsidiaries. State laws will govern insurance sales, but states can not discriminate against national bank by preventing national banks from conducting insurance activities that nonbanks may conduct. The Gramm Act bars a bank holding company from merging with insurance or securities firms, or embarking on new powers, if any of its banks earned less than a "satisfactory" CRA rating in its most recent examination. The Gramm Act also provides that customers will have the right to prevent banks from sharing information with third parties. The Gramm Act is expected to further increase competition in providing financial services. INTERSTATE BANKING AND BRANCHING On September 29, 1994, the President signed into law the Rieglel Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain approval under Bank Holding Company Act to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which it is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five-year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. 14 In 1995, California adopted "opt in" legislation under the Interstate Act that permits out-of-state banks to acquire California banks that satisfy a five-year minimum age requirement (subject to exceptions for supervisory transactions) by means of merger or purchases of assets, although entry through acquisition of individual branches of California institutions and de novo branching into California are not permitted. The Interstate Act and the California branching statute will likely increase competition from out-of-state banks in the markets in which the Company intends to operate, although it is difficult to assess the impact that such increased competition may have on the Company's operations. The Interstate Act may increase competition in the Company's market areas especially from larger financial institutions and their holding companies. It is difficult to assess the impact such likely increased competition may have on the Company's operations. COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate-income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. In 1995 the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending, service and investment performance, rather than the extent to which the institution conducts needs assessments, documents community outreach activities or complies with other procedural requirements. In 1994 the federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." The Bank has consistently been rate "satisfactory" and was examined most recently during the fourth quarter of 1998. The final report of examination has been received, and the Bank received a "satisfactory" rating. POTENTIAL ENFORCEMENT ACTIONS Commercial banking organizations and bank holding companies, such as the Bank and the Company, may be subject to potential enforcement actions by federal and state bank regulatory officials for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease and desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. 15 HAZARDOUS WASTE CLEAN-UP COSTS Management is aware of recent legislation and cases relating to hazardous waste clean-up costs and potential liability. Based on a general survey of the loan portfolios of the Bank, conversations with local authorities and appraisers, and the type of lending currently and historically done by the Bank (the Bank has generally not made the types of loans generally associated with hazardous waste contamination problems), management is not aware of any potential liability for hazardous waste contamination. OTHER REGULATIONS AND POLICIES The federal regulatory agencies have adopted regulations that implement Section 304 of FDICIA which requires federal banking agencies to adopt uniform regulations prescribing standards for real estate lending. Each insured depository institution must adopt and maintain a comprehensive written real estate lending policy, developed in conformance with prescribed guidelines, and each agency has specified loan-to-value limits in guidelines concerning various categories of real estate loans. Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal regulations include requirements to maintain non-interest bearing reserves against deposits, limitations on the nature and amount of loans which may be made, and restrictions on payment of dividends. The California Commissioner of Financial Institutions approves the number and locations of the branch offices of a bank. California law exempts banks from the usury laws. BUSINESS CONCENTRATIONS As of December 31, 1999, the Company had approximately $354 million in assets and $323 million in deposits. No individual or single group of related accounts is considered material in relation to the Company's totals, or in relation to its overall business. MONETARY POLICY Banking is a business which depends on rate differentials. In general, the difference between the interest paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its clients and securities held in the Bank investment portfolios will comprise a major portion of the Bank's earnings. The earnings and growth of the Bank will be affected not only by general economic conditions, both domestic and international, but also by the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve Board. The Federal Reserve Board can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in U.S. Government securities, limitations upon savings and time deposit interest rates, and adjustments to the discount rates applicable to borrowings by banks which are members of the Federal Reserve System. The actions of the Federal Reserve Board influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact that future changes in fiscal or monetary policies or economic controls may have on the Bank's businesses and earnings cannot be predicted. 16 COMPETITION The banking business in California generally, and in the Bank's primary service areas specifically, is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices and operations over a wide geographic area. Among the advantages such major banks have over the Bank are their ability to finance and wide-ranging advertising campaigns and to allocate their investment assets to regions of higher yield and demand. Such banks offer certain services such as trust services and international banking which are not offered directly by the Bank (but which can be offered indirectly by the Bank through correspondent institutions). In addition, by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Bank. (Legal lending limits to an individual client are based upon a percentage of a bank's total capital accounts.) Other entities, both governmental and in private industry, seeking to raise capital through the issuance and sale of debt or equity securities also provide competition for the Bank in the acquisition of deposits. Banks also compete with money market funds and other money market instruments which are not subject to interest rate ceilings. In order to compete with other competitors in their primary service areas, the Bank attempts to use to the fullest extent the flexibility which their independent status permits. This includes an emphasis on specialized services, local promotional activity, and personal contacts by their respective officers, directors and employees. In particular, each of the banks offers highly personalized banking services. EMPLOYEES At December 31, 1999, the Bank had a total of 328 full-time employees and 28 part-time employees. The Bank believes that its employee relations are satisfactory. 17 ITEM 2. PROPERTIES The Company currently maintains an administrative facility in Orange, California, which is utilized by the Company and the Bank. The Bank also maintains seven full service branches, one regional loan center and six loan production offices. The Bank owns three of its branch locations and leases all of its other facilities. For additional information regarding the Bank's lease obligations, see Note E to the Consolidated Financial Statements, included in Item 8 hereof. The Company believes that all of its properties are appropriately maintained and suitable for their respective present needs and operations. ITEM 3. LEGAL PROCEEDINGS To the best of the Company's knowledge, there are no pending legal proceedings to which the Company is a party and which may have a materially adverse effect upon the Company's property or business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of securities holders during the fourth quarter of 1999. 18 PART II ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The equity securities of BYL Bancorp consist of one class of common stock, of which there were 2,537,102 shares outstanding, held by approximately 800 shareholders of record at year-end 1999. Holders of the common stock are entitled to receive dividends, when, as and if declared by the Board of Directors out of funds legally available therefor, as specified by the California Financial Code. During 1999 and 1998, the Company paid quarterly cash dividends of $0.075 per share and $0.05 per share, respectively. During the first quarter of 2000 the Company has suspended the payment of quarterly cash dividends. Management of the Company is aware of five (5) securities dealers who maintain an inventory and make a market in its Common Stock. The market makers are Ryan, Beck & Co., Wedbush Morgan Securities Inc., Herzog, Heine & Geduld, Sutro & Co. and Sandler, O'Neill & Partners. The information set forth in the table below summarizes, for the periods indicated, the bid and ask prices of the Company Common Stock. These quotes do not necessarily include retail markups, markdowns, or commissions and may not necessarily represent actual transactions. Additionally, there may have been transactions at prices other than those shown below.
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
19 ITEM 6. SELECTED FINANCIAL DATA The following is our summary consolidated financial information. The balance sheet and income statement data as of or for the five years ended December 31, 1999 are taken from our audited consolidated financial statements as of the end of and for each such year. You should read this summary consolidated financial information in conjunction with our consolidated financial statements and notes that appear in this prospectus.
AT OR FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ SUMMARY OF OPERATIONS: Interest Income $ 27,528 $ 24,016 $ 18,455 $ 12,642 $ 9,746 Interest Expense 11,586 8,406 6,057 3,840 2,757 ------------ ------------ ------------ ------------ ------------ Net Interest Income 15,942 15,610 12,398 8,802 6,989 Provision for Loan Losses 694 755 778 364 262 ------------ ------------ ------------ ------------ ------------ Net Interest Income After Provision for Loan Losses 15,248 14,855 11,620 8,438 6,727 Noninterest Income 24,049 23,408 15,920 8,752 6,726 Noninterest Expense 33,891 30,870 22,717 14,045 11,211 ------------ ------------ ------------ ------------ ------------ Income Before Income Taxes 5,406 7,393 4,823 3,145 2,242 Income Taxes 2,330 3,277 1,968 1,229 872 ------------ ------------ ------------ ------------ ------------ Net Income $ 3,076 $ 4,116 $ 2,855 $ 1,916 $ 1,370 ============ ============ ============ ============ ============ Dividends on Common Stock $ 760 $ 467 $ 502 $ 168 $ 89 PER SHARE DATA: Net Income - Basic $ 1.21 $ 1.63 $ 1.19 $ 0.98 $ 0.88 Net Income - Diluted $ 1.21 $ 1.55 $ 1.12 $ 0.96 $ 0.75 Book Value $ 11.51 $ 10.62 $ 9.01 $ 8.10 $ 9.26 BALANCE SHEET SUMMARY: Total Assets $353,736 $318,013 $238,086 $183,755 $125,872 Total Deposits 322,973 287,206 207,935 162,058 113,295 Loans Held for Sale 69,756 74,598 47,150 24,363 10,186 Total Loans 196,675 165,199 139,002 106,019 67,979 Allowance for Loan Losses (ALLL) 2,610 2,300 1,923 1,616 1,047 Total Shareholders' Equity 29,200 26,882 22,550 19,434 11,273 SELECTED RATIOS: Return on Average Assets 0.88% 1.49% 1.31% 1.23% 1.17% Return on Average Equity 11.05% 17.03% 13.80% 12.81% 12.56% Net Interest Margin 5.38% 6.40% 6.46% 6.47% 6.68% Dividend Payout Ratio - Common Stock 24.78% 11.35% 17.59% 8.82% 6.50% Non-performing Loans to Total Loans 0.84% 1.23% 0.92% 1.15% 1.98% Non-performing Assets to Total Assets 0.55% 0.94% 0.93% 1.57% 1.81% ALLL to Non-performing Loans 157.04% 113.30% 150.35% 132.68% 77.90% Average Shareholder's Equity to Average Assets 8.00% 8.75% 9.49% 9.63% 9.28%
20 On June 14, 1996, our bank acquired Bank of Westminster ("BOW"), pursuant to the terms of an Agreement and Plan of Reorganization dated January 12, 1996. Our bank acquired 100% of the outstanding common stock of BOW for $6,174,000 in cash. BOW had assets of approximately $54,923,000. At the time of such acquisition, the Bank also raised approximately $7.8 million in additional equity in a firmly underwritten offering by issuing 1,073,000 shares of the Bank's Common Stock as adjusted for the four for three stock split effective June 30, 1997. BOW's result of operations are included only since the second quarter of fiscal 1996. Due to the relatively large size of this transaction, any comparison of data as of and for the years ended December 31, 1996 and December 31, 1997 to data as of or for prior dates or periods may not be meaningful. On November 19, 1997, the Bank completed the reorganization of BYL as its bank holding company, and BYL's Common Stock began trading on that date. On May 29, 1998 pursuant to the terms of an Agreement and Plan of Reorganization dated January 29, 1998, the Company completed the acquisition of DNB Financial ("DNBF"). This transaction was structured as a pooling of interests through a tax-free exchange of 4.1162 of the Company's shares of common stock for each outstanding share of DNBF's common stock, resulting in the issuance of 956,641 shares of Company common stock to the shareholders of DNBF. The acquisition of DNBF increased the total assets of the Company and its subsidiaries to approximately $270 million and total shareholder's equity to approximately $23 million. Due to the relatively large size of this transaction, any comparison of data as of and for the years ended December 31, 1999 and December 31, 1998 to data and of or for prior date or periods may not be meaningful. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following sections set forth a discussion of the significant operating changes, business trends, financial condition, earnings, capital position, and liquidity that have occurred in the two-year period ended December 31, 1999, together with an assessment, when considered appropriate, of external factors that may affect us in the future. This discussion should be read in conjunction with our consolidated financial statements and notes included herein. OVERVIEW EARNINGS SUMMARY Net income in 1999 was $3.1 million, decrease of $1.0 million or24.4%, compared to $4.1 million in 1998. Diluted earnings per share in 1999 were $1.21 compared to $1.55 in 1998. The decrease in earnings in 1999 was due primarily to decrease profitability of the SBA and Mortgage Loan Divisions. Net income in 1998 was $4.1 million, an increase of $1.2 million or 44.2%, compared to $2.9 million in 1997. Diluted earnings per share in 1998 were $1.55 compared to $1.12 in 1997. The increase in earnings in 1998 was due primarily to strong asset growth and increased profitability of our SBA and Mortgage Loan Divisions. BALANCE SHEET SUMMARY Total assets at December 31, 1999 were $353.7 million, a $35.7 million or 11.2% increase from $318.0 million at December 31, 1998. Average assets for 1999 were $347.8 million compared to $276.4 million for 1998. Total deposits increased $35.8 million or 12.5% to $323.0 million at December 31, 1999. Gross loans increased $26.6 million or 11.1% , to $266.4 million at December 31, 1999. Shareholder's equity increased $2.3 million or 8.6%, to $29.2 million at December 31, 1999. Total assets at December 31, 1998 were $318.0 million, a $79.9 million or 33.6% increase from $238.1 million at December 31, 1997. Average assets for 1998 were $276.4 million compared to $217.9 million for 1997. The increases in shareholders' equity in 1998 and 1997 allowed us to aggressively expand our asset base. The following table sets forth several key operating ratios for 1999, 1998 and 1997:
For the Year Ended December 31, ------------------------------------------ 1999 1998 1997 ----------- ---------- ----------- Return on Average Assets 0.88% 1.49% 1.31% Return on Average Equity 11.05% 17.03% 13.80% Average Shareholder's Equity to Average Total Assets 8.00% 8.75% 9.49%
22 DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY The following table presents, for the years indicated, the distribution of average assets, liabilities and shareholders' equity, as well as the total dollar amounts of interest income from average interest-earning assets and the resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual loans are included in the calculation of the average balances of loans, and interest not accrued is excluded (dollar amounts in thousands).
