As filed with the Securities and Exchange Commission on September 5, 1997.
Registration No. _________
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
BYL BANCORP
(Exact name of registrant as specified in charter)
California 6712 33-0755794
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
Bank of Yorba Linda
18206 Imperial Highway
Yorba Linda, California 92686
(714) 996-1800
(Address, including zip code, and telephone number,
including area code, or registrant's principal executive offices)
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Mr. Robert Ucciferri
President and Chief Executive Officer
Bank of Yorba Linda
18206 Imperial Highway
Yorba Linda, California 92686
(714) 996-1800
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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With a copy to:
Loren P. Hansen, Esq.
Knecht & Hansen
1301 Dove Street, Suite 900
Newport Beach, California 92660
(714) 851-8070
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Approximate date of commencement of proposed sale to public: As soon as
practicable following the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. /X/
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED AMOUNT BEING REGISTERED PER SHARE (1) OFFERING PRICE(1) REGISTRATION FEE(1)
- ------------------------------------ ----------------------- -------------- ----------------- -------------------
Common Stock, no par value 1,535,064 shares(2) $14.625 $22,450,311 $6,803.12
- --------------------
(1) The proposed maximum offering price and proposed maximum aggregate
offering price reflect the market price and market value of the common
stock of the Bank to be converted and exchanged in connection with the
reorganization described in the Proxy Statement/Prospectus, calculated
pursuant to Section 6(b) of the Securities Act of 1933, as amended,
and Rule 457(f)(2) under the Securities Act of 1933, as amended, based
on the average bid and asked price of Bank Common Stock on August 26,
1997.
(2) Based on approximate number of shares to be issued in respect to the
same number of outstanding shares of common stock of Bank of Yorba
Linda (the "Bank"). The proposed maximum offering price and proposed
maximum aggregate offering price are estimated solely in order to
determine the registration fee.
BYL BANCORP
Cross Reference Sheet
Pursuant to Rule 501(b) of Regulation S-K
INFORMATION STATEMENT/PROSPECTUS
ITEM AND CAPTION OF FORM S-4 CAPTION OF LOCATION
---------------------------- --------------------------------
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus . . . . . . . . . . . Facing Page of Registration Statement; Cross Reference
Sheet; Outside Front Cover Page of Prospectus and Proxy
Statement
2. Inside Front and Outside Back Cover Page of
Prospectus . . . . . . . . . . . . . . . . . . . . . Inside Front Cover Page; Available Information; Table
of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information. . . . . . . . . . . . . . . . SUMMARY OF PROXY STATEMENT/PROSPECTUS; SOLICITATION OF
PROXIES; INFORMATION REGARDING THE BUSINESS AND
PROPERTIES OF THE HOLDING COMPANY; BANK HOLDING COMPANY
REORGANIZATION; COMPARISON OF THE RIGHTS OF HOLDERS OF
HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK
4. Terms of the Transaction . . . . . . . . . . . . . . SUMMARY OF PROXY STATEMENT/PROSPECTUS; COMPARISON OF
THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK
AND BANK COMMON STOCK; SOLICITATION OF PROXIES
5. Pro Forma Financial Information. . . . . . . . . . . Not Applicable
6. Material Contacts with the Company Being Acquired. . BANK HOLDING COMPANY REORGANIZATION
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters. . . . Not Applicable
8. Interests of Named Experts and Counsel . . . . . . . EXPERTS; LEGAL MATTERS
9. Disclosure of Commission Position on
Indem-nification for Securities Act Liabilities. . . COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrant . . . . . Not Applicable
11. Incorporation of Certain Information by Reference. . Not Applicable
12. Information with Respect to S-2 or S-3 Registrant. . Not Applicable
13. Incorporation of Certain Information by Reference. . Not Applicable
14. Information with Respect to Registrants Other Than
S-3 or S-2 Registrants . . . . . . . . . . . . . . . INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF
THE HOLDING COMPANY; SUPERVISION AND REGULATION OF THE
HOLDING COMPANY AND THE BANK - Holding Company, Effect
of Governmental Policies and Recent Legislation;
RESTRICTIONS ON TRANSFERS OF FUNDS TO THE HOLDING
COMPANY BY THE BANK; MARKET PRICE OF AND DIVIDENDS ON
HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies. . . . . . Not Applicable
16. Information with Respect to S-2 or S-3 Companies . . Not Applicable
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies . . . . . . . . . . . . . . . . MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE BANK;
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF
THE BANK; SUPERVISION AND REGULATION OF THE HOLDING
COMPANY AND THE BANK - Bank; Effect of Governmental
Policies and Recent Legislation; RESTRICTIONS ON
TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK;
MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY AND
BANK COMMON STOCK; FINANCIAL STATEMENTS OF BANK
18. Information if Proxies, Consents or Authorizations
are to be Solicited. . . . . . . . . . . . . . . . . Proxy Statement/Prospectus Cover Page; SUMMARY OF PROXY
STATEMENT/PROSPECTUS; BANK HOLDING COMPANY
REORGANIZATION - Organizational Transactions;
SOLICITATION OF PROXIES - Record Date and Persons
Entitled to Give Proxy; Proxy and Revocability of
Proxies; Security Ownership of Certain Beneficial
Owners and Management; BANK HOLDING COMPANY
REORGANIZATION - Terms of the Merger Agreement;
Dissenting Shareholders' Rights; INFORMATION
CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING
COMPANY - Management; Employees
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offering. . Not Applicable
20. Indemnification of Directors and Officers. . . . . . Part II
21. Exhibits and Financial Statement Schedules . . . . . Part II
22. Undertakings . . . . . . . . . . . . . . . . . . . . Part II
PROXY STATEMENT FOR APPROVAL OF
PLAN OF REORGANIZATION AND MERGER AGREEMENT
IN CONNECTION WITH THE FORMATION OF HOLDING COMPANY
AND APPROVAL OF BYL BANCORP 1997 STOCK OPTION PLAN
_____________, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Meeting") of Bank of Yorba Linda (the "Bank") to be held on _________, 1997
at __:p.m. at the Bank, 18206 Imperial Highway, Yorba Linda, California. Your
Board of Directors looks forward to greeting personally those shareholders
who attend.
The enclosed Proxy Statement/Prospectus is provided by the Board of Directors
of Bank of Yorba Linda in connection with the solicitation of votes of our
shareholders for approval of the formation of a bank holding company for Bank
of Yorba Linda. Upon approval of the Plan of Reorganization and Merger
Agreement, Bank of Yorba Linda will become a subsidiary of the newly formed
holding company, BYL Bancorp. Votes for approval of this action are being
solicited from all shareholders of the Bank.
Banking has changed dramatically over the past 17 years since the Bank was
first formed. In order to take full advantage of the changes in the banking
environment the Bank must continue to evolve and grow. We believe
establishing a holding company will give us a broader range of options with
respect to access to additional capital, possibilities for expansion of the
branch system and expanded abilities in the financial services area, as well
as other business activities. For these reasons, the Board of Directors has
unanimously approved the proposal to form a bank holding company and
recommends that you vote in favor of this proposal.
The enclosed Proxy Statement/Prospectus is also provided by the Board of
Directors in connection with the solicitation of votes of our shareholders as
prospective shareholders of the holding company, for approval of the BYL
Bancorp 1997 Stock Option Plan (the "1997 Plan"). Votes for approval of this
action are also being solicited from all shareholders of the Bank as
prospective shareholders of the holding company.
We are asking all of the Bank's shareholders to consider and vote upon
approval of the Plan of Reorganization and Merger Agreement ("Merger
Agreement") entered into as of May 2, 1997, by the Bank of Yorba Linda, BYL
Bancorp and BYL Merger Corporation, a California corporation. This Merger
Agreement provides for the merger of BYL Merger Corporation with and into the
Bank, as a result of which the bank surviving the merger, Bank of Yorba
Linda, will be the wholly-owned subsidiary of BYL Bancorp. We are also asking
that all of the Bank's shareholders, as prospective
________________, 1997
Page 2
shareholders of the holding company, to consider and vote upon approval of
the 1997 Plan.
BYL Bancorp is a newly-formed California corporation, organized at the
direction of the Bank's Board of Directors for the purpose of becoming a bank
holding company. In accordance with the Merger Agreement, as more fully
described in the attached Proxy Statement/Prospectus, BYL Bancorp will
acquire all of the outstanding shares of the Bank by issuing, subject to
certain limitations, common stock in BYL Bancorp to each of the Bank's
shareholders, in exchange for all of the outstanding shares of Bank of Yorba
Linda's common stock. After this exchange you will have the same number of
shares in BYL Bancorp as you have in the Bank.
It is important to note that your stock in the Bancorp will have a value
equal to the value of your stock in the Bank and therefore the exchange will
take place without any recognition of gain or loss for federal income tax
purposes. It is equally important to inform you that no changes in the Bank's
directors, officers, or other personnel are contemplated as a result of the
formation of the bank holding company. Additionally, after formation of the
bank holding company, the Bank of Yorba Linda will continue its present
business and operations under the name of Bank of Yorba Linda.
The new 1997 Plan is intended to replace the Bank's Stock Option Plans. The
1997 Plan would reserve 460,519 shares or 30% of the unissued Common Stock of
BYL Bancorp. The 1997 Plan would allow for the granting of options to
directors, officers employees and consultants by attracting and retaining
competent managerial personnel, and added incentive for high levels of
performance and for unusual efforts to increase the earnings of BYL Bancorp
and Bank of Yorba Linda. The terms and conditions of the 1997 Plan are
described in the Proxy Statement/Prospectus.
Section 902 and 903 of the California Corporations Code, and the Bank's
Articles of Incorporation, require the approval of the Plan of Reorganization
and Merger Agreement by a majority of the outstanding shares of common stock
of the Bank.
You are urged to read the attached documents carefully as they contain the
terms of the merger, facts concerning the business, results of operations,
financial condition and properties of both BYL Bancorp and Bank of Yorba
Linda. It is very important that your shares be represented because the
affirmative vote of a majority of the outstanding shares of Bank of Yorba
Linda is required to approve the Merger Agreement and the 1997 Plan. It is
therefore essential that all shareholders vote and you are urged to fill in,
date, sign and mail the enclosed Proxy in the enclosed self-addressed postage
prepaid envelope.
________________, 1997
Page 3
It is expected that the enclosed Proxy Statement/Prospectus and accompanying
Proxy will be mailed or delivered to shareholders of the Bank on or after
___________, 1997. We hope that the Proxy Statement/Prospectus will answer
any questions you may have concerning the proposed formation of the bank
holding company. If you have any questions, concerning this Proxy
Statement/Prospectus or the accompanying proxy, or if you need any help
voting your shares, please telephone Mr. Barry J. Moore of Bank of Yorba
Linda at (714) 996-1800.
You interest and participation are appreciated.
Sincerely,
Robert Ucciferri H. Rhoads Martin
President and Chief Executive Officer Chairman of the Board
BANK OF YORBA LINDA
18206 Imperial Highway
Yorba Linda, California 92686
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _____________, 1997
To the Shareholders of Bank of Yorba Linda:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of the
Board of Directors, the Special Meeting of Shareholders (the "Meeting") of
Bank of Yorba Linda (the "Bank") will be held at 18206 Imperial Highway,
Yorba Linda, California 92686 on ____________, 1997 at 5:30 p.m., California
time, for the following purposes:
1. PLAN OF REORGANIZATION AND AGREEMENT OF MERGER. To consider and
vote upon a proposal (the "Reorganization Proposal") to approve the Plan of
Reorganization and Agreement of Merger (the "Merger Agreement"), entered into
as of May 2, 1997 by and among the Bank, BYL Bancorp (the "Holding Company")
and BYL Merger Corporation (the "Merger Corp."), providing for the
acquisition of the Bank by the Holding Company by means of a merger (the
"Merger") of the Merger Corp. with and into the Bank, as a result of which
the Holding Company will issue common stock, no par value of the Holding
Company ("Holding Company Common Stock"), to each of the Bank shareholders,
in exchange for all of the outstanding shares of common stock, no par value
of the Bank (the "Bank Common Stock"). These transactions are more fully
described in the enclosed Proxy Statement/Prospectus and in the Merger
Agreement attached as Appendix I to the Proxy Statement/Prospectus.
2. APPROVAL OF BYL BANCORP 1997 STOCK OPTION PLAN. To approve, as
prospective shareholders of the Holding Company, the BYL Bancorp 1997 Stock
Option Plan that would reserve 460,519 shares of the unissued Common Stock of
the Holding Company as described in the Proxy Statement dated _________,
1997, subject to any necessary changes required by any regulatory agency.
3. ADJOURNMENT OF MEETING. To authorize the Board of Directors to
adjourn the Meting to permit the further solicitation of proxies, if
necessary.
4. OTHER BUSINESS. To transact such other business as may properly
come before the meeting and any adjournments thereof.
-1-
The Board of Directors has fixed ____________, 1997 as the record date
for the determination of shareholders entitled to notice of, and vote at, the
Meeting.
