UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________________
Commission file number: 000-23257
BYL BANCORP
CALIFORNIA NO. 33-0755794
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
1875 North Tustin Street, Orange, California 92865
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 685-1317
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(c) of the Securities Exchange Act of 1934 during
the preceding 12 months (of shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
On August 11, 2000, there were 2,537,102 shares of BYL Bancorp Common Stock
outstanding.
BYL BANCORP AND SUBSIDIARY
JUNE 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1 - Financial Statements
Consolidated Condensed Balance Sheet at June 30, 2000 and
December 31, 1999............................................ 3
Consolidated Condensed Statement of Income for the three
months and six months ended June 30, 2000 and 1999........... 4
Consolidated Condensed Statement of Changes in Shareholders'
Equity from January 1, 1998 through June 30, 2000............ 5
Consolidated Condensed Statement of Cash Flows for the six
months ended June 30, 2000 and 1999......................... 6
Notes to Consolidated Financial Statements..................... 7-8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9-18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..... 19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.............................................. 20
Item 2 - Changes in Securities.......................................... 20
Item 3 - Defaults upon Senior Securities................................ 20
Item 4 - Submission of Matters to a Vote of Security Holders............ 20
Item 5 - Other Information.............................................. 20
Item 6 - Exhibits and Reports on Form 8-K............................... 21
2
ITEM 1. FINANCIAL STATEMENTS
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
2000 1999
-------- ------------
Cash and Due From Bank ................................ $ 26,679 $ 34,119
Federal Funds Sold .................................... 33,200 --
-------- --------
TOTAL CASH AND CASH EQUIVALENTS ................... 59,879 34,119
Interest-Bearing Deposits ............................. 100 100
Investment Securities ................................. 20,867 21,580
Federal Home Loan Bank Stock, at Cost ................. 605 1,113
Loans Held For Sale ................................... 33,291 69,756
Loans ................................................. 179,509 198,884
Allowance for Loan Losses ............................. (2,639) (2,610)
-------- --------
NET LOANS ......................................... 176,870 196,274
Premises and Equipment ................................ 6,380 6,447
Other Real Estate Owned ............................... 819 277
Goodwill .............................................. 1,264 1,324
Interest-Only Strips Receivable and Servicing Assets... 15,651 15,659
Accrued Interest and Other Assets ..................... 6,594 7,087
-------- --------
$322,320 $353,736
======== ========
Noninterest-Bearing Deposits .......................... $ 72,227 $ 66,619
Interest-Bearing Deposits ............................. 220,118 256,354
-------- --------
TOTAL DEPOSITS .................................... 292,345 322,973
Borrowed Funds
Accrued Interest and Other Liabilities ................ 943 1,563
-------- --------
TOTAL LIABILITIES ................................. 293,288 324,536
Common Shares ......................................... 12,788 12,788
Retained Earnings ..................................... 16,085 15,918
Accumulated Other Comprehensive Income ................ 159 494
-------- --------
TOTAL SHAREHOLDERS' EQUITY ........................ 29,032 29,200
-------- --------
$322,320 $353,736
======== ========
3
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
Interest Income ................. $ 7,102 $ 6,446 $14,649 $12,938
Interest Expense ................ 2,624 2,568 5,614 5,366
------- ------- ------- -------
Net Interest Income ......... 4,478 3,878 9,035 7,572
Provision for Loan Losses ....... 150 51 200 231
------- ------- ------- -------
Net Interest Income after
Provision for Loan Losses ... 4,328 3,827 8,835 7,341
Noninterest Income .............. 4,289 5,213 9,411 11,181
Noninterest Expense ............. 7,841 7,788 17,859 16,471
------- ------- ------- -------
Income Before Taxes ......... 776 1,252 387 2,051
Income Taxes .................... 349 570 220 910
------- ------- ------- -------
Net Income .................. $ 427 $ 682 $ 167 $ 1,141
======= ======= ======= =======
Per Share Data:
Net Income - Basic ............ $ .17 $ .27 $ 0.07 $ 0.45
======= ======= ======= =======
Net Income - Diluted .......... $ .17 $ .27 $ 0.07 $ 0.44
======= ======= ======= =======
4
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP
UNAUDITED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Accumulated
Common Shares Other
---------------------- Comprehensive Retained Comprehensive
Number Amount Income Earnings Income Total
--------- ---------- ---------- ---------- ------------- ----------
BALANCE AT JANUARY 1, 1998 .......... 2,503,171 $ 12,622 $ 9,955 $ (27) $ 22,550
Comprehensive Income:
Net Income ........................ $ 4,116 4,116 4,116
Other Comprehensive Income--
Unrealized Gain on
Available-for-Sale
Securities, Net ............... 183 183 183
Unrealized Gain on
Interest-Only Strips, Net ..... 364 364 364
