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, 2000 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 92865
(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 2,542,835 shares of Common Stock outstanding at March 23, 2001. The
aggregate market value of Common Stock held by non-affiliates at March 23, 2001
was approximately $31,785,000 based upon the last known trade of $12.50 per
share on March 23, 2001.
Documents incorporated by reference: The proxy statement for the Annual Meeting
of Shareholders of the registrant to be held in the third or fourth quarter of
2001. 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 ................................................... 20
Item 3. Legal Proceedings ............................................ 20
Item 4. Submission of Matters to a Vote of Security Holders .......... 20
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ......................................... 21
Item 6. Selected Financial Data ..................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation .......................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 40
Item 8. Financial Statements and Supplementary Data ................. 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................... 79
Part III
Item 10. Directors and Executive Officers of the Registrant .......... 79
Item 11. Executive Compensation ...................................... 79
Item 12. Security Ownership of Certain Beneficial Owners and
Management .................................................. 79
Item 13. Certain Relationships and Related Transaction ............... 79
Part IV
Item 14. Exhibits Financial Statement Schedules, and Reports
on Form 8-K ................................................. 80
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, 2000, the Company
had total assets of approximately $286.4 million, total deposits of $254.3
million and total shareholders' equity of $29.2 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
located at 1875 North Tustin Street, Orange, California, and the Bank
operates seven full-service banking centers in the Bank's primary market
areas of Orange and Riverside Counties, California. In addition to
conducting its regular community banking activities, the Bank also
originates and sells non-conforming residential real estate loans and SBA
guaranteed loans. The Bank's mortgage division is located in Tustin,
California.
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. The Bank originates nonconforming mortgages in California and
various other states and sells such loans in the secondary market, and
originates and sells SBA guaranteed loans, with the objective of building a
balanced community loan 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.
In furtherance of its focus in operating strategy, following the receipt of all
necessary regulatory approvals, the Bank completed the acquisition of the Bank
of Westminster on June 14, 1996. The aggregate purchase price of the Bank of
Westminster was $6.17 million. In conjunction with the acquisition of the Bank
of Westminster, the Bank completed an offering of new primary stock underwritten
on a firm commitment basis by Ryan, Beck & Co.
Following receipt of all necessary regulatory approvals, the Company completed
the acquisition of DNB Financial on May 29, 1998 in which each share of DNB
Financial was converted into the right to receive 4.1162 shares of the Company's
common stock, resulting in the issuance of 956,641 shares of Company common
stock to the shareholders of DNB Financial.
The Company or the Bank has not engaged in any material research activities
relating to the development of new services or the improvement of our existing
services. The Company or the Bank has no present plans regarding "a new line of
business" requiring the investment of a material amount of total assets.
3
Most of the Bank's business originates from the Orange and Riverside counties,
and there is no emphasis on foreign sources and application of funds. The Bank's
business, based upon performance to date, does not appear to be seasonal. The
Bank is not dependent upon a single customer or group of related customers for a
material portion of the Bank's deposits. The Bank is unaware of any material
effect upon the Bank's capital expenditures, earnings or competitive position as
a result of federal, state or local environmental regulation.
Proposed Merger with PBOC Holdings, Inc.
On November 2, 2000, the Company and PBOC Holdings, Inc. ("PBOC"), parent
company of People's Bank of California ("People's"), announced the signing
of an Agreement and Plan of Reorganization (the "Agreement") dated November
1, 2000, pursuant to which PBOC will acquire the Company and the Bank. Upon
consummation of the transaction, PBOC will become the surviving corporation,
and People's will become the surviving bank. Consummation of the Agreement
is subject to a number of conditions, including, but not limited to, the
approval of the Agreement by the shareholders of the Company and the receipt
of requisite regulatory approvals.
Under the terms of the transaction, the holders of Company Common Stock will
receive $15.00 in cash for each share of Company Common Stock owned. The cash
amount may be adjusted upward or downward under certain circumstances which are
set forth in the Agreement. The maximum cash price per share of Company common
stock is approximately $15.34, and the minimum cash per share of Company common
stock is approximately $14.50.
Concurrently with the execution and delivery of the Agreement, the directors and
certain executive officers of the Company entered into a form of letter
agreement with PBOC pursuant to which among other things, such persons agreed to
vote their shares of Company common stock in favor of approval of the Agreement.
In connection with the Agreement, PBOC and the Company entered into a Stock
Option Agreement dated as of November 1, 2000, pursuant to which the Company
granted PBOC an option to purchase up to 505,971 shares of Company's common
stock (subject to adjustment as set forth therein), which represents 19.9% of
the Company's outstanding shares of common stock, at a purchase price of $10.597
per share (subject to adjustment as set forth therein). The option will become
exercisable upon the occurrence of certain events, as specified in the Stock
Option Agreement, none of which has occurred as of the date hereof.
PBOC is a Delaware corporation and is registered as a savings and loan holding
company under the Home Owners' Loan Act, as amended. PBOC operates People's,
which is its wholly-owned subsidiary. At December 31, 2000, PBOC had total
consolidated assets of approximately $3.3 billion, total consolidated deposits
of approximately $2.0 billion, and total consolidated shareholders' equity of
approximately $213.6 million.
People's is a federal savings and loan association headquartered in Los Angeles
California, which originally commenced operations in 1887. It currently operates
26 banking offices primarily in Los Angeles County, as well as Orange and
Ventura counties in Southern California.
On December 11, 2000, PBOC announced that it has executed an agreement dated
December 8, 2000 in which it will be acquired by FBOP Corp., a $5.4 billion bank
and savings holding company headquartered in Oak Park, Illinois. FBOP Corp. owns
banks in California, Illinois and Texas. Under the terms of the agreement
between FBOP Corp. and PBOC, FBOP Corp. will acquire PBOC, and California
National Bank, a subsidiary of FBOP Corp., will acquire People's.
4
As required by the Agreement, on January 8, 2001, the Bank sold the R-3
certificate retained in the 1999-1 Securitization to the highest bidder in a
private bidding procedure conducted by Sutro & Co. for $1,419,512, less a 5%
commission and other sale-related expenses. The highest bidder was Messrs.
H. Rhoads Martin, Charles Cox and Eddie Fischer, all of whom are directors
of the Company and the Bank. As a result, the consideration to be received
from PBOC upon consummation of the merger will be reduced by an amount equal
to approximately $0.159 per share as a result of the sale of the R-3
certificate. However, since the merger was not consummated by March 6, 2001,
the consideration to be received from PBOC upon consummation of the merger
began increasing from March 6, 2001 on a daily basis until the closing date
equal to 8% per annum on the $15.00 per share merger consideration.
On March 21, 2001, at a special meeting of shareholders, the Company's
shareholders approved the principal terms of the Agreement, and PBOC and the
Company are waiting for approval from the Office of Thrift Supervision and
completion of the 15 day waiting period before the Agreement can be consummated.
The Company is unaware of any other requirements that it must fulfill in order
for the Agreement to be consummated.
Lower Earnings Due to Extraordinary Loss on Mortgage Loans Previously Sold
On March 6, 2001, the Company announced that the Company's earnings would be
substantially reduced by the recognition of certain extraordinary losses on
mortgage loans previously sold. At the time of the announcement, the Company
believed that earnings in the first quarter would be impacted and that it
was likely that quarterly results of operations would be approximately
breakeven. However, accounting rules require that contingency losses be
reported at the end of the most recent accounting period to be presented.
Because the Company's year-end financial statements had not been issued
prior to the announcement, the Company is required to recognize the
extraordinary losses as of December 31, 2000. It is currently estimated that
the gross losses will be approximately $1,658,000 and the actual losses, net
of reduced incentive payments, will be approximately $1,160,000 or $681,000
after tax before any future recoveries. The Company has therefore recognized
in the fourth quarter of 2000 a non-recurring, extraordinary loss with
respect to certain mortgage loans previously sold by both the Bank's former
Diamond Bar Division and current Tustin Mortgage Division operations to third
party investors. The Company's net income for the year ended December 31,
2000 has been reduced to $578,000 or $0.23 per share basic and $0.23 per
share diluted. This compares with the $3,076,000 or $1.21 per share basic
and diluted net income reported for the year ended December 31, 1999.
The losses arise from the Bank's obligation to repurchase from the third
party investors certain fraudulent mortgage loans which were originated by
mortgage brokers who were not employees or affiliates of the Company or the
Bank. The fraudulent loans were originated through third-party brokers and
were subsequently sold as part of both of the Divisions' normal operations
to certain regular investors in such loans. In the case of the Tustin
Mortgage Division, these loans were originated by a professional,
large-scale fraud ring operated out of Texas that is believed to have
impacted over twenty different mortgage lenders other than the Bank. The
fraud scheme was quite complex and is believed to have involved more than 30
persons including at least 13 businesses with various names and owners, and
included developers, real estate agents, appraisers, brokers and others. In
the case of the former Diamond Bar Division (which was closed by the Bank as
part of its restructuring in February 2000), the fraudulent mortgage loans
involve falsification of appraisals, verifications of income and earnest
money deposits, forged documents, false notarizations and stolen identities
of borrowers. No employee of the Company or the Bank is believed to have
been in any way involved in any of the fraudulent origination activities.
The Company believes that there is a substantial probability of obtaining
significant future recoveries to mitigate the extraordinary losses arising from
these fraudulent loans.
5
Securitizations
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 certificates representing
interests in such Trust. The Trust consists of the Unguaranteed Interests in
such SBA Loans that are subject to the Pooling Agreement, and the Trust has
issued three (3) classes of certificates representing certain fractional
undivided ownership interests in the Trust. The Aggregate principal amount of
the Unguaranteed Interests delivered to the Trust on October 31, 1998 equaled
approximately $38.1 million.
Pursuant to the SBA Pooling Agreement, the Trust issued $34.4 million aggregate
principal amount of BYL Bank SBA Loan-Backed Adjustable Rate Certificates,
Series 1998-1, Class A ("Class A Certificate"), $6.02 million aggregate
principal amount of BYL Bank SBA Loan-Backed Adjustable Rate Certificates,
Series 1998-1, Class M ("Class M Certificate") and $2.58 million aggregate
principal amount of BYL Bank SBA Loan-Backed Adjustable Rate Certificates,
Series 1998-1, Class B ("Class B Certificate").
The Class A and Class B Certificates were sold to a limited number of "Qualified
Institutional Buyers" as defined in Rule 144A under the Securities Act of 1933,
and institutional "Accredited Investors" as defined in Rule 501 under the
Securities Act. Pursuant to the requirements of the SBA, the Class B
Certificates were retained by 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 Non-SBA Commercial Loans
On August 11, 1999, the Bank entered into a Pooling and Servicing Agreement
dated as of June 30, 1999 (the "SBL 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
SBL Loans to a newly-created trust (the "SBL Trust") for the benefit of the
holders of certificates representing interests in such SBL Trust. The SBL Trust
consists of the SBL Loans that are subject to the SBL Pooling Agreement, and the
SBL Trust has issued three (3) classes of certificates representing certain
fractional undivided ownership interests in the SBL Trust. The aggregate
principal amount of the Business Loans delivered to the SBL Trust on August 11,
1999 equaled approximately $47.1 million.