For the Year Ended December 31, --------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------ ------------------------------ ------------------------------- Average Average Average Yield Yield Yield Interest or Interest or Interest or Average Earned Rate Average Earned Rate Average Earned Rate Balance or Paid Paid Balance or Paid Paid Balance or Paid Paid ----------- --------- -------- ----------- --------- -------- ----------- ---------- -------- 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%
23 EARNINGS ANALYSIS NET INTEREST INCOME A significant component of our earnings is net interest income. Net interest income is the difference between the interest we earn on our loans and investments and the interest we pay on deposits and other interest-bearing liabilities. Our net interest income is affected by changes in the amount and mix of our interest-earning assets and interest-bearing liabilities, referred to as a "volume change". It is also affected by changes in the yields we earn on interest-earning assets and rates we pay on interest-bearing deposits and other borrowed funds, referred to as a "rate change". The following table sets forth changes in interest income and interest expense for each major category of interest-earning asset and interest-bearing liability, and the amount of change attributable to volume and rate changes for the years indicated. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each (dollar amounts in thousands).
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 ----------- ------------ ----------- ---------- ---------- ------------ 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 =========== ============ =========== ========== ========== ============
24 1999 COMPARED TO 1998 Net interest income for 1999 was $15.9 million, an increase of 1.9% compared to the $15.6 million reported in 1998. This increase was primarily due to the significant increase in average interest-earning assets which increased $52.2 million or 21.3% to $296.1 million in 1999 compared to $243.9 million in 1998. Interest income in 1999 was $27.5 million, a $3.5 million or a 14.6% increase over the $24.0 million recorded in 1998. The increase in interest income was the result primarily of volume increases in loan totals offset by a decreased interest rate environment. Average loans outstanding increased 21.4% to $253.8 million in 1999 compared to $209.0 million in 1998. The yield on interest-earning assets decreased 55 basis points to 9.30% from 9.85% in 1998. The yield on the loan portfolio, the Banks largest interest-earning asset, decreased 66 basis points, from 10.55% to 9.89%. Interest expense also rose significantly in 1999 as we increased deposits and other borrowings to fund the loan growth discussed above. Interest expense was $11.6 million in 1999, compared to $8.4 million in 1998. The increase in interest expense was primarily the result of an increase in interest-bearing liabilities. Average interest-bearing liabilities increased 33.4% to $246.4 million in 1999 compared to $184.7 million in 1998. An increase in the cost of interest-bearing liabilities accounted for $616 or 19.3% of the total increase in interest expense. Rates on interest bearing deposits increased 15 basis points to 4.70% from 4.55% in 1998. Interest rates played a significant role in the changes in net interest income in 1999. Our yield on interest-earning assets decreased 55 basis points, while the yield on interest-bearing liabilities increased 15 basis points. The net yield on interest-earning assets in 1999 declined 102 basis points to 5.38% compared to 6.40% in 1998. 1998 COMPARED TO 1997 Net interest income for 1998 was $15.6 million, an increase of 25.9% compared to the $12.4 million reported in 1997. This increase was primarily due to the significant increase in average interest-earning assets which increased $52.0 million or 27.1% to $243.9 million in 1998 compared to $191.9 million in 1997. Interest income in 1998 was $24.0 million, a $5.5 million or a 30.1% increase over the $18.5 million recorded in 1997. Increased loan totals accounted for the majority of this increase as the average loans outstanding increased 34.4% to $209.0 million in 1998 compared to $155.6 million in 1997. The significant increase in shareholders' equity in 1998 and 1997 has allowed the Bank to aggressively grow its loan portfolio and other interest-earning assets. Interest expense also rose significantly in 1998 as the Bank increased deposits and other borrowings to fund the loan growth discussed above. Interest expense was $8.4 million in 1998, compared to $6.0 million in 1997. Interest rates played a minor role in the changes in net interest income in 1998. The Bank was able to increase its yield on interest-earning assets by 23 basis points, however, the rates the Bank paid on interest-bearing liabilities increased 29 basis points. The net yield on interest-earning assets in 1998 declined 6 basis points to 6.40% compared to 6.46% in 1997. 25 NONINTEREST INCOME The Bank receive noninterest income from three primary sources: service charges and fees on accounts and banking services, fees and premiums generated by our Mortgage Loan Division, and fees, premiums, and servicing income generated by our SBA Loan Division. In 1999, noninterest income was $24.0 million, an increase of $.6 million or 2.6% compared to the 1998 amount of $23.4 million. The majority of the increase was generated by our SBA and Mortgage Loan Divisions who continued to expand their operations in 1999. The majority of the increase was from the increase in Net Servicing and Interest-Only Strip Income, which increased to $1.8 million or 157.1%, compared to $0.7 million in 1998. In 1998, noninterest income was $23.4 million, an increase of $7.5 million or 47.0% compared to the 1997 amount of $15.9 million. The majority of this increase, $6.5 million, was generated by our SBA and Mortgage Loan Divisions who continued to expand their operations in 1998. Included in the increase was a gain of $3.6 million from the securitization of the unguranteed portion SBA loans totaling approximately $38.1 million. By the end of 1998, these divisions had developed networks of referring brokers throughout most pacific coast states. Service charges, fees and other income increased almost $1.0 million in 1998 from a combination of increased deposit activity and income from other loan referral programs NONINTEREST EXPENSE Noninterest expense reflects our costs of products and services related to systems, facilities and personnel. The major components of noninterest expense stated as a percentage of average assets are as follows:
1999 1998 1997 ------------- ------------- ------------- Salaries and Employee Benefits 5.72% 7.11% 6.46% Occupancy Expenses .65 .60 .62 Furniture and Equipment .80 .74 .64 Professional Fees and Outside Services .56 .65 .65 OREO Expenses .06 .10 .08 Commission and Loan Expenses .47 .38 .29 Office Expenses .58 .55 .60 Other .90 1.04 1.08 ------------- ------------- ------------- 9.74% 11.17% 10.42% ============= ============= =============
Noninterest expense was $33.9 million in 1999, an increase of $3.0 million or 9.7% over the $30.9 million reported in 1998. The majority of this increase, $1.9 million was from the expansion of facilities and equipment for our SBA and Mortgage Loan Divisions. Other expense categories increased in total amount but declined as a percentage of total average assets. 26 Noninterest expense was $30.9 million in 1998, an increase of $8.1 million or 35.9% over the $22.8 reported in 1997. The majority of this increase, $5.6 million, was created by increased salaries and benefits generated by our SBA and Mortgage Loan Divisions. Compensation in these divisions are primarily incentive-based, therefore, significant increases in volume of loan originations, and resulting gains, result in significant increases in salaries and incentive payments. Other expense categories increased in total amount but were consistent as a percentage of total assets. Included in other in 1998 was $542,000 of acquisition related expenses. INCOME TAXES Income tax expense was $2.3, $3.3, and $2.9 million for the years ended December 31, 1999, December 31, 1998, and December 31, 1997, respectively. These expenses resulted in an effective tax rate of 43.1% in 1999, 44.3% in 1998, and 40.8% in 1997. The increase in effective rate in 1998 was due primarily to non-deductible merger expenses. 27 BALANCE SHEET ANALYSIS INVESTMENT PORTFOLIO The following table summarizes the amounts and distribution of our investment securities held as of the dates indicated, and the weighted average yields as of December 31, 1999 (dollar amounts in thousands):
December 31, ------------------------------------------------------------------------------ 1999 1998 1997 --------------------------------- --------------------- --------------------- Weighted Book Market Average Book Market Book Market Value Value Yield Value Value Value Value ---------- --------- ---------- ---------- --------- ---------- ---------- U.S. GOVERNMENT AND AGENCY SECURITIES: Within One Year $ - $ - $ - $ - $ 1,022 $ 1,025 One to Five Years - - - - 233 232 After Ten Years - - - - 1,297 1,307 ---------- --------- ---------- --------- ---------- ---------- Total U.S. Government and Agency Securities - - - - 2,552 2,564 MUNICIPAL SECURITIES - FIVE TO TEN YEARS - - - - 1,018 1,032 MUTUAL FUNDS - - 3,000 3,000 6,059 6,016 MORTGAGE BACKED SECURITIES 6,597 6,868 10.64% 2,305 2,570 - - ---------- --------- ---------- --------- ---------- ---------- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 6,597 $ 6,868 10.64% $ 5,305 $ 5,570 $ 9,629 $ 9,612 ========== ========= ========== ========= ========== ========== U.S. TREASURIES: Within One Year $ 500 $ 501 6.37% $ 2,001 $ 2,015 $ 1,999 $ 1,998 One to Five Years - - 498 511 2,499 2,505 ---------- --------- ---------- --------- ---------- ---------- Total U.S. Treasuries Securities 500 501 2,499 2,526 4,498 4,503 U.S. GOVERNMENT AND AGENCY SECURITIES: Within One Year 3,013 2,987 4.80% 994 1,001 - - One to Five Years 10,995 10,755 5.66% 7,035 7,029 998 999 Five to Ten Years 3,968 3,990 After Ten Years - - - - 1,500 1,502 ---------- --------- ---------- --------- ---------- ---------- Total U.S. Government and Agency Securities 14,008 13,742 5.47% 8,029 8,030 6,466 6,491 MUNICIPAL SECURITIES: One to Five Years - - - - 1,074 1,079 Five to Ten Years - - - - 852 867 ---------- --------- ---------- --------- ---------- ---------- Total Municipal Securities - - - - 1,926 1,946 MORTGAGE BACKED SECURITIES 204 202 6.82% 316 318 60 56 ---------- --------- ---------- --------- ---------- ---------- TOTAL HELD-TO-MATURITY SECURITIES $ 14,712 $ 14,445 5.52% $ 10,844 $ 10,874 $ 12,950 $ 12,996 ========== ========= ========== ========= ========== ==========
28 Securities may be pledged to meet security requirements imposed as a condition to receipt of deposits of public funds and other purposes. At December 31, 1999 and 1998, the carrying values of securities pledged to secure public deposits and other purposes were $14.7 million and $10.8 million, respectively. LOANS HELD FOR SALE We originate mortgage loans and SBA loans for sale to institutional investors. Loans held for sale increased from $47.2 million at December 31, 1997, to $74.6 million at December 31, 1998 and decreased to $69.8 million at December 31, 1999. Historically, we sold these loans within sixty (60) days of origination, but during 1998 the Bank began to warehouse and accumulate pools of loans to take advantage of short-term fluctuations in the market. At December 31, 1999 and 1998, we were servicing approximately $220.1 million and $164.8 million, respectively, in SBA and other loans previously sold. In connection with a portion of these loans, the Company has capitalized approximately $2.8 million and $2.5 million in servicing assets at December 31, 1999 and 1998, respectively. Servicing assets are amortized over the estimated life of the serviced loan using a method that approximates the interest method. We evaluate the carrying value of the excess servicing receivables by estimating the excess future servicing income, based on our best estimate of the remaining loan lives. We have also recorded interest-only strips receivable in connection with our loan sales and securitizations. These totaled $12.3 million in 1999 and $5.9 million at December 31, 1998. See also Note C in the Consolidated Financial Statements for additional information on loans held for sale and key assumptions used to value retained interest in securitizations. 29 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):