----------
Total Comprehensive Income .......... $ 4,663
==========
Exercise of Stock Option ............ 28,131 138 138
Dividends on Common Shares .......... (467) (467)
Fractional Shares from Merger
with DANB ......................... (2) (2)
--------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 ........ 2,531,302 12,760 13,602 520 26,882
Comprehensve Income:
Net Income ........................ $ 3,076 3,076 3,076
Other Comprehensive Income-
Unrealized Gain on
Available-for-Sale
Securities, Net ............... 3 3 3
Unrealized Loss on
Interest-Only Strips, Net ... (29) (29) (29)
----------
Total Comprehensive Income .......... $ 3,050
==========
Exercise of Stock Option ......... 5,800 28 28
Dividends on Common Shares ....... (760) (760)
--------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1999 ........ 2,537,102 12,788 15,918 494 29,200
Comprehensve Income:
Net Income ....................... $ 167 167 167
Other Comprehensive Income-
Unrealized Loss on
Interest-Only Strips, Net ... (335) (335) (335)
----------
Total Comprehensive Income .......... $ (168)
==========
--------- ---------- ---------- ---------- ----------
BALANCE AT JUNE 30, 2000 ............ 2,537,102 $ 12,788 $ 16,085 $ 159 $ 29,032
========= ========== ========== ========== ==========
5
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
For the Six Months Ended
June 30,
------------------------
2000 1999
-------- --------
OPERATING ACTIVITIES
Net Income ........................................... $ 167 $ 1,141
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization .................... 944 892
Provision for Loan Losses ........................ 200 231
Net Change in Loans Held for Sale ................ 36,465 (52,979)
Other Items - Net ................................ (491) 2,331
-------- --------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ....................... 37,285 (48,384)
INVESTING ACTIVITIES
Change in Interest-Bearing Deposits .................. -- (2,324)
Purchases of Investment Securities ................... (20,006) (10,101)
Maturities of Investment Securities .................. 20,704 8,222
Proceeds from Sale of Federal Home Loan Bank Stock ... 573 --
Net Change in Loans .................................. 18,417 19,095
Purchase of Premises and Equipment ................... (894) (1,319)
Other Items - Net .................................... 309 204
-------- --------
NET CASH PROVIDED BY
BY INVESTING ACTIVITIES .................... 19,103 13,777
FINANCING ACTIVITIES
Net Change in Borrowed Funds ......................... -- 13,000
Net Change in Deposits ............................... (30,628) 11,144
Proceeds from Exercise of Options .................... -- 12
Dividends ............................................ -- (380)
-------- --------
NET CASH PROVIDED
BY FINANCING ACTIVITIES .................... (30,628) 23,776
-------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ....................... 25,760 (10,831)
Cash and Cash Equivalents at Beginning of Period ....... 34,119 32,914
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ........................... $ 59,879 $ 22,083
======== ========
6
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying financial information has been prepared in accordance with the
Securities and Exchange Commission rules and regulations for quarterly reporting
and therefore does not necessarily include all information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles. This information should be read
in conjunction with the Company's Annual Report on Form 10K for the year ended
December 31, 1999.
The consolidated financial statements include BYL Bancorp and its wholly owned
subsidiary, BYL Bank Group (the "Bank").
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management, the
unaudited financial information for the three month and six month periods ended
June 30, 2000 and 1999, reflect all adjustments, consisting only of normal
recurring accruals and provisions, necessary for a fair presentation thereof.
NOTE 2 -- EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Accordingly, basic earnings per share are computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during each period. The computation of diluted earnings per share
also considers the number of shares issuable upon the assumed exercise of
outstanding common stock options. All earnings per common share amounts
presented have been restated in accordance with the provisions of this
statement.
NOTE 3 -- SEGMENTS
The Company has two primary reportable segments: its wholesale lending
operations and its retail banking operations. The wholesale lending segment
originates loans for resale to institutional investors. The Company's SBA loan
Division and its Mortgage Loan Division's are included in this segment. The
retail banking segment accepts deposits, originates loans and provides other
banking services to the communities in which its seven branch offices are
located.
The company evaluates performance based on profit or loss from operations before
allocation of the provision for loan losses, administrative costs, amortization
of goodwill and income taxes. The retail segment charges the wholesale segments
for use of excess funds based on the estimated cost of outside financing.
7
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NOTE 3 -- SEGMENTS - CONTINUED
The following tables summarize segment operations for the six months ended June
30, 2000 and 1999.