Pursuant to the SBL Pooling Agreement, the Trust issued $16 million aggregate
principal amount of BYL Bank Business Loan-Backed Pass-Through Certificates,
Series 1999-1, Class A-1 ("Class A-1 Certificates"), $12 million aggregate
principal amount of BYL Bank Business Loan-Backed Pass Through Certificates,
Series 1999-1, Class A-2 Certificates ("Class A-2 Certificates"); $27.2 million
aggregate principal amount of BYL Bank Business Loan-Backed Pass-Through
Certificates, Series 1999-1, Class A-3 Certificates ("Class A-3 Certificates");
$4.8 million aggregate principal amount of BYL Bank Business Loan-Backed
Pass-Through Certificates, Series 1999-1, Class B Certificates ("Class B-1
Certificates"); and BYL Bank Business Loan-Backed Pass-Through Certificates,
Series 1999-1, Class R Certificates ("Class R Certificates").
6
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.
As a result of such evaluations, 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 regulatory capital requirements on loan securitizations. The shift in
the Bank's strategy from loan sales or securitizations to portfolio retention
requires 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 indirect automobile
division. On February 22, 2000, the Bank completed the sale of its Diamond Bar
Mortgage Division, an originator of 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.
Regulatory Actions, Prompt Corrective Action and Capital Restoration Plan
During late 1999 the FDIC completed an examination (the "1999 FDIC Examination")
of the books and records of the Bank. In connection with the 1999 FDIC
Examination, 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 disagreed with the
assumptions recommended by the FDIC, it has reflected this adjustment in its
quarterly call reports for regulatory capital purposes, engaged an independent
third-party to review the assumptions used by 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 was classified by the FDIC as
undercapitalized. As a result, the Bank filed a capital restoration plan
with the FDIC, which provided that the Bank expected 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. 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 December
31, 2000, the Bank's management believes the Bank is adequately capitalized,
as the Bank's risk based capital ratio was 9.30%, Tier 1 leverage capital
ratio was 9.42%, and total risk based capital ratio was 10.08%.
In addition, as a result of the 1999 FDIC Examination, for the purpose of
cooperating with the FDIC and without admitting or denying any allegations, 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.
7
In order to comply with the FDIC administrative action, the Bank engaged
PricewaterhouseCoopers ("PWC") to assist the Bank in determining the assumptions
used in the valuation of these assets as well as design a new valuation model
for ongoing measurement of the changes in valuation of these assets. The model
was used for both call report and financial statement purposes for the months of
August and September, and for all periods thereafter. The Bank has and will
continue to use the discount rates and payment frequencies previously stipulated
by the FDIC for call report purposes until the FDIC has accepted the PWC model
and assumptions. The Company and the Bank now 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 believes
that the Bank is in compliance with the FDIC administrative action.
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 to reflect the effects of the changes, and call reports from
June 30, 2000 forward continue to carry the adjustments, also pursuant to the
agreement with the FDIC.
As a result of a FRB examination in the first quarter of 2000, the Company
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, refrain from certain transactions without FRB
approval, develop and submit a written capital plan, submit a statement
concerning the steps the Board proposes to take to improve the condition of 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. Management believes that the Company is in compliance with
the FRB MOU.
As described above, the Bank eliminated asset securitizations from its business
plan in early 2000. Residual assets on the Bank's December 31, 2000 call report
total approximately $9.98 million, or approximately 36% of the Bank's Tier 1
capital. After the sale of the remaining portions of the 1999-1 residuals in
January 2001 as described below, the remaining residuals on the Bank's call
reports total approximately $4.4 million or 16% of the Bank's Tier 1 capital.
On March 10, 2000, the FDIC and other financial institution regulatory agencies
proposed revisions to the risk-based capital treatment of recourse arrangements,
direct credit substitutes and asset securitizations in FIL 15-2000. If the
proposed revisions are adopted, the Bank does not believe that capital will be
adversely affected.
Proposed Formation of Subsidiary and Proposed Transaction
As a result of the 1999 FDIC Examination, the Company had 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 proposed 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. The Company and its
joint venture partner, CNL Commercial Funding, LP ("CFL"), changed the corporate
structure of the subsidiary to a C Corporation to be called CNL Commercial
Finance, Inc. ("CCF"). The purpose of the joint venture is to originate, service
and securitize commercial loans, some of which are to be guaranteed by the Small
Business Administration, which are detailed below. The subsidiary, CCF, would
have a total $10 million in equity capital. The Company would have
8
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
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.
On September 14, 2000, the Company and the Bank completed the first phase of the
transaction with CCF, in which the Bank sold certain assets and transferred
certain personnel of the SBA Division. The Bank also sold 59% of its retained
interest in the 1999-1 Securitization. The Bank realized cash in the amount of
$3.223 million as a result of the completion of the first phase of the CCF
transaction. Following receipt of all necessary regulatory approvals, the
Company and the Bank intended to complete the second phase of the transaction
which would have involved the transfer of the remaining 41% of the retained
interest in the 1999-1 Securitization, except for the investment rated security.
At that time, the Company intended to execute the $2.5 million note as described
above. At this time, because of certain issues that have arisen at the SBA, the
Company will not complete the second portion of the transaction with CCF, and
the CNL transaction agreements have terminated in accordance with their terms.
Sale of R-3 Certificates
On December 21, 2000, the Bank executed an agreement with Sutro & Co. in
order to liquidate the BYL R-3 certificates. Following the termination of
the CNL transaction with CCF, on January 8, 2001, the Bank sold the R-3
certificate to the highest bidder in a private bidding procedure conducted
by Sutro & Co. for $1,419,512, less a 5% commission and other sale-related
expenses. The highest bidder was Messrs. H. Rhoads Martin, Charles Cox and
Eddie Fischer, all of whom are directors of the Company and the Bank.
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.
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.
9
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.
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.
10
Effect of Governmental Policies and Recent Legislation
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate we pay on our deposits and our other
borrowings and the interest rate we receive on loans extended to our customers
and securities held in our portfolio comprise the major portion of our earnings.
These rates are highly sensitive to many factors that are beyond our control.
Accordingly, our earnings and growth are subject to the influence of domestic
and foreign economic conditions, including inflation, recession and
unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Board of Governors of the Federal Reserve System ("FRB"). The FRB implements
national monetary policies (with objectives such as curbing inflation and
combating recession) by its open-market operations in U.S. Government
securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
FRB in these areas influence the growth of our loans, investments and deposits
and also affects interest rates charged on loans and paid on deposits. The
nature and impact of any future changes in monetary policies cannot be
predicted.
Capital Standards
The Federal Reserve Board and FDIC have adopted risk-based minimum capital
guidelines (for bank holding companies and insured non-member state banks,
respectively) intended to provide a measure of capital that reflects the degree
of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long-term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
11
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 "adequately capitalized" at December
31, 2000. See Regulatory Actions, Prompt Corrective Action and 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.
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.
12
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%;
Leverage ratio of 5%. and 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
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
13
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.
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 (FDICIA). 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 this 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
14
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.
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 1980's and early 1990's. The new law requires
saving and loan associations to 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 domestic deposits.
Interstate Banking and Branching
On September 29, 1994, the President signed into law the Riegel Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Under the
Interstate Act, beginning one year after the date of enactment, a bank holding
company that is adequately capitalized and managed may obtain approval under
Bank Holding Company Act to acquire an existing bank located in another state
without regard to state law. A bank holding company would not be permitted to
make such an acquisition if, upon consummation, it would control (a) more than
10%4 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
15
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
In 1995, California adopted "opt in" legislation under the Interstate Act that
permits out-of-state banks to acquire California banks that satisfy a five-year
minimum age requirement (subject to exceptions for supervisory transactions) by
means of merger or purchases of assets, although entry through acquisition of
individual branches of California institutions and de novo branching into
California are not permitted. The Interstate Act and the California branching
statute will likely increase competition from out-of-state banks in the markets
in which 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 each 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 Leading 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.
Financial Modernization Legislation
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act,
or GLB Act, which significantly changed the regulatory structure and oversight
of the financial services industry. The GLB Act revises the Bank Holding Company
Act of 1956 and repeals the affiliation provisions of the Glass-Steagall Act of
1933, permitting a qualifying holding company, called a financial holding
company, to engage in a full range of financial activities, including banking,
insurance, and securities activities, as well as merchant banking and additional
activities that are "financial in nature" or "complementary" to such financial
activities. The GLB Act thus provides expanded financial affiliation
opportunities for existing bank holding companies and permits various non-bank
financial services providers to acquire banks by allowing bank holding companies
to engage in activities such as securities underwriting, and underwriting and
brokering of insurance products. The GLB Act also expands passive investments by
financial holding companies in any type of company, financial or nonfinancial,
through merchant banking
16
and insurance company investments: In order for a bank holding company to
qualify as a financial holding company, its subsidiary depository institutions
must be "well-capitalized" and "well-managed" and have at least a "satisfactory"
Community Reinvestment Act rating.
The GLB Act also reforms the regulatory framework of the financial services
industry. Under the GLB Act, financial holding companies are subject to primary
supervision by the FRB while current federal and state regulators of financial
holding company regulated subsidiaries such as insurers, broker-dealers,
investment companies and banks generally retain their jurisdiction and
authority. In order to implement its underlying purposes, the GLB Act preempts
state laws restricting the establishment of financial affiliations authorized or
permitted under the GLB Act, subject to specified exceptions for state insurance
regulators. With regard to securities laws, the GLB Act removes the current
blanket exemption for banks from the broker-dealer registration requirements
under the Securities Exchange Act of 1934, amends the Investment Company Act of
1940 with respect to bank common trust fund and mutual fund activities, and
amends the Investment Advisers Act of 1940 to require registration of banks that
act as investment advisers for mutual funds.
The GLB Act also includes provisions concerning subsidiaries of banks,
permitting a bank to engage in most financial activities through a financial
subsidiary, provided that a bank and its depository institution affiliates
are "well capitalized" and "well managed" and meet certain other
qualification requirements relating to total assets, subordinated debt,
capital, risk management, and affiliate transactions. With respect to
subsidiaries of state banks, new activities as "principal" would be limited
to those permissible for a bank financial subsidiary. The GLB Act requires a
state bank with a financial subsidiary permitted under the GLB Act as well as
its depository institution affiliates to be "well capitalized," and also
subjects a bank to the same capital, risk management and affiliate
transaction rules as applicable to banks. The provisions of the GLB Act
relating to financial holding companies became effective 120 days after its
enactment excluding the federal preemption provisions, which became effective
on the date of enactment.
The GLB Act will likely increase competition in the markets in which the
Company operates, although it is difficult to assess the impact that such
increased competition may have on the Company's operations.
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.
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.
17
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, 2000, the Company had approximately $286.4 million in assets
and $254.3 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.