December 31, ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------- ------------- -------------- ------------- ------------ LOANS Commercial $ 104,719 $ 56,244 $ 36,359 $ 24,512 $ 13,706 Real Estate - Construction 5,524 4,411 2,867 4,149 3,478 Real Estate - Other 45,976 82,235 84,792 71,799 46,885 Consumer 40,456 22,309 14,984 5,559 3,910 ------------- ------------- -------------- ------------- ------------ Total Loans 196,675 165,199 139,002 106,019 67,979 Net Deferred Loan Costs (Fees) 2,209 1,255 471 173 ( 102) Allowance for Loan Losses ( 2,610) ( 2,300) ( 1,923) ( 1,616) ( 1,047) ------------- ------------- -------------- ------------- ------------ Net Loans $ 196,274 $ 164,154 $ 137,550 $ 104,576 $ 66,830 ============= ============= ============== ============= ============ COMMITMENTS Standby Letters of Credit $ 839 $ 360 $ 371 $ 203 $ 398 Undisbursed Loans and Commitments to Grant Loans 28,060 21,627 18,521 14,843 10,014 ------------- ------------- -------------- ------------- ------------ Total Commitments $ 28,899 $ 21,987 $ 18,892 $ 15,046 $10,412 ============= ============= ============== ============= ============
RISK ELEMENTS We assess and manage credit risk on an ongoing basis through our lending policies. We strive to continue our historically low level of credit losses by continuing our emphasis on credit quality in the loan approval process, active credit administration and regular monitoring. In extending credit and commitments to borrowers, we generally require collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow or from proceeds from the sale of selected assets of the borrower. Our requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with our evaluation of the credit worthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. We secure our collateral by perfecting our interest in business assets, obtaining deeds of trust, or outright possession among other means. We believe that our lending policies and underwriting standards will tend to minimize losses in an economic downturn, however, there is no assurance that losses will not occur under such circumstances. 30 The following table shows the maturity distribution of the fixed rate portion of the loan portfolio and the repricing distribution of the variable rate portion of the loan portfolio, including loans held for sale, at December 31, 1999:
Over 3 Months Due after 3 Months through one year to Due after or Less 12 months five years five years Total - --------------------- -------------------- -------------------- -------------------- -------------------- $ 181,834 $ 6,346 $ 51,107 $ 27,811 $ 267,098 ===================== ==================== ==================== ==================== Loans on Non-Accrual 1,542 -------------------- Total Loans, including Loans Held for Sale $ 268,640 ====================
NONPERFORMING ASSETS The following table provides information with respect to the components of our nonperforming assets at the dates indicated (dollar amounts in thousands):
For the Year Ended December 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ------------ ---------- ---------- Loans 90 Days Past Due and Still Accruing $ 120 $ 223 $ - $ 122 $ 149 Nonaccrual Loans 1,542 1,807 1,279 1,096 1,195 ----------- ----------- ------------ ---------- ---------- Total Nonperforming Loans 1,662 2,030 1,279 1,218 1,344 Other Real Estate Owned 277 971 924 1,661 930 ----------- ----------- ------------ ---------- ---------- Total Nonperforming Assets $ 1,939 $ 3,001 $ 2,203 $ 2,879 $ 2,274 =========== =========== ============ ========== ========== Nonperforming Loans as a Percentage of Total Loans 0.84% 1.22% 1.21% 1.79% 1.97% Allowance for Loan Loss as a Percentage of Nonperforming Loans 157.04% 113.30% 126.35% 85.96% 71.43% Nonperforming Assets as a Percentage of Total Assets 0.55% 0.94% 1.20% 2.29% 1.94%
Nonaccrual loans are generally past due 90 days or are loans that we believe the interest on which may not be collectible. Loans past due 90 days will continue to accrue interest only when we believe the loan is both well-secured and in the process of collection. Other real estate owned is acquired through foreclosure or other means. These properties are recorded on an individual asset basis at the estimated fair value less selling expenses. We believe these properties can be liquidated at or near their current fair value. 31 PROVISION AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level that is considered adequate to provide for the loan losses inherent in our loans. The provision for loan losses was $694,000 in 1999 compared to $755,000 in 1998 and $778,000 in 1997. The following table summarizes, for the years indicated, changes in the allowances for loan losses arising from loans charged-off, recoveries on loans previously charged-off, and additions to the allowance which have been charged to operating expenses and certain ratios relating to the allowance for loan losses (dollar amounts in thousands):
For the Year Ended December 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------- ------------ ------------ ------------ ----------- OUTSTANDING LOANS: Average for the Year $ 253,771 $ 209,080 $ 155,588 $ 102,145 $ 68,052 End of the Year $ 196,675 $ 165,199 $ 139,002 $ 106,019 $ 67,979 ALLOWANCE FOR LOAN LOSSES: Balance at Beginning of Year $ 2,300 $ 1,923 $ 1,616 $ 1,047 $ 960 Actual Charge-Offs: Commercial 102 175 486 318 133 Consumer 118 252 29 21 24 Real Estate 298 101 20 192 162 ------------- ------------ ------------ ------------ ----------- Total Charge-Offs 518 528 535 531 319 Less Recoveries: Commercial 123 140 33 19 18 Consumer 10 7 7 11 3 Real Estate 1 3 24 6 123 ------------- ------------ ------------ ------------ ----------- Total Recoveries 134 150 64 36 144 ------------- ------------ ------------ ------------ ----------- Net Loans Charged-Off 384 378 471 495 175 Provision for Loan Losses 694 755 778 364 262 Allowance on Loans Acquired from BOW - - - 700 - ------------- ------------ ------------ ------------ ----------- Balance at End of Year $ 2,610 $ 2,300 $ 1,923 $ 1,616 $ 1,047 ============= ============ ============ ============ =========== RATIOS: Net Loans Charged-Off to Average Loans 0.15% 0.18% 0.30% 0.48% 0.26% Allowance for Loan Losses to Total Loans 1.33% 1.39% 1.38% 1.87% 1.54% Net Loans Charged-Off to Beginning Allowance for Loan Losses 16.70% 19.66% 29.15% 47.28% 18.23% Net Loans Charged-Off to Provision for Loan Losses 55.33% 50.07% 60.54% 135.99% 66.79% Allowance for Loan Losses to Nonperforming Loans 157.04% 113.30% 150.35% 132.68% 77.90%
32 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):
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 ------------------- ------------------- -------------------- --------------------- ------------------- Loan Loan Loan Loan Loan Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- Commercial $ 960 53.2% $ 854 34.1% $ 657 26.2% $ 806 23.1% $ 522 20.2% Construction 134 2.8% 100 2.7% 33 2.1% 65 3.9% 42 5.1% Real Estate 1,034 23.4% 1,049 49.8% 873 61.0% 569 67.7% 368 69.0% Consumer 267 20.6% 55 13.5% 139 10.8% 50 5.2% 32 5.8% Unallocated 215 n/a 242 n/a 221 n/a 126 n/a 83 n/a --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- $2,610 100.0% $2,300 100.0% $1,923 100.0% $1,616 100.0% $1,047 100.0% ========= ========= ========= ========= ========= ========= ========= =========== ========= =========
FUNDING Deposits are our primary source of funds. At December 31, 1999, we had a deposit mix of 56.7% in time and savings deposits, 22.7% in money market and NOW deposits, and 20.6% in noninterest-bearing demand deposits. Our net interest income is enhanced by our percentage of noninterest-bearing deposits. 33 The following table summarizes the distribution of average deposits and the average rates paid for the years indicated (dollar amounts in thousands):
December 31, ------------------------------------------------------------------------ 1999 1998 1997 ----------------------- ----------------------- ----------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------------ ---------- ----------- ----------- ------------ ---------- Money Market and NOW Accounts $ 74,797 3.70% $ 53,640 3.01% $ 48,414 2.73% Savings Deposits 87,566 4.65% 39,308 4.13% 26,164 3.52% TCD Less than $100,000 42,386 5.11% 51,997 5.43% 37,866 5.49% TCD $100,000 or More 39,963 6.27% 38,120 5.92% 28,923 5.74% ------------ ----------- ------------ Total Interest-Bearing Deposits 244,712 4.70% 183,065 4.54% 141,367 4.23% Noninterest-Bearing Demand Deposits 68,632 n/a 62,771 n/a 51,664 n/a ------------ ----------- ------------ Total Average Deposits $313,344 3.67% $245,836 3.38% $193,031 3.10% ============ =========== ============
The scheduled maturity distribution of the Bank's time deposits of $100,000 or greater, as of December 31, 1999, were as follows (dollar amounts in thousands): Three Months or Less $ 20,012 Over Three Months to One Year 23,457 Over One Year to Three Years 2,959 -------------- $ 46,428 ==============
LIQUIDITY AND INTEREST RATE SENSITIVITY The objective of the Bank's asset/liability strategy is to manage liquidity and interest rate risks to ensure the safety and soundness of the Bank and its capital base, while maintaining adequate net interest margins and spreads to provide an appropriate return to the our shareholders. We manage the Bank's interest rate risk exposure by limiting the amount of long-term fixed rate loans we hold for investment, by originating mortgage and SBA loans for sale to the secondary market, increasing emphasis on shorter-term, higher yield loans for portfolio, increasing or decreasing the relative amounts of long-term and short-term borrowings and deposits and/or purchasing commitments to sell loans. 34 The table below sets forth the interest rate sensitivity of the our interest-earning assets and interest-bearing liabilities as of December 31, 1999, using the interest rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or matures within its contractual terms, except for loans held for sale which we classifies as highly liquid based on historical sale patterns (dollar amounts in thousands):
After After One Within Three Months Year But Three But Within Within After Months One Year Five Years Five Years Total ------------ ------------- ------------- ------------ ------------ INTEREST-EARNING ASSETS: Interest Bearing Deposits $ - $ 100 $ - $ - $ 100 Investment Securities and FHLB Stock 3,385 3,513 10,995 4,800 22,693 Gross Loans 181,834 6,346 51,107 27,811 267,098 ------------ ------------- ------------- ------------ ------------ $185,219 $ 9,959 $ 62,102 $ 32,611 $ 289,891 ============ ============= ============= ============ ============ INTEREST-BEARING LIABILITIES: Money Market and NOW Deposits $ 73,193 $ - $ - $ - $ 73,193 Savings 79,983 - - - 79,983 Time Deposits 44,812 52,098 6,268 - 103,178 Other Borrowings - - - - - ------------ ------------- ------------- ------------ ------------ $ 197,988 $ 52,098 $ 6,268 $ - $ 256,354 ============ ============= ============= ============ ============ Interest Rate Sensitivity Gap $( 12,769) $( 42,139) $ 55,834 $ 32,611 $ 33,537 Cumulative Interest Rate Sensitivity Gap $( 12,769) $( 54,908) $ 926 $ 33,537 $ 67,074 Ratios Based on Total Assets: Interest Rate Sensitivity Gap ( 3.61%) ( 11.91%) 15.78% 9.22% 9.48% Cumulative Interest Rate Sensitivity Gap ( 3.61%) ( 15.52%) 0.26% 9.48%
Liquidity refers to our ability to maintain a cash flow adequate to fund both on-balance sheet and off-balance sheet requirements on a timely and cost-effective basis. Potentially significant liquidity requirements include funding of commitments to loan clients and withdrawals from deposit accounts. CAPITAL RESOURCES Shareholders' equity at December 31, 1999 was $29.2 million, an increase of $2.3 million or 8.6% over $26.9 million at December 31, 1998. Average shareholders' equity for 1999 was $27.8 million compared to $24.2 million in 1998. The increase in shareholder's equity is primarily from net income of $3,076 in 1999 less dividends paid totaling $760. Shareholders' equity at December 31, 1998 was $26.9 million, an increase of $4.3 million or 19.2% over $22.6 million at December 31, 1997. Average shareholders' equity for 1998 was $24.2 million compared to $20.7 million in 1997. 35 In 1990, the banking industry began to phase in new regulatory capital adequacy requirements based on risk-adjusted assets. These requirements take into consideration the risk inherent in investments, loans, and other assets for both on-balance sheet and off-balance sheet items. Under these requirements, the regulatory agencies have set minimum thresholds for Tier 1 capital, total capital and leverage ratios. At December 31, 1999, the Bank's capital exceeded the Tier 1 Capital and Leverage Ratio's minimum regulatory requirement and was below the minimum regulatory requirement for Total Capital. The Bank was considered to be under-capitalized at December 31, 1999, as defined in the regulations issued by the FDIC. The Bank's risk-based capital ratios, shown below as of December 31, 1999, have been computed in accordance with regulatory accounting policies (Our capital ratios are comparable to the Bank's).