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. YOU ARE URGED TO
SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID
ENVELOPE AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON. ANY SHAREHOLDER GIVING A PROXY MAY REVOKE IT PRIOR TO THE
TIME IT IS VOTED BY NOTIFYING THE CORPORATE SECRETARY IN WRITING TO THAT
EFFECT, BY FILING A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY VOTING IN
PERSON AT THE MEETING.
By Order of the Board of Directors
John F. Myers, Secretary
Yorba Linda, California
Dated: _____________, 1997
In order to facilitate the providing of adequate accommodations, please
indicate on the Proxy whether or not you plan to attend the Meeting.
-2-
SOLICITATION OF PROXIES TO APPROVE
THE PLAN OF REORGANIZATION AND MERGER AGREEMENT
PROVIDING FOR THE FORMATION OF A BANK HOLDING COMPANY,
AND TO APPROVE THE 1997 STOCK OPTION PLAN
OF THE PROPOSED BANK HOLDING COMPANY
PROSPECTUS
OF
BYL BANCORP
PROXY STATEMENT
OF
BANK OF YORBA LINDA
1,535,064 SHARES OF BYL BANCORP COMMON STOCK
This Proxy Statement/Prospectus is being furnished to the shareholders
of BANK OF YORBA LINDA (the "Bank") in connection with the solicitation of
Proxies by the Board of Directors of the Bank for the approval of the Plan of
Reorganization and Merger Agreement (the "Merger Agreement") in connection
with the acquisition of the Bank by BYL BANCORP (the "Holding Company") in
which the Bank shall become a wholly-owned subsidiary of the Holding Company.
In addition, this Proxy Statement/Prospectus is being furnished to Bank
Shareholders to consider and vote upon, as prospective shareholders of the
Holding Company, the Holding Company's 1997 Stock Option Plan (the "1997
Plan") that would reserve 460,519 shares of the unissued Common Stock of the
Holding Company as described in this Proxy Statement/Prospectus that was
approved by the Holding Company's Board of Directors, subject to the approval
of the California Commissioner of Corporations and the holders of a majority
of the issued and outstanding shares of the Bank as prospective shareholders
of the Holding Company. This Registration Statement is not registering any
shares reserved for issuance under the 1997 Plan.
The Holding Company, a California corporation, has filed this Prospectus
of BYL BANCORP and Proxy Statement of BANK OF YORBA LINDA (collectively the
"Proxy Statement/Prospectus") with the Securities and Exchange Commission
(the "Commission") as part of a Registration Statement on Form S-4 (the
"Registration Statement"), pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), for the purpose of registering thereunder up to
1,535,064 shares of the Holding Company's common stock, no par value
("Holding Company Common Stock"), in connection with the acquisition of BANK
OF YORBA LINDA, a California state-chartered banking corporation (the
"Bank"), by the Holding Company through a merger (the "Merger") of BYL MERGER
CORPORATION (the "Merger Corp."), a wholly-owned subsidiary of the Holding
Company, with and into the Bank, as a result of which the Bank surviving the
Merger, BANK OF YORBA LINDA (the "Surviving Bank"), shall become the
wholly-owned subsidiary of the Holding Company, and the Bank's shareholders
will receive for their Bank Common Stock, no par value ("Bank Common Stock"),
an equal number of shares of Holding Company Common Stock (the
"Reorganization").
This Proxy Statement/Prospectus also serves as the Prospectus of the
Holding Company under the Securities Act with respect to the issuance of up
to 1,535,064 shares of Holding Company Common Stock pursuant to the Merger
Agreement more fully described herein whereby the Surviving Bank will become
a wholly-owned subsidiary of the Holding Company.
1
As a result of the Merger, the Holding Company will (subject to certain
limitations described elsewhere in this Proxy Statement/Prospectus and in the
Merger Agreement), issue Holding Company Common Stock to each of the Bank
Shareholders in exchange for all of the outstanding shares of Bank Common
Stock. See "BANK HOLDING COMPANY REORGANIZATION," and the text of the Merger
Agreement which is attached hereto as Annex I to this Proxy Statement/Pro-
spectus and is hereby incorporated by reference and made a part hereof.
The consummation of the proposed Reorganization is subject to the
receipt of the requisite approvals of applicable regulatory agencies and the
shareholders of both the Holding Company and the Bank as well as the
fulfillment of certain other conditions, as more fully described in this
Proxy Statement/Prospectus. See "BANK HOLDING COMPANY REORGANIZATION - Terms
of the Merger Agreement; Conditions to the Merger, Termination of Merger
Agreement; - Regulatory Approvals," herein. The 1997 Plan is subject to the
receipt of the requisite approvals of applicable regulatory agencies and the
shareholders of the Bank as prospective shareholders of the Holding Company.
See "APPROVAL OF THE BYL BANCORP 1997 STOCK OPTION PLAN."
This Proxy Statement/Prospectus is being first mailed or delivered to
shareholders of the Bank on or about ________, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS ________, 1997
2
AVAILABLE INFORMATION
No person has been authorized to give any information or to make any
representation not contained in or incorporated by reference in this Proxy
Statement/Prospectus, and, if given or made, such information or
representation not contained herein must not be relied upon as having been
authorized by the Holding Company or the Bank. This Proxy Statement/Prospectus
does not constitute an offer to sell, or the solicitation of an offer to
purchase, any of the securities offered by this Proxy Statement/Prospectus, or
the solicitation of Proxies, in any jurisdiction to or from any person to or
from whom it is unlawful to make such offer or solicitation of an offer, or
consent solicitation in such jurisdiction. Neither the delivery of this Proxy
Statement/Prospectus nor the issuance or sale of any securities hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Holding Company or the Bank since the date hereof or that
the information herein is correct as of any time subsequent to the date hereof.
The Holding Company is a newly formed corporation organized at the
direction of the Bank's Board of Directors for the purpose of acquiring
voting control of the Bank and thereby becoming a bank holding company. For
further information with respect to the Reorganization, reference is made to
the Merger Agreement which is incorporated by reference herewith and is
attached as Annex I. As a newly formed corporation, the Holding Company has
not been subject to the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and there is currently no public market for
its common stock. However upon consummation the Reorganization, the Holding
Company will become subject to the information and reporting requirements
pursuant to Section 15(d) of the Exchange Act and filings thereby required to
be made with the Commission will be available for inspection and copying at
the offices of the Commission set forth below. The Holding Company will
become subject to the information, reporting and proxy solicitation
requirements of Section 13(a) of the Exchange Act pursuant to Section 12(g)
of the Exchange Act, and the Holding Company will file a registration
statement under the Exchange Act prior to the effective date of this
Registration Statement.
The Bank is subject to the information, reporting and proxy solicitation
requirements of the Exchange Act, and in accordance therewith files reports
and other information with the Federal Deposit Insurance Corporation (the
"FDIC"). Such reports and other information can be inspected and copied at
the public reference facilities for the Registrations and Disclosure Division
maintained by the FDIC at 550 17th Street, Room F-643, Washington, D.C.
20429, telephone number (202) 393-8400, and by contacting Mr. Barry J. Moore,
Senior Executive Vice President of the Bank, at BANK OF YORBA LINDA, 18206
Imperial Highway, Yorba Linda, California 92886, telephone number (714)
996-1800.
This Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement. For further information with respect
to the Holding Company and the securities offered hereby, reference is made
to the Registration Statement, including the exhibits filed therewith. Copies
of the Registration Statement, including exhibits, may be obtained from the
Commission upon payment of a prescribed fee, or may be examined without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following
regional offices of the Commission: 75 Park Place, Room 1228, New York, New
York 10007 and Room 3190, Kluczynski, Federal Building, 230 South, Dearborn
Street, Chicago, Illinois 60604.
3
The SEC also maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at HTTP://www.sec.gov.
4
TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION..........................................................3
SUMMARY OF PROXY STATEMENT/PROSPECTUS..........................................9
Bank Holding Company Reorganization.......................................9
Date, Time and Place of Meeting......................................9
Record Date..........................................................9
Parties to the Merger Agreement......................................9
Rights of Dissenting Shareholders...................................10
Vote Required.......................................................10
The Reorganization..................................................10
Reasons for the Reorganization......................................11
Restrictions on Acquisition of the Holding Company..................11
Interests of Certain Persons in the Merger..........................12
Conditions to the Reorganization and Regulatory Approvals...........12
Certain Federal Income Tax Consequences.............................13
Proxies.............................................................13
Recommendations.....................................................14
BYL Bancorp 1997 Stock Option Plan.......................................14
Summary of the 1997 Plan............................................14
Vote Required.......................................................14
SELECTED FINANCIAL DATA.......................................................15
SPECIAL MEETING OF SHAREHOLDERS...............................................17
Introduction.............................................................17
Voting of Proxies and Revocability of Proxies............................17
Record Date and Persons Entitled to Give Proxies.........................17
Cost of Solicitations of Proxies.........................................18
Security Ownership of Certain Beneficial Owners and Management...........18
BANK HOLDING COMPANY REORGANIZATION...........................................21
General..................................................................21
Reasons for Reorganization...............................................21
Organizational Transactions..............................................22
Terms of the Merger Agreement............................................23
CONVERSION..........................................................23
EFFECTIVE TIME OF THE MERGER........................................23
INTERESTS OF CERTAIN PERSONS IN THE MERGER..........................24
EMPLOYEE BENEFITS...................................................24
CONDITIONS TO THE MERGER............................................24
TERMINATION OF MERGER AGREEMENT.....................................25
Exchange of Share Certificates...........................................25
Costs of Reorganization..................................................25
Regulatory Approvals.....................................................26
Dissenting Shareholders' Rights..........................................26
Accounting Treatment.....................................................26
5
Certain Federal Income Tax Consequences..................................26
Restrictions on Affiliates...............................................28
Recommendations..........................................................28
Capitalization...........................................................28
COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY
COMMON STOCK AND BANK COMMON STOCK............................................29
Bank Common Stock........................................................29
Holding Company Common Stock.............................................30
Comparison of Bank Common Stock and Holding Company Common Stock.........32
ASSESSABILITY.......................................................32
Classification of Board of Directors.....................................33
Voting Rights............................................................33
Number of Directors......................................................33
DIVIDEND RESTRICTIONS...............................................33
DISSENTERS' RIGHTS..................................................34
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY............................34
California and Federal Banking Law.......................................34
Anti-Takeover Provisions in Holding Company's Articles of Incorporation..34
BOARD OF DIRECTORS..................................................35
CUMULATIVE VOTING AND SPECIAL MEETINGS..............................35
AUTHORIZED SHARES...................................................35
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATION WITH
PRINCIPAL STOCKHOLDERS............................................36
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS...................36
STOCKHOLDER NOMINATIONS AND PROPOSALS...............................36
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S
ARTICLES OF INCORPORATION.........................................36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE BANK.........................................38
Management's Discussion..................................................38
Line of Business Results.................................................38
Financial Condition......................................................39
Results of Operations....................................................39
Distribution of Assets, Liabilities, and Shareholders' Equity............39
Net Interest Income......................................................42
Provision for Loan Losses................................................43
Non-Interest Income......................................................43
Non-Interest Expense.....................................................43
Income Taxes.............................................................44
Investment Activity......................................................44
Loans Held for Sale......................................................45
Loan Portfolio...........................................................45
Nonperforming Assets.....................................................46
Allowance for Loan Losses................................................47
Deposits.................................................................48
Liquidity and Liability Management.......................................49
Capital Resources........................................................50
6
Effects of Inflation.....................................................50
Impact of New Accounting Pronouncements..................................51
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING COMPANY.....52
Organization.............................................................52
Business.................................................................52
Management...............................................................52
Employees................................................................53
Properties...............................................................53
Legal Proceedings........................................................53
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE BANK................53
General..................................................................53
Market Area..............................................................54
Operating Strategy.......................................................54
Acquisition..............................................................54
Secondary Stock Offering.................................................55
Lending Activities.......................................................55
Monetary Policy..........................................................55
Competition..............................................................56
Employees................................................................57
Premises.................................................................57
Legal Proceedings........................................................57
SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK................57
The Holding Company......................................................57
The Bank.................................................................59
Effect of Governmental Policies and Recent Legislation...................60
STANDARDS FOR SAFETY AND SOUNDNESS..................................61
PROMPT CORRECTIVE REGULATORY ACTION.................................61
OTHER ITEMS.........................................................64
CAPITAL ADEQUACY GUIDELINES.........................................65
SAFETY AND SOUNDNESS STANDARDS......................................66
PREMIUMS FOR DEPOSIT INSURANCE......................................66
INTERSTATE BANKING AND BRANCHING....................................67
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS............68
CHANGES IN ACCOUNTING PRINCIPLES....................................69
HAZARDOUS WASTE CLEAN-UP COSTS......................................72
OTHER REGULATIONS AND POLICIES......................................72
RESTRICTIONS ON TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK.........72
MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY COMMON STOCK
AND BANK COMMON STOCK.........................................................73
Market Information.......................................................73
Shareholders.............................................................75
Dividends................................................................75
DIRECTORS AND EXECUTIVE OFFICERS OF THE HOLDING COMPANY AND THE BANK..........75
The Board of Directors and Committees....................................77
7
Executive Officers.......................................................77
Director Compensation....................................................78
Executive Compensation...................................................78
Employment Agreements....................................................81
Salary Continuation Agreements...........................................81
Bank Bonus Pool..........................................................82
401(k) Plan..............................................................82
The Bank's 1990 Stock Option Plan........................................83
The Bank's 1997 Stock Option Plan........................................83
SUMMARY OF PLAN.....................................................83
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES.............................................................85
Certain Transactions.....................................................86
APPROVAL OF BYL BANCORP 1997 STOCK OPTION PLAN................................86
Introduction.............................................................86
Summary of Plan..........................................................87
Comparison to the Bank of Yorba Linda 1997 Stock Option Plan.............89
Federal Income Tax Consequences..........................................89
COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.......90
EXPERTS.......................................................................90
LEGAL MATTERS.................................................................91
ANNUAL REPORT.................................................................91
ANNEX I: Plan of Reorganization and Merger Agreement........................92
ANNEX II: BYL Bancorp Stockholder Agreement..................................93
INDEX TO FINANCIAL STATEMENTS.................................................94
8
SUMMARY OF PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus, and is intended to assist shareholders in
their review of this Proxy Statement/Prospectus. This summary does not
purport to be complete and is qualified in its entirety by reference to the
full text of the more detailed Proxy Statement/Prospectus, the annexes and
the exhibits thereto, and the documents referred to herein and therein. Each
Bank shareholder is urged to read this Proxy Statement/Prospectus and the
annexes hereto in their entirety and with care.