Competition
The banking business in California generally, and is 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 is the acquisition of
18
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 branches offer highly
personalized banking services.
Employees
At December 31, 2000, the Bank had a total of 211 full-time equivalent employees
and 9 part-time employees. The Bank believes that its employee relations are
satisfactory.
19
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 and two 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 2000.
20
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 2,542,568 shares outstanding, held by approximately 800
shareholders of record at year-end 2000. 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 the Company paid quarterly cash dividends
of $0.075 per share. No dividends were paid during 2000 as 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.
1999
--------------
First Quarter 16.750 17.563
Second Quarter 13.375 13.625
Third Quarter 13.250 13.688
Fourth Quarter 11.750 12.000
2000
--------------
First Quarter 10.063 10.500
Second Quarter 10.500 10.938
Third Quarter 12.188 12.375
Fourth Quarter 14.188 14.500
21
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,
2000 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,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------ ------------
Summary of Operations:
Interest Income $ 27,953 $ 27,528 $ 24,016 $ 18,455 $ 12,642
Interest Expense 10,267 11,586 8,406 6,057 3,840
------------- ------------- ------------- ------------ ------------
Net Interest Income 17,686 15,942 15,610 12,398 8,802
Provision for Loan Losses 600 694 755 778 364
------------- ------------- ------------- ------------ ------------
Net Interest Income After Provision
for Loan Losses 17,086 15,248 14,855 11,620 8,438
Noninterest Income 16,728 24,049 23,408 15,920 8,752
Noninterest Expense 32,791 33,891 30,870 22,717 14,045
------------- ------------- ------------- ------------ ------------
Income Before Income Taxes 1,023 5,406 7,393 4,823 3,145
Income Taxes 445 2,330 3,277 1,968 1,229
------------- ------------- ------------- ------------ ------------
Net Income $ 578 $ 3,076 $ 4,116 $ 2,855 $ 1,916
============= ============= ============= ============ ============
Dividends on Common Stock $ -- $ 760 $ 467 $ 502 $ 168
Per Share Data:
Net Income - Basic $ 0.23 $ 1.21 $ 1.63 $ 1.19 $ 0.98
Net Income - Diluted $ 0.23 $ 1.21 $ 1.55 $ 1.12 $ 0.96
Book Value $ 11.48 $ 11.51 $ 10.62 $ 9.01 $ 8.10
Balance Sheet Summary:
Total Assets $ 286,398 $ 353,736 $ 318,013 $ 238,086 $ 183,755
Total Deposits 254,325 322,973 287,206 207,935 162,058
Loans Held for Sale 22,439 69,756 74,598 47,150 24,363
Total Loans 165,495 196,675 165,199 139,002 106,019
Allowance for Loan Losses (ALLL) 2,295 2,610 2,300 1,923 1,616
Total Shareholders' Equity 29,185 29,200 26,882 22,550 19,434
Selected Ratios:
Return on Average Assets 0.18% 0.88% 1.49% 1.31% 1.23%
Return on Average Equity 1.97% 11.05% 17.03% 13.80% 12.81%
Net Interest Margin 6.43% 5.38% 6.40% 6.46% 6.47%
Dividend Payout Ratio - Common Stock 0.00% 24.78% 11.35% 17.59% 8.82%
Non-performing Loans to Total Loans 0.78% 0.84% 1.23% 0.92% 1.15%
Non-performing Assets to Total Assets 0.75% 0.55% 0.94% 0.93% 1.57%
ALLL to Non-performing Loans 177.63% 157.04% 113.30% 150.35% 132.68%
Average Shareholder's Equity
to Average Assets 9.06% 8.00% 8.75% 9.49% 9.63%
22
On June 14, 1996, the Bank acquired Bank of Westminster ("BOW"), pursuant to
the terms of an Agreement and Plan of Reorganization dated January 12, 1996.
The 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
the Company as its bank holding company, and the Company'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 shareholders' 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.
23
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, 2000,
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 2000 was $.6 million, a decrease of $2.5 million or 81.2%,
compared to $3.1 million in 1999. Diluted earnings per share in 2000 were $.23
compared to $1.21 in 1999. The decrease in earnings in 2000 was due to
reorganization expenses, revised asset valuations, and one time fraud losses
from the mortgage divisions.
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 securitization assets by $800,000 to
record a permanent decline in fair value as a result of a new valuation model
being implemented. During the third quarter of 2000 the Company closed the SBA
department and sold, at carrying value, 59% or $3.0 million in residual assets
from the 1999-1 securitization. In January 2001 the company sold the remaining
assets of the 1999-1 securitization and incurred a $1.1 million loss on sale,
which resulted in the 1999-1 securitization assets being written down by $1.1
million to reflect a permanent decline in fair value as of December 31, 2000.
During the first quarter of 2001 the Company was notified that certain loans
purchased by third party investors and originated by outside mortgage brokers
were fraudulent and the Company is required to repurchase these loans. The
Company has estimated its net loss to be $1.2 million that was recorded in our
2000 financial statements.
Net income in 1999 was $3.1 million, a decrease of $1.0 million or 24.4%,
compared to $4.1 million in 1998. Diluted earnings per share in 1999 were $1.21
compared to $1.55 in 1998. The decrease in earnings in 1999 was due primarily to
decreased profitability of the SBA and Mortgage Loan Divisions.
BALANCE SHEET SUMMARY
Total assets at December 31, 2000 were $286.4 million, a $67.3 million or 19.0%
decrease from $353.7 million at December 31, 1999. Average assets for 2000 were
$324.3 million compared to $347.8 million for 1999. Total deposits decreased
$68.7 million or 21.3% to $254.3 million at December 31, 2000. Gross loans
decreased $78.5 million or 29.5% , to $187.9 million at December 31, 2000.
Shareholder's equity remained the same at $29.2 million at December 31, 2000.
Total assets at December 31, 1999 were $353.7 million, a $35.79 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. The increases in
shareholders' equity in 1999 and 1998 allowed us to expand our asset base.
24
The following table sets forth several key operating ratios for 2000, 1999 and
1998:
For the Year Ended
December 31,
----------------------------
2000 1999 1998
------- ------- -------
Return on Average Assets 0.18% 0.88% 1.49%
Return on Average Equity 1.97% 11.05% 17.03%
Average Shareholder's Equity to Average Total Assets 9.06% 8.00% 8.75%
25
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,
----------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ------------------------------ -----------------------------
Average Average Average
Interest Yield or Interest Yield or Interest Yield or
Average Earned Rate Average Earned Rate Average Earned Rate
Balance or Paid Paid Balance or Paid Paid Balance or Paid Paid
------- ------- ----- ------- ------- ------ -------- -------- -----
Assets
Interest-Earning Assets:
Investment Securities $24,001 $1,617 6.74% $21,635 $1,450 6.70% $18,564 $ 1,119 6.03%
Federal Funds Sold 18,889 1,156 6.12% 20,554 976 4.75% 13,322 669 5.02%
Other Earning Assets 252 8 3.17% 168 9 5.36% 2,935 171 5.83%
Loans 231,704 25,172 10.86% 253,771 25,093 9.89% 209,080 22,057 10.55%
------- ------ ------- ------ ------- ------
Total Interest-Earning
Assets 274,846 27,953 10.17% 296,128 27,528 9.30% 243,901 24,016 9.85%
Cash and Due From
Banks 20,546 24,663 15,756
Premises and Equipment 5,873 6,561 5,299
Other Real Estate Owned 670 714 1,067
Accrued Interest and
Other Assets 24,943 22,294 12,641
Allowance for Loan Losses ( 2,601) ( 2,514) ( 2,281)
-------- -------- --------
Total Assets $324,277 $347,846 $276,383
======== ======== ========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Money Market and NOW $71,903 2,335 3.25% $74,797 2,764 3.70% $53,640 1,613 3.01%
Savings 60,056 2,292 3.82% 87,566 4,076 4.65% 39,308 1,622 4.13%
Time Deposits under
$100,000 51,258 3,095 6.04% 42,386 2,165 5.11% 51,997 2,823 5.43%
Time Deposits of
$100,000 or More 40,957 2,483 6.06% 39,963 2,505 6.27% 38,120 2,258 5.92%
Other 1,069 62 5.80% 1,646 76 4.62% 1,623 90 5.55%
------- ------ ------- ------ ------- ------
Total Interest-Bearing
Liabilities 225,243 10,267 4.56% 246,358 11,586 4.70% 184,688 8,406 4.55%
------ ------ -----
Noninterest-Bearing
Liabilities:
Demand Deposits 67,354 68,632 62,771
Other Liabilities 2,308 5,015 4,753
Shareholders' Equity 29,372 27,841 24,171
-------- -------- --------
Total Liabilities and
Shareholders' Equity $324,277 $347,846 $276,383
======== ======== ========
Net Interest Income $17,686 $15,942 $ 15,610
======= ======= ========
Net Yield on Interest-Earning
Assets 6.43% 5.38% 6.40%
26
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, 2000 Year Ended December 31, 1999
versus versus
Year Ended December 31, 1999 Year Ended December 31, 1998
--------------------------------------------- --------------------------------------------
Increase (Decrease) Due Increase (Decrease) Due
To Change in To Change in
--------------------------------------------- --------------------------------------------
Volume Rate Total Volume Rate Total
------------- -------------- ------------- ------------ ------------- --------------
Interest-Earning Assets:
Investment Securities $ 159 $ 8 $ 167 $ 198 $ 133 $ 331
Federal Funds Sold ( 84) 264 180 345 ( 38) 307
Other Earning Assets 4 ( 5) ( 1) ( 79) ( 83) ( 162)
Loans ( 2,283) 2,362 79 4,486 (1,450) 3,036
------------- -------------- ------------- ------------ ------------- --------------
Total Interest Income ( 2,204) 2,629 425 4,950 (1,438) 3,512
Interest-Bearing Liabilities:
Money Market and NOW ( 104) ( 325) ( 429) 728 423 1,151
Savings ( 1,134) ( 650) ( 1,784) 2,222 232 2,454
Time Deposits under
$100,000 497 433 930 ( 499) ( 159) ( 658)
Time Deposits $100,000
or More 61 ( 83) ( 22) 112 135 247
Other ( 31) 17 ( 14) 1 ( 15) ( 14)
------------- -------------- ------------- ------------ ------------- --------------
Total Interest Expense ( 711) ( 608) ( 1,319) 2,564 616 3,180
------------- -------------- ------------- ------------ ------------- --------------
Net Interest Income $( 1,493) $ 3,237 $1,744 $ 2,386 $(2,054) $ 332
============= ============== ============= ============ ============= ==============
27
2000 COMPARED TO 1999
Net interest income for 2000 was $17.7 million, an increase of 10.9% compared to
the $15.9 million reported in 1999. This increase was primarily due to the
increase in interest rates. Prime rate increased 100 basis point in 2000.