Six Months Ended June, 2000
---------------------------------------------------
Wholesale Segments
----------------------- Retail Total
Mortgage SBA Segment Company
--------- --------- --------- ---------
Net Interest Income ..................... $ 1,213 $ 2,723 $ 5,099 $ 9,035
Noninterest Income ...................... 6,080 2,692 639 9,411
Operating Expense ....................... (6,726) (2,964) (4,710) (14,400)
--------- --------- --------- ---------
OPERATIONAL PROFIT .................. 567 2,451 1,028 4,046
Provision for Loan Losses ............... (200)
Administrative Costs .................... (3,399)
Goodwill Amortization ................... (60)
Income Taxes ............................ (220)
---------
NET INCOME .......................... $ 167
=========
Loans Originated for Sale During 2000 ... $ 148,000 $ 52,000
Loans Sold during 2000 .................. $ 162,000 $ 66,000
Six Months Ended June, 1999
---------------------------------------------------
Wholesale Segments
----------------------- Retail Total
Mortgage SBA Segment Company
--------- --------- --------- ---------
Net Interest Income ..................... $ 1,258 $ 1,570 $ 4,744 $ 7,572
Noninterest Income ...................... 7,527 3,081 573 11,181
Operating Expense ....................... (7,698) (2,263) (4,404) (14,365)
--------- --------- --------- ---------
OPERATIONAL PROFIT .................. 1,087 2,388 913 4,388
Provision for Loan Losses ............... ( 231)
Administrative Costs .................... ( 2,046)
Goodwill Amortization ................... ( 60)
Income Taxes ............................ ( 910)
---------
NET INCOME .......................... $ 1,141
=========
Loans Originated for Sale During 1999 ... $ 269,000 $ 87,000
Loans Sold during 1999 .................. $ 265,000 $ 35,000
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BYL Bancorp (the "Company") has one wholly owned subsidiary, BYL Bank Group,
formerly the Bank of Yorba Linda (the "Bank"). The Bank's SBA loan division and
a Mortgage Loan Division operate under the name of Bank of Yorba Linda. The
Bank's operations are the only significant operations of the Company. The
accompanying financial information should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Statements contained in this Report on Form 10Q that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding the Company's expectations, intentions, beliefs
or strategies regarding the future. All forward-looking statements included in
this document are based on information available to the Company on the date
thereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Factors that could cause actual results to differ materially from those in such
forward-looking statements are included in the discussions below.
SALE OF UNGUARANTEED INTEREST IN SBA LOANS
On December 10, 1998, the Bank entered into a Pooling and Servicing Agreement
dated as of October 1, 1998 (the "SBA Pooling Agreement") between the Bank, as
Servicer and Master Servicer, and Marine Midland Bank, as Trustee (the
"Trustee") whereby the Bank transferred certain unguaranteed interests (the
"Unguaranteed Interests") in loans (the "SBA Loans") partially guaranteed by the
U.S. Small Business Administration ("SBA") to a newly-created trust (the
"Trust") for the benefit of the SBA and the holders of certificate representing
interests in such Trust. The Trust consists of the Unguaranteed Interests in
such SBA Loans that are subject to the Pooling Agreement, and the Trust has
issued three (3) classes of certificates representing certain fractional
undivided ownership interests in the Trust. The Aggregate principal amount of
the Unguaranteed Interests delivered to the Trust on October 31, 1998 equaled
approximately $38.1 million.
Pursuant to the SBA Pooling Agreement, the Trust issued $34.4 million aggregate
principal amount of BYL Bank Group SBA Loan-Backed Adjustable Rate Certificate,
Series 1998-1, Class A ("Class A Certificate"), $6.02 million aggregate
principal amount of BYL Bank Group SBA Loan-Backed Adjustable Rate Certificate,
Series 1998-1, Class M. ("Class M Certificate") and $2.58 million aggregate
principal amount of BYL Bank Group SBA Loan-Back Adjustable Rate Certificates,
Series 1998-1, Class B ("Class B Certificate").
The Class A and Class M Certificates were sold to a limited number of "Qualified
Institutional Buyers" as defined in Rule 144A under the Securities Act of 1933,
and institutional "Accredited Investors" as defined in Rule 501 under the
Securities Act. Pursuant to the requirements of the SBA, the Class B Certificate
were retained by the Bank and are subordinate to the Class A and Class M
Certificates. The Class M Certificates are subordinate to the Class A
Certificates.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
SALE OF COMMERCIAL LOANS
On August 11, 1999, the Bank entered into a Pooling and Servicing Agreement
dated as of June 30, 1999 (the "Business Loan Pooling Agreement") among the
Bank, as seller and master servicer, HSBC Bank USA, as Trustee, and Bankers
Trust (Delaware) as Delaware Trustee, whereby the Bank has transferred a pool of
business loans to a newly-created trust (the "Business Loan Trust") for the
benefit of the holders of certificates representing interests in such Business
Loan Trust. The Business Loan Trust consists of the Business Loans that are
subject to the Business Loan Pooling Agreement, and the Business Loan Trust has
issued three (3) classes of certificates representing certain fractional
undivided ownership interests in the Business Loan Trust. The aggregate
principal amount of the Business Loans delivered to the Business Loan Trust on
August 11, 1999 equaled approximately $47.1 million.