BANK HOLDING COMPANY REORGANIZATION
DATE, TIME AND PLACE OF MEETING. . _____________, 1997 at 5:30 p.m. at Bank
of Yorba Linda, 18206 Imperial Highway,
Yorba Linda, California 92686.
RECORD DATE. . . . . . . . . . . . ________________, 1997 ("Record Date").
PARTIES TO THE MERGER AGREEMENT. . The Holding Company is a California
corporation, and, subject to the
consummation of the Reorganization,
including the approval of the Holding
Company's Application to the Board of
Governors of the Federal Reserve System,
will acquire 100% of the outstanding
shares of the Bank, and will be
registered as a bank holding company
under the Bank Holding Company Act of
1956, as amended. The principal
executive office of the Holding Company
is located at 18206 Imperial Highway,
Yorba Linda, California 92886, telephone
number (714) 996-1800. Upon consummation
of the Reorganization, the Holding
Company's business will be to act as a
bank holding company for BANK OF YORBA
LINDA, the bank surviving the Merger.
See "BANK HOLDING COMPANY REORGANIZATION"
and "INFORMATION CONCERNING THE BUSINESS
AND PROPERTIES OF THE HOLDING COMPANY",
herein.
The Bank is a California state-chartered
bank. The principal executive office of
the Bank is located at 18206 Imperial
Highway, Yorba Linda, California 92886,
telephone number (714) 996-1800. The
Bank's principal business is that of an
independent commercial bank. The Bank
provides a wide range of banking services
to primarily small and medium sized
businesses and individuals in Orange
County and in the Southern California
area. See "BANK HOLDING COMPANY
REORGANIZATION" and "INFORMATION
CONCERNING THE BUSINESS AND PROPERTIES OF
THE HOLDING COMPANY."
9
The Merger Corp. is a California
corporation organized by the Directors of
the Bank as a wholly-owned subsidiary of
the Holding Company. The Merger Corp.'s
principal purpose is to merge with the
Bank in order to facilitate the Holding
Company's acquisition of the Bank. See
"BANK HOLDING COMPANY REORGANIZATION -
ORGANIZATIONAL TRANSACTIONS."
RIGHTS OF DISSENTING
SHAREHOLDERS . . . . . . . . . . Bank shareholders do not have dissenters'
rights with respect to the Merger.
VOTE REQUIRED. . . . . . . . . . The affirmative vote of the holders of a
majority of the issued and outstanding
shares of Bank Common Stock entitled to
vote (the "Required Vote") is required to
approve the Reorganization Proposal. A
copy of the Merger Agreement is attached
to this Proxy Statement/Prospectus as
Annex I. See "SOLICITATION OF PROXIES -
PROXY AND REVOCABILITY OF PROXIES."
The affirmative vote of a majority of the
outstanding shares of the Merger Corp.
and the and the Holding Company entitled
to vote are also required for approval of
the Reorganization Proposal. See "BANK
HOLDING COMPANY REORGANIZATION - TERMS OF
THE MERGER AGREEMENT; CONDITIONS TO THE
MERGER."
THE REORGANIZATION . . . . . . . The Merger Agreement provides for the
acquisition of the Bank by the Holding
Company by means of the Merger. Upon
consummation of the Merger, the Merger
Corp. will be merged with and into the
Bank under the charter of the Bank and
the separate corporate existence of the
Merger Corp. will cease. As a result of
the Merger, the surviving entity will
continue to be known as "BANK OF YORBA
LINDA" and will continue the Bank's
current business and operations as a
California state-chartered bank in
essentially the same manner as it was
conducted prior to the Reorganization.
Each share of Bank Common Stock
outstanding immediately prior to the
Merger will, on and after the
consummation of the Merger, automatically
represent one share of Holding Company
Common Stock. Upon consummation of the
Merger, all of the Surviving Bank's
common stock will be owned by the Holding
Company. See "BANK HOLDING COMPANY
REORGANIZATION -
10
GENERAL; TERMS OF THE MERGER AGREEMENT;
CONVERSION."
REASONS FOR THE
REORGANIZATION . . . . . . . . . In the opinion of the Bank's Board of
Directors, the bank holding company
structure will permit greater flexibility
in responding to evolving changes in the
banking and financial services industries
and meeting the competition of other
financial institutions. The Board of
Directors of the Bank believes that the
Reorganization will provide Bank
Shareholders with the opportunity to own
a business entity which will provide
greater operating and financial
flexibility and will permit expansion
into a broader range of financial
services and other business activities.
The Holding Company anticipates that
during the initial months following the
consummation of the Reorganization, its
principal business and activity will be
to serve as the bank holding company for
the Surviving Bank. See "BANK HOLDING
COMPANY REORGANIZATION - REASONS FOR
REORGANIZATION."
RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY. . . . . . . . . The Holding Company's Articles of
Incorporation and Bylaws contain certain
provisions not contained in the Articles
of Incorporation or Bylaws of the Bank
relating to the Board of Directors and
certain business combinations, all of
which may be deemed to have
"anti-takeover" effects. If and when the
Holding Company becomes a "listed
corporation" (i.e., outstanding shares
listed on an exchange or NASDAQ), which
is expected to occur on or before
consummation of the Reorganization, and
has at least 800 holders of its equity
securities, (i) the Board of Directors
will be divided into 2 classes, and the
members of each class shall be elected
for a term of two (2) years, and (ii)
cumulative voting for directors will be
eliminated. The Articles of
Incorporation also contain provisions
indicating that (a) the affirmative vote
of at least 66 2\3 of the Holding
Company's outstanding shares will be
required to approve certain "Business
Combinations" involving a "Related
Person", and (b) the affirmative vote of
at least 66 2/3 of the Holding Company's
outstanding shares will be required to
approve or amend certain provisions of
the Articles of Incorporation, including
provisions limiting voting rights,
approval relating to certain business
11
combinations, number and classification
of directors and other items.
INTERESTS OF CERTAIN PERSONS IN
THE MERGER . . . . . . . . . . . The Reorganization will not have any
substantive effect on the operation or
management of the Surviving Bank which
will continue to have the same directors,
officers, management personnel, assets
and operating policies as the Bank had
prior to the Reorganization. Upon
consummation of the Reorganization, the
Holding Company will have the same
directors and officers as the Holding
Company had prior to consummation of the
Reorganization. See "BANK HOLDING
COMPANY REORGANIZATION - TERMS OF THE
MERGER AGREEMENT - INTERESTS OF CERTAIN
PERSONS IN THE MERGER", and "INFORMATION
CONCERNING THE BUSINESS AND PROPERTIES OF
THE HOLDING COMPANY - MANAGEMENT."
As of the Record Date, the Bank's
directors, executive officers and their
affiliates beneficially owned, in the
aggregate, approximately 12.24% of the
Bank's outstanding shares entitled to
vote for the approval of the Merger
Agreement. The Holding Company has one
shareholder, also a director and
executive officer of the Bank, who
beneficially owns 100% of the Holding
Company's common stock, who intends to
vote such shares in favor of approval of
the Merger Agreement. Following
consummation of the Reorganization, the
Holding Company will repurchase such
shares of the Holding Company Common
Stock. See "SOLICITATION OF PROXIES -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT"; and "BANK HOLDING
COMPANY REORGANIZATION - ORGANIZATIONAL
TRANSACTIONS." The affirmative consent
of a majority of the outstanding shares
of Bank Common Stock and Holding Company
Common Stock, respectively, are required
to approve the Merger Agreement. See
"SOLICITATION OF PROXIES"; and "BANK
HOLDING COMPANY REORGANIZATION - TERMS OF
THE MERGER AGREEMENT; CONDITIONS TO THE
MERGER", herein.
CONDITIONS TO THE REORGANIZATION
AND REGULATORY APPROVALS . . . . In addition to approval of the Merger
Agreement by the Board of Directors and
the shareholders of the Bank, the Merger
Corp. and the Holding
12
Company, consummation of the
Reorganization will require the prior
approval, on terms satisfactory to
the Bank, the Merger Corp. and the
Holding Company, of certain
regulatory agencies, including the
Board of Governors of the Federal
Reserve System ("Federal Reserve
Board"), the Federal Deposit
Insurance Corporation ("FDIC"), and
the California Commissioner of
Financial Institutions (the
"Commissioner"). Management of the
Bank is not aware of any
circumstances which would lead it to
believe that such agencies will not
approve the Merger and the
Reorganization. Even if such
approvals are obtained, the Board of
Directors of the Bank, the Holding
Company or the Merger Corp. may,
under certain circumstances,
terminate the Merger Agreement. See
"BANK HOLDING COMPANY REORGANIZATION
- REGULATORY APPROVALS."
A notification for prior approval of the
Holding Company to acquire the Bank was
filed by the Holding Company with the
Federal Reserve Board on _________, 1997.
An application (the "Merger Application")
for prior approval of the Merger was
filed with the FDIC on _________, 1997.
An application (the "State Application")
for an acquisition of control of the Bank
by the Holding Company was filed with the
Commissioner on August 7, 1997.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES . . . . . . . . . . The Reorganization is conditioned upon
receipt of a ruling from the Internal
Revenue Service or an opinion to the
effect, among other things, that no gain
or loss will be recognized by Bank
Shareholders upon the exchange of their
common stock solely for Holding Company
Common Stock. The Bank, the Holding
Company or the Merger Corp. may terminate
the Merger Agreement in the event a
favorable ruling from the Internal
Revenue Service is not received or a
favorable opinion of counsel with respect
to the tax effect of the reorganization
is not received. See "BANK HOLDING
COMPANY REORGANIZATION - CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
PROXIES. . . . . . . . . . . . . The enclosed Proxy is being solicited by
the Board of Directors of the Bank. Each
share of the Bank Common Stock
represented by a properly executed Proxy
will, unless such Proxy has been
13
previously revoked, be voted in
accordance with the instructions
indicated on such Proxy. Any Proxy may
be revoked at any time prior to the time
it is voted by notifying the Bank's
corporate secretary in writing to that
effect, by filing a duly executed proxy
bearing a later date, or by voting in
person at the meeting. "SOLICITATION OF
PROXIES."
RECOMMENDATIONS. . . . . . . . . On April 23, 1997, the Board of Directors
of the Bank approved the Merger Agreement
and the Reorganization and determined
that the transactions contemplated by the
Merger Agreement were in the best
interests of the Bank and its
shareholders and recommended that such
shareholders approve the Merger
Agreement. See "BANK HOLDING COMPANY
REORGANIZATION - RECOMMENDATIONS."
BYL BANCORP 1997 STOCK OPTION PLAN
SUMMARY OF THE 1997 PLAN . . . . The 1997 Plan proposes to reserve 460,519
shares of Common Stock of the Holding
Company for issuance pursuant to the
exercise of options. The 1997 Plan is
designed to replace the Bank's 1997 Stock
Option Plan, with certain changes,
including (i) an increase in the number
of shares subject to the 1997 Plan, (ii)
options may be granted to consultants,
(iii) except for directors and officers,
a minimum vesting at least 20% per year
for full time employees, and (iv) the
ability to exercise vested options under
certain conditions if terminated for
cause as more fully described in this
Proxy Statement/Prospectus. See
"APPROVAL OF BYL BANCORP 1997 STOCK
OPTION PLAN."