Interest income in 2000 was $27.9 million, a $.4 million or a 1.5% increase over
the $27.5 million recorded in 1999. The increase in interest income was the
result primarily of rate increases in prime rate offset by a decrease in average
loan totals. Average loans outstanding decreased 8.7% to $231.7 million in 2000
compared to $253.8 million in 1999. The yield on interest-earning assets
increased 87 basis points to 10.17% from 9.30% in 1999. The yield on the loan
portfolio, the Banks largest interest-earning asset, increased 97 basis points,
from 9.89% to 10.86%.
Interest expense decreased in 2000 as we decreased deposits and other borrowings
due to the decrease in loan totals discussed above. Interest expense was $10.2
million in 2000, compared to $11.6 million in 1999. The decrease in interest
expense was primarily the result of a decrease in interest-bearing liabilities.
Average interest-bearing liabilities decreased 8.6% to $225.2 million in 2000
compared to $246.4 million in 1999. A decrease in the cost of interest-bearing
liabilities accounted for $608 or 46.1% of the total decrease in interest
expense. Rates on interest bearing deposits decreased 14 basis points to 4.56%
from 4.70% in 1999.
Interest rates played a significant role in the changes in net interest income
in 2000. Our yield on interest-earning assets increased 87 basis points, while
the yield on interest-bearing liabilities decreased 14 basis points. The net
yield on interest-earning assets in 2000 increased 105 basis points to 6.43%
compared to 5.38% in 1999.
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.
28
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 2000, noninterest income was $16.7 million, a decrease of $7.3 million or
30.4% compared to the 1999 amount of $24.0 million. The majority of the decrease
is attributable to our closing the Diamond Bar Mortgage Division and SBA
Division and the $800,000 write-down and $1.1 million loss from sale of the
assets retained in the 1999-1 securitization. Loans sold declined from $695
million in 1999 to $415 million in 2000.
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.
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:
2000 1999 1998
------- ------- -------
Salaries and Employee Benefits 5.32% 5.72% 7.11%
Occupancy Expenses .63 .65 .60
Furniture and Equipment .61 .80 .74
Professional Fees and Outside Services .71 .56 .65
OREO Expenses .06 .06 .10
Commission and Loan Expenses .82 .47 .38
Office Expenses .49 .58 .55
Other 1.47 .90 1.04
------- ------- -------
10.11% 9.74% 11.17%
======= ======= =======
Noninterest expense was $32.8 million in 2000, a decrease of $1.1 million or
3.2% over the $33.9 million reported in 1999. The majority of this decrease is
attributable to our closing of the Diamond Bar Mortgage Division and SBA
Division. Professional fees and outside services have increased due to increased
regulatory oversight and commission and loan expenses increased primarily due to
the $1.6 million loss on sale of our indirect auto loan portfolio during the
first quarter of 2000.
Noninterest expense was $33.9 million in 1999, an increase of $3.0 million or
9.7% over the $30.9 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 assets.
INCOME TAXES
Income tax expense was $.4, $2.3, and $3.3 million for the years ended December
31, 2000, December 31, 1999, and December 31, 1998, respectively. These expenses
resulted in an effective tax rate of 43.5% in 2000, 43.1% in 1999, and 44.3% in
1998. The increase in effective rate in 2000 and 1998 was due primarily to
non-deductible merger expenses.
29
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, 2000 (dollar amounts in thousands):
December 31,
------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------- ------------------------- -------------------------
Weighted
Book Market Average Book Market Book Market
Value Value Yield Value Value Value Value
----------- ------------ ----------- ----------- ------------ ------------ -----------
Available-for-Sale Securities
U.S. Government and Agency Securities:
Within One Year $ -- $ -- $ -- $ -- $ -- $ --
One to Five Years -- -- -- -- -- --
After Ten Years -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total U.S. Government and
Agency Securities -- -- -- -- -- --
Municipal Securities -
Five to Ten Years -- -- -- -- -- --
Mutual Funds -- -- -- -- 3,000 3,000
Mortgage Backed Securities 5,768 5,768 9.90% 6,597 6,868 2,305 2,570
-------- -------- -------- -------- -------- --------
Total Available-for-Sale Securities $ 5,768 $ 5,768 9.90% $ 6,597 $ 6,868 $ 5,305 $ 5,570
======== ======== ======== ======== ======== ========
Held-to-Maturity Securities
U.S. Treasuries:
Within One Year $ -- $ -- $ 500 $ 501 $ 2,001 $ 2,015
One to Five Years -- -- -- -- 498 511
-------- -------- -------- -------- -------- --------
Total U.S. Treasuries Securities -- -- 500 501 2,499 2,526
U.S. Government and Agency Securities:
Within One Year 998 999 6.24% 3,013 2,987 994 1,001
One to Five Years 10,000 9,962 5.60% 10,995 10,755 7,035 7,029
Five to Ten Years -- -- -- -- -- --
After Ten Years -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total U.S. Government
and Agency Securities 10,998 10,961 5.66% 14,008 13,742 8,029 8,030
Municipal Securities:
One to Five Years -- -- -- -- -- --
Five to Ten Years -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total Municipal Securities -- -- -- -- -- --
Mortgage Backed Securities 165 165 6.83% 204 202 316 318
-------- -------- -------- -------- -------- --------
Total Held-to-Maturity Securities $ 11,163 $ 11,126 5.67% $ 14,712 $ 14,445 $ 10,844 $ 10,874
======== ======== ======== ======== ======== ========
30
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, 2000
and 1999, the carrying values of securities pledged to secure public deposits
and other purposes were $11.2 million and $14.7 million, respectively.
LOANS HELD FOR SALE
We originate mortgage loans and SBA loans for sale to institutional investors.
Loans held for sale decreased from $74.6 million at December 31, 1998, to $69.8
million at December 31, 1999 and to $22.4 million at December 31, 2000.
Historically, we sold these loans within sixty (60) days of origination, but
during 1998 the Bank began to warehouse and accumulate pools of loans to take
advantage of short-term fluctuations in the market.
At December 31, 2000 and 1999, we were servicing approximately $242.8 million
and $220.1 million, respectively, in SBA and other loans previously sold. In
connection with a portion of these loans, the Company has capitalized
approximately $2.9 million and $2.8 million in servicing assets at December 31,
2000 and 1999, 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 $8.5 million in 2000 and $12.9
million at December 31, 1999.
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.
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,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
Loans
Commercial $ 28,893 $ 52,695 $ 56,244 $ 36,359 $24,512
Real Estate - Construction 11,995 5,524 4,411 2,867 4,149
Real Estate - Other 120,535 98,010 82,235 84,792 71,799
Consumer 4,072 40,446 22,309 14,984 5,559
--------- --------- --------- --------- --------
Total Loans 165,495 196,675 165,199 139,002 106,019
Net Deferred Loan Costs (Fees) 74 2,209 1,255 471 173
Allowance for Loan Losses ( 2,295) ( 2,610) ( 2,300) ( 1,923) ( 1,616)
--------- --------- --------- --------- --------
Net Loans $ 163,274 $ 196,274 $ 164,154 $ 137,550 $104,576
========= ========= ========= ========= ========
Commitments
Standby Letters of Credit $ 1,236 $ 839 $ 360 $ 371 $ 203
Undisbursed Loans and
Commitments to Grant Loans 22,612 28,060 21,627 18,521 14,843
--------- --------- --------- --------- --------
Total Commitments $ 23,848 $ 28,899 $ 21,987 $ 18,892 $15,046
========= ========= ========= ========= ========
31
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.
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, 2000:
Over
3 Months Due after
3 Months through one year to Due after
or Less 12 months five years five years Total
----------- ---------- ----------- ----------- -----------
$ 133,261 $ 8,352 $ 19,216 $ 25,887 $ 186,716
=========== ========== =========== ===========
Loans on Non-Accrual 1,292
-----------
Total Loans, including Loans Held for Sale $ 188,008
===========
32
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,
----------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Loans 90 Days Past Due and Still
Accruing $ -- $ 120 $ 223 $ -- $ 122
Nonaccrual Loans 1,292 1,542 1,807 1,279 1,096
------- ------- ------- ------- -------
Total Nonperforming Loans 1,292 1,662 2,030 1,279 1,218
Other Real Estate Owned 858 277 971 924 1,661
------- ------- ------- ------- -------
Total Nonperforming Assets $ 2,150 $ 1,939 $ 3,001 $ 2,203 $ 2,879
======= ======= ======= ======= =======
Nonperforming Loans as a
Percentage of Total Loans 0.78% 0.84% 1.22% 1.88% 1.79%
Allowance for Loan Loss as a
Percentage of Nonperforming Loans 177.63% 157.04% 113.30% 81.86% 78.82%
Nonperforming Assets as a
Percentage of Total Assets 0.75% 0.55% 0.94% 1.75% 2.45%
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.
33
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 $600,000 in 2000 compared to $694,000 in 1999 and $775,000 in
1998.
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,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Outstanding Loans:
Average for the Year $231,704 $253,771 $209,080 $155,588 $102,145
End of the Year $165,495 $196,675 $165,199 $139,002 $106,019
Allowance For Loan Losses:
Balance at Beginning of Year $ 2,610 $ 2,300 $ 1,923 $ 1,616 $ 1,047
Actual Charge-Offs:
Commercial 85 102 175 486 318
Consumer 117 118 252 29 21
Real Estate 829 298 101 20 192
-------- -------- -------- -------- --------
Total Charge-Offs 1,031 518 528 535 531
Less Recoveries:
Commercial 21 123 140 33 19
Consumer 18 10 7 7 11
Real Estate 77 1 3 24 6
-------- -------- -------- -------- --------
Total Recoveries 116 134 150 64 36
-------- -------- -------- -------- --------
Net Loans Charged-Off 915 384 378 471 495
Provision for Loan Losses 600 694 755 778 364
Allowance on Loans Acquired
from BOW -- -- -- 700
-------- -------- -------- -------- --------
Balance at End of Year $ 2,295 $ 2,610 $ 2,300 $ 1,923 $ 1,616
======== ======== ======== ======== ========
Ratios:
Net Loans Charged-Off to Average
Loans 0.39% 0.15% 0.18% 0.30% 0.48%
Allowance for Loan Losses to Total
Loans 1.39% 1.33% 1.39% 1.38% 1.87%
Net Loans Charged-Off to Beginning
Allowance for Loan Losses 35.06% 16.70% 19.66% 29.15% 47.28%
Net Loans Charged-Off to Provision
for Loan Losses 152.50% 55.33% 50.07% 60.54% 135.99%
Allowance for Loan Losses to
Nonperforming Loans 177.63% 157.04% 113.30% 150.35% 132.68%
34
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, 2000 December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- ----------------- ----------------- -----------------
Loan Loan Loan Loan Loan
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial $ 829 17.5% $ 960 26.8% $ 854 34.1% $ 657 26.2% $ 806 22.5%
Construction 241 7.2% 134 2.8% 100 2.7% 33 2.1% 65 6.9%
Real Estate 774 72.8% 1,034 49.8% 1,049 49.8% 873 61.0% 569 64.8%
Consumer 109 2.5% 267 20.6% 55 13.5% 139 10.8% 50 5.8%
Unallocated 342 n/a 215 n/a 242 n/a 221 n/a 126 n/a
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,295 100.0% $2,610 100.0% $2,300 100.0% $1,923 100.0% $1,616 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
FUNDING
Deposits are our primary source of funds. At December 31, 2000, we had a deposit
mix of 49.8% in time and savings deposits, 23.8% in money market and NOW
deposits, and 26.4% in noninterest-bearing demand deposits. Our net interest
income is enhanced by our percentage of noninterest-bearing deposits.