Pursuant to the Business Loan Pooling Agreement, the Trust issued $16 million
aggregate principal amount of BYL Bank Group Business Loan-Backed Pass-Through
Certificates, Series 1999-1, Class A-1 ("Class A-1 Certificates"), $12 million
aggregate principal amount of BYL Bank Group Business Loan-Backed Pass Through
Certificates, Series 1999-1, Class A-2 Certificates ("Class A-2 Certificates");
$27.2 million aggregate principal amount of BYL Bank Group Business Loan-Backed
Pass-Through Certificates, Series 1999-1, Class A-3 Certificates ("Class A-3
Certificates"); $4.8 million aggregate principal amount of BYL Bank Group
Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class B
Certificates ("Class B-1 Certificates"); and BYL Bank Group Business Loan-Backed
Pass-Through Certificates, Series 1999-1, Class R Certificates ("Class R
Certificates").
The Class A Certificates were sold to a limited number of "Qualified
Institutional Buyers" as defined in Rule 144A under the Securities Act of 1933,
and institutional "Accredited Investors" as defined in Rule 501 under the
Securities Act. The Class B-1 Certificates and the Class R Certificates were
retained by the Bank and are subordinate to the Class A-1 Certificates, the
Class A-2 Certificates and the Class A-3 Certificates.
RESTRUCTURING
During the fourth quarter of 1999 the Bank evaluated various possible
alternatives of increasing capital, including the issuance of various kinds
of securities and the divestiture or closing of those operations which were
expected to continue to provide rates of return below the Bank's targeted
ROA. Also, during the fourth quarter of 1999, the Company determined that the
maximum potential value of the Bank's commercial loan originations would be
realized through the retention of these loans in the Bank's loan portfolio.
This decision was based upon the current and anticipated returns obtainable
from either the sale or securitization of these commercial loan originations
and the proposed increased capital requirements on loan securitizations. The
shift in the Bank's strategy from loan sales or securitizations to portfolio
retention will require increasing levels of capital in order to maximize the
value of the Bank's ability to generate commercial loans at premium yields.
On February 4, 2000, the Bank completed the sale of its automobile loan
portfolio of approximately $38 million and closed its automobile division. On
February 22, 2000, the Bank completed the sale of its Diamond Bar Mortgage
Division, an originator of Agency conforming residential mortgages. As a result
of this restructuring, the Company reported a loss for the first quarter 2000 of
approximately $260,000. The Company also suspended quarterly dividends effective
January 1, 2000. The Company continues to
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RESTRUCTURING - CONTINUED
explore various means to increase capital and shareholder value, including the
raising of additional capital, the formation of a holding company subsidiary
that would house many of the Bank's current lending activities, and forming
strategic alliances with other well-positioned financial firms or institutions.
REGULATORY ACTIONS, PROMPT CORRECTIVE ACTION AND CAPITAL RESTORATION PLAN
During late 1999 the FDIC completed an examination of the books and records
of the Bank. In connection with this exam the FDIC notified the Bank that it
had incorrectly calculated the risk-weighted capital requirements of the
assets retained in the Bank's 1998 and 1999 securitizations. The FDIC also
challenged the assumptions and financial model used by the Bank in valuing
these residual assets. Based on the assumptions deemed acceptable by the
FDIC, the FDIC believed the Bank's residual assets were overstated by $2.6
million. Although the Bank disagrees with the assumptions recommended by the
FDIC, it has agreed to reflect this adjustment in its Quarterly Call Reports,
primarily for regulatory capital purposes and also to engage an independent
third-party to review the assumptions used by the Bank as well as design a
financial model to more accurately measure the value of residual assets in
future reporting periods.
Primarily due to these items, the Bank has been classified as
undercapitalized. As a result, the Bank filed a capital restoration plan
with the FDIC, which provided that the Bank expects to be adequately
capitalized by March 31, 2000. As of March 31, 2000, the Bank was adequately
capitalized. The capital restoration plan also provides for increasing
levels of capital every quarter until the Bank is well capitalized in 2001.
The Bank has eliminated asset securitizations from its business plan. The
Bank will continue operations of all traditional retail banking activities
through the Bank's existing branch system. As of June 30, 2000, Bank
management believes the Bank is adequately capitalized, as the Bank's Tier 1
Capital Ratio was 7.94% and the Total Risk Based Capital Ratio was 8.93% as
of June 30, 2000.
The Bank has now amended its call reports in order to reflect the proper
computation of risk-weighted capital for residual assets and for the $2.6
million adjustment to these residual assets pursuant to the Bank's agreement
with the FDIC. All call reports from December 31, 1998 through March 31,
2000 have been restated, also pursuant to the agreement with the FDIC.
In addition, as a result of the recent FDIC examination, for the purpose of
cooperating with the FDIC and without admitting or denying any allegations,
effective July 10, 2000, the Bank stipulated to an administrative action with
the FDIC that requires the Bank, among other items, to retain qualified
management; have and maintain certain Tier 1 capital and total risk based
capital ratios; eliminate from its books certain assets classified loss;
revise policies concerning the Bank's asset securitization activities; obtain
a model to more adequately value its retained interests related to
securitized assets; and adopt and implement certain other policies relating
to profitability, liquidity and funds management, sensitivity to interest
rate risk; revise certain reports to the FDIC; and correct all alleged
violations of law. The order became effective July 10, 2000.