VOTE REQUIRED. . . . . . . . . . The affirmative vote of a majority of the
outstanding shares of the Bank, as
prospective shareholders of the Holding
Company entitled to vote are also
required for approval of the BYL Bancorp
1997 Stock Option Plan. See "APPROVAL OF
BYL BANCORP 1997 STOCK OPTION PLAN."
14
SELECTED FINANCIAL DATA
The following table presents selected financial data for the Bank as of
and for each of the five years in the period ended December 31, 1996 and as
of and for the six months ended June 30, 1997 and 1996. The data as of and
for each of the five years in the period ended December 31, 1996 is derived
from audited financial statements of the Bank and the notes thereto. The data
at June 30, 1997 and for the six months ended June 30, 1997 and 1996 is
derived from the unaudited financial statements of the Bank. In the opinion
of management, such unaudited financial statements have been prepared on the
same basis as the audited financial statements, and include all adjustments,
which consist solely of normal recurring accruals, necessary for a fair
statement of the results for the unaudited interim periods. Results for the
six months ended June 30, 1997 should not be considered necessarily
indicative of the results to be expected for the full year. The information
below is qualified in its entirety by the detailed information and financial
statements included elsewhere herein, and should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE
BANK", and the financial statements of the Bank and notes thereto included
elsewhere in this Proxy Statement/Prospectus.
15
SELECTED FINANCIAL DATA
The following table reflects selected financial data relating to the past five
years of the Bank's operations.
AT OR FOR THE SIX
MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- ------- ------- ------- -------
SUMMARY OF OPERATIONS:
Interest Income $ 6,062 $ 2,740 $ 7,498 $ 4,479 $ 4,127 $ 4,023 $ 4,516
Interest Expense 1,756 690 2,060 1,045 1,005 1,039 1,255
-------- -------- -------- ------- ------- ------- -------
Net Interest Income 4,306 2,050 5,438 3,434 3,122 2,984 3,261
Provision for Loan Losses 195 123 344 262 423 819 318
-------- -------- -------- ------- ------- ------- -------
Net Interest Income after Provision
for Loan Losses 4,111 1,927 5,094 3,172 2,699 2,165 2,943
Noninterest Income 5,731 3,379 7,653 5,662 3,799 3,362 2,586
Noninterest Expense 8,282 4,545 10,661 7,095 5,687 5,336 4,691
-------- -------- -------- ------- ------- ------- -------
Income before Income Taxes 1,560 761 2,086 1,739 811 191 838
Income Taxes 667 310 884 717 335 71 336
-------- -------- -------- ------- ------- ------- -------
Net Income $ 893 $ 451 $ 1,202 $ 1,022 $ 476 $ 120 $ 502
-------- -------- -------- ------- ------- ------- -------
-------- -------- -------- ------- ------- ------- -------
PER SHARE DATA:
Net Income - Primary (1) $ 0.54 $ 0.69 $ 1.05 $ 1.98 $ 0.83 $ 0.13 $ 0.91
Net Income - Fully Diluted (2) $ 0.54 $ 0.65 $ 1.04 $ 1.39 $ 0.62 $ 0.13 $ 0.65
Book Value (3) $ 8.92 $ 7.96 $ 8.43 $ 8.68 $ 6.70 $ 5.87 $ 5.73
Tangible Book Value (4) $ 7.88 $ 6.83 $ 7.35 $ 8.68 $ 6.70 $ 5.87 $ 5.73
STATEMENTS OF FINANCIAL CONDITION SUMMARY:
Total Assets $152,081 $117,672 $116,467 $59,784 $53,430 $52,230 $56,204
Total Deposits 136,446 103,801 102,368 54,025 48,693 47,965 51,868
Loans Held for Sale 41,423 14,285 24,363 10,186 9,969 2,683 1,932
Total Loans, Net 68,738 61,531 63,339 30,917 27,756 37,798 38,109
Allowance for Loan Losses 1,182 1,337 1,210 580 536 413 482
Total Shareholders' Equity 13,694 12,216 12,938 5,157 4,405 4,020 3,960
SELECTED RATIOS:
Return on Average Assets 1.35% 1.45% 1.35% 1.88% 0.88% 0.22% 0.94%
Return on Average Equity 13.32% 17.85% 13.82% 21.37% 11.31% 3.13% 13.31%
Net Interest Margin 7.71% 7.79% 7.29% 7.34% 6.83% 6.41% 6.71%
Average Loans as a Percent
of Average Deposits 84.72% 79.18% 79.90% 82.03% 80.76% 82.55% 83.84%
Non-Performing Assets to Total Assets 1.48% 1.83% 1.49% 2.37% 1.77% 3.40% 2.88%
Non-Performing Loans to Total Loans 1.94% 2.03% 1.09% 2.88% 1.00% 0.35% 3.21%
Allowance for Loan Losses to Total Loans 1.70% 2.13% 1.88% 1.84% 1.90% 1.08% 1.25%
Allowance for Loan Losses to
Non-Performing Loans 86.98% 86.60% 172.61% 63.81% 190.07% 308.21% 38.47%
Tier 1 Leverage Capital Ratio 7.97% 14.24% 9.24% 8.12% 7.54% 6.38% 6.65%
Tier 1 Capital to Risk-Weighted Assets 9.99% 11.07% 11.77% 10.49% 10.71% 8.51% 8.57%
Total Capital to Risk-Weighted Assets 11.06% 12.32% 13.02% 11.74% 11.96% 9.75% 9.67%
- -----------------
(1) These amounts represent the net income reduced by preferred stock dividends
divided by the weighted average number of common shares outstanding for the
respective years.
(2) These amounts represent net income dividend by the weighted average number
of common shares outstanding, plus the conversion of the preferred stock
and unpaid cumulative dividends.
(3) As used throughout this Annual Report, the term "book value per share" is
defined as total stockholders' equity less the preferred stock and unpaid
cumulative dividends divided by the number of common shares outstanding at
the end of the year.
(4) The term "tangible book value per share" is defined as total stockholders'
equity less the convertible preferred stock, unpaid cumulative dividends,
and goodwill divided by the number of common shares at the end of the
period.
SPECIAL MEETING OF SHAREHOLDERS
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of Proxies by the Bank Board of Directors for use at a Special
Meeting of Shareholders of the Bank (the "Meeting") to be held on
_____________, 1997 at 5:30 p.m. at the Bank's headquarters office, 18206
Imperial Highway, Yorba Linda, California, and at any adjournments thereof.
At the Meeting, shareholders will be asked to approve the Merger Agreement
providing for the merger of BYL MERGER CORPORATION (the "Merger Corp.") with
and into the Bank, as a result of which the Bank will be the wholly-owned
subsidiary of BYL Bancorp. In addition, this Proxy Statement/Prospectus is
also furnished in connection with the solicitation of Proxies of shareholders
of the Bank as prospective shareholders of the Holding Company for approval
of the BYL Bancorp 1997 Stock Option Plan (the "1997 Plan").
VOTING OF PROXIES AND REVOCABILITY OF PROXIES
A Proxy for use at the Meeting is enclosed. All shares of Bank Common
Stock represented by properly executed Proxies received by the Bank will,
unless revoked, be voted at the Meeting in accordance with the instructions
on such Proxies. If no instruction is specified with regard to a mater to be
considered, the shares of Bank Common stock represented by the Proxy will be
voted in favor of (i) approval of the Merger Agreement, and (ii) approval of
the 1997 Plan.
The Proxy also confers discretionary authority to vote the shares
represented thereby in accordance with the recommendations of the Bank Board
of Directors on any matter that was not known at the time this Proxy
Statement/Prospectus was mailed which may properly be presented for action at
the Meeting and may include actions with respect to procedural matters
pertaining to the conduct of the Meeting and the election of any person to
any office for which a bona fide nominee is named herein if such nominee is
unable to serve or for good cause will not serve. If any other business is
properly presented at the Meeting, the Proxy will be voted in accordance with
the recommendation of the Bank Board of Directors.
Any Bank shareholder may revoke his Proxy at any item before it is voted
by filing with the Bank's Corporate Secretary an instrument revoking it or a
duly executed proxy bearing a later date, or by attending the Meting and
advising the Chairman of his or her election to vote in person.
THE BANK MUST RECEIVE PROXIES REPRESENTING A MAJORITY OF THE OUTSTANDING
SHARES OF THE BANK'S COMMON STOCK FOR APPROVAL OF THE MERGER AGREEMENT AND
THE 1997 Plan.
RECORD DATE AND PERSONS ENTITLED TO GIVE PROXIES
There were issued and outstanding 1,535,064 shares of the Bank's Common
Stock at the close of business on _________ 1997, which has been set as the
Record Date for the purpose of determining the shareholders entitled to vote
at the Meting. The Bank has no other class of stock outstanding. Approval of
the Merger Agreement and the 1997 Plan may be given by any person in whose
name shares of Common Stock stand on the books of the Bank as of the Record
Date, or by his or her duly authorized agent.
Each holder of Bank Common Stock will be entitled to one vote for each
share of Bank Common Stock standing in his or her name on the books of the
Bank as of the Record Date.
17
A majority of the outstanding shares of Bank Common Stock entitled to
vote shall constitute a quorum. Under the Bank's Articles of Incorporation,
the Reorganization Proposal requires the affirmative vote of a majority of
the outstanding shares of Bank Common Stock. In addition, approval of the
1997 Plan requires the affirmative vote of a majority of the outstanding
shares of Bank Common Stock as proposed to be exchanged for Holding Company
Common Stock. Accordingly, abstentions from voting will have the effect of a
vote "AGAINST" the Reorganization Proposal.
If you hold your Bank Common Stock in "street name" and you fail to
instruct your broker or nominee as to how to vote your Bank Common Stock, you
broker or nominee MAY NOT, pursuant to applicable stock exchange rules, vote
your Bank Common Stock with respect to the Reorganization Proposal.
COST OF SOLICITATIONS OF PROXIES
This Proxy Statement/Prospectus is made on behalf of the Board of
Directors of the Bank and the Holding Company, and the Bank will bear the
costs of solicitation. The expense of preparing, assembling, printing and
mailing this Proxy Statement/Prospectus and the materials used in this
solicitation of Proxies also will be borne by the Bank. It is contemplated
that Proxies will be solicited principally through the mail, but directors,
officers and regular employees of the Bank may solicit Proxies personally or
by telephone. Although there is no formal agreement to do so, the Bank may
reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding these proxy materials
to their principals. The Bank does not intend to utilize the services of
other individuals or entities not employed by or affiliated with the Bank in
connection with the solicitation of Proxies.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 1997
pertaining to beneficial ownership of the Bank's Common Stock by persons
known to the Bank to own five percent (5%) or more of such stock, current
directors and Executive Officers (1) of the Bank, and all directors and
Executive Officers of the Bank as a group. The information contained herein
has been obtained from the Bank's records and from information furnished
directly by the individual or entity to the Bank. All shares are held with
shared voting and investment power except as otherwise indicated. All
addresses of Directors and Executive Officers are in care of the Bank at
18206 Imperial Highway, Yorba Linda, California.
The table should be read with the understanding that more than one (l)
person may be the beneficial owner or possess certain attributes of
beneficial ownership with respect to the same securities. In addition, shares
of Common Stock issuable pursuant to options which may be exercised within
sixty (60) days of June 30, 1997 are deemed to be issued and outstanding and
have been treated as outstanding in calculating the percentage ownership of
those individuals possessing such interest.
- -----------------
(1) As used throughout this Proxy Statement, the term "officer" or "executive
officer" refers to the President and Chief Executive Officer, the Senior
Executive Vice President/Chief Financial Officer, and the Executive Vice
President/Credit Administrator.
18
BENEFICIAL OWNERSHIP(1)
OF COMMON STOCK ON
NAME TITLE JUNE 30, 1997 PERCENT
---- ----- ----------------------- -------
Basswood Partners Shareholder 152,055 9.90%
Leonard O. Lindborg Director 8,533(2) .55%
H. Rhoads Martin Director 19,467(3) 1.26%
Barry J. Moore Sr. Executive Vice President/ 42,000(4) 2.66%
Chief Operating Officer and
Director
Michael H. Mullarky Executive Vice President 28,332(5) 1.82%
and Credit Administrator
John F. Myers Director, Secretary 14,666(6) .95%
- -----------------
(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship,
or otherwise has or shares: (a) voting power which includes the power to
vote, or to direct the voting of such security; and/or the investment
power, which includes the power to dispose, or to direct the disposition,
of such security. Beneficial owner also includes any person who has the
right to acquire beneficial ownership of such security as defined above
within sixty (60) days of June 30, 1997.
(2) Include 1,200 shares of Common Stock which may be acquired by Mr. Lindborg
upon exercise of options pursuant to the Bank's 1990 Stock Option Plan, and
4,000 shares of Common Stock which may be acquired by Mr. Lindborg upon
exercise of options pursuant to the Bank's 1997 Stock Option Plan.