Minimum Requirements Bank ----------------- ----------- Tier 1 Capital 4.00% 7.28% Total Capital 8.00% 7.99% Leverage Ratio 4.00% 7.40%
On March 8, 2000 the Bank was notified by the FDIC that the Bank is under-capitalized for purposes of Prompt Corrective Action. Accordingly, the Bank is prohibited, among other things, from renewing broker deposits, paying dividends and is subject to enforcement actions. Subsequent to the notification by the FDIC, the Bank has filed a capital restoration plan with the FDIC. The plan provides that the Bank will have Total Capital in excess of 8% by March 31, 2000 and in excess of 10% by the third quarter of 2001. See also Note O in the Consolidated Financial Statements for additional information on our regulatory capital requirements and computations. EFFECTS OF INFLATION The financial statements and related financial information presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or same magnitude as the price of goods and services. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. This new standard was originally effective for 2000. In June 1999, the FASB issued SFAS No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133". This Statement establishes the effective date of SFAS No. 133 for 2001 and is not expected to have a material impact on the Company's financial statements. 36 YEAR 2000 ISSUES During the periods leading up to January 1, 2000, the Company addressed the potential problems associated with the possibility that the computers that control or operate the Company's information technology system and infrastructure may not have been programmed to read four-digit date codes and, upon arrival of the Year 2000, may have recognized the two-digit code "00" as the year 1900, causing systems to fail to function or generate erroneous data. The Company expended approximately $61,000 through the periods ended December 31, 1999 in connection with its year 2000 compliance program. The Company experienced no significant problems related to its information technology systems upon arrival of the Year 2000, nor was there any interruption in service to its customers. The Company could still incur losses if Year 2000 issues adversely affect its depositors or borrowers. Such problems could include delayed loan payments due to Year 2000 problems affecting any significant borrowers or impairing the payroll systems of large employers in the Company's primary market areas. Because the Company's loan portfolio is highly diversified with regard to individual borrowers and types of business, the Company does not expect, and to date has not realized, any significant or prolonged difficulties that will affect net earnings or cash flow. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK NET INTEREST MARGIN. As previously discussed, net interest income is the difference between the interest income and fees earned on loans and investments and the interest expense paid on deposits and other liabilities. The amount by which interest income exceed interest expense depends on two factors: the volume of earnings assets compared to the volume of interest-bearing deposits and liabilities, and the interest rat earned on those interest earning assets compared with the interest paid on those interest-bearing deposits and liabilities. Net interest margin is the net interest income expressed as a percentage of earning assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid, and the relationship is subject to the following types of risks that are related to changes in interest rates. MARKET RISK. The market values of assets or liabilities on which the interest rate is fixed will increase or decrease with changes in market interest rates. If the Company invests funds in a fixed rate long-term security and then interest rates rise, the security is worth less than a comparable security just issued because the older security pays less interest than the newly issued security. If the older security had to be sold, the Company would have to recognize a loss. Correspondingly, if interest rates decline after a fixed rate security is purchased, its value increases. Therefore, while the value changes regardless of which direction interest rates move, the adverse exposure to "market risk" is primarily due to rising interest rates. This exposure is lessened by managing the amount of fixed rate assets and by keeping maturities relatively short. However, this strategy must be balanced against the need for adequate interest income because variable rate and shorter fixed rate securities generally earn less interest than longer term fixed rate securities. 37 There is market risk relating to the Company's fixed rate or term liabilities as well as its assets. For liabilities, the adverse exposure to market risk is to lower rates because the Company must continue to pay the higher rate until the end of the term. However, because the amount of fixed rate liabilities is significantly less that the fixed rate assets, and because the average maturity is substantially less than for the assets, the market risk is not as great. Net interest margin was 5.38% in 1999 compared to 6.40% in 1998 and 6.46% in 1997. The following is a summary of the carrying amounts and estimated fair values of selected Company financial assets and liabilities at December 31, 1999 (amounts in thousands):
Carrying Estimated Amount Fair Value ------------------ ----------------- 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
Other than a relatively small difference due to credit quality issues pertaining to loans, the difference between the carrying amount and the fair value is a measure of how much more or less valuable the Company's financial instruments are to it than when acquired. The net difference for interest-bearing financial assets is $0.4 million. The amount is not deemed to be significant compared to the outstanding balances taken as a whole. MISMATCH RISK. Another interest-related risk arises from the fact that when interest rate change, the changes do not occur equally in the rates of interest earned and paid because of difference in the contractual terms of the assets and liabilities held. The Company has a large portion of its loan portfolio tied to the prime interest rate. If the prime rate is lowered because of general market conditions, e.g., other banks are lowering their lending rates; these loans will be repriced. If the Company were at the same time to have a large proportion of its deposits in long-term fixed rate certificates, net interest income would decrease immediately. Interest earned on loans would decline while interest expense would remain at higher levels for a period of time because of the higher rate still being paid on deposits. A decrease in net interest income could also occur with rising interest rates if the Company had a large portfolio of fixed rate loans and securities funded by deposit accounts on which the rate is steadily rising. This exposure to "mismatch risk" is managed by matching the maturities and repricing opportunities of assets and liabilities. This is done by varying the terms and conditions of the products that are offered to depositors and borrowers. For example, if many depositors want longer-term certificates while most borrowers are requesting loans with floating interest rates, the Company will adjust the interest rates on the certificates and loans to try to match up demand. The company can then partially fill in mismatches by purchasing securities with the appropriate maturity or repricing characteristics. One of the means of monitoring this matching process is the use of a "gap" report table. This table show the extent to which the maturities or repricing opportunities of the major categories of assets and liabilities are matched based upon specific interest rate shifts of up to +/- 300 basis points. 38 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):
CHANGE IN NET CHANGE IN INTEREST RATES INTEREST INCOME -------------------------------- -------------------- +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)
The Company has adequate capital to absorb any potential losses as a result of a decrease in interest rates. Periods of more than one year is not estimated because steps can be taken to mitigate the adverse effects of any interest rate changes. BASIS RISK. A third interest-related risk arises from the fact that interest rates rarely change in a parallel or equal manner. The interest rates associated with the various assets and liabilities differ in how often they change, the extent to which they change, and whether they change sooner or later than other interest rates. For example, while the repricing of a specific asset and a specific liability may fall in the same period of a gap report the interest rate on the asset may rise 100 basis points, while market conditions dictate that the liability increases only 50 basis points. While evenly matched in the gap report, the Company would experience an increase in net interest income. This exposure to "basis risk" is the type of interest risk least able to be managed, but is also the least dramatic. Avoiding concentration in only a few types of assets or liabilities is the best insurance that the average interest received and paid will move in tandem, because the wider diversification means that many different rates, each with their own volatility characteristics, will come into play. The Company has made an effort to minimize concentrations in certain types of assets and liabilities. 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report 41 Consolidated Balance Sheets at December 31, 1999 and 1998 42 and 43 Consolidated Statements of Income for each of the Years in the Three-Year Period Ended December 31, 1999 44 Consolidated Statements of Shareholders' Equity for each of the Years in the Three-Year Period Ended December 31, 1999 45 Consolidated Statements of Cash Flows for each of the Years in the Three-Year Period Ended December 31, 1999 46 Notes to Financial Statements 47 through 75
All supplemental schedules are omitted as inapplicable or because the required information is included in the financial statements or notes hereto. 40 To the Board of Directors and Shareholders of BYL Bancorp and Subsidiary INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of BYL Bancorp and Subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BYL Bancorp and Subsidiary as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Laguna Hills, California February 11, 2000 41 BYL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (DOLLAR AMOUNTS IN THOUSANDS)
1999 1998 ---------------- ---------------- 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 ================ ================
The accompanying notes are an integral part of these consolidated financial statements. 42 BYL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (DOLLAR AMOUNTS IN THOUSANDS)
1999 1998 ---------------- ---------------- 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 ================ ================
The accompanying notes are an integral part of these consolidated financial statements. 43 BYL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997 --------------- -------------- -------------- 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
The accompanying notes are an integral part of these consolidated financial statements. 44 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)
Common Shares Accumulated ----------------------- Other Number of Comprehensive Retained Comprehensive Shares Amount Income Earnings Income ----------- ---------- ------------- ------------- --------------- 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 =========== ========== ============= ===============
The accompanying notes are an integral part of these consolidated financial statements. 45 BYL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES 1999 1998 1997 ------------ ------------ ------------ 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
The accompanying notes are an integral part of these consolidated financial statements. 46 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of BYL Bancorp and its subsidiary, BYL Bank Group ("the Bank"), collectively referred to herein as the "Company". NATURE OF OPERATIONS The Bank operates seven retail branches in Orange and Riverside County, California. It also operates a Small Business Administration (SBA) loan department and a mortgage loan department. The Bank's primary source of revenue is providing loans to customers for both retention in the Bank's loan portfolio as well as sales to other institutional investors. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks and federal funds sold. Generally, federal funds are sold for one day periods. CASH AND DUE FROM BANKS Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the federal reserve bank. The Bank complied with the reserve requirements as of December 31, 1999. The Bank maintains amounts due from banks which exceed federally insured limits. The Bank has not experienced any losses in such accounts. INVESTMENT SECURITIES Bonds, notes, and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. 47 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENT SECURITIES - CONTINUED Investments not classified as trading securities nor as held to maturity securities are classified as available-for-sale securities and recorded at fair value. Unrealized gains or losses on available-for-sale securities are excluded from net income and reported as an amount net of taxes as a separate component of other comprehensive income included in shareholders' equity. Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method. Realized gains or losses on sales of held-to-maturity or available-for-sale securities are recorded using the specific identification method. LOANS HELD FOR SALE Mortgage, SBA loans and other loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. LOANS Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. For impairment recognized in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN", amended by SFAS No. 118, the entire change in the present value of expected cash flows is reported as either provision for loan losses in the same manner in which impairment initially was recognized, or as a reduction in the amount of provision for loan losses that otherwise would be reported. 