In order to comply with the FDIC Order, the Bank has engaged
PricewaterhouseCoopers ("PWC") to assist the Bank in determining the
assumptions used in the valuation of these assets as well as design a
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
REGULATORY ACTIONS, PROMPT CORRECTIVE ACTION AND CAPITAL RESTORATION PLAN
- CONTINUED
new valuation model for ongoing measurement of the changes in valuation of
these assets. The Bank has now received the cash flow model from PWC for the
1999-1 Securitization and is in the process of running the model under
various assumptions. The Company and the Bank will account for any
adjustments generated utilizing these new assumptions as a change in
estimates and adjust its financial statements in accordance with the results
obtained from the model for both securitizations. As a result of the new
model and assumptions the assets for the 1999-1 securitization were written
down $800,000 as a permanent decline in value during the quarter ended June
30, 2000. Management does not anticipate a significant write down of the
1998-1 securitization.
Further, as a result of a recent FRB examination of the Company, the Company
has executed a Memorandum of Understanding with the FRB. The FRB MOU requires
that the Company, among other items, refrain from declaring dividends without
the prior written approval of the FRB, develop and submit a written capital
plan, submission to the FRB of a statement concerning the steps the Board
proposes to take to improve the condition of the Bank and the consolidated
organization, refrain from increasing debt or renewing existing debt without
prior approval of the FRB, and submit written progress reports to the FRB.
FORMATION OF SUBSIDIARY AND PROPOSED TRANSACTION
As a result of the recent FDIC examination, the Company has determined that
it would be in the best interests of the Company and the Bank to transfer the
retained assets, including the strips, residuals, servicing rights and other
retained interests in the 1999 securitization, as well as most of the
personnel of the SBA Department, to a minority-owned subsidiary of the
Company.
The Company and the Bank executed a definitive agreement dated July 12, 2000,
that describes the terms of a proposed joint venture for a Delaware limited
liability company to be called CNL Commercial Finance, LLC. However, the
Company and its joint venture partner, CNL Commercial Funding, LP ("CFL")
have decided to change the corporate structure of the subsidiary to a C
Corporation to be called CNL Commercial Finance, Inc. ("CCF"). The purpose of
the joint venture is to originate, service and securitize commercial loans,
some of which are to be guaranteed by the Small Business Administration,
which are detailed below. The subsidiary, CCF, would have a
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
FORMATION OF SUBSIDIARY AND PROPOSED TRANSACTION - CONTINUED
total of $10 million in equity capital. The Company would have a 25% equity
and voting interest in the subsidiary. The Company would execute a note for
its $2.5 million contribution, and CFL would hold a 75% ownership interest in
the subsidiary.
Under the amended definitive agreement, the cash price will be at least equal to
the Bank's book value of the strips, residuals, servicing rights and other
retained interests that are being transferred from the 1999-1 securitization, as
well as other assets, but will not include one certificate that is rated
investment grade Baa.
POSSIBLE BUYOUT OF THE COMPANY'S INTEREST
CFL has the option to purchase all of the Company's interest in the
subsidiary if any banking, credit law, regulation or regulatory decision
arising directly from the Company's ownership interest in the subsidiary
should significantly impair the subsidiary's profitability. In addition, the
CCF Stockholder's Agreement also describes a buyout that could occur as a
result of the Company's unwillingness or inability to meet a capital call for
additional funds because of expansion or because of insufficient earnings or
inadequate credit performance. The Stockholders' Agreement also describes a
buyout that could occur if the Company does not agree with major decisions of
CCF, CCF decided to enter into a new activity not previously approved by the
Federal Reserve Bank, or if the Company is subject to criticism, which will
have negative economic consequences for the Company.
BUSINESS OF THE SUBSIDIARY
The subsidiary's business will include the following:
- - originating, warehousing, selling and securitizing SBA loans under various
SBA programs;
- - originating, warehousing, and securitizing SBL loans or loan pools;
- - servicing loan pools, including the servicing of the Bank's 1999
securitized SBL loans though either (1) the assignment of BYL Bank's
servicing rights with the approval of 51% of the certificate holders in the
securitization and the appropriate rating agencies, or (2) the execution of
a sub-servicing agreement by and between BYL Bank and the subsidiary; and
- - providing lending-related services to SBA and SBL borrowers.
MANAGEMENT
The current managers of the SBA Division of the Bank will manage the subsidiary.
In addition, the policies and procedures currently in effect in the SBA and SBL
Departments of the Bank are intended to become the policies and procedures at
the subsidiary.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
REGULATORY APPLICATIONS
The Company is currently seeking approval from the FRB pursuant to Section
4(c)(8) of the Federal Reserve Act with this application in order to make its
proposed investment in the subsidiary. The subsidiary is in the process of
obtaining a Finance Lenders Law License from the California Department of
Corporations in order to conduct the activities described herein. The Company is
also discussing the type of applications that may be necessary with the SBA.