The following table summarizes the distribution of average deposits and the
average rates paid for the years indicated (dollar amounts in thousands):
December 31,
--------------------------------------------------------------------
2000 1999 1998
------------------- -------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
Money Market and NOW Accounts $ 71,903 3.25% $ 74,797 3.70% $ 53,640 3.01%
Savings Deposits 60,056 3.82% 87,566 4.65% 39,308 4.13%
TCD Less than $100,000 51,258 6.04% 42,386 5.11% 51,997 5.43%
TCD $100,000 or More 40,957 6.06% 39,963 6.27% 38,120 5.92%
-------- -------- --------
Total Interest-Bearing Deposits 224,174 4.55% 244,712 4.70% 183,065 4.54%
Noninterest-Bearing Demand Deposits 67,354 n/a 68,632 n/a 62,771 n/a
-------- -------- --------
Total Average Deposits $291,528 3.50% $313,344 3.67% $245,836 3.38%
======== ======== ========
35
The scheduled maturity distribution of the Bank's time deposits of $100,000 or
greater, as of December 31, 2000, were as follows (dollar amounts in thousands):
Three Months or Less $ 14,197
Over Three Months to One Year 22,645
Over One Year to Three Years 1,932
--------
$ 38,774
========
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.
The table below sets forth the interest rate sensitivity of our interest-earning
assets and interest-bearing liabilities as of December 31, 2000, using the
interest rate sensitivity gap ratio. For purposes of the following table, an
asset or liability is considered rate-sensitive within a specified period when
it can be repriced or matures within its contractual terms, except for loans
held for sale which we classifies as highly liquid based on historical sale
patterns (dollar amounts in thousands):
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 $ 111 $ -- $ -- $ -- $ 111
Federal Funds Sold 26,100 -- -- -- 26,100
Investment Securities and FHLB Stock 2,293 998 10,000 4,269 17,560
Gross Loans 133,261 8,352 19,216 25,887 186,716
-------- -------- -------- -------- --------
$161,765 $ 9,350 $ 29,216 $ 30,156 $230,487
======== ======== ======== ======== ========
Interest-Bearing Liabilities:
Money Market and NOW Deposits $ 60,523 $ -- $ -- $ -- $ 60,523
Savings 44,795 -- 44,795
Time Deposits 32,408 43,562 5,885 81,855
-------- -------- -------- -------- --------
$137,726 $ 43,562 $ 5,885 $ -- $187,173
======== ======== ======== ======== ========
Interest Rate Sensitivity Gap $ 24,039 $(34,212) $ 23,331 $ 30,156 $ 43,314
Cumulative Interest Rate Sensitivity Gap $ 24,039 $(10,173) $ 13,158 $ 43,314 $ 86,628
Ratios Based on Total Assets:
Interest Rate Sensitivity Gap 6.80% (9.67%) 6.60% 8.53% 12.24%
Cumulative Interest Rate Sensitivity Gap 6.80% (2.88%) 3.72% 12.24%
36
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, 2000 and 1999 was $29.2 million. Average
shareholders' equity for 2000 was $29.4 million compared to $27.8 million in
1999. Shareholders' equity activity is primarily from net income of $578 in 2000
less a decline in other comprehensive income totaling $620.
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.
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, 2000, 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% 9.30%
Total Capital 8.00% 10.08%
Leverage Ratio 4.00% 9.42%
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.
37
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"(as amended
in 2000 by SFAS No. 138). 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. SFAS No. 133 is not
expected to have a material impact on the Company's financial statements.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using two
digits rather than 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 year 2000, causing systems to fail to function or generate
erroneous data.
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.
38
SUMMARY OF QUARTERLY RESULTS
The following table summarizes quarterly operating results for 2000 and 1999.
2000 Earnings by Quarter
---------------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
Interest Income $ 7,547 $ 7,102 $ 6,885 $ 6,419 $ 27,953
Interest Expense 2,990 2,624 2,445 2,208 10,267
-------- -------- -------- -------- --------
Net Interest Income 4,557 4,478 4,440 4,211 17,686
Provision for Loan Losses 50 150 200 200 600
-------- -------- -------- -------- --------
Net Interest Income After Provision
for Loan Losses 4,507 4,328 4,240 4,011 17,086
Noninterest Income 5,122 4,289 4,906 2,411 16,728
Noninterest Expense 10,018 7,841 7,383 7,549 32,791
-------- -------- -------- -------- --------
Income Before Income Taxes (389) 776 1,763 (1,127) 1,023
Income Taxes (129) 349 749 (524) 445
-------- -------- -------- -------- --------
Net Income $ (260) $ 427 $ 1,014 $ (603) $ 578
======== ======== ======== ======== ========
Net Income Per Share- Basic $ (0.10) $ 0.17 $ 0.40 $ (0.24) $ 0.23
======== ======== ======== ======== ========
Net Income Per Share- Diluted $ (0.10) $ 0.17 $ 0.40 $ (0.24) $ 0.23
======== ======== ======== ======== ========
1999 Earnings by Quarter
---------------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
Interest Income $ 6,492 $ 6,446 $ 7,192 $ 7,398 $ 27,528
Interest Expense 2,798 2,568 3,053 3,167 11,586
-------- -------- -------- -------- --------
Net Interest Income 3,694 3,878 4,139 4,231 15,942
Provision for Loan Losses 180 51 130 333 694
-------- -------- -------- -------- --------
Net Interest Income After Provision
for Loan Losses 3,514 3,827 4,009 3,898 15,248
Noninterest Income 5,968 5,213 6,867 6,001 24,049
Noninterest Expense 8,683 7,788 9,058 8,362 33,891
-------- -------- -------- -------- --------
Income Before Income Taxes 799 1,252 1,818 1,537 5,406
Income Taxes 340 570 775 645 2,330
-------- -------- -------- -------- --------
Net Income $ 459 $ 682 $ 1,043 $ 892 $ 3,076
======== ======== ======== ======== ========
Net Income Per Share- Basic $ 0.18 $ 0.27 $ 0.41 $ 0.35 $ 1.21
======== ======== ======== ======== ========
Net Income Per Share- Diluted $ 0.18 $ 0.27 $ 0.41 $ 0.35 $ 1.21
======== ======== ======== ======== ========
39
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.
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 for liabilities than for the assets, the market risk is
not as great.
Net interest margin was 6.43% in 2000 compared to 5.38% in 1999 and 6.40% in
1998.
The following is a summary of the carrying amounts and estimated fair values of
selected Company financial assets and liabilities at December 31, 2000 (amounts
in thousands):
Carrying Estimated
Amount Fair Value
-------- ----------
Financial Assets:
Securities $ 16,931 $ 16,894
Loans, Net of Allowance for Credit Losses $163,274 $162,780
Financial Liabilities:
Deposits $254,325 $254,384
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 $0.6 million. The amount is not deemed to be significant compared to
the outstanding balances taken as a whole.
40
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.
The following table shows the estimated impact to net interest income for an
instantaneous shift in various interest rates as of December 31, 2000 (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 $ 2,179
+200 basis points 1,525
+100 basis points 738
-100 basis points (841)
-200 basis points (1,748)
-300 basis points (2,329)
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.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
Independent Auditors' Report 43
Consolidated Balance Sheets at December 31, 2000 and 1999 44 and 45
Consolidated Statements of Income for each of the Years
in the Three-Year Period Ended December 31, 2000 46
Consolidated Statements of Shareholders' Equity for each of the
Years in the Three-Year Period Ended December 31, 2000 47
Consolidated Statements of Cash Flows for each of the Years
in the Three-Year Period Ended December 31, 2000 48
Notes to Financial Statements 49 through 78
All supplemental schedules are omitted as inapplicable or because the required
information is included in the financial statements or notes hereto.
42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of BYL Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheets of BYL Bancorp and
Subsidiary as of December 31, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
Laguna Hills, California
March 8, 2001
43
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(Dollar Amounts in Thousands)
2000 1999
--------- ---------
ASSETS
Cash and Due from Banks $ 30,370 $ 34,119
Federal Funds Sold 26,100 --
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 56,470 34,119
Interest-Bearing Deposits 111 100
Investment Securities
Available for Sale 5,768 6,868
Held to Maturity 11,163 14,712
--------- ---------
TOTAL INVESTMENT SECURITIES 16,931 21,580
Federal Home Loan Bank Stock, at Cost 629 1,113
Loans Held for Sale 22,439 69,756
Loans
Commercial 28,893 52,695
Real Estate - Construction 11,995 5,524
Real Estate - Other 120,535 98,010
Consumer 4,072 40,446
--------- ---------
TOTAL LOANS 165,495 196,675
Net Deferred Loan Costs 74 2,209
Allowance for Loan Losses (2,295) (2,610)
--------- ---------
NET LOANS 163,274 196,274
Premises and Equipment 5,770 6,447
Other Real Estate Owned 858 277
Cash Surrender Value of Life Insurance 2,290 2,196
Deferred Tax Assets 3,180 1,804
Goodwill 1,204 1,324
Interest-Only Strips Receivable and Servicing Assets 11,340 15,659
Accrued Interest and Other Assets 1,902 3,087
--------- ---------
$ 286,398 $ 353,736
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
44
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(Dollar Amounts in Thousands)
2000 1999
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $ 67,152 $ 66,619
Money Market and NOW 60,523 73,193
Savings 44,795 79,983
Time Deposits Under $100,000 43,081 56,750
Time Deposits $100,000 and Over 38,774 46,428
--------- ---------
TOTAL DEPOSITS 254,325 322,973
Accrued Interest and Other Liabilities 2,888 1,563
--------- ---------
TOTAL LIABILITIES 257,213 324,536
Commitments and Contingencies - Note E and K
Shareholders' Equity
Preferred Shares - Authorized 25,000,000
Shares; None Outstanding
Common Shares - Authorized 50,000,000
Shares; Issued and Outstanding 2,542,568
in 2000 and 2,537,102 Shares in 1999 12,815 12,788
Retained Earnings 16,496 15,918
Accumulated Other Comprehensive Income (126) 494
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 29,185 29,200
--------- ---------
$ 286,398 $ 353,736
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
45
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands, Except Per Share Data)
2000 1999 1998
------- ------- -------
INTEREST INCOME
Interest and Fees on Loans $25,172 $25,093 $22,057
Interest on Investment Securities 1,512 1,310 1,119
Other Interest Income 1,269 1,125 840
------- ------- -------
TOTAL INTEREST INCOME 27,953 27,528 24,016
INTEREST EXPENSE
Interest on Money Market and NOW 2,335 2,764 1,613
Interest on Savings Deposits 2,292 4,076 1,622
Interest on Time Deposits 5,578 4,670 5,081
Interest on Other Borrowings 62 76 90
------- ------- -------
TOTAL INTEREST EXPENSE 10,267 11,586 8,406
------- ------- -------
NET INTEREST INCOME 17,686 15,942 15,610
Provision for Credit Losses 600 694 755
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,086 15,248 14,855
NONINTEREST INCOME
Net Servicing and Interest-Only Strip Income 1,985 1,817 662
Net Gain on Sale and Securitization of Loans 12,116 19,563 19,724
Service Charges, Fees, and Other Income 2,627 2,669 3,022
------- ------- -------
16,728 24,049 23,408
------- ------- -------
33,814 39,297 38,263
NONINTEREST EXPENSE
Salaries and Employee Benefits 17,262 19,906 19,662
Occupancy Expenses 2,033 2,287 1,645
Furniture and Equipment 1,966 2,798 2,032
Other Expenses 11,530 8,900 7,531
------- ------- -------
32,791 33,891 30,870
------- ------- -------
INCOME BEFORE INCOME TAXES 1,023 5,406 7,393
Income Taxes 445 2,330 3,277
------- ------- -------
NET INCOME $ 578 $ 3,076 $ 4,116
======= ======= =======
Per Share Data
Net Income - Basic $ 0.23 $ 1.21 $ 1.63
Net Income - Diluted $ 0.23 $ 1.21 $ 1.55
The accompanying notes are an integral part of these consolidated financial
statements.