48 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED LOANS - CONTINUED On January 1, 1997, the Company adopted SFAS No. 125 "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES". The statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under this statement, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. To calculate the gain (loss) on sale of loans, the Company's investment in the loan is allocated among the retained portion of the loan, the servicing retained, the interest-only strip and the sold portion of the loan, based on the relative fair market value of each portion. The gain (loss) on the sold portion of the loan is recognized at the time of sale based on the difference between the sale proceeds and the allocated investment. As a result of the relative fair value allocation, the carrying value of the retained portion is discounted, with the discount accreted to interest income over the life of the loan. That portion of the excess servicing fees that represent contractually specified servicing fees (contractual servicing) are reflected as a servicing asset which is amortized over an estimated life using a method approximating the level yield method; in the event future prepayments exceed Management's estimates and future expected cash flows are inadequate to cover the unamortized servicing asset, additional amortization would be recognized. The portion of excess servicing fees in excess of the contractual servicing fees is reflected as interest-only (I/O) strips receivable which are classified as interest-only strips receivable available for sale and are carried at fair value. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is increased by charges to income and decreased by charge-offs (net of recoveries). The Company performs quarterly detailed reviews to identify the risks inherent in the loan portfolio, assess the overall quality of the loan portfolio and to determine the adequacy of the allowance for loan losses and the related provision for loan losses to be charged to expense. This systematic reviews follow the methodology set forth by the FDIC in its 1993 policy statement on the allowance for loan losses. Loans identified as less than "acceptable" are reviewed individually to estimate the amount of probable losses that need to be included in the allowance. These reviews include analysis of financial information as well as evaluation of collateral securing the credit. Additionally, management considers the inherent risk present in the "acceptable" portion of the loan portfolio taking into consideration historical losses on pools of similar loans, adjusted for trends, conditions and other relevant factors that may affect repayment of the loans in these pools. 49 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED MORTGAGE BANKING ACTIVITIES The Company originates and sells residential mortgage loans to a variety of secondary market investors, including the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA) and others. Gains and losses on the sale of mortgage loans are recognized upon delivery based on the difference between the selling price and the carrying value of the related mortgage loans sold. Deferred origination fees and expenses are recognized at the time of sale in the determination of the gain or loss. The Company sells the servicing for such loans to the purchaser of the loans. The Company recognizes the gain or loss on servicing sold when all risks and rewards of ownership have transferred. Mortgage loans held for sale are stated at the lower of cost or market as determined by the outstanding commitments from investors or current investor yield requirements calculated on an aggregate loan basis. Valuation adjustments are charged against noninterest income. Forward commitments to sell, and put options on mortgage-backed securities are used to reduce interest rate risk on a portion of loans held for sale and anticipated loan fundings of the Diamond Bar Mortgage Division. The resulting gains and losses on forward commitments are deferred and included in the carrying values of loans held for sale. Premiums on put options are capitalized and amortized over the option period. Gains and losses on forward commitments and put options deferred against loans held for sale approximately offset equivalent amounts of unrecognized gains and losses on the related loans. Forward commitments to sell and put options on mortgage-backed securities that hedge anticipated loan funding are not reflected in the consolidated statement of financial condition. Gains and losses on these instruments are not recognized until the actual sale of the loans held for sale. Loans generally fund in 10 to 30 days from the date of commitment. As noted in Note S, in conjunction with the closing of the Diamond Bar Mortgage Division, the Company no longer utilizes these activities to reduce interest rate risk. PREMISES AND EQUIPMENT Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to ten years for furniture and fixtures and forty years for buildings. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterment or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred. 50 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED OTHER REAL ESTATE OWNED Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value minus estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses. GOODWILL AND OTHER INTANGIBLES Goodwill represents the excess of the purchase price over the estimated fair value of net assets associated with acquisition transactions of the Company accounted for as purchases and is amortized over fifteen years. Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions and are amortized over seven years. Goodwill and other intangibles are evaluated periodically for other than temporary impairment. Should such an assessment indicate that the undiscounted value of an intangible may be impaired, the net book value of the intangible would be written down to net estimated recoverable value. INCOME TAXES Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is "more likely than not" that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryforward periods. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 specifies the disclosure of the estimated fair value of financial instruments. The Bank's estimated fair value amounts have been determined by the Bank using available market information and appropriate valuation methodologies. Considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 51 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the balance sheet date and, therefore, current estimates of fair value may differ significantly from the amounts presented in the accompanying Notes. EARNINGS PER SHARES (EPS) Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. STOCK-BASED COMPENSATION SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The pro forma effects of adoption are disclosed in Note M. CURRENT ACCOUNTING PRONOUNCEMENTS In June 1998, FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. This new standard was originally effective for 2000. In June 1999, the FASB issued SFAS No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133". This Statement establishes the effective date of SFAS No. 133 for 2001 and is not expected to have a material impact on the Company's financial statements. RECLASSIFICATIONS Certain reclassifications were made to prior years' presentations to conform to the current year. These classifications are of a normal recurring nature. 52 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE B - INVESTMENT SECURITIES Debt and equity securities have been classified in the consolidated balance sheets according to management's intent. The carrying amount of securities and their approximate fair values at December 31 were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ------------- ------------- ------------- ------------- 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 ============= ============= ============= =============
The gross unrealized gain of $271 on available-for-sale securities is included in accumulated other comprehensive income at December 31, 1999, net of taxes of $111. 53 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE B - INVESTMENT SECURITIES - CONTINUED During 1998, the Company received $1,504 in proceeds and recorded a loss of $39 from the sale of investment securities. The Company did not sell any investment securities for the years ended December 31, 1999, and 1997. Investment securities carried at $14,712 and $10,844 at December 31, 1999 and 1998, respectively, were pledged to secure public deposits and other purposes as required by law. The scheduled maturities of securities available for sale and securities held to maturity at December 31, 1999, were as follows:
Available-for-Sale Held-to-Maturity ---------------------------------- ---------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------------- --------------- -------------- --------------- 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 ============== =============== ============== ===============
NOTE C - LOANS HELD FOR SALE The Bank originates auto, mortgage and SBA loans for sale to institutional investors. A substantial portion of the Bank's revenues are from origination of loans guaranteed by the Small Business Administration under its Section 7 program and sale of the guaranteed portions of those loans. Funding for the Section 7 program depends on annual appropriations by the U.S. Congress. At December 31, 1999 and 1998, the Bank was servicing approximately $220,120 and $164,764, respectively, in loans previously sold. Prior to January 1, 1997, the Company's excess servicing fees were recorded as excess servicing assets which were amortized over the estimated life of the related loans. Effective January 1, 1997, under provisions of SFAS 125, excess servicing assets on loans sold prior to January 1, 1997 were reclassified to interest-only strips receivable and to servicing assets. These assets are amortized as an offset to loan servicing income and I/O strip income over the estimated life of the related loans. 54 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE C - LOANS HELD FOR SALE - CONTINUED A summary of the changes in the servicing assets and interest-only strips receivable is as follows:
Servicing Assets --------------------------------------------- 1999 1998 1997 ------------ ------------ ----------- 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 ============ ============ ===========
Interest-Only Strips Receivable --------------------------------------------- 1999 1998 1997 ------------ ------------ ----------- 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 $ -
The unrecognized gain on interest-only strips receivable of $570 is included in accumulated other comprehensive income at December 31, 1999, net of taxes of $236. The estimated fair value of the servicing assets was approximately $2,815 at December 31, 1999. Fair value is estimated by discounting estimated future cash flows from the servicing assets using discount rates that approximate current market rates over the expected lives of the loans being serviced. For purposes of measuring impairment, the Bank has identified each servicing asset with the underlying loan being serviced. A direct write down is recorded where the fair value is below the carrying amount of a specific servicing asset. 55 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE C - LOANS HELD FOR SALE - CONTINUED Included in the above Interest-Only Strips Receivable are retained interest in securitized assets ("RISA"), which has been capitalized upon the securitization of $43,000 of the unguaranteed portion of SBA loans in 1998 and $60,000 of commercial real estate loans in 1999. The RISA represents the present value of the estimated future earnings to be received by the company from the excess spread created in securitization transactions. Excess spread is calculated by taking the difference between the coupon rate of the loans sold and the certificate rate paid to the investors less contractually specified servicing and costs and projected credit losses, after giving effect to estimated prepayments. The Company utilized prepayment rates for the 1998 securitization of 12% in 1998 and 15.3% in 1999. The prepayment rate for the 1999 securitization is 5% for the first sixty months and 15% thereafter. Annual net credit loss assumptions utilized for the 1999 and 1998 securitization transactions ranged from .25% to .50%. The Company used a discount rate during 1999 and 1998 of 125 to 525 points over the certificate rates paid to investors at the time of securitization in discounting future earnings. RISA is classified in a manner similar to available for sale securities and as such is marked to market each quarter. The Company is not aware of an active market for the purchase or sale of the RISA, and accordingly, the company determines the estimated fair value of the RISA by discounting the expected cash flows released from the trust (the "Cash-Out Method") using a discount rate which the Company believes is commensurate with the risks involved. Any changes in the market value of RISA is reported as a separate component of shareholders' equity as an unrealized gain or loss, net of deferred taxes. In initially valuing the RISA, the Company establishes an off balance sheet allowance for expected future credit losses. The allowance is based upon historical experience and management's estimate of future performance regarding credit losses. The amount is reviewed periodically and adjustments are made if actual experience or other factors indicate that future performance may differ from management's prior estimates. 56 BY BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE C - LOANS HELD FOR SALE - CONTINUED The following table presents the estimated future undiscounted retained interest earnings to be received from securitizations. Estimated future undiscounted RISA earnings are calculated by taking the difference between the coupon rate of the contracts sold and the rates paid to the investors, less the contractually specified servicing fee of .40% and costs, after giving effect to estimated prepayments and assuming no losses. To arrive at the RISA, this amount is reduced by the off balance sheet allowance established for potential future losses and by discounting to present value.