SUBSIDIARY WILL ACT AS SUB-SERVICER FOR BANK
The only relationship between the Bank and the subsidiary would be a
sub-servicer relationship in which the subsidiary would service the loans
serviced by the Bank under the 1999-1 securitization. The Bank will be retaining
a sufficient number of employees from the SBA Department in order to perform the
Bank's requirements under the 1998 Securitization.
ACQUISITIONS
On May 29, 1998, the Company completed the acquisition with DNB Financial
("DNBF"), parent company of De Anza National Bank on a pooling-of-interests
basis , and, accordingly, the Company's historical consolidated results have
been restated. Under the terms of the Agreement and Plan of Reorganization, each
share of DNBF Common Stock was exchanged for 4.12 shares of the Company's Common
Stock. A total of 956,641 shares of the Company's Common Stock was issued to
DNBF shareholders. Also, on May 29, 1998, De Anza National Bank, DNBF's only
subsidiary, merged with and into BYL Bank Group.
On June 13, 1996, the Bank acquired 100% of the outstanding common stock of Bank
of Westminster (BOW) for $6,174,000 in cash. BOW had total assets of
approximately $54,923,000. The acquisition was accounted for using the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16. "Business Combinations". Under this method of accounting, the purchase price
was allocated to the assets acquired and deposits and liabilities assumed based
on their fair values as of the acquisition date. The financial statements
include the operations of BOW from the date of the acquisition. Goodwill arising
from the transaction totaled approximately $1,717,000 and is being amortized
over fifteen years on a straight-line basis.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
OVERVIEW
For the three months ended June 30, 2000, the Company reported net income of
$427,000, or $0.17 per share compared to a net income of $682,000, or $0.27 per
share for the same three month period in 1999.
For the first half of 2000, the Company reported net income of $167,000 compared
to $1.1 million in 1999. The annualized return on average assets was .10% for
2000 compared to .68% in 1999. Annualized return on shareholders equity was
1.15% in 2000 compared to 8.37% in 1999.
During the first quarter of 2000 the Company closed the Diamond Bar Mortgage
Division and the Indirect Auto Division. The Company sold the indirect auto loan
portfolio and incurred a $1.6 million loss on sale. During the second quarter of
2000 the Company wrote down the 1999-1 secruitization assets by $800,000 as a
result of a new valuation model being implemented.
FINANCIAL CONDITION
Total assets as of June 30, 2000, decreased 8.88% to $322.3 million in
comparison to total assets of $353.7 million as of December 31, 1999. The
majority of this decrease was centered in loans held for sale, which decreased,
by $36 million. The reduction is assets resulted in the reduction of
interest-bearing deposits by $36 million.
ASSET QUALITY
The following table sets forth the components of non-performing assets and
related ratios: (dollar amounts in thousands)
June 30,
----------------- December 31,
2000 1999 1999
------ ------ ------
Loans 90 day past due and still accruing ... $ -- $ 189 $ 120
Loans on nonaccrual ........................ 2,914 2,452 1,542
------ ------ ------
Nonperforming Loans .................... 2,914 2,641 1,662
Other real estate owned (OREO) ............. 819 1,042 277
------ ------ ------
Nonperforming Assets ................... $3,733 $3,683 $1,939
====== ====== ======
Nonperforming Loans as a Percent
of Total Loans .......................... 1.37% 0.96% 0.84%
Allowance for Loan Losses as a Percent
of Nonperforming Loans .................. 90.56% 93.07% 157.04%
Nonperforming Assets as a Percent
of Total Assets ......................... 1.16% 1.08% 0.55%
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
ASSET QUALITY - CONTINUED
The Company's asset quality has declined in 2000 as evidenced by an increase in
the ratio of nonperforming loans to total loans which increased to 1.37% at June
30, 2000 from .84% at December 31, 1999. Conversely, the allowance for loan
losses as a percent of nonperforming loans decreased to 90.56% at June 30, 2000,
down from 157.04% at December 31, 1999. A portion of this decrease is due to the
increase in nonaccrual loans and OREO. The ALLL at June 30, 2000 was 1.47% of
total loans compared to 1.31% at December 31, 1999. At June 30, 2000, the
Company had eight properties of OREO with a total book value of $819,000. The
Company believes all properties will be liquidated without any significant
losses.
LIQUIDITY
The origination and sale of its wholesale loan products impact the Bank's
liquidity significantly. The loan to deposit ratio at June 30, 2000 was 72.8%.
Had the Bank actually sold all of the loans it held for sale, this ratio would
have declined to 61.4%.
CAPITAL RESOURCES
Total shareholders equity at June 30, 2000 totaled $29.0 million, which
represents a .7% decrease from $29.2 million at December 31, 1999.