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 1999, and 1998
(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, 1998 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
==========
Dividends on Common (760)
Exercise of Stock Options 5,800 28
--------- ------- --------- -------
Balance at December 31, 1999 2,537,102 12,788 15,918 494
Comprehensive Income:
Net Income $ 578 578
Other Comprehensive Income - Unrealized
Loss on Available-for-Sale Securities,
Net of Taxes of $308 (441) (441)
Add Reclassification Adjustment for Loss
Included in Net Income, net of Taxes of $196 282 282
Unrealized Loss on Interest-Only
Strips Net of Taxes of $902 (1,277) (1,277)
Add Reclassification Adjustment for Loss
Included in Net Income, net of Taxes of $576 816 816
---------
Total Comprehensive Loss $ (42)
=========
Exercise of Stock Options 5,466 27
--------- ------- --------- -------
Balance at December 31, 2000 2,542,568 $12,815 $ 16,496 $ (126)
========= ======= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
47
BYL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
OPERATING ACTIVITIES 2000 1999 1998
--------- --------- ---------
Net Income $ 578 $ 3,076 $ 4,116
Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 4,238 3,622 1,920
Deferred Income Taxes (939) 57 (496)
Loans Originated for Sale (367,581) (690,108) (336,685)
Proceeds from Loan Sales 425,430 701,551 319,630
Gain on Sale of Loans (12,116) (19,563) (19,724)
Provision for Loan Losses 600 694 755
Write Down of Available-for-Sale Securities 478 -- --
Write Down of Interest-Only Strips Receivable 1,392 -- --
Other Real Estate Owned Losses 75 72 220
Other Items - Net 1,180 1,995 (5,784)
--------- --------- ---------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 53,335 1,396 (36,048)
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits (11) (100) 3,419
Purchases of Available-for-Sale Securities -- (236) (1,894)
Purchases of Held-to-Maturity Securities (20,006) (10,994) (10,551)
Proceeds from Maturities and Sale of Available-for-Sale Securities 899 3,452 18,683
Proceeds from Maturities of Held-to-Maturity Securities 23,538 7,108 2,663
Proceeds from Sale of Interest-Only Strips 3,003 -- --
Net Change in Loans 30,411 (33,022) (28,838)
Proceeds from Sales of Other Real Estate Owned 824 830 1,212
Purchases of Premises and Equipment (1,386) (2,294) (2,184)
Proceeds from Sale of Premises and Equipment 365 30 82
--------- --------- ---------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 37,637 (35,226) (17,408)
FINANCING ACTIVITIES
Net Change in Demand Deposits and Savings Accounts (47,325) 20,624 67,451
Net Change in Time Deposits (21,323) 15,143 11,820
Net Change Short-Term Borrowings -- -- (4,000)
Reductions in Long-Term Debt -- -- (465)
Proceeds from Exercise of Stock Options 27 28 138
Dividends Paid -- (760) (467)
--------- --------- ---------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (68,621) 35,035 74,477
--------- --------- ---------
INCREASE IN CASH
AND CASH EQUIVALENTS 22,351 1,205 21,021
Cash and Cash Equivalents at Beginning of Year 34,119 32,914 11,893
--------- --------- ---------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 56,470 $ 34,119 $ 32,914
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 10,381 $ 11,495 $ 8,338
Income Taxes Paid $ 742 $ 2,470 $ 4,237
The accompanying notes are an integral part of these consolidated financial
statements.
48
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(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, 2000.
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.
49
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(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", as 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.
50
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Securitizations and Loan Sales
The Company sells the guaranteed portion of SBA loans and securitizes certain
unguaranteed commercial loans and the unguaranteed portion of SBA loans. 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, subordinated certificates,
the servicing retained, the interest-only strip, and the sold portion of the
loan, based on the relative fair 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. To obtain
fair values, quoted market prices are used if available. If fair value quotes
are unavailable, the Company estimates fair value based on the present value of
future expected cash flows estimated using management's best estimates of the
key assumptions - credit loss, prepayment speed and discount rates commensurate
with the risks involved. 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.
Actual prepayment rates may be affected by a variety of economic and other
factors, including prevailing interest rates and the availability of alternative
financing. The effect of these factors varies depending on the types of loans.
Estimated prepayment rates are based on management's expectations of future
prepayments, and, while management believes that the term of amortization and
market interest rate on the variable rate loans somewhat reduce the prepayment
risk, there can be no assurance that management's prepayment estimates are
accurate. If the actual prepayment rate or actual losses for loans sold is
higher than projected at the time such loans were sold, the carrying value of
the servicing asset and or I/O strip may be considered impaired and be reduced
by a charge to earnings if an impairment is considered "other than temporary".
If the actual prepayment rate for loans sold is lower than estimated, the
carrying value of the servicing asset is not increased, although the total
future cash flow income would exceed previously estimated amounts.
Allowance for Loan Losses
The allowance for loan 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.
51
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Allowance for Loan Losses - Continued
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.
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. 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. The Company
no longer utilizes these activities to reduce interest rate risk.
52
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives, which ranges from three to
ten years for furniture and fixtures and forty years for buildings. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the improvements or the remaining lease term, whichever is
shorter. Expenditures for betterment or major repairs are capitalized and those
for ordinary repairs and maintenance are charged to operations as incurred.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost or fair value
minus estimated costs to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other expenses.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the estimated fair
value of net assets associated with acquisition transactions of the Company
accounted for as purchases and is amortized over fifteen years. Core deposit
intangibles represent the intangible value of depositor relationships resulting
from deposit liabilities assumed in acquisitions and are amortized over seven
years. Goodwill and other intangibles are evaluated periodically for other than
temporary impairment. Should such an assessment indicate that the undiscounted
value of an intangible may be impaired, the net book value of the intangible
would be written down to net estimated recoverable value.
Income Taxes
Deferred income taxes are computed using the asset and liability method, which
recognizes a liability or asset representing the tax effects, based on current
tax law, of future deductible or taxable amounts attributable to events that
have been recognized in the consolidated financial statements. A valuation
allowance is established to reduce the deferred tax asset to the level at which
it is "more likely than not" that the tax asset or benefits will be realized.
Realization of tax benefits of deductible temporary differences and operating
loss carryforwards depends on having sufficient taxable income of an appropriate
character within the carryforward periods.
53
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
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"(as amended in 2000 by SFAS No. 138). 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.
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
54
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Reclassifications
Certain reclassifications were made to prior years' presentations to conform to
the current year. These classifications are of a normal recurring nature.
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, 2000:
Mortgage-Backed Securities $ 5,768 $ -- $ -- $ 5,768
======== ======== ======== ========
December 31, 1999:
Mortgage-Backed Securities $ 6,597 $ 271 $ -- $ 6,868
======== ======== ======== ========
Held-to-Maturity Securities:
December 31, 2000:
U.S. Government and Agency Securities $ 10,998 $ 1 $ (38) $ 10,961
Mortgage-Backed Securities 165 -- -- 165
-------- -------- -------- --------
$ 11,163 $ 1 $ (38) $ 11,126
======== ======== ======== ========
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
======== ======== ======== ========
55
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE B - INVESTMENT SECURITIES - Continued
The gross unrealized gain of $271 on available-for-sale securities is included
in accumulated other comprehensive income at December 31, 1999, net of taxes of
$111.
During 2000, the Company wrote down the available-for-sale mortgage-back
securities and recorded a loss of $478. The write down reflected the permanent
decline in value resulting from a sale that closed on January 17, 2001. 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, 2000 and 1999.
Investment securities carried at $11,163 and $14,712 at December 31, 2000 and
1999, 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, 2000, were as follows:
Available-for-Sale Held-to-Maturity
-------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
Due In One Year or Less $ -- $ -- $ 998 $ 999
Due from One to Five Years -- -- 10,000 9,962
Mortgage-Backed Securities 5,768 5,768 165 165
------- ------- ------- -------
$ 5,768 $ 5,768 $11,163 $11,126
======= ======= ======= =======
NOTE C - LOANS HELD FOR SALE
The Bank originates 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, 2000 and 1999, the Bank was servicing approximately $242,843 and
$220,120, respectively, in loans previously sold.
56
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(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
--------------------------------------
2000 1999 1998
-------- -------- --------
Balance at Beginning of Year $ 2,803 $ 2,479 $ 1,920
Increase from Loan Sales 948 1,045 968
Amortization and Prepayments Charged to Income (466) (721) (409)
Increase in Valuation Allowance (401) -- --
-------- -------- --------
Balance at End of Year $ 2,884 $ 2,803 $ 2,479
======== ======== ========
Interest-Only Strips Receivable
--------------------------------------
2000 1999 1998
-------- -------- --------
Balance at Beginning of Year $ 12,286 $ 5,926 $ 644
Increase from Loan Sales 2,305 7,224 5,437
Amortization and Prepayments Charged to Income (1,524) (864) (155)
Writedown of Interest-Only Strips Receivable (1,392) -- --
Sale of Interest-Only Strips Receivable (3,003) -- --
-------- -------- --------
Balance at End of Year $ 8,672 $ 12,286 $ 5,926
======== ======== ========
Unrecognized Gain (Loss) at End of Year $ (216) $ 570 $ 620
The unrecognized gain (loss) on interest-only strips receivable of $(216) and
$570 is included in accumulated other comprehensive income, net of taxes of $90
and $236 at December 31, 2000 and 1999, respectively.
The estimated fair value of the servicing assets was approximately $2,884 at
December 31, 2000. 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.