1999 1998 ------------ ------------ 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 ============ ============
NOTE D - LOANS The Bank's loan portfolio consists primarily of loans to borrowers within Orange and Riverside County in Southern California. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank's market area and, as a result, the Bank's loan and collateral portfolios are, to some degree, concentrated in those industries. A summary of the changes in the allowance for credit losses as of December 31 follows:
1999 1998 1997 ----------- ------------ ------------ 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 =========== ============ ============
57 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE D - LOANS - CONTINUED The following is a summary of the investment in impaired loans, the related allowance for credit losses, and income recognized thereon as of December 31:
1999 1998 1997 ----------- ------------ ------------ 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
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:
1999 1998 ------------ ------------ 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 ============ ============
The Bank has entered into various operating lease agreements, primarily covering its branch locations. These agreements expire at various times through the year 2005. 58 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE E - PREMISES AND EQUIPMENT - CONTINUED The approximate future minimum annual payments for these leases by year are as follows: 2000 $ 1,289 2001 1,258 2002 826 2003 262 2004 152 Thereafter 76 ------------- $ 3,863 =============
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: 2000 $ 96,910 2001 through 2003 6,264 After 2003 4 ------------- $ 103,178 =============
59 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE G - OTHER EXPENSES A summary of other expenses for the years ended December 31 is as follows:
1999 1998 1997 ------------ ------------ ------------ 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 ============ ============ ============
NOTE H - INCOME TAXES The provisions for income taxes included in the statements of income consist of the following:
1999 1998 1997 ------------ ----------- ----------- 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 ============ =========== ===========
Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The Company's principal differences are from loan loss provision accounting, loan sales, and depreciation differences. 60 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE H - INCOME TAXES - CONTINUED The following is a summary of the components of the deferred tax asset account recognized in the accompanying consolidated balance sheets:
1999 1998 ------------ ------------ 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 ============ ============
A comparison of the federal statutory income tax rates to the Company's effective income tax rates for the years ended December 31 follows:
1999 1998 1997 ------------------------ ------------------------ ------------------------ Amount Rate Amount Rate Amount Rate ----------- ----------- ----------- ----------- ----------- ----------- 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% =========== =========== =========== =========== =========== ===========
61 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE I - EARNINGS PER SHARE (EPS) The following is a reconciliation of net income and shares outstanding to the income and number of share used to compute EPS:
1999 1998 1997 -------------------------- ------------------------- -------------------------- Income Shares Income Shares Income Shares ------------ ------------ ----------- ----------- ------------ ------------ 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 ============ ============ =========== =========== ============ ============
NOTE J - EMPLOYEE BENEFITS The Bank has a salary deferral 401(k) Plan that covers substantially all employees. The Bank contributed matching funds at its option, which amounted to $381, $302 and $34 in 1999, 1998 and 1997, respectively. The Bank has entered into retirement benefit agreements with certain officers providing for future benefits aggregating approximately $2,415, payable in equal annual installments for ten years from the death or retirement dates of each participating officer. The obligations for these agreements are funded by single premium life insurance policies, with cash surrender values aggregating approximately $2,196, $1,374, and $906 at December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999, 1998 and 1997, approximately $216, $152, and $97, respectively, has been accrued in conjunction with these agreements. NOTE K - COMMITMENTS AND CONTINGENCIES The Company is involved in various litigation which has arisen in the ordinary course of its business. In the opinion of management, based upon representation of legal counsel, the disposition of such pending litigation will not have a material effect on the Bank's financial statements. 62 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE K - COMMITMENTS AND CONTINGENCIES - CONTINUED In the ordinary course of business, the Bank enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the statement of financial position. The Bank's exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements. As of December 31, 1999, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk: Commitments to Extend Credit $ 28,060 Standby Letter of Credit 839 ------------- $ 28,899 =============
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments to guarantee the performance of a Bank customer to a third party. Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, is based on management's credit evaluation of the customer. The majority of the Bank's commitments to extend credit and standby letters of credit are secured by real estate. NOTE L - RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has granted loans to certain officers and directors and the companies with which they are associated. In the Bank's opinion, all loans and loan commitments to such parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons 63 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE L - RELATED PARTY TRANSACTIONS - CONTINUED The following is an analysis of the activity of all such loans:
1999 1998 ------------ ------------ Beginning Balance $ 2,241 $ 1,486 Credits Granted, Including Renewals 1,033 887 Repayments ( 493) ( 132) ------------ ------------ Ending Balance $ 2,781 $ 2,241 ============ ============
The Bank leases its main Riverside facility from a partnership comprised of two of its directors. The initial term of the lease started in 1982 and expires in 2002, with two successive ten year options. Monthly rental expense, currently at $14, is adjusted for cost of living increases every three years. The Bank also pays its pro-rata share of taxes and common operating expenses. NOTE M - STOCK OPTION PLAN At December 31, 1999, the Company has an option plan which is described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its fixed stock option plan. In 1997, the Company adopted an incentive stock option plan under which up to 460,519 shares of the Company's common shares may be issued to directors, officers, and key employees at not less than 100% of the fair market value at the date the options are granted. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions; risk-free rates of 4.5% in 1998 and 5.8% in 1997, volatility of 28% in 1998 and 19% in 1997 and expected lives of five years. The weighted-average fair value of options granted during 1998 was $5.22 and $3.87 for 1997. 64 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE M - STOCK OPTION PLAN - CONTINUED A summary of the status of the Company's fixed stock option plan as of December 31, 1999, 1998, and 1997, and changes during the years ending on those dates is presented below:
1999 1998 1997 ----------------------- ----------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- ---------- ----------- ---------- ----------- ----------- 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
The following table summarizes information about fixed options outstanding at December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------------------------- ------------------------------- Weighted- Weighted Weighted- Average Average Average Exercise Number Remaining Exercise Number Exercise Price Outstanding Contractual Life Price Exercisable Price - ------------------------ ---------------- -------------------- -------------- ---------------- ------------- $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 ================ ================
65 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE M - STOCK OPTION PLAN - CONTINUED Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the following pro forma amount:
1999 1998 1997 -------------- ------------- ------------- 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
The information above does not include options from DNB Financial which was acquired in 1998 (see Note P). DNB Financial had no options granted in 1998 and 1997 and therefore did not impact the pro forma data presented above. During 1997, options previously granted equal to 92,609 shares were exercised. NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 66 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments: FINANCIAL ASSETS The carrying amounts of cash, short term investments, due from customers on acceptances, and Bank acceptances outstanding are considered to approximate fair value. Short term investments include federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with Banks. The fair values of investment securities, including available-for-sale, are generally based on quoted market prices. The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments where available. FINANCIAL LIABILITIES The carrying amounts of deposit liabilities payable on demand, commercial paper, and other borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long term debt is based on rates currently available to the Bank for debt with similar terms and remaining maturities. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material. 67 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED The estimated fair value of financial instruments at December 31, 1999 and 1998 is summarized as follows:
December 31, ------------------------------------------------------------ 1999 1998 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------- ------------- ------------- ------------- 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
NOTE O - REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 68 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE O - REGULATORY MATTERS - CONTINUED Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as under-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below.
Required Capital -------------------------------------------- To Be Well- Capitalized For Capital Under Prompt Adequacy Corrective Actual Purposes Provisions --------------------- --------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ---------- -------- ---------- --------- ---------- -------- 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%
On March 8, 2000 the Bank was notified by the FDIC that the Bank is under-capitalized for purposes of Prompt Corrective Action. Accordingly, the Bank is prohibited, among other things, from renewing broker deposits, paying dividends and is subject to enforcement actions. NOTE P - MERGERS AND ACQUISITIONS At the close of business on May 29, 1998, the Company consummated a merger with DNB Financial and its wholly-owned subsidiary, De Anza National Bank. This merger was accounted for by the pooling of interest method, whereby the Company's Financial Statements have been restated as if the two companies were historically one unit. A total of 956,641 common shares were issued to the shareholders of DNB Financial in connection with this merger. 69 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE P - MERGERS AND ACQUISITIONS - CONTINUED The following table summarizes the separate revenue and net income of the Company and DNB Financial that have been reported in the restated financial statements included herein:
1999 1998 1997 -------------- --------------- --------------- 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 ============== =============== ===============
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:
December 31, ------------------------------------ 1999 1998 -------------- -------------- 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 ============== ==============
70 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED CONDENSED STATEMENTS OF INCOME
Year Ended December 31, ------------------------------------ 1999 1998 -------------- -------------- 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 ============== ==============
71 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------ 1999 1998 -------------- -------------- 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 ============== ==============
72 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) NOTE R - SEGMENT INFORMATION The Company has two primary reportable segments; its wholesale lending operations and its retail banking operations. The wholesale lending segment originates loans for resale to institutional investors. The Company's SBA Loan Division and its Mortgage Loan Division are included in this segment. The retail banking segment accepts deposits, originates loans and provides other banking services to the communities in which its seven branch offices are located. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before allocation of the provision for loan losses, administrative costs, amortization of goodwill and income taxes. The retail segment charges the wholesale segments for use of excess funds based on the estimated cost of outside financing The following tables summarize segment operations and asset allocations for the last three years:
1999 ---------------------------------------------------------------- Wholesale Segments ------------------------------- Retail Total Mortgage SBA Segment Company -------------- --------------- -------------- -------------- CONDENSED INCOME STATEMENT Net Interest Income $ 2,933 $ 3,398 $ 9,611 $ 15,942 Noninterest Income 16,582 5,641 1,826 24,049 Operating Expense ( 16,011) ( 4,031) ( 7,604) ( 27,646) -------------- --------------- -------------- -------------- OPERATIONAL PROFIT 3,504 5,008 3,833 12,345 Provision for Loan Losses ( 694) Administrative Costs ( 6,124) Goodwill Amortization ( 121) Income Taxes ( 2,330) -------------- NET INCOME $ 3,076 ============== Total Assets at December 31, 1999 $ 44,103 $ 139,488 $ 170,145 $ 353,736 Loans Originated for Sale during 1999 $ 567,000 $ 123,000 Loans Sold during 1999 $ 587,000 $ 108,000
73 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997, AND 1996 (DOLLAR AMOUNTS IN THOUSANDS) NOTE R - SEGMENT INFORMATION - CONTINUED