The Company and its bank subsidiary are subject to risk-based capital
regulations adopted by the federal banking regulators. These guidelines are used
to evaluate capital adequacy and are based upon an institution's risk profile
and off-balance sheet exposures, such as unused loan commitments and letters of
credit. At June 30, 2000, the Bank's Tier 1 leverage capital ration was 7.94%
compared to 7.40% at December 31, 1999.
June 30, December 31,
Ratio 2000 1999
------- ------- --------
Tier 1 Capital (to Average Assets) ......... 4.00% 7.94% 7.40%
Tier 1 Capital (to Risk Weighted Assets) ... 4.00% 8.11% 7.28%
Total Capital (to Risk Weighted Assets) .... 8.00% 8.93% 7.99%
On March 8, 2000 the Bank was notified by the FDIC that the Bank is
under-capitalized for purposes of Prompt Corrective Action. Accordingly, the
Bank is prohibited, among other things, from renewing broker deposits, paying
dividends and is subject to enforcement actions. Subsequent to the notification
by the FDIC, the Bank has filed a capital restoration plan with the FDIC.
Effective July 10, 2000, the Bank stipulated to an administrative action with
the FDIC which requires the Bank to have Tier 1 Capital Ratio of 7.75% by
September 30, 2000, Tier 1 Capital Ratio of 8.00% and Total Risk Based Capital
Ratio of 9.5% by December 31, 2000, Total Risk Based Capital Ratio of 10.25% by
June 30, 2001 and Total Risk Based Capital Ratio of 11.00% by December 31, 2001.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
ANALYSIS OF NET INTEREST INCOME AND MARGIN
Net interest income is the amount by which the interest and amortization of fees
generated from loans and other earning assets exceeds the cost of funding those
assets, usually deposit account interest expense. Net interest income depends on
the difference (the "interest rate spread") between gross interest and fees
earned on the loans and investment portfolios and the interest rates paid on
deposits and borrowings. Net interest income was $4.5 million for the quarter
ended June 30, 2000, compared to $3.9 million for the quarter ended June 30,
1999 and $9.0 million for the six months ended June 30, 2000 compared to $7.6
million for the six months ended June 30, 1999.
The following table sets forth the components of net interest income, average
earning assets and net interest margin: (in thousands)
Three Months Ended Six Months Ended Year Ended
June 30, June 30, December 31,
--------------------- --------------------- ------------
2000 1999 2000 1999 1999
-------- -------- -------- -------- --------
Interest Income ........... $ 7,102 $ 6,446 $ 14,649 $ 12,938 $ 27,528
Interest Expense .......... 2,624 2,568 5,614 5,366 11,586
-------- -------- -------- -------- --------
Net Interest Income ... $ 4,478 $ 3,878 $ 9,035 $ 7,572 $ 15,942
======== ======== ======== ======== ========
Average Earning Assets .... $280,724 $285,671 $295,411 $289,768 $296,128
Net Interest Margin ....... 6.38% 5.43% 6.12% 5.23% 5.38%
The net interest margin increased in 2000 compared to the same periods in 1999
due to a 175 basis point increase in prime rate since July of 1999.
PROVISION FOR LOAN LOSSES
BYL Bancorp made a $50,000 and $150,000 contribution to the allowance for loan
losses in the first and second quarters of 2000 compared to $180,000 and $51,000
for the first and second quarters in 1999. Management believes that the
allowance, which equals 1.47% of total loans at June 30, 2000, is adequate to
cover future losses.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
PROVISION FOR LOAN LOSSES - CONTINUED
Changes in the allowance for loan losses for the quarter and six months ended
June 30, 2000 and 1999 are as follows (dollar amounts in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Allowance, Beginning of Period .......... $ 2,607 $ 2,444 $ 2,610 $ 2,300
Provision for Loan Losses ............... 150 51 200 231
Loans Charged Off - net of Recoveries ... (118) (37) (171) (73)
------- ------- ------- -------
Allowance, End of Period ................ $ 2,639 $ 2,458 $ 2,639 $ 2,458
======= ======= ======= =======
NONINTEREST INCOME
Noninterest income was $4.3 million for the quarter ended June 30, 2000
compared to $5.2 million for the same period in 1999. Similarly for the first
half of 1999, noninterest income was $9.4 million compared to $11.2 million
for the same period in 1999. This decrease is attributable to the closing of
the Diamond Bar Mortgage Division and the $800,000 write-down of the assets
retained in the 1999-1 securitization.