(3) Includes 3,467 shares of Common Stock which may be acquired by Mr. Martin
upon exercise of options pursuant to the Bank's 1990 Stock Option Plan, and
4,000 shares of Common Stock which may be acquired by Mr. Martin upon
exercise of options pursuant to the Bank's 1997 Stock Option Plan.
(4) Includes 19,333 shares of Common Stock which may be acquired by Mr. Moore
upon exercise of options pursuant to the Bank's 1990 Stock Option Plan, and
22,667 shares of Common Stock which may be acquired by Mr. Moore upon
exercise of options pursuant to the Bank's 1997 Stock Option Plan.
(5) Includes 4,167 shares held in the Joseph W. Mullarky Testamentary Trust
dated January 5, 1987, and Mr. Michael Mullarky acts as sole trustee.
Includes 17,333 shares of Common Stock which may be acquired by Mr.
Mullarky upon exercise of options pursuant to the Bank's 1990 Stock Option
Plan, and 2,667 shares of Common Stock which may be acquired by Mr.
Mullarky upon exercise of options pursuant to the Bank's 1997 Stock Option
Plan.
(6) Includes 3,467 shares of Common Stock which may be acquired by Mr. Myers
upon exercise of options pursuant to the Bank's 1990 Stock Option Plan, and
4,000 shares of Common Stock which may be acquired by Mr. Myers upon
exercise of options pursuant to the Bank's 1997 Stock Option Plan.
19
BENEFICIAL OWNERSHIP
OF COMMON STOCK ON
NAME TITLE JUNE 30, 1997 PERCENT
---- ----- ------------------------ -------
Robert Ucciferri President, Chief Executive 68,745(7) 4.35%
Officer and Director
Brent W. Wahlberg Director 16,121(8) 1.04%
All Directors and Executive 197,864(9) 12.24%
Officers as a Group (7 in number)
- -----------------
(7) Includes 33,333 shares of Common Stock which may be acquired by Mr.
Ucciferri upon exercise of options pursuant to the Bank's 1990 Stock Option
Plan, and 13,333 shares of Common Stock which may be acquired by Mr.
Ucciferri upon exercise of options pursuant to the Bank's 1997 Stock Option
Plan.
(8) Includes 3,467 shares of Common Stock which may be acquired by Mr. Wahlberg
upon exercise of options pursuant to the Bank's 1990 Stock Option Plan, and
4,000 shares of Common Stock which may be acquired by Mr. Wahlberg upon
exercise of options pursuant to the Bank's 1997 Stock Option Plan.
(9) Includes 81,600 shares of Common Stock which may be acquired upon exercise
of options pursuant to the Bank's 1990 Stock Option Plan, and 54,667 shares
of Common Stock which may be acquired upon exercise of options pursuant to
the Bank's 1997 Stock Option Plan.
20
BANK HOLDING COMPANY REORGANIZATION
GENERAL
The Board of Directors of the Bank has unanimously approved the
formation of a holding company, to be known as BYL Bancorp, for the Bank, by
means of the Merger pursuant to the terms and conditions of the Merger
Agreement described herein and unanimously recommends that shareholders of
the Bank vote to approve the Reorganization Proposal. A copy of the Merger
Agreement is attached hereto as Annex I. The following discussion of the
Reorganization Proposal is a summary only and does not purport to be a
complete description and is qualified in its entirety by reference to the
complete Merger Agreement.
At the Effective Time of the Merger (defined below), the Merger Corp.
will be merged with and into the Bank, with the Bank as the Surviving Bank,
as a result of which each outstanding share of Bank Common Stock shall be
converted into Holding Company Common Stock on a one-for-one basis. As a
result of the Merger, the current Bank Shareholders will become the sole
shareholders of the Holding Company and the Holding Company will become the
sole shareholder of the Surviving Bank. Upon consummation of the
Reorganization, the Surviving Bank will continue the Bank's present business
and operations under the name "BANK OF YORBA LINDA", as a wholly-owned
subsidiary of the Holding Company and under the Articles of Incorporation and
Bylaws of the Bank. The consolidated capitalization, assets, liabilities,
income and financial statements of the Holding Company immediately following
the Reorganization will be substantially the same as those of the Bank
immediately prior to the consummation of the Reorganization. See "BANK
HOLDING COMPANY REORGANIZATION - CAPITALIZATION."
REASONS FOR REORGANIZATION
In the opinion of the Bank's Board of Directors, the bank holding
company structure will permit greater flexibility in responding to evolving
changes in the banking and financial services industries and meeting the
competition of other financial institutions. The Bank's Board of Directors
believes that a bank holding company is an entity which can provide greater
operating and financial flexibility and will permit expansion into a broader
range of financial services and other business activities.
Management of the Bank believes that a bank holding company will permit
Bank shareholders to participate in the ownership of a more flexible entity
for financing and growth within the banking and financial services
industries. A bank holding company may provide more alternatives in the
raising of funds required by the Bank or by the Holding Company under
changing conditions in financial and monetary markets. For example, if a
subsidiary bank required additional capital, the bank holding company might
raise funds by relying on its own borrowing ability without having to go to
the equity market. At present the Holding Company has no plans, arrangements
or commitments to borrow any funds if the Merger Agreement is approved.
Furthermore, upon consummation of the Reorganization and until such time at
the Holding Company receives income in the form of dividends from the
Surviving Bank, the Holding Company is not expected to be able to rely on its
own borrowing ability to raise funds as it will not have any significant
assets, other than its investment in the Surviving Bank, to support such
borrowing.
Flexibility in financing also will be provided by the Holding Company's
authorized capitalization of 50,000,000 shares of Holding Company Common
Stock, no par value, and 25,000,000 shares of Holding Company Preferred
Stock, no par value. If the Reorganization Proposal is approved, up to
1,535,064 shares of Holding Company Common Stock will be issued to the
shareholders of the
21
Bank, up to 460,519 shares may be issued pursuant to outstanding stock
options grants and will be available for future grants issued under the
Holding Company's 1997 Stock Option Plan, leaving 48,004,417 shares of
authorized but unissued Holding Company Common Stock. These shares will be
available for issuance from time to time to raise additional capital (such as
in connection with a subsequent offering following the Reorganization, as
discussed above), for acquisitions or for any other corporate purposes and,
to the extent authorized by law, may be issued without further action by the
Holding Company's shareholders.
The Reorganization will also provide certain flexibility for acquiring
or establishing other banking operations. For example, in the event an
opportunity for the acquisition of another bank were to develop, it might be
desirable to maintain the separate existence of the other bank after the
acquisition rather than merging it into the Surviving Bank. The existence of
a bank holding company would allow such an acquisition. However, except for
the acquisition of the Bank described herein, at this time the Holding
Company does not have any specific plans, arrangements or commitments to
acquire or establish any such banking operations.
The Reorganization can also allow for the distribution of certain assets
of the Bank, such as the Bank's mortgage division, to a separate subsidiary
of the Holding Company if certain events should occur, thereby possibly
enhancing the value of the Holding Company.
It is also anticipated that the new corporate structure can be used
advantageously to engage in other financially oriented activities, either
directly, or indirectly through newly formed subsidiaries or by acquiring
companies already established in such fields. Such activities currently are
limited to activities permissible under the Federal Bank Holding Company Act
of 1956, as amended (the "BHC Act"). Neither the Bank nor the Holding Company
is currently engaged in any specific discussions relating to acquisitions nor
do they anticipate engaging in any such discussions in the immediate future.
However, should the Surviving Bank or the Holding Company be presented with
an acquisition opportunity within their market areas, either or both the
Surviving Bank and the Holding Company expects to make a determination
whether or not to and the manner in which it should pursue such opportunity,
although this may require the prior approval or consent of the Federal
Reserve Board and/or the Commissioner. See "SUPERVISION AND REGULATION OF THE
HOLDING COMPANY AND THE BANK - THE HOLDING COMPANY."
Management of the Bank believes that the Reorganization will enhance the
Bank's ability to satisfy ever changing and expanding needs of present
customers for banking and banking-related services and to continue to attract
new customers for financial services. The recommended corporate form will
better suit expansion into new areas of service than would be existing
structure.
The Holding Company anticipates that during the initial months following
the consummation of the Reorganization, the principal business and activity
of the Holding Company will be to serve as the bank holding company for the
Surviving Bank.
ORGANIZATIONAL TRANSACTIONS
At the direction of the Board of Directors of the Bank, the Holding
Company was incorporated under the laws of the State of California on April
17, 1997 for the purpose of becoming a bank holding company by acquiring all
of the outstanding Bank Common Stock. Mr. Robert Ucciferri, by purchasing 150
shares of Holding Company Common Stock at $10.00 per share, provided the
Holding Company's initial capitalization of $1,500. A copy of the Stockholder
Agreement with Mr.
22
Ucciferri is attached hereto as Annex II. See "BANK HOLDING COMPANY
REORGANIZATION - REGULATORY APPROVALS."
Upon consummation of the Merger, these 150 shares of Holding Company
Common Stock will be repurchased by the Holding Company for the same
aggregate sum of $1,500 and cancelled. The obligation of the Holding Company
to repurchase said shares and the obligation of Mr. Ucciferri to resell those
shares to the Holding Company is set forth in the "BYL Bancorp Stockholder
Agreement" attached to this Proxy Statement/Prospectus as Annex II.
At the direction of the Board of Directors of the Bank, the Merger Corp.
was incorporated under the laws of the State of California on April 17, 1997
for the purpose of merging with the Bank in order to facilitate the Holding
Company's acquisition of the Bank. In order to capitalize the Merger Corp.,
the Merger Corp. issued 100 shares of common stock of the Merger Corp. (the
"Merger Corp. Common Stock") to the Holding Company for $1,000. Prior to the
Effective Time of the Merger, the Holding Company will be the sole
shareholder of the Merger Corp. Upon consummation of the Merger, these 100
shares of Merger Corp. Common Stock will be converted into Surviving Bank
Common Stock.
TERMS OF THE MERGER AGREEMENT
CONVERSION. At the Effective Time of the Merger (defined below), the
shares of common stock of the Bank, Merger Corp. and Holding Company, parties
to the Merger Agreement, shall be converted and exchanged as described herein.
Each share of Bank Common Stock issued and outstanding immediately prior
to the Effective Time of the Merger will, at the Effective Time of the
Merger, automatically become and be converted into the right to receive, at
the election of the shareholder, one share of Holding Company Common Stock.
Each share of Merger Corp. Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger will, on and after the
Effective Time of the Merger, be converted into one (1) share of Bank Common
Stock and, as a result, at the Effective Time of the Merger, all of the
common stock of the Surviving Bank will be owned by the Holding Company.
Each share of Holding Company Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger will, at the Effective
Time of the Merger, be repurchased by the Holding Company.
At the Effective Time of the Merger, the Bank shareholders will be the
shareholders of the Holding Company. As shareholders of the Holding Company,
they will have essentially the same rights to govern the Holding Company's
activities as they have with respect to the Bank; however, as shareholders of
the Holding Company, they will not be entitled to vote on matters requiring
the approval of Bank shareholders. Shareholders of the Holding Company will
be entitled to vote with respect to matters affecting the Holding Company
which will own 100% of the Surviving Bank. A discussion of those rights is
contained in the section entitled "COMPARISON OF BANK COMMON STOCK AND
HOLDING COMPANY COMMON STOCK."
EFFECTIVE TIME OF THE MERGER. The Merger will be effective at the time
the Merger Agreement is filed in the office of the Secretary of State of
California (the "Effective Time of the Merger"). The Effective Time of the
Merger will not occur until (i) all requisite board of directors,
shareholders and
23
regulatory approvals and consents for the Merger and the Reorganization are
obtained; (ii) the expiration of any applicable waiting periods under the BHC
Act and the Bank Merger Act; and (iii) the satisfaction of all of the
requirements of law and conditions specified in the Merger Agreement. There
is no date by which the Effective Time of the Merger must occur.
INTERESTS OF CERTAIN PERSONS IN THE MERGER. The Merger Agreement
provides that the directors of the Bank immediately prior to the Effective
Time of the Merger will be directors of the Surviving Bank. Additionally, the
officers and other employees of the Bank immediately prior to the Effective
Time of the Merger will all be employed in substantially the same capacities
by the Surviving Bank.
EMPLOYEE BENEFITS. Upon consummation of the Reorganization, the Bank's
1997 Stock Option Plan (the "Plan") will be terminated and a new Stock Option
Plan of the Holding Company (the "1997 Plan") will be established. Stock
options with respect to shares of Bank Common Stock granted under the Plan
and outstanding prior to consummation of the Reorganization will
automatically become options to purchase the same number of shares of Holding
Company Common Stock upon identical terms and conditions, subject to such
modifications as contained in 1997 Plan, and for an identical price. The
Holding Company will assume all of the Bank's obligations with respect to
such outstanding options.