1998 ---------------------------------------------------------------- Wholesale Segments ------------------------------- Retail Total Mortgage SBA Segment Company -------------- --------------- -------------- -------------- CONDENSED INCOME STATEMENT Net Interest Income $ 2,772 $ 3,382 $ 9,456 $ 15,610 Noninterest Income 13,487 6,899 3,022 23,408 Operating Expense ( 11,225) ( 4,405) ( 10,433) ( 26,063) -------------- --------------- -------------- -------------- OPERATIONAL PROFIT 5,034 5,876 2,045 12,955 Provision for Loan Losses ( 755) Administrative Costs ( 4,686) Goodwill Amortization ( 121) Income Taxes ( 3,277) -------------- NET INCOME $ 4,116 ============== Total Assets at December 31, 1998 $ 37,365 $ 74,720 $ 205,928 $ 318,013 Loans Originated for Sale during 1998 $ 245,000 $ 89,000 Loans Sold during 1998 $ 222,000 $ 94,000
1997 ----------------------------------------------------------------- Wholesale Segments ------------------------------- Retail Total Mortgage SBA Segment Company -------------- -------------- --------------- --------------- CONDENSED INCOME STATEMENT Net Interest Income $ 1,230 $ 2,023 $ 9,145 $ 12,398 Noninterest Income 10,158 3,681 2,081 15,920 Operating Expense ( 7,513) ( 3,121) ( 9,017) ( 19,651) -------------- -------------- --------------- --------------- OPERATIONAL PROFIT 3,875 2,583 2,209 8,667 Provision for Loan Losses ( 778) Administrative Costs ( 2,952) Goodwill Amortization ( 114) Income Taxes ( 1,968) --------------- NET INCOME $ 2,855 =============== Total Assets at December 31, 1997 $ 46,957 $ 43,861 $ 147,268 $ 238,086 Loans Originated for Sale during 1997 $ 190,000 $ 62,000 Loans Sold during 1997 $ 163,000 $ 42,000
74 BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997, AND 1996 (DOLLAR AMOUNTS IN THOUSANDS) NOTE S - SUBSEQUENT EVENTS As discussed in Note O, the Bank is under capitalized pursuant to the regulatory capital requirements administered by the FDIC. In order to improve its capital ratios, during the first quarter of 2000, the Bank closed its Indirect Auto Division, sold the related loan portfolio and divested itself of its Diamond Bar Mortgage Division, an originator of Agency conforming residential mortgages. As a result of these restructurings, the Company expects to report a loss for the first quarter of 2000 approaching approximately $500,000. On a recent exam, the FDIC concluded that the Bank did not adequately support the assumptions utilized to project the value assigned to various residual assets retained in securitization completed in 1998 and 1999. The FDIC has advised the Bank it believes these assets are overstated by approximately $2.7 million, on a pre-tax basis. Management strongly disagrees with the FDIC conclusions in this matter and intends to appeal the FDIC findings. In connection with this appeal, the Bank has engaged a reputable third-party consultant to evaluate the assumption used in the valuation of these assets as well as design a new valuation model for ongoing measurement of the changes in valuation of these assets. 75 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this Item is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders to be held in the second or third quarter, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders to be held in the second or third quarter, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held in the second or third quarter, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held in the second or third quarter, 2000. 76 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS EXHIBIT NO. ----------- 2.1 Plan of Reorganization and Merger Agreement - Annex I of Proxy Statement/Prospectus incorporated by reference (A) 3.1 Articles of Incorporation of the Registrant (A) 3.2 Amendment to Articles of Incorporation of Registrant (A) 3.3 Bylaws of the Registrant (A) 4.1 Specimen Certificate evidencing shares of Registrant's Common Stock (A) 4.2 Stockholder Agreement Covering Issuance and Compulsory Repurchase of Organizing Shares of Registrant - Annex II of Proxy Statement/ Prospectus incorporated by reference (A) 10.1 Form of Indemnification Agreement (A) 10.2 BYL Bancorp 1997 Stock Option Plan (C) 10.3 Form of Proxy,Proxy Statemment and Notice of Annual Meeting (E) 10.4 Employment Agreement - Mr. Robert Ucciferri (A) 10.5 Employment Agreement - Mr. Barry J. Moore (A) 10.6 Employment Agreement - Mr. Michael Mullarky (A) 10.7 Employment Agreement - Ms. Gloria Van Kampen (D) 10.8 Employment Agreement - Mr. Gary Strachn 10.9 Salary Continuation Agreement - Mr. Robert Ucciferri (A) 10.10 Salary Continuation Agreement - Mr. Barry J. Moore (A) 10.11 Salary Continuation Agreement - Mr. Michael Mullarky (F) 10.12 Salary Continuation Agreement - Ms. Gloria Van Kampen (F) 10.13 Agreement and Plan of Reorganization with DNB Financial (B) 21.1 Subsidiary of BYL Bancorp (A) 23.1 Consent of Vavrinek, Trine, Day & Co., LLP b) REPORTS ON FORM 8-K None. - --------------------------------- (A) Filed as an Exhibit to the Registrant's Registration Statement (File No. 333-34995) filed on September 5, 1997, which exhibit is incorporated herein by this reference. (B) Filed as an Exhibit to Form 8-K filed on January 29, 1998, which exhibit is incorporated herein by this reference. (C) Filed as an Exhibit to the Registration Statement on Form S-8 filed on May 15, 1998. (D) Filed as an Exhibit to the Annual Report on Form 10-K as of December 31, 1998. (E) Filed as an exhibit to the Annual Report on Form 10-K as of December 31, 1998, incorporating Schedule 14 A information pursuant to Section 14(a) of the Securities Exchange Act of 1934, filed on May 18, 1999. (F) Filed as an Exhibit to Form 10-Q filed on November 15, 1999, which Exhibit is incorporated herein by this reference. 77 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BYL BANCORP By: /s/ Robert Ucciferri -------------------------------------- Robert Ucciferri President and Chief Executive Officer In accordance with the Securities Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities on the dates indicated:
Signature Title Date - --------- ----- ---- /s/ Barry J. Moore Senior Executive Vice President April 13, 2000 - --------------------------------- and Chief Financial Officer Barry J. Moore /s/ Henry C. Cox II Director April 13, 2000 - --------------------------------- Henry C. Cox II /s/ Eddie R. Fischer Director April 13, 2000 - --------------------------------- Eddie R. Fischer /s/ Neil Hatcher Director April 13, 2000 - --------------------------------- Neil Hatcher /s/ Leonard O. Lindborg Director April 13, 2000 - --------------------------------- Leonard O. Lindborg /s/ H. Rhoads Martin, Jr. Chairman of the Board, Director April 13, 2000 - --------------------------------- H. Rhoads Martin, Jr. /s/ John F. Myers Director April 13, 2000 - --------------------------------- John F. Myers /s/ Brent W. Walberg Director April 13, 2000 - --------------------------------- Brent W. Walberg
78 EX-10.8 2 EXHIBIT 10.8 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of December 22,1999 , by and between BYL Bank Group , a California banking corporation, with its headquarters office located at 1875 N. Tustin Ave., Orange, California 92865 (the "Bank"), and Gary Strachn, residing at 1655 Clark Avenue #225, Long Beach, California 90815 (the "Employee"). A. The Bank is a corporation organized for the purpose of carrying on the business of banking. B. The Bank desires to avail itself of the skill, knowledge and experience of Employee in order to insure the successful management of its business; C. The parties hereto desire to specify the terms of Employee's employment by Bank as a Senior Vice President and Chief Financial Officer in this written agreement which supersedes all prior agreements, whether written or oral; and D. The employment, the duration thereof, the compensation to be paid to Employee, termination and other terms and conditions of employment provided in this Agreement were duly fixed, stated, approved and authorized for and on behalf of the Bank by action of its Board of Directors at a meeting held on December 22, 1999, at which meeting a quorum was present and voted. NOW, THEREFORE, on the basis of the foregoing facts and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. TERM (a) Subject to the provisions below, the Bank agrees to continue to employ Employee, and Employee agrees to be employed by the Bank, subject to the terms and conditions of this Agreement, for a period commencing on December 22, l999 and ending on December 31, 2000. The term for which Employee is employed hereunder is hereinafter referred to as the "Employment Period". (b) Subject to the notice provisions set forth in this paragraph, the term of this Agreement shall automatically be extended for one (1) additional year on January 1, 2001 after the expiration of the term described in Paragraph 1(a). The term shall not be automatically extended as provided in this paragraph if either party shall give written notice to the other, on or before September 30 of each year, that the Agreement shall not be automatically renewed on the next January 1. In the event either party shall give the other written notice as provided in this paragraph, the term of this Agreement shall thereafter terminate on the next following agreement termination date. -1- 2. DUTIES AND AUTHORITY (a) During the Employment Period, Employee shall devote all his productive time, ability and attention to the business and affairs of the Bank. Employee shall not directly render service of a business, commercial or professional nature to any other person or organization without the consent of the Board of Directors of the Bank (the "Board of Directors"); provided, however, that nothing contained herein shall prohibit Employee, or require the Board of Directors to approve or consent to Employee serving a charitable or nonprofit organization or serving as an advisor or director of any corporation which does not compete with the business of the Bank. Employee agrees during the Employment Period to use his best efforts, skill and abilities to promote the Bank's interests and to serve as an Senior Vice President and Chief Financial Officer of the Bank. Employee's duties shall include all responsibilities assigned to the Senior Vice President. For the purposes of regulatory reporting, the position of Chief Financial Officer is considered an Executive Officer. 3. BANK'S AUTHORITY. Employee agrees to observe and comply with all laws and the Bank's rules and regulations as adopted by the Board of Directors regarding performance of his duties and to carry out and to perform all appropriate orders, directions and policies stated by the Board of Directors to him periodically, either orally or in writing. 4. COMPENSATION. (a) The Bank agrees to pay to Employee during the term of this Agreement a base salary of $85,000 per annum, beginning on the effective date of this Agreement and payable on the first and fifteenth day of each month during the term of this Agreement; provided, however, that the base salary shall be reviewed annually by the Board of Directors, on or before January 31, and may be changed by mutual agreement of the parties. Any such change may be subject to review by the Bank's regulatory agencies. (b) In addition to all other compensation referred to above, the Employee shall be entitled to participate in any and all other bonus plans, employee benefits and other plans that may be developed and adopted by the Bank. (c) All compensation shall be subject to the customary withholding tax and other employment taxes as required with respect to compensation paid by a corporation to an employee. (d) The Bank shall provide a car for Employee's use during the term, and shall pay all insurance, gas and maintenance expenses of such automobile. Any expenses of such automobile which are paid by the Bank and which are for the personal use of the automobile by Employee shall be taxable as income to Employee. The Employee shall use due care and reasonable efforts to furnish to the Bank adequate written records and other documentary evidence required by Federal and State laws and regulations substantiating the extent to which use of the automobile constitutes deductible business expenses of the Bank. -2- (e) During the Employment Period, Employee shall be eligible to participate in any pension or profit-sharing plan, or similar employee benefit plan or retirement program of the Bank now or hereafter existing, to the extent that he is eligible under the provisions thereof and commensurate with his position in relationship to other participants. The Bank shall pay for cost of an annual physical examination of Employee. (f) Employee shall accrue vacation at the rate of 8.3 hours per semi-monthly pay period (for a total of 200 hours or 25 days per year) and shall accumulate sick leave at the rate of 3.3 hours per semi-monthly pay period (for a total of 80 hours or 10 days per year). Notwithstanding any terms of the Bank's personnel policy to the contrary, any unused sick leave shall carry forward to the next year until used, but in no event shall any compensation for unused sick leave be due to Employee upon his resignation or upon the termination of this employment for any other reason, including his death or disability. Vacation time shall not accrue to more than 200 hours (25 days), except that under special circumstances up to 280 hours (35 days) of vacation may be accrued if such accrual is approved in advance by the Board of Directors in its discretion. Employee shall be required to take at least two consecutive weeks of vacation during each calendar year at a time mutually convenient to Employee and the Bank. (g) The Bank agrees to provide medical and dental insurance for Employee on the same terms as provided for all Senior Vice President officers of the Bank. The Bank shall provide for Employee, at the Bank's expense, participation in medical, accident and health, and life insurance benefits equivalent to the maximum benefits available from time to time under the California Bankers Association Group insurance program for Employee's salary level, as long as Employee is insurable at a normal premium payment. Said coverage shall take effect as of the Effective Date hereof and shall continue throughout the Term. The Bank's liability to Employee for any breach of this paragraph shall be limited to the amount of premiums payable by the Bank to obtain the coverage contemplated herein. 5. REIMBURSEMENT OF EXPENSES. The services required by the Bank will require Employee to incur business, entertainment and communityrelations expenses and the Bank hereby agrees to provide credit cards and charge accounts for Employee's use for such expenses. The Bank agrees to reimburse Employee for all out-of-pocket expenses which are business related, upon submission of appropriate documentation therefor and approval thereof by the Board of Directors or a committee thereof appointed for such purpose. The Board or a committee thereof shall review such expenses at least monthly so that reimbursement of appropriate expenses is not unreasonably delayed. Each expense, to be reimbursed, must be of a nature qualifying it as a proper deduction on the income tax returns of the Bank as a business expense and not as deductible compensation to Employee. The records and other documentary evidence submitted by Employee to the Bank with each request for reimbursement of such expenses shall be in the form required by applicable statutes and regulations issued by appropriate taxing authorities for the substantiation of such expenditures as deductible business expenses of the Bank and not as deductible compensation to Employee. 