NONINTEREST EXPENSE
Noninterest expense was $7.8 million for the quarter ended June 30, 2000 and
$17.9 million for the first six months of 2000 compared to $7.8 million and
$16.5 million for the same periods in 1999. The majority of the increases for
the six months ended June 30, 2000 were attributable to the $1.6 million loss on
sale of the Bank's indirect auto loan portfolio during the first quarter of
2000.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
In Management's opinion there has not been a material change in BYL Bancorp's
market risk profile during the three months ended June 30, 2000. Market risk is
the risk of loss in a financial instrument arising from adverse changes in
market prices and rates, foreign currency exchange rates, commodity prices and
equity prices. BYL Bancorp's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities and market risk in
loans originated for sale as a result of changes in interest rates. To that end,
management actively monitors and manages its inherent rate risk exposure. BYL
Bancorp manages its interest rate sensitivity by matching the repricing
opportunities on its earning assets to those on its funding liabilities.
Management uses various asset/liability strategies to manage the repricing
characteristics of its assets and liabilities to ensure that exposure to
interest rate fluctuations is limited within BYL Bancorp's guidelines of
acceptable levels of risk-taking.
At June 30, 2000, BYL Bancorp had $170 million of assets and $213 million of
liabilities repricing within one year. Therefore, $43 million more in interest
rate sensitive liabilities than interest rate sensitive assets will change to
the then current rate (changes occur due to the instruments being at a variable
rate or because the maturity of the instrument requires its replacement at the
then current rate). Generally, if rates were to fall during this period,
interest income would decline by a lesser amount than interest expense and net
income would increase. Conversely, if rates were to rise, the reverse would
apply, and BYL Bancorp's net income would decrease.
YEAR 2000 RISK
OVERVIEW
The Year 2000 issue is the result of computer programs being written using two
digits rather that four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date using "00" as the
year 1900 rather than the year 2000.
The Company expended approximately $113,000 through the periods ended December
31, 1999 in connection with its year 2000 compliance program. The Company
experienced no significant problems related to its information technology
systems upon arrival of the Year 2000, nor was there any interruption in service
to its customers.
19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Subsidiary Bank is at
times party to various legal actions; all such actions are of a
routine nature and arise in the normal course of business of the
Subsidiary Bank.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
20
PART II - OTHER INFORMATION -CONTINUED
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits
Exhibit No. Exhibit
----------- -------
2.1 Plan of Reorganization and Merger Agreement - Annex I of
Proxy Statement/Prospectus incorporated by reference (A)
3.1 Articles of Incorporation of the Registrant (A)
3.2 Amendment to Articles of Incorporation of Registrant (A)
3.3 Bylaws of the Registrant (A)
4.1 Specimen Certificate evidencing shares of Registrant's
Common Stock (A)
4.2 Stockholder Agreement Covering Issuance and Compulsory
Repurchase of Organizing Shares of Registrant - Annex II
of Proxy Statement/Prospectus incorporated by reference
(A)
10.1 Form of Indemnification Agreement (A)
10.2 BYL Bancorp 1997 Stock Option Plan, as amended in 1998
(C)
10.3 Form of Proxy, Proxy Statement and Notice of Annual
Meeting (E)
10.4 Employment Agreement - Mr. Robert Ucciferri (A)
10.5 Employment Agreement - Mr. Barry J. Moore (A)
10.6 Employment Agreement - Mr. Michael Mullarky (A)
10.7 Employment Agreement - Ms. Gloria Van Kampen (D)
10.8 Employment Agreement - Mr. Gary Strachn (G)
10.9 Salary Continuation Agreement - Mr. Robert Ucciferri (A)
10.10 Salary Continuation Agreement - Mr. Barry J. Moore (A)
10.11 Salary Continuation Agreement - Mr. Michael Mullarky (F)
10.12 Salary Continuation Agreement - Ms. Gloria Van Kampen
(F)
10.13 Agreement and Plan of Reorganization with DNB Financial
(B)
10.14 Agreements, as amended, for formation of CNL Financial
Services, Inc.
B) Reports on Form 8-K
None.
- ----------
(A) Filed as an Exhibit to the Registrant's Registration Statement (File No.
333-34995) filed on September 5, 1997, which exhibit is incorporated
herein by this reference.
(B) Filed as an Exhibit to Form 8-K filed on January 29, 1998, which exhibit
is incorporated herein by this reference.
(C) Filed as an Exhibit to the Registration Statement on Form S-8 filed on
May 15, 1998.
(D) Filed as an Exhibit to the Annual Report on Form 10-K as of December 31,
1998.
(E) Filed as an exhibit to the Annual Report on Form 10-K as of December 31,
1998, incorporating Schedule 14 A information pursuant to Section 14(a)
of the Securities Exchange Act of 1934, filed on May 18, 1999.
(F) Filed as an Exhibit to Form 10-Q filed on November 15, 1999, which
Exhibit is incorporated herein by this reference.
(G) Filed on an Exhibit to the Annual Report on Form 10-K as of December 31,
1999.
21
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BYL BANCORP
Date: August 11, 2000 /s/ Robert Ucciferri
------------------------------
Robert Ucciferri
President and
Chief Executive Officer
Date: August 11, 2000 /s/ Barry J. Moore
------------------------------
Barry J. Moore
Senior Executive Vice President
Chief Operating Officer and
22