The 1997 Plan proposes to reserve 460,519 shares of Common Stock of the
Holding Company for issuance pursuant to the exercise of options. The 1997
Plan is designed to replace the Bank's 1997 Stock Option Plan, with certain
changes, including (i) an increase in the number of shares subject to the
1997 Plan, (ii) options may be granted to consultants in addition to
directors, officers and employees, (iii) the exercise of options with not
only cash but also a promissory note or by applying the appreciated value of
the shares being surrendered to payment of the exercise price, (iv) except
for directors and officers, all employees will have a minimum vesting at
least 20% per year, and (v) the ability to exercise vested options under
certain conditions if employee is terminated for cause as more fully
described in this Proxy Statement/Prospectus. See "APPROVAL OF BYL BANCORP
1997 STOCK OPTION PLAN."
All other employee benefits and benefit plans of the Bank in effect
immediately prior to the Effective Time of the Merger will be unchanged by
the Reorganization, except that any plan which refers to Bank Common Stock
will, following consummation of the Reorganization, be deemed to refer
instead to Holding Company Common Stock and will become the employee benefits
and benefit plans solely of the Surviving Bank.
CONDITIONS TO THE MERGER. The obligations of each of the parties to the
Merger Agreement to consummate the Merger are subject to the satisfaction, on
or before the Effective Time of the Merger, of the following conditions (i)
approval of the terms of the Reorganization Proposal including the Merger
Agreement, by the shareholders of the Bank owning at least a majority of the
capital stock of the Bank; (ii) approval of the Merger Agreement by a
majority of the outstanding shares of the Holding Company and the Merger
Corp.; (iii) approval by a majority of the Board of Directors of both the
Bank and the Merger Corp. of the Merger Agreement; (iv) approval of the
Merger Agreement by the Holding Company; (v) all consents and approvals
prescribed by law, including, without limitation, the approval of the Federal
Reserve Board, the FDIC and the Commissioner, for the consummation of the
Merger and Reorganization; and (vi) all other requirements prescribed by law
which are necessary for the consummation of the Merger and Reorganization
including, but not limited to, the expiration of any applicable waiting
periods under the Bank Merger Act and the BHC Act. The Merger Agreement does
not provide for an outside closing date for the transactions contemplated
herein.
24
The directors of the Bank, the Merger Corp. and the Holding Company have
unanimously approved the Reorganization Proposal. The Holding Company has
filed an notification for prior approval to become a bank holding company
pursuant to the BHC Act with the Federal Reserve Board and an application to
acquire control of the Bank under Section 700 of the California Financial
Code with the Commissioner. In addition, the Bank and the Merger Corp. have
filed applications for approval of the Merger with the FDIC and the
Commissioner. See "BANK HOLDING COMPANY REORGANIZATION - REGULATORY
APPROVALS."
TERMINATION OF MERGER AGREEMENT. The Merger Agreement may be terminated
before the Effective Time of the Merger if (i) the number of shares voting
against the Reorganization Proposal is such that the Board of Directors of
the Bank determines that it is inadvisable to consummate the Merger or
Reorganization and the Board of Directors of the Bank determines that it is
inadvisable to consummate the Merger or Reorganization; (ii) any action,
consent or approval, governmental or otherwise, necessary to permit the
Surviving Bank to conduct all or any part of the business activities of the
Bank prior to the Effective Time of the Merger, shall not have been obtained;
or (iii) for any other reason the consummation of the Merger and
Reorganization is inadvisable in the opinion of the Board of Directors of the
Bank, the Merger Corp. or the Holding Company. Although not indicated in the
Merger Agreement, the Board of Directors believes that it will give strong
consideration to terminating the Merger Agreement if more than 25% of the
outstanding shares of the Bank vote against the Merger. If the holders of a
majority of the outstanding shares of Bank Common Stock fail to approve the
Reorganization Proposal, or the transaction is otherwise terminated, as
provided above, then the business of the Bank would continue to operate under
the ownership of its existing shareholders.
No assurances can be given as to when or if all conditions will be
satisfied.
EXCHANGE OF SHARE CERTIFICATES
As soon as practicable after consummation of the Reorganization, the
Holding Company will mail to each holder of record of Bank Common Stock
immediately prior to the Effective Time of the Merger, a letter of
transmittal which is to be used by each such Bank Shareholder to return to
the Holding Company the stock certificates representing Bank Common Stock
owned by him or her, which certificates should be duly endorsed in blank by
such Bank Shareholder. As soon as practicable after receiving such
certificates from a Bank Shareholder, together with the duly executed letter
of transmittal and any other items specified by the letter of transmittal,
the Holding Company will deliver to such Bank Shareholder new certificates
evidencing the appropriate number of shares of Holding Company Common Stock.
If the new certificates are to be delivered to a person other than the
record holder of the certificates of Bank Common Stock surrendered in
exchange therefor (i) the certificate so surrendered must be properly
endorsed or accompanied by appropriate stock powers and otherwise be in
proper form for transfer; (ii) the transfer must otherwise be proper; and
(iii) the person requesting the transfer must pay to the Holding Company any
transfer or other taxes payable by reason of the transfer or must establish
to the satisfaction of the Holding Company that such taxes have been paid or
are not required to be paid.
COSTS OF REORGANIZATION
The costs of the Reorganization are estimated at approximately $100,000.
If the Reorganization is consummated, the costs of the Reorganization will be
assumed and paid, to the
25
extent properly allocated, by the Holding Company, the Bank and/or the
Surviving Bank. In the event the Reorganization is not consummated, such
costs as have been incurred, including the cost of organizing the Holding
Company and the Merger Corp., will be assumed and paid by the Bank.
REGULATORY APPROVALS
Federal and California law and regulations provide that certain
acquisition transactions, such as the Reorganization, may not be consummated
unless approved in advance by applicable regulatory authorities. The Merger
Agreement provides that the Holding Company, the Bank and the Merger Corp.
shall proceed expeditiously and cooperate fully in the procurement of any
consents and approvals and in the taking of any other action and the
satisfaction of all requirements, prescribed by law or otherwise, necessary
for consummation of the Merger, including the preparation and submission of
applications required to be filed with the FDIC, the Commissioner and the
Federal Reserve Board. Receipt of all requisite regulatory approvals and
consents is a condition precedent to the consummation of the Merger and the
Reorganization. See "BANK HOLDING COMPANY REORGANIZATION - TERMS OF THE
MERGER AGREEMENT - CONDITIONS TO THE MERGER."
A notification for prior approval of the Holding Company to acquire the
Bank was a filed with the Federal Reserve Board on __________, 1997. An
application for prior approval of the Merger was filed with the FDIC on
__________, 1997. An Application for prior approval of the Merger was filed
with the Commissioner on August 7, 1997. There can be no assurances that the
required approvals will be obtained, or as to conditions or timing of such
approvals.
Although neither the Holding Company nor the Bank is aware of any reason
why the requisite approvals of and consents to the Merger and Reorganization
would not be granted, there can be no assurance such approvals and consents
will be obtained or that, if obtained, such approvals and consents will not
include conditions which would be of a type that would relieve the Holding
Company, the Bank or the Merger Corp. from their obligation to consummate the
Merger and Reorganization. See "BANK HOLDING COMPANY REORGANIZATION - TERMS
OF THE MERGER AGREEMENT - CONDITIONS TO THE MERGER" AND "- TERMINATION OF
MERGER AGREEMENT."
DISSENTING SHAREHOLDERS' RIGHTS
Pursuant to the provisions of California law, shareholders of the Bank
will not have dissenting rights in the Merger.
ACCOUNTING TREATMENT
Because the Merger is a reorganization with no change in ownership
interests, the consolidated financial statements of the Holding Company and
the financial statements of the Surviving Bank will retain the former bases
of accounting of the Bank and will be presented substantially identical to
the Bank's financial statements prior to the Reorganization.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion, which is the opinion of Vavrinek, Trine, Day &
Co., is limited to certain federal income tax consequences of the proposed
Reorganization and does not discuss state, local or foreign tax consequences
or all of the tax consequences that might be relevant to shareholders of the
Bank entitled to special tax treatment.
26
In the opinion of Vavrinek, Trine, Day & Co., the Bank's certified
public accountants, the proposed Merger will qualify for federal income tax
purposes as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). This opinion is
conditioned upon the accuracy of various representations made to counsel and
certain assumptions made by counsel. The assumptions include, among others,
the assumption that there is no, and through the Effective Time of the Merger
there will be no, plan or intention on the part of shareholders of the Bank
who own one percent (1%) or more of Bank Common Stock and, to the best
knowledge of the management of the Bank, the Merger Corp. and the Holding
Company, there is no, and through the Effective Time of the Merger there will
be no, plan or intention on the part of the remaining shareholders of the
Bank to sell or otherwise dispose of the Holding Company Common Stock to be
received in the Merger. The opinion is based on current law and assumes that
the Merger is consummated as described herein. Neither this summary nor the
opinion of Vavrinek, Trine, Day & Co. is binding on the IRS and no ruling
from the IRS has been sought or will be sought with respect to such tax
consequences.
Based upon the qualification of the Merger as a reorganization within
the meaning of Section 368 of the Code:
(a) No gain or loss will be recognized by the Bank, the Merger Corp. or
the Holding Company as a result of the Merger;
(b) No gain or loss will be recognized by the shareholders of the Bank
upon receipt of the Holding Company Common Stock in exchange for their shares
of Bank Common Stock pursuant to the Merger;
(c) The basis of the Holding Company Common Stock received by the
shareholders of the Bank pursuant to the Merger will be the same as the basis
of the shares of Bank Common Stock surrendered in exchange therefor;
(d) The holding period of the Holding Company Common Stock received by
shareholders of the Bank pursuant to the Merger will include the holding
period of the Bank Common Stock surrendered in exchange therefor, provided
that such Bank Common Stock is held as a capital asset on the date of
consummation of the Merger;
(e) A holder of an outstanding option granted under the Bank's Stock
Option Plans will not recognize income, gain or loss solely as a result of
the assumption of the Bank's Stock Option Plans by the Holding Company.
(f) The assumption by the Holding Company of outstanding incentive
stock options granted under the Bank's Stock Option Plans will not be deemed
a modification of the option under Section 424(h) of the Code.
THE BANK'S SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER INCLUDING TAX RETURN
REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS.
27
RESTRICTIONS ON AFFILIATES
The obligation of the Bank and the Holding Company to consummate the
Reorganization is subject to the condition that each person who is an
"affiliate" of the Bank for purposes of Rule 145 promulgated under the
Securities Act, execute and deliver a letter to the effect that, among other
things; (i) such person will not dispose of any shares of Holding Company
Common Stock to be received by him pursuant to the Merger Agreement (a) in
violation of the Securities Act or the rules and regulations of the SEC
promulgated thereunder (and, accordingly, that any public offering or sale of
such shares will require either registration under the Securities Act or
compliance with the resale provision of Rule 145 or the availability of
another exemption from the registration requirements of the Securities Act),
or (b) prior to such time as financial results covering at least 30 days of
postmerger combined operations have been published; and (ii) such person
consents to the placing of a legend on the certificate evidencing such shares
referring to the issuance of such shares in a transaction to which Rule 145
is applicable and to the giving of stop-transfer instructions to the Holding
Company's transfer agent with respect to such certificates.
For purposes of Rule 145, affiliates include the Bank's directors and
executive officers. According to Rule 145, the affiliates will be restricted
in their ability to resell their stock. These restrictions include the
limitation, subject to certain exceptions, that not more than one percent
(1%) of the total number of Holding Company shares outstanding be sold for
the account of any affiliate in any three month period.
RECOMMENDATIONS
The Bank's Board of Directors has carefully reviewed the Reorganization
Proposal and believes that, for the reasons set forth in this Proxy
Statement/Prospectus, the proposed Reorganization, is fair to and in the best
interests of the Bank and the Bank's shareholders. On April 23, 1997, the
Bank's Board of Directors unanimously approved the Merger Agreement and the
Reorganization and unanimously recommended that the Bank's shareholders
consent to the Merger Agreement.
CAPITALIZATION
The following table sets forth the actual capitalization of the Bank at
June 30, 1997, the proposed capitalization of the Merger Corp. and the
Holding Company immediately prior to consummation of the Reorganization, and
the pro forma capitalization of the Surviving Bank and the Holding Company on
a consolidated basis to reflect the consummation of the Reorganization.