57
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(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 ("1998-1") and
$60,000 of commercial real estate loans in 1999 ("1999-1"). 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 1998 and 1999 securitization
transactions ranged from .25% to .50%. The Company used a discount rate during
1998 and 1999 of 125 to 525 basis 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.
During the second quarter of 2000 the Company increased the discount rate used
to fair value the RISA by approximately 300 basis points and recorded a $800
permanent decline in value on its 1999-1 RISA. During the third quarter the
Company sold 59% of its 1999-1 RISA for $3,003. On January 8, 2001, in an arms
length transaction, the Company sold the remaining balance of the 1999-1 RISA to
a group of directors for $1,339 and wrote down the RISA by $592 in 2000 to
reflect the permanent decline in value resulting from sale. As of December 31,
2000 the 1999-1 RISA was carried at net realizable value.
During 2000 the Company received cash flows from the RISA's trusts of $1,885 on
the interest only strip receivable and $363 in servicing income.
Static pool losses are calculated by summing the actual and projected future
credit losses and dividing them by the original balance of each pool of assets.
No losses have occurred from securitized loans. The static losses for the
unguaranteed portion of SBA loans securitized are 1.63%, 1.39% and 3.15% at
December 31, 2000, 1999, and 1998, respectively.
58
BY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE C - LOANS HELD FOR SALE - Continued
At December 31, 2000, key economic assumptions used to fair value the RISA for
the 1998-1 unguaranteed portion of SBA loans securitized, along with the decline
in the RISA due to an immediate 10 percent and 20 percent adverse changes in
those assumptions are as follows:
SBA
Loans
1998-1
----------
Carrying Value of Retained Interest - Fair Value $ 3,733
Weighted-Average Life (in years) 10.7
Prepayment Speed Assumption (annual rate) 14.44%
Decline in Fair Value from a 10% Adverse Change 80
Decline in Fair Value from a 20% Adverse Change 158
Expected Credit Losses (annual rate) 0.40%
Decline in Fair Value from a 10% Adverse Change 40
Decline in Fair Value from a 20% Adverse Change 81
Discount Rate (annual rate) 13.28%
Decline in Fair Value from a 10% Adverse Change 167
Decline in Fair Value from a 20% Adverse Change 319
The decline in fair value due to changes in the assumptions are hypothetical and
should be used with caution. As the figures indicate, changes in fair value
based on a 10 percent variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair value
may not be linear. Also, in the table, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may result
in lower prepayments and increase credit losses), which might magnify or
counteract the sensitivities.
59
BY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(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 as of December 31, 2000. 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.
2000 1999
-------- --------
Estimated Net Undiscounted RISA Earnings $ 7,716 $ 19,475
Off Balance Sheet Allowance for Losses (700) (1,864)
Discount to Present Value (3,283) (6,966)
-------- --------
Retained Interest in Securitized Assets $ 3,733 $ 10,645
======== ========
Outstanding Balance of Loans Sold Through Securitizations $ 29,440 $ 94,297
======== ========
The following table presents the total loans being serviced for the unguaranteed
portion of SBA loans sold through the 1998-1 securitization along with the
guaranteed portion being serviced and related past due loans as of December 31,
2000 and credit losses for the year ended December 31, 2000.
2000
--------
Loans Sold through Securitization Serviced by the Company $ 29,440
Guaranteed portion Sold on Secondary Market and Serviced by the Company 62,434
Loans Remaining on Balance Sheet 322
--------
Total Loans Related to Securitization being Managed by the Company $ 92,196
========
Loans Past Due over 60 Days $ 1,624
Net Losses on Above Loans for the Year $ --
60
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
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 loan losses as of December 31
follows:
2000 1999 1998
------- ------- -------
Balance at Beginning of Year $ 2,610 $ 2,300 $ 1,923
Additions to the Allowance Charged to Expense 600 694 755
Recoveries on Loans Charged Off 116 134 150
------- ------- -------
3,326 3,128 2,828
Less Loans Charged Off (1,031) (518) (528)
------- ------- -------
$ 2,295 $ 2,610 $ 2,300
======= ======= =======
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:
2000 1999 1998
------- ------- -------
Recorded Investment in Impaired Loans $ 1,292 $ 1,542 $ 1,806
Related Allowance for Impaired Losses $ 180 $ 243 $ 289
Average Recorded Investment in Impaired Loans $ 2,074 $ 2,349 $ 2,102
Interest Income Recognized from Cash Payments $ -- $ -- $ --
Loans having carrying values of $1,479, $725, and $1,479 were transferred to
other real estate owned in 2000, 1999 and 1998, respectively. During 1999 loans
totaling $517 were made to facilitate the sale of other real estate owned.
61
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
2000 1999
-------- --------
Land $ 943 $ 943
Buildings 2,107 2,091
Leasehold Improvements 1,585 1,685
Furniture, Fixtures, and Equipment 8,005 7,584
-------- --------
12,640 12,303
Less Accumulated Depreciation and Amortization (6,870) (5,856)
-------- --------
$ 5,770 $ 6,447
======== ========
The Bank has entered into various operating lease agreements, primarily covering
its branch locations. These agreements expire at various times through the year
2005.
The approximate future minimum annual payments for these leases by year are as
follows:
2001 $ 1,107
2002 856
2003 650
2004 152
2005 76
-------
$ 2,841
=======
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 $955 in 2000, $1,526 in 1999, and $987 in 1998.
62
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE F - DEPOSITS
At December 31, 2000, the scheduled maturities of time deposits are as follows:
2001 $ 75,970
2002 4,445
2003 1,362
2004 through 2005 78
--------
$ 81,855
========
NOTE G - OTHER EXPENSES
A summary of other expenses for the years ended December 31 is as follows:
2000 1999 1998
-------- ------ -------
Regulatory Assessments $ 544 $ 61 $ 58
Other Real Estate Owned 202 226 288
Professional Fees and Outside Services 2,299 1,965 1,792
Loan Expenses 2,674 1,649 1,047
Office Expenses 1,586 2,016 1,527
Write Down of Available for Sale Securities 478 -- --
Other 3,747 2,983 2,819
-------- ------ -------
$ 11,530 $8,900 $ 7,531
======== ====== =======
63
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE H - INCOME TAXES
The provisions for income taxes included in the statements of income consist of
the following:
2000 1999 1998
-------- ------ -------
Current:
Federal $ 1,005 $1,704 $ 2,723
State 379 569 1,050
-------- ------ -------
1,384 2,273 3,773
Deferred (939) 57 (496)
-------- ------ -------
$ 445 $2,330 $ 3,277
======== ====== =======
Deferred taxes are a result of differences between income tax accounting and
generally accepted accounting principles with respect to income and expense
recognition. The Company's principal differences are from loan loss provision
accounting, loan sales, and depreciation differences.
The following is a summary of the components of the deferred tax asset account
recognized in the accompanying consolidated balance sheets:
2000 1999
------- -------
Deferred Tax Assets:
Allowance for Loan Losses $ 724 $ 763
Other Real Estate Writedowns 49 91
Gain on Sale of Loans 385 1,098
California Franchise Tax 108 196
Unrealized Losses on Securities and Other Assets 90 --
Other Assets/Liabilities 1,848 160
------- -------
3,204 2,308
Deferred Tax Liabilities:
Unrealized Gains on Securities and Other Assets -- (347)
Premises and Equipment (24) (157)
------- -------
(24) (504)
------- -------
Net Deferred Tax Assets $ 3,180 $ 1,804
======= =======
64
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands, Except Per Share Data)
NOTE H - INCOME TAXES - Continued
A comparison of the federal statutory income tax rates to the Company's
effective income tax rates for the years ended December 31 follows:
2000 1999 1998
------------------- --------------------- ---------------------
Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- -------
Federal Tax Rate $ 348 34.0% $ 1,838 34.0% $ 2,514 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 74 7.2 387 7.1 536 7.3
Tax Savings from Exempt
Interest (43) (4.2) (42) (0.8) (44) (0.6)
Merger Expenses 136 13.3 -- -- 222 3.0
Other Items - Net (70) (6.8) 147 2.8 49 0.6
------- ------- ------- ------- ------- -------
Bank's Effective Rate $ 445 43.5% $ 2,330 43.1% $ 3,277 44.3%
======= ======= ======= ======= ======= =======
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:
2000 1999 1998
---------------------- ---------------------- ----------------------
Income Shares Income Shares Income Shares
------- --------- -------- --------- -------- ---------
Net Income as Reported $ 578 $ 3,076 $ 4,116
Weighted Average Shares
Outstanding During the Year 2,538,624 2,534,053 2,520,828
------- --------- -------- --------- -------- ---------
Used in Basic EPS 578 2,538,624 3,076 2,534,053 4,116 2,520,828
Dilutive Effect of
Outstanding Stock Options 2,464 17,556 135,410
------- --------- -------- --------- -------- ---------
Used in Dilutive EPS $ 578 2,541,088 $ 3,076 2,551,609 $ 4,116 2,656,238
======= ========= ======== ========= ======== =========
65
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
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
$359, $381, and $302 in 2000, 1999 and 1998, respectively.
The Bank has entered into retirement benefit agreements with certain officers
providing for future benefits aggregating approximately $2,496, 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 $2,290 and $2,196 at December 31, 2000 and 1999, respectively. As
of December 31, 2000, 1999, and 1998, approximately $292, $216, and $152,
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.
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, 2000, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
Commitments to Extend Credit $22,612
Standby Letter of Credit 1,236
-------
$23,848
=======
66
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
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
The following is an analysis of the activity of all such loans:
2000 1999
------- -------
Beginning Balance $ 2,781 $ 2,241
Credits Granted, Including Renewals -- 1,033
Repayments (972) (493)
------- -------
Ending Balance $ 1,809 $ 2,781
======= =======
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
$15, is adjusted for cost of living increases every three years. The Bank also
pays its pro-rata share of taxes and common operating expenses.
As described in Note C, a group of directors, in an arms length transaction,
purchased the remaining interest in the 1999 RISA for $1,339.
67
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands, Except Per Share Data)
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, volatility of 28% in 1998 and expected lives of five
years. The weighted-average fair value of options granted during 1998 was $5.22.