6. CONFIDENTIAL INFORMATION. -3- Without the prior written permission of the Bank in each case, Employee shall not publish, disclose or make available to any other person, firm or corporation, either during or after the termination of this Agreement, any confidential information which Employee may obtain during the Employment Period, or which Employee may create prior to the end of the Employment Period relating to the business of the Bank, or to the business of any customer or supplier of any of them; provided, however, Employee may use such information during the Employment Period for the benefit of the Bank. Prior to or at the termination of this Agreement, Employee shall return all documents, files, notes, writings and other tangible evidence of such confidential information to the Bank. 7. COVENANT NOT TO SOLICIT CUSTOMERS OR FELLOW EMPLOYEES. Employee agrees that for a period of twelve (12) months following the termination of his employment hereunder he will not solicit the banking business of any customer with whom the Bank had done business during the preceding one year period. Employee further agrees not to solicit the services of any officer or employee of the Bank during such twelve (12) month period. 8. REMEDY. Employee understands that, because of the unique character of the services to be rendered by Employeehereunder, the Bank would not have any adequate remedy at law for the material breach or threatened breach by Employee of any one or more of the covenants set forth in this Agreement and agrees that in the event of any such material breach or threatened breach, the Bank may in addition to the other remedies which may be available to it: (a) Declare forfeited any moneys representing accrued salary, contingent payments or other fringe benefits due and payable to Employee, and, or alternatively, (b) File a suit in equity to enjoin Employee from the breach or threatened breach of such covenants. 9. TERMINATION OF EMPLOYEE WITHOUT CAUSE. (a) The Board of Directors may terminate Employee's employment hereunder without Cause (as defined in subsection 10(b) below) at any time, provided, however, that such termination by the Board without Cause shall entitle Employee to the compensation described in subsection 9(b) below. (b) In the event Employee is terminated by the Bank without Cause, the Bank shall pay to Employee an amount equal to nine (9) months of base salary, auto allowance, vacation pay and insurance benefits, and accrued bonuses as severance pay in lieu of and in substitution for any other claims for salary and continued benefits hereunder (based on Employee's base salary and benefits prevailing at the time of termination). Such severance payment shall be in addition to all other sums owing to Employee as accrued vacation pay. -4- However, if Employee's employment is terminated by the Bank or the Bank's successor pursuant to this Section 9 within nine (9) months as a result of the consummation of a plan of dissolution or a liquidation of the Bank, or consummation of a plan of reorganization, merger or consolidation of the Bank with one or more corporations, as a result of which the Bank is not the surviving corporation, or upon the sale of all or substantially all of the assets of the Bank to another corporation, or the acquisition of stock representing more than 25% of the voting power of the Bank then outstanding by another corporation or person, the Bank shall pay to Employee an amount equal to eighteen (18) months of base salary, auto allowance, vacation pay, and insurance benefits, as severance pay in lieu of and in substitution for any other claims for salary and continued benefits hereunder (based on Employee's base salary and benefits prevailing at the time of termination). Such severance payment shall be in addition to all sums owing to employee as accrued vacation pay. With respect to any stock options issued to the Employee that were outstanding on the date of the termination of his employment under this Section 9, any options which would become exercisable had the Employee remained in the employ of the Bank through the end of the Employment Period but which are not exercisable on the effective date of the Employee's termination of employment under this Section 9 shall automatically become exercisable upon any such termination, and shall remain exercisable in full for a period of one year after such termination of employment. 10. TERMINATION OF EMPLOYEE FOR CAUSE. (a) Notwithstanding anything herein contained, on or after the date hereof and prior to the end of the Employment Period, the Bank shall have the right to terminate Employee's employment hereunder for Cause (as defined in Subsection 10(b) below) by giving to Employee written notice of such termination as of a date (not earlier than ten (10) days after such notice) to be specified in such notice, and the Employment Period shall terminate on the date so specified, whereupon Employee shall be entitled to receive only his then accrued salary at the rate provided in Section 4(a), plus his accrued vacation pay, but only to the date on which termination shall take effect; provided, however, that if termination is due to physical or mental disability of Employee, such termination shall not affect any rights which Employee may have at the time of termination pursuant to any insurance or other death benefit, bonus, retirement, or arrangements of the Bank; or any stock option plan or any options thereunder, which rights shall continue to be governed by the provisions of such plans and arrangements. (b) For purposes of this Agreement, "Cause" shall mean the determination by the Board of Directors, acting in good faith and by majority vote, with or without a meeting, that Employee has (i) willfully failed to perform or habitually neglected the appropriate duties which he is required to perform hereunder; or (ii) willfully failed to follow any policy of the Bank which materially adversely affects the condition of the Bank; or (iii) engaged in any activity in contravention of any Bank policy, statute, regulation or governmental policy which materially adversely affects the Bank's condition, or its reputation in the community, or which evidences the lack of Employee's fitness or ability to perform Employee's duties; or (iv) willfully refused to follow any appropriate instruction from the Board of Directors unless Employee asserts that -5- compliance with such instruction would cause the Bank or Employee to violate any statute, regulation or governmental or Bank policy; or (v) subject to subsection (c) below, become physically or mentally disabled or otherwise evidenced his inability to discharge his duties as an Senior Vice President of the Bank, or (vi) been convicted of or pleaded guilty or nolo contendere to any felony, or (vii) committed any act which would cause termination of coverage under the Bank's Bankers Blanket Bond as to Employee, as distinguished from termination of coverage as to the Bank as a whole. (c) If Employee becomes disabled and such disability continues for a period of one hundred eighty (180) consecutive days, then upon expiration of such 180-day period, if the term of this Agreement has not already expired, the Bank may, in its discretion, terminate the Agreement and all benefits due hereunder, but Employee shall be entitled upon such termination to receive disability payments in accordance with such disability plan as may be established for the payment of disability benefits as permitted under the Internal Revenue Code; provided, however, that if such disability is job related, as determined by an arbitrator mutually acceptable to the Bank and Employee or Employee's representative, then the compensation due hereunder shall continue for a period of one year after the commencement of such disability. (d) This Agreement shall terminate immediately without further liability or obligation to Employee if the Bank is closed by any supervisory authority. 11. TERMINATION UPON EMPLOYEE'S DEATH; EFFECT OF TERMINATION ON OTHER PLANS (a) Notwithstanding anything herein contained, if Employee shall die, this Agreement shall terminate on the date of Employee's death, whereupon Employee's estate shall be entitled to receive his salary, accrued vacation, and any bonus earned up through the date of termination. Such termination shall not affect any rights which Employee may have at the time of his death pursuant to any of the Bank's plans or arrangements for insurance or for any other death benefit, bonus, or retirement benefit. (b) Notwithstanding anything herein contained, any termination of employment under this Section 11 shall not affect any accrued rights which Employee may have at the time of such termination, including, but not limited to, any of the Bank's plans for arrangements for insurance, vacation, retirement, and stock options, which then accrued rights shall continue to be governed by the provisions of such plans and arrangements to the extent they are not inconsistent with the terms of this Agreement. 12. MERGER, CONSOLIDATION OR REORGANIZATION. In the event of a merger where the Bank is not the surviving corporation, or in the event of a consolidation, or in the event of a transfer of all or substantially all of the assets of the Bank, or in the event of any other corporation reorganization where there is a change in ownership of at least twenty-five percent (25%) except as may result from a transfer of shares to another corporation in exchange for at least eighty percent (80%) control of that corporation, or in the event of the dissolution of the Bank, this Agreement shall not be terminated, in which -6- case, except in the event of dissolution, the surviving or resulting corporation, the transferee of the Bank's assets, or the Bank shall be bound by and shall have the benefit of the provisions of this Agreement. The Bank shall endeavor to take all reasonable actions necessary to insure that such corporation or transferee, if other than the Bank, is bound by the provisions of this Agreement. 13. MODIFICATION This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by written instrument duly executed by each party. 14. NOTICES Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested or delivered against receipt to the party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 14). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 14. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 15. DISPUTE RESOLUTION PROCEDURES Any controversy or claim arising out of or this Agreement or the breach thereof, or the interpretation thereof, shall be settled by binding arbitration in accordance with the Rules of the American Arbitration Association; and judgment upon the award rendered in such arbitration shall be final and may be entered in any court having jurisdiction thereof. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with the American Arbitration Association. In no event shall the demand for arbitration be made after the date when institution or legal or equitable proceedings based on such claim, dispute or other matter in questions would be barred by the applicable statute of limitations. This agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law. Any party desiring to initiate arbitration procedures hereunder shall serve written notice on the other party. The parties agree that an arbitrator shall be selected pursuant to these provisions within thirty (30) days of the service of the notice of arbitration. In the event of any arbitration pursuant to these provisions, the parties shall retain the rights of all discovery provided pursuant to the California Code of Civil Procedure and the Rules thereunder, except that all time periods contained in said Code and Rules shall be shortened by fifty percent (50%) for purposes of arbitration proceedings hereunder. Any arbitration initiated pursuant to these provisions shall be on an expedited basis and the dispute shall be heard within one hundred twenty (120) days following the serving of the notice of arbitration and a written decision shall be rendered within sixty (60) days thereafter. All rights, causes of action, remedies and defenses available under California law and equity are available to the parties hereto and shall be applicable as though in a court of law. The parties shall share equally all costs of any such arbitration. -7- 16. MISCELLANEOUS. (a) This Agreement is drawn to be effective in the State of California and shall be construed in accordance with California laws, except to the extent superseded by any other federal law. No amendment or variation of the terms of this Agreement shall be valid unless made in writing and signed by Employee and a duly authorized representative of the Bank. (b) Any waiver by either party of a breach of any provision of this Agreement shall not operate as to be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. (c) Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of the Bank and its successors and those who are its assigns under Section 12. (d) This Agreement does not create, and shall not be construed as creating, any rights enforceable by a person not a party to this Agreement (except as provided in subsection (c) above). (e) The headings in this Agreement are solely for the convenience of reference and shall be given no effect on the construction or interpretation of this Agreement. (f) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflict of laws, except where federal law governs. 17. RESIGNATION AS DIRECTOR UPON TERMINATION. Upon termination of this Agreement, Employee, if he is then serving as a director of the Bank and/or the Bank's holding company, agrees to immediately resign his position as a director by giving written notice of his resignation to the Chairman of the Board of Directors of the Bank and/or the Bank's holding company. IN WITNESS WHEREOF, the Bank has caused this Agreement to be signed by its duly authorized officers and Employee has executed this Agreement to be effective as of the day and year written above. -8- BANK: BYL Bank Group By: /s/ H. RHOADS MARTIN --------------------------------- H. Rhoads Martin Chairman of the Board EMPLOYEE: By: /s/ GARY STRACHN --------------------------------- Gary Strachn -9- EX-23.1 3 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion of our Independent Auditor's Report dated February 11, 2000 regarding the consolidated balance sheets of BYL Bancorp and Subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999 in the Form 10-K filed with the Securities and Exchange Commission. VAVRINEK, TRINE, DAY & CO., LLP April 13, 2000 Laguna Hills, California EX-27 4 EXHIBIT 27
9 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 34,119 100 0 0 6,868 14,712 14,445 268,640 2,610 353,736 322,973 0 1,563 0 0 0 12,788 16,412 353,736 25,093 1,310 1,125 27,528 11,510 11,586 15,942 694 0 33,891 5,406 5,406 0 0 3,076 1.21 1.21 5.38 1,542 120 0 2,094 2,300 518 134 2,610 2,395 0 215
-----END PRIVACY-ENHANCED MESSAGE-----