28
BANK OF BYL MERGER BYL BANCORP AND
YORBA LINDA CORP(1) BYL BANCORP(2) BANK OF YORBA LINDA
-----------------------------------------------------------------
Shareholders' Equity
Common Stock. . . . . $10,298,000 $1,000 $1,500 $10,298,000
Undivided Profits . . 3,396,000 0 0 3,396,000
----------- --------- ---------- -----------
Total . . . . . . . $13,694,000 $1,000 $1,500 $13,694,000
----------- --------- ---------- -----------
----------- --------- ---------- -----------
Share Data:
Common Stock
Authorized. . . . . 5,000,000 1,000,000 50,000,000 50,000,000
Outstanding . . . . 1,535,064 100 150 1,535,064
Par Value . . . . . No Par No Par No Par No Par
Preferred Stock
Authorized . . . . 1,000,000 None 25,000,000 25,000,000
Outstanding . . . . None N/A None None
COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING
COMPANY COMMON STOCK AND BANK COMMON STOCK
The Bank is a California banking corporation organized under the laws of
the State of California, and the rights of Bank Shareholders are governed by
the California Financial Code, the California Corporations Code (the
"Corporations Code"), the Articles of Incorporation of the Bank (the "Bank
Articles"), and the bylaws of the Bank, as amended (the "Bank Bylaws"). Upon
consummation of the Reorganization, the Bank Shareholders will become
shareholders of the Holding Company ("Holding Company Shareholders"). As
shareholders of the Holding Company, the rights of the then former Bank
Shareholders will be governed by Division 1, Chapters 1 - 23 of the
Corporations Code, other applicable California statutes, the Articles of
Incorporation of the Holding Company (the "Holding Company Articles"), and
the bylaws of the Holding Company (the "Holding Company Bylaws").
BANK COMMON STOCK
The Bank is authorized by its Articles of Incorporation, as amended, to
issue 5,000,000 shares of Bank Common Stock, without par value, and 1,000,000
shares of Bank Preferred Stock At June 30, 1997, 1,535,064 shares of Bank
Common Stock, and no shares of Preferred Stock, were issued and outstanding.
Holders of Bank Common Stock are entitled to one vote, in person or by proxy,
for each share of Bank Common Stock held of record in the shareholder's name
on the books of the Bank as of the record date on any matter submitted to the
vote of the shareholders. Each share of Bank Common Stock has the same
rights, privileges and preferences as every other share and will share
equally in the Bank's net assets upon liquidation or dissolution. The Bank
Common Stock has no
- -----------------
(1) Funds to capitalize the Merger Corp. will be obtained by issuing 100 shares
of common stock to the Holding Company for $1,000. Upon consummation of
the Merger, these 100 shares of Merger Corp. Common Stock will be converted
into Surviving Bank Common Stock.
(2) Funds to capitalize the Holding Company have been obtained by issuing 150
shares of common stock to Mr. Robert Ucciferri for $1,500. Upon
consummation of the Reorganization, and pursuant to a written agreement,
these will be repurchased for $1,500 and cancelled by the Holding Company.
See "ANNEX II."
29
preemptive, conversion or redemption rights or sinking fund provisions and
all the shares offered hereby will, when issued, be fully paid. Shares of
Bank Common Stock are subject to assessment by the Bank upon order of the
Commissioner for the purpose of correcting an impairment of contributed
capital in the manner and to the extent provided in Division 1 of the
California Financial Code. See "COMPARISON OF THE RIGHTS OF HOLDERS OF
HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - ASSESSABILITY."
California law prohibits a California state-chartered bank from lending
on the security of its own stock.
Shareholders are entitled to dividends when, as and if declared by the
Bank's Board of Directors out of funds legally available therefor (and after
satisfaction of the prior rights of holders of outstanding preferred stock,
if any) subject to certain restrictions on payment of dividends imposed by
the California Financial Code and other applicable regulatory limitations.
See "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND
BANK COMMON STOCK - DIVIDEND RESTRICTIONS."
The transfer agent and registrar for the Bank Common Stock is U.S. Stock
Transfer Corporation.
HOLDING COMPANY COMMON STOCK
The Holding Company is authorized by its Articles of Incorporation to
issue 50,000,000 shares of Holding Company Common Stock, without par value,
and 25,000,000 shares of Holding Company Preferred Stock, without par value.
As of the date hereof, 150 shares of Holding Company Common Stock were issued
and outstanding. Holders of Holding Company Common Stock will be entitled to
one vote, in person or by proxy, for each share of Holding Company Common
Stock held of record in the shareholder's name on the books of the Holding
Company as of the record date on any matter submitted to the vote of the
shareholders, except that in connection with the election of directors, and
until the Holding Company is considered to be a "listed corporation" as
provided in Corporations Code Section 310.5, which is intended to occur upon
the completion of the Reorganization, the shares may be voted cumulatively.
However, the Holding Company's Articles of Incorporation provide there will
be no cumulative voting for the election of directors if and when the Holding
Company becomes a "listed corporation" (i.e., outstanding shares listed on
the New York or American Stock Exchange or outstanding securities designated
as qualified for trading as a national market security on the National
Association of Securities Dealers Automatic Quotation System and has at least
800 holders of its equity securities; the Bank currently has approximately
800 holders of its securities). The Holding Company intends to become a
"listed corporation" at the time the Reorganization is consummated.
The Holding Company's Articles of Incorporation provide that the Board
of Directors will be divided into two classes, with any class having a term
of two years, if and when the Holding Company becomes a "listed corporation"
(as defined in the previous paragraph). Upon the Holding Company becoming a
"listed corporation," the Board of Directors of the Holding Company will be
divided into two classes, each of which shall contain approximately one-half
of the whole number of the members of the Board. The members of each class
shall be elected for a term of two years, with the terms of office of all
members of one class expiring each year so that approximately one-half of the
total number of directors are elected each year. The Holding Company's
Articles of Incorporation also provide that any vacancy occurring in the
Board, including a vacancy created by an increase in the number of directors,
shall be filled by a vote of two-thirds of the directors then in office and
any
30
director so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which the director
has been chosen expires. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to fully use its voting power to gain
control of the Board of Directors without consent of the incumbent Board of
Directors of the Holding Company.
The Articles of Incorporation of the Holding Company also require the
approval of the holders of at least 66-2/3% of the Holding Company's
outstanding shares of voting stock to approve certain "Business Combinations"
(as defined therein) involving a "Related Person" (as defined therein) except
in cases where the proposed transaction has been approved in advance by a
majority of those members of the Holding Company's Board of Directors who are
unaffiliated with the Related Person and were directors prior to the time
when the Related Person became a Related Person. The term "Related Person" is
defined to include any individual, corporation, partnership or other entity
(other than the Bank or its subsidiary) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock
of the Holding Company or an affiliate of such person or entity. This
proposed provision of the Articles of Incorporation applies to any "Business
Combination," which is defined to include: (i) any merger or consolidation
of the Holding Company with or into any Related Person; (ii) any sale, lease,
exchange, mortgage, transfer, or other disposition of 25% or more of the
assets of the Holding Company or combined assets of the Holding Company and
its subsidiaries to a Related Person; (iii) any merger or consolidation of a
Related Person with or into the Holding Company or a subsidiary of the
Holding Company; (iv) any sale, lease, exchange, transfer, or other
disposition of 25% or more of the assets of a Related Person to the Holding
Company or a subsidiary of the Holding Company; (v) the issuance of any
securities of the Holding Company or a subsidiary of the Holding Company to a
Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any
recapitalization involving the common stock of the Holding Company; or (viii)
any agreement or other arrangement providing for any of the foregoing.
Under California law, absent this proposed provision, business
combinations, including mergers, consolidations and sales of substantially
all of the assets of a corporation must, subject to certain exceptions, be
approved by the vote of the holders of a majority of the outstanding shares
of common stock of the Holding Company and any other affected class of stock.
The increased stockholder vote required to approve a business combination may
have the effect of foreclosing mergers and other business combinations which
a majority of stockholders deem desirable and place the power to prevent such
a merger or combination in the hands of a minority of stockholders.
Each share of Holding Company Stock has the same rights, privileges and
preferences as every other share and will share equally in the Holding
Company's net assets upon liquidation of dissolution. Holding Company Common
Stock will have no preemptive, conversion or redemption rights or sinking
fund provisions and all of the issued and outstanding shares of Holding
Company Common Stock, when issued, will be fully paid and nonassessable. The
Holding Company's Articles of Incorporation also provide that amendments to
the Holding Company's Articles of Incorporation must be approved by a
majority vote of its Board of Directors and also by a majority of the
outstanding shares of its voting stock, provided, however, that an
affirmative vote of at least 66-2/3% of the outstanding voting stock entitled
to vote (after giving effect to the provision limiting voting rights) is
required to amend or repeal certain provisions of the Articles of
Incorporation, including the provision limiting voting rights, the provisions
relating to approval of certain business combinations, the number and
classification of directors, director and officer indemnification by the
Holding Company and amendment of the Holding Company's Bylaws and Articles of
Incorporation. The Holding Company's
31
Bylaws may be amended by its Board of Directors, or by
a vote of 66-2/3% of the total votes eligible to be voted at a duly
constituted meeting of stockholders. See "COMPARISON OF THE RIGHTS OF HOLDERS
OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - ASSESSABILITY."
Shareholders are entitled to dividends when, as and if declared by the
Holding Company's Board of Directors out of funds legally available therefor
(and after satisfaction of the prior rights of holders of outstanding
preferred stock, if any (subject to certain restrictions on payment of
dividends imposed by the General Corporation Law of California. See
"COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK
COMMON STOCK - DIVIDEND RESTRICTIONS."
Following consummation of the Reorganization, the transfer agent and
registrar for the Holding Company Common Stock will be U.S. Stock Transfer
Corporation.
COMPARISON OF BANK COMMON STOCK AND HOLDING COMPANY COMMON STOCK
ASSESSABILITY. As a California state-chartered bank, the Bank's Common
Stock is subject to assessment pursuant to the provisions of Division 1 of
the California Financial Code. Section 662 of Division 1 of the California
Financial Code provides that when a bank's contributed capital is "impaired"
(when the retained earnings deficit is in excess of 40% of contributed
capital), the Commissioner shall order the bank to restore its capital
impairment within 60 days of the issuance of such an order. If the
contributed capital is not restored by other means, the bank's board is
required to levy and collect an assessment on its outstanding common shares
pursuant to Section 423 of the California Corporations Code. The date the
bank levies the assessment must be within 60 days after the Commissioner's
order and the resolutions levying the assessment of the common stock must fix
a date not more than 60 days after the date of the adoption of the assessment
resolution on which the assessment is payable (the "Payable Date"); fix a
date not less than 30 nor more than 60 days from the Payable Date on which
such assessment becomes delinquent if not paid (the "Delinquency Date"); fix
a date not less than 15 nor more than 60 days from the Delinquency Date for
the sale of the delinquent shares (the "Sale Date"); and fix the hour and
place of sale.
If an assessment is levied, the shareholders of the bank are required to
pay the assessment on a pro rata basis determined by the number of shares
held by each shareholder. If a shareholder has not paid the amount of the
assessment by the Delinquency Date, the shareholder may, prior to the Sale
Date, redeem his shares by paying the amount of the assessment together with
a penalty of 5% of the amount of the assessment on such shares. If a
particular shareholder fails or refuses to pay such shareholder's pro rata
portion of the assessment, the assessed shares may be sold by the bank in
satisfaction of the assessment and penalties thereon. The shareholders are
not subject to personal liability for payment of such an assessment. The
bank's only remedy for the collection of any such assessment is the sale of
the shares as described above or, in the event no such sale can be
consummated, forfeiture of such shares.
Holding Company Common Stock is not assessable. Under applicable
regulatory policies, however, holding companies of federally insured
financial institutions such as the Bank are required to serve as a "source of
strength" for their insured subsidiaries. As a practical matter, this may
result in the Holding Company being required by regulatory order or directive
to contribute additional capital to the Bank, to guarantee certain Bank
obligations or to take other actions requiring the investment of Holding
Company capital or resources for the Bank's benefit.
32
CLASSIFICATION OF BOARD OF DIRECTORS
The Bank's Articles of Incorporation requires the Bank's Board of
Directors to be divided into two (2) classes, with each class having a term
of office of two (2) years. Each director of the Bank must be elected every
two (2) years. The Holding Company's Articles of Incorporation and Bylaws
provide for its Board of Directors to be divided into two (2) classes with
each class having a term of two years, if and when the Holding Company
becomes a "listed corporation", which is intended to occur upon consummation
of the Reorganization.
VOTING RIGHTS
In addition to the description of voting rights contained in "COMPARISON
OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON
STOCK -BANK COMMON STOCK" and "- HOLDING COMPANY COMMON STOCK", the Bank may
amend its Articles of Incorporation or Bylaws to eliminate cumulative voting
if and when the Bank becomes a "listed corporation" (as defined above).
NUMBER OF DIRECTORS
Although the Corporations Code does not require the Holding Company or
the Bank to maintain any specific range of number of directors, the number of
directors of the Holding Company and the Bank may not be less than a stated
minimum nor more than a stated maximum (which in no case shall be greater
than two times the stated minimum minus one) with the exact number of
directors to be fixed, within the limits specified. The Bank Bylaws currently
provide that the number of directors on the Bank Board of Directors may not
be fewer than five nor more than nine, and the current number of members on
the Bank's Board of Directors has been fixed at seven. The Holding Company
Bylaws currently provide that the number of directors on the Holding Company
Board of Directors may not be fewer than six nor more than eleven, and the
current number of members on the Holding Company's Board of Directors has
been fixed at seven.