A summary of the status of the Company's fixed stock option plan as of December
31, 2000, 1999, and 1998, and changes during the years ending on those dates is
presented below:
2000 1999 1998
----------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ---------- ----------- ---------- ----------- -----------
Outstanding at Beginning of Year 404,102 $ 12.88 413,102 $ 12.80 288,700 $ 9.56
Options Granted -- -- -- -- 152,533 17.47
Options Exercised (5,466) 4.88 (5,800) 4.88 (28,131) 4.88
Options Forfeited (86,950) 15.31 (3,200) 17.38 -- --
----------- ----------- -----------
Outstanding at End of Year 311,686 12.34 404,102 12.88 413,102 12.80
=========== =========== ===========
Options Exercisable at Year-End 250,646 11.08 284,636 10.95 203,052 9.31
Weighted-Average
Fair Value of Options
Granted During the Year $ -- $ -- $ 5.22
68
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands, Except Per Share Data)
NOTE M - STOCK OPTION PLAN - Continued
The following table summarizes information about fixed options outstanding at
December 31, 2000:
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 76,735 1.8 years $ 4.88 76,735 $ 4.88
$12 to $13 133,218 5.9 years $ 12.70 133,218 $ 12.70
$17 to $21 101,733 7.2 years $ 17.48 40,693 $ 17.48
---------------- ----------------
311,686 5.3 years 250,646
================ ================
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:
2000 1999 1998
-------------- ------------- -------------
Net Income:
As Reported $ 578 $ 3,076 $ 4,116
Pro Forma $ 409 $ 2,703 $ 3,888
Per Share Data:
Net Income - Basic
As Reported $ .23 $ 1.21 $ 1.63
Pro Forma $ .16 $ 1.07 $ 1.54
Net Income - Diluted
As Reported $ .23 $ 1.21 $ 1.55
Pro Forma $ .16 $ 1.06 $ 1.46
69
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
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.
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.
70
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The estimated fair value of financial instruments at December 31, 2000 and 1999
is summarized as follows:
December 31,
------------------------------------------------------------
2000 1999
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
Financial Assets:
Cash and Due From Banks $ 30,370 $ 30,370 $ 34,119 $ 34,119
Federal Funds Sold 26,100 26,100 -- --
Interest-Bearing Deposits 111 111 100 100
Investment Securities 16,931 16,894 21,580 21,313
Federal Home Loan Bank Stock, at Cost 629 629 1,113 1,113
Loans Held for Sale 22,439 23,337 69,756 71,849
Loans, net 163,274 162,780 196,274 196,136
I/O Strips Receivable and Servicing Assets 11,340 11,340 15,659 15,659
Cash Surrender Value - Life Insurance 2,290 2,290 2,196 2,196
Financial Liabilities:
Deposits 254,325 254,384 322,973 323,010
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined).
71
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE O - REGULATORY MATTERS - Continued
As of December 31, 2000, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as adequately-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 and be released from the administrative
action described 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, 2000:
Total Capital (to Risk-Weighted Assets) $29,346 10.08% $ 23,281 8.00% $29,102 10.00%
Tier 1 Capital (to Risk-Weighted Assets) $27,051 9.30% $ 11,641 4.00% $17,461 6.00%
Tier 1 Capital (to Average Assets) $27,051 9.42% $ 11,484 4.00% $14,355 5.00%
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%
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 ratio of 8.00% as of
December 31, 2000 and total risk based capital ratio of 9.50% as of December 31,
2000 and 11.00% as of December 31, 2001; 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 interest
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; not pay dividends; and
correct all alleged violations of law. As of December 31, 2000 the Bank believes
it is substantially in compliance with the administrative order.
72
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands, Except Per Share Data)
NOTE P - MERGERS AND ACQUISITIONS
On November 1, 2000 the Company signed an Agreement and Plan of Reorganization
to be acquired by PBOC Holdings, Inc. Under the terms of the transaction, the
holders of the Company Common Stock will receive $15.00 in cash for each share
of Company Common Stock owned. The cash amount may be adjusted upward or
downward under certain circumstances, which are set forth in the agreement.
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.
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,
--------------------
2000 1999
------- -------
ASSETS:
Cash $ 96 $ 134
Investment in Subsidiary 29,089 29,029
Other Assets -- 37
------- -------
$29,185 $29,200
======= =======
LIABILITIES:
Long-Term Debt $ -- $ --
Other Liabilities -- --
------- -------
TOTAL LIABILITIES -- --
SHAREHOLDER'S EQUITY 29,185 29,200
------- -------
$29,185 $29,200
======= =======
73
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY -
Continued
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------
2000 1999
----- ------
INCOME:
Cash Dividends from Subsidiary $ -- $ 760
Interest Income -- --
----- ------
TOTAL INCOME -- 760
EXPENSES:
Merger Related Expenses -- --
Other 102 50
----- ------
TOTAL EXPENSES 102 50
----- ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY (102) 710
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 680 2,366
----- ------
NET INCOME $ 578 $3,076
===== ======
74
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE Q - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
2000 1999
----- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 578 $ 3,076
Noncash Items Included in Net Income:
Equity in Income of Subsidiary (680) (3,126)
Change in Other Assets and Liabilities 37 (37)
----- -------
NET CASH USED IN
OPERATING ACTIVITIES (65) (87)
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends Received from Subsidiary -- 760
----- -------
NET CASH PROVIDED
BY INVESTING ACTIVITIES -- 760
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Long-Term Debt --
Options Exercised and Shares Retired 27 28
Dividends Paid (760)
----- -------
NET CASH USED (PROVIDED)
BY FINANCING ACTIVITIES 27 (732)
----- -------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (38) (59)
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF YEAR 134 193
----- -------
CASH AND CASH EQUIVALENTS
AT ENDING OF YEAR $ 96 $ 134
===== =======
75
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(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:
2000
------------------------------------------------------------
Wholesale Segments
-------------------------- Retail Total
Mortgage SBA Segment Company
--------- --------- --------- ---------
Condensed Income Statement
Net Interest Income $ 2,281 $ 5,106 $ 10,299 $ 17,686
Noninterest Income 11,914 2,900 1,914 16,728
Operating Expense (12,777) (4,551) (8,111) (25,439)
--------- --------- --------- ---------
Operational Profit 1,418 3,455 4,102 8,975
Provision for Loan Losses (600)
Administrative Costs (7,231)
Goodwill Amortization (121)
Income Taxes (445)
---------
Net Income $ 578
=========
Total Assets at December 31, 2000 $ 24,025 $ 112,543 $ 149,830 $ 286,398
Loans Originated for Sale during 2000 $ 279,000 $ 89,000
Loans Sold during 2000 $ 315,000 $ 100,000
76
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE R - SEGMENT INFORMATION - Continued
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
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
77
BYL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
(Dollar Amounts in Thousands)
NOTE S - SUBSEQUENT EVENTS
During the first quarter of 2001 the Company was notified that certain loans
purchased by third party investors and originated by outside mortgage brokers
were fraudulent and the Company is required to repurchase these loans. The
Company has estimated that the gross losses will be approximately $1,658 and the
actual losses, net of reduced incentive payments, will be approximately $1,160.
Accordingly, the Company recorded a $1,160 loss contingency as of December 31,
2000.
78
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 third or fourth quarter, 2001.
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 third or fourth quarter, 2001.
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 third or fourth quarter, 2001.
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 third or fourth quarter, 2001.
79
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)
2.2 Agreement and Plan of Reorganization and ancillary documents,
among BYL Bancorp, BYL Bank Group, PBOC Holdings, Inc. and
People's Bank of California dated November 1, 2000 (J)
3.1 Articles of Incorporation of the Registrant (A)
3.2 Amendment to Articles of Incorporation of Registrant (A)
3.3 Bylaws of the Registrant (A)
4.1 Specimen Certificate evidencing shares of Registrant's Common
Stock (A)
4.2 Stockholder Agreement Covering Issuance and Compulsory
Repurchase of Organizing Shares of Registrant - Annex II of
Proxy Statement/Prospectus incorporated by reference (A)
10.1 Form of Indemnification Agreement (A)
10.2 BYL Bancorp 1997 Stock Option Plan, as amended in 1998 (C)
10.3 Form of Proxy, Proxy Statement and Notice of Annual
Shareholders' Meeting for 1999 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. (H)
10.15 Agreement by and among BYL Bancorp, BYL Bank Group, JAM
Partners, L.P., Sy Jacobs, Everest Partners Limited
Partnership, Everest Managers, L.L.C., David M. W. Harvey and
Nick Becker Dated September 7, 2000 (I)
10.16 Form of Proxy, Proxy Statement and Notice of Annual
Shareholders' Meeting for 2000 Annual Meeting (K)
10.17 Form of Proxy, Proxy Statement and Notice of Special Meeting
for March 21, 2001 Special Shareholder Meeting (L)
21.1 Subsidiary of BYL Bancorp (A)
23.1 Consent of Vavrinek, Trine, Day & Co., LLP
80
b) Reports on Form 8-K
(a) Form 8-K filed on November 3, 2000 regarding Agreement and
Plan of Reorganization and related documents, among BYL
Bancorp, BYL Bank Group, PBOC Holdings, Inc. and People's Bank
of California dated November 1, 2000.
(b) Form 8-K filed on March 7, 2001 regarding extraordinary losses
on mortgage loans sold.
- ---------------------------------
(A) Filed as an Exhibit to the Registrant's Registration Statement (File No.
333-34995) filed on September 5, 1997, which exhibit is incorporated
herein by this reference.
(B) Filed as an Exhibit to Form 8-K filed on January 29, 1998, which exhibit
is incorporated herein by this reference.
(C) Filed as an Exhibit to the Registration Statement on Form S-8 filed on May
15, 1998.
(D) Filed as an Exhibit to the Annual Report on Form 10-K as of December 31,
1998.
(E) Filed as an exhibit to the Annual Report on Form 10-K as of December 31,
1998, incorporating Schedule 14-A information pursuant to Section 14(a) of
the Securities Exchange Act of 1934, filed on May 18, 1999.
(F) Filed as an Exhibit to Form 10-Q filed on November 15, 1999, which Exhibit
is incorporated herein by this reference.
(G) Filed on an Exhibit to the Annual Report on Form 10-K as of December 31,
1999.
(H) Filed as an Exhibit to Form 10-Q on August 17, 2000.
(I) Filed as and Exhibit to Form 8-K filed on September 8, 2000.
(J) Filed as Exhibits to Form 8-K filed on November 3, 2000.
(K) Filed as an exhibit to the Annual Report on Form 10-K as of December 31,
1999, incorporating Schedule 14A information pursuant to Section 14(a) of
the Securities Exchange Act of 1934, filed on August 22, 2000.
(L) Final Schedule 14A information pursuant to Section 14(a) of the Securities
Exchange Act of 1934, filed on January 23, 2001.
81
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 March 30, 2001
- ------------------------------ and Chief Financial Officer
Barry J. Moore
/s/ Henry C. Cox II Director March 30, 2001
- ------------------------------
Henry C. Cox II
/s/ Eddie R. Fischer Director March 30, 2001
- ------------------------------
Eddie R. Fischer
/s/ Neil Hatcher Director March 30, 2001
- ------------------------------
Neil Hatcher
/s/ Leonard O. Lindborg Director March 30, 2001
- ------------------------------
Leonard O. Lindborg
/s/ H. Rhoads Martin, Jr. Chairman of the Board, Director March 30, 2001
- ------------------------------
H. Rhoads Martin, Jr.
/s/ John F. Myers Director March 30, 2001
- ------------------------------
John F. Myers
/s/ Brent W. Wahlberg Director March 30, 2001
- ------------------------------
Brent W. Wahlberg
/s/ Sy Jacobs Director March 30, 2001
- ------------------------------
Sy Jacobs
82