DIVIDEND RESTRICTIONS. Since the Bank is a state-charted bank, its
ability to pay dividends or make distributions to its shareholders is subject
to restrictions set forth in the California Financial Code. The California
Financial Code provides that neither a bank nor any majority-owned subsidiary
of a bank may make a distribution to its shareholders in an amount which
exceeds the lesser of (i) the bank's retained earnings; or (ii) the bank's
net income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned subsidiary of a bank
may, with the prior approval of the Commissioner, make a distribution to the
shareholders of the bank in an amount not exceeding the greatest of (i) its
retained earnings; (ii) its net income for its last fiscal year; or (iii)
stockholders' equity of a bank is inadequate or that the making of a
distribution by a bank would be unsafe our unsound, the Commissioner may
order the bank to refrain from making a proposed distribution.
The ability of the Holding Company to pay cash dividends is limited by
the provisions of Section 500 of the California Corporations Code, which
prohibits the payment of dividends unless (i) the retained earnings of the
corporation immediately prior to the distribution exceeds the amount of the
distribution; (ii) the assets of the corporation exceed 1 1/4 times its
liabilities; or (iii) the current assets of the corporation exceed its
current liabilities, but if the average pre-tax earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 1 1/4 times its current
liabilities.
33
DISSENTERS' RIGHTS. Pursuant to the General Corporation Law of
California, holders of Holding Company Common Stock would be entitled,
subject to the provisions of Chapter 13, to dissenters' rights in connection
with any transaction which constitutes a reorganization (as defined in
Section 181 of the California Corporations Code). However, pursuant to the
California Financial Code, shareholders of Bank Common Stock are not entitled
to dissenters' rights in connection with any transactions between two banking
institutions which constitutes a reorganization (as defined in Section 181 of
the California Corporations Code) where the Bank is the corporation surviving
such transaction, even if dissenters' rights were otherwise available
pursuant to Chapter 13. Therefore, no dissenters' rights will apply to the
Reorganization.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of
California and Federal law and regulations and California corporate law, as
well as the Articles of Incorporation and Bylaws of the Holding Company,
relating to stock ownership and transfers, the Board of Directors and
business combinations, all of which may be deemed to have "anti-takeover"
effects. The description of these provisions is necessarily general and
reference should be made to the actual law and regulations and to the
Articles of Incorporation and Bylaws of the Holding Company. See "ADDITIONAL
INFORMATION" as to how to obtain a copy of these documents.
CALIFORNIA AND FEDERAL BANKING LAW
The Federal Change in Bank Control Act of 1978 prohibits a person or
group of persons "acting in concert" from acquiring "control" of a bank
holding company unless the Federal Reserve Bank (the "FRB") has been given 60
days' prior written notice of such proposed acquisition and within that time
period the FRB has not issued a notice disapproving the proposed acquisition
or extending for up to another 30 days the period during which such a
disapproval may be issued. An acquisition may be made prior to the expiration
of the disapproval period if the FRB issues written notice of its intent not
to disapprove the action. Under a rebuttable presumption established by the
FRB, the acquisition of more than 10% of a class of voting stock of a bank
with a class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended (such as the Common Stock), would, under the
circumstances set forth in the presumption, constitute the acquisition of
control.
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Commissioner has approved such acquisition of control. A
person would be deemed to have acquired control of the Holding Company under
this state law if such person, directly or indirectly, has the power (i) to
vote 25% or more of the voting power of the Holding Company or (ii) to direct
or cause the direction of the management and policies of the Holding Company.
For purposes of this law, a person who directly or indirectly owns or
controls 10% or more of the Common Stock would be presumed to control the
Holding Company.
In addition, any "company" would be required to obtain the approval of
the FRB under the Holding Company Holding Company Act of 1956, as amended
(the "BHC Act"), before acquiring 25% (5% in the case of an acquiror that is,
or is deemed to be, a bank holding company) or more of the outstanding Common
Stock of, or such lesser number of shares as constitute control over, the
Holding Company.
ANTI-TAKEOVER PROVISIONS IN HOLDING COMPANY'S ARTICLES OF INCORPORATION
The Holding Company's Articles of Incorporation contain certain
provisions that deal with matters of corporate governance and certain rights
of shareholders. The following discussion is a
34
general summary of the Holding Company's Articles of Incorporation and
regulatory provisions relating to stock ownership and transfer, the Board of
Directors and business combinations, which might be deemed to have a
potential "anti-takeover" effect. These proposed provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Holding Company stockholders may deem
to be in their best interest or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction
may not have an opportunity to do so. Such provisions will also render the
removal of incumbent Board of Directors or management of the Holding Company
more difficult. Any provision requiring more than a majority vote by the
Holding Company's stockholders may only be effective for a two year period
from its effective date, unless renewed by the Board of Directors and the
stockholders. The following description of certain of the amendments to the
Articles of Incorporation of the Holding Company is necessarily general, and
reference should be made in each case to such Articles of Incorporation,
which is contained as an exhibit to the Holding Company's registration
statement. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
BOARD OF DIRECTORS. When the Holding Company becomes a "listed
corporation", as defined in "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING
COMPANY COMMON STOCK AND BANK COMMON STOCK - HOLDING COMPANY COMMON STOCK,"
the Board of Directors of the Holding Company will be divided into two
classes, each of which shall contain approximately one-half of the whole
number of the members of the Board. The members of each class shall be
elected for a term of two years, with the terms of office of all members of
one class expiring each year so that approximately one-half of the total
number of directors are elected each year. The effect of a vacancy on the
Board of Directors is also described in "COMPARISON OF THE RIGHTS OF HOLDERS
OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - HOLDING COMPANY
COMMON STOCK." The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board
of Directors without consent of the incumbent Board of Directors of the
Holding Company.
CUMULATIVE VOTING AND SPECIAL MEETINGS. if the Holding Company becomes a
"listed corporation," the Articles of Incorporation do not provide for
cumulative voting for any purpose, as described in "COMPARISON OF THE RIGHTS
OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - HOLDING
COMPANY COMMON STOCK."
AUTHORIZED SHARES. The Articles of Incorporation authorize the issuance
of 50,000,000 shares of Common Stock and 25,000,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Reorganization to provide the
Holding Company's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and the exercise of employee stock options. However, these
additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control
of the Holding Company. The Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates, and liquidation preferences. As a result of
the ability to fix voting rights for a series of preferred stock, the Board
has the power, to the extent consistent with its fiduciary duties to issue a
series of preferred stock to persons friendly to management in order to
attempt to block a tender offer, merger or other transaction by which a third
party seeks control of the Holding Company, and thereby assist members of
management to retain their positions. The Holding Company's Board has no
present plans for the issuance of additional shares, other than the issuance
of shares of Common Stock upon exercise of stock options.
35
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATION WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation require the approval of the
holders of at least 66-2/3% of the Holding Company's outstanding shares of
voting stock to approve certain "Business Combinations" (as defined in
therein) involving a "Related Person" (as defined therein) except in cases
where the proposed transaction has been approved in advance by a majority of
those members of the Holding Company's Board of Directors who are
unaffiliated with the Related Person and were directors prior to the time
when the Related Person became a Related Person, as described more fully in
"COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK
COMMON STOCK - HOLDING COMPANY COMMON STOCK."
Under California law, absent this proposed provision, business
combinations, including mergers, consolidations and sales of substantially
all of the assets of a corporation must, subject to certain exceptions, be
approved by the vote of the holders of a majority of the outstanding shares
of common stock of the Holding Company and any other affected class of stock.
The increased stockholder vote required to approve a business combination may
have the effect of foreclosing mergers and other business combinations which
a majority of stockholders deem desirable and place the power to prevent such
a merger or combination in the hands of a minority of stockholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. The Holding Company's
Articles of Incorporation must be approved by a majority vote of its Board of
Directors and also by a majority of the outstanding shares of its voting
stock, provided, however, that an affirmative vote of at least 66-2/3% of the
outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Articles of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, the number and classification of directors, director and
officer indemnification by the Holding Company and amendment of the Holding
Company's Bylaws and Articles of Incorporation, as described in "COMPARISON
OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON
STOCK - HOLDING COMPANY COMMON STOCK." The Holding Company's Bylaws may be
amended by its Board of Directors, or by a vote of 66-2/3% of the total votes
eligible to be voted at a duly constituted meeting of stockholders.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bylaws of the Holding Company
require a stockholder who intends to nominate a candidate for election to the
Board of Directors to give not less than 10 days' advance notice to the
Secretary of the Holding Company. The Articles of Incorporation provide that
a stockholder who desires to raise new business to provide certain
information to the Holding Company concerning the nature of the new business,
the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide the Holding Company with certain information concerning
the nominee and the proposing stockholder.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S ARTICLES
OF INCORPORATION. The Board of Directors of the Holding Company believes that
the provisions described above are prudent and will reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by its Board of Directors.
The Board of Directors believes these provisions are in the best interest of
the Holding Company and its stockholders. In the judgment of the Board of
Directors, the Holding Company's Board will be in the best position to
determine the true value of the Holding Company and to negotiate more
effectively for what may be in the best interest of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interest
of the Holding Company and its stockholders to encourage potential acquirors
to negotiate directly with the Board of Directors of the Holding Company and
that these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing
36
a merger or other transaction at a price reflective of the true value of the
Holding Company and which is in the best interest of all stockholders.
Attempts to acquire control of financial institutions have recently
become increasingly common. Takeover attempts which have not been negotiated
with and approved by the Board of Directors present to stockholders the risks
of a takeover on terms which may be less favorable than might otherwise be
available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value of the Holding Company and
its stockholders, with due consideration given to matters such as the
management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to incur great expense. Although a
tender offer or other takeover attempt may be made at a price substantially
above the current market prices, such offers are sometimes made for less than
all of the outstanding shares of a target company. As a result, stockholders
may be presented with the alternative of partially liquidating their
investment at a time that may be disadvantageous, or retaining their
investment in an enterprise which is under different management and whose
objectives may not be similar to those of the remaining stockholders. The
concentration of control, which could result from a tender offer or other
takeover attempt, could also deprive the Holding Company's remaining
stockholders of benefits of certain protective provisions of the Exchange
Act, if the number of beneficial owners became less than the 300 thereby
allowing for Exchange Act deregistration.
Despite the belief of the Holding Company as to the benefits to
stockholders of these provisions of the Holding Company's Articles of
Incorporation, these provisions may also have the effect of discouraging a
future takeover attempt which would not be approved by the Holding Company's
Board, but pursuant to which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders
who might desire to participate in such a transaction may not have any
opportunity to do so. Such provisions will also render the removal of the
Holding Company's Board of Directors and of management more difficult. The
Board of Directors of the Holding Company, however, has concluded that the
potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders, the Holding Company may adopt additional charter provisions
regarding the acquisition of its equity securities that would be permitted
for a California business corporation. The Holding Company does not presently
intend to propose the adoption of further restrictions on the acquisition of
the Holding Company's equity securities.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Articles of Incorporation and Bylaws, federal law
and California law may be to discourage potential takeover attempts and
perpetuate incumbent management, even though certain stockholders of the
Holding Company may deem a potential acquisition to be in their best
interest, or deem existing management not to be acting in their best
interests.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION
Management's discussion, which incorporates an analysis of financial condition
and results of operations, is designed to provide a more comprehensive
understanding of the significant changes and trends related to the Bank's
financial condition, results of operations, liquidity, and capital resources.
The discussion should be read in conjunction with the Financial Statements of
the Bank and Notes thereto.
38
FINANCIAL CONDITION
As of June 30, 1997, the Bank's total assets were $152.1 million, an
increase of $35.6 million or 30.6% from the December 31, 1996 total assets of
$116.5 million. The increase in capital during 1996 allowed the Bank to expand
its SBA and Mortgage Loan Division resulting in a $17.1 million increase in
loans held for sale and a $5.3 million increase in total loans. Federal funds
sold also increased $11.6 million during this period.
During 1996, the Bank's total assets increased $56.7 million from $59.8 million
at December 31, 1995 to $116.5 million at December 31, 1996. This increase
resulted primarily from the acquisition of Bank of Westminster on June 13, 1996.
Bank of Westminster (BOW) had total assets of $54.9 million when acquired by the
Bank. To fund this acquisition, the Bank raised $7.8 million of additional
capital in an underwritten offering of common stock. (See also Note O in the
accompanying financial statements.)
The Bank's total assets increased by $6.4 million from $53.4 million at December
31, 1994 to $59.8 million at December 31, 1995. This increase was funded
primarily by an increase in deposits of $5.3 million and an increase in
shareholders' equity of $800,000.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1997 was $893,000 or $0.54
per share compared to $451,000 or $0.69 per share for the same period in
1996. Earnings per share comparisons for the first six months of 1997 versus
the comparable 1996 period are negatively impacted by the increase in the
weighted average number of common shares outstanding for the 1997 periods due
to the public offering of 805,000 Shares (1,073,333 adjusted for the stock
split) of the Bank's Common Stock in conjunction with the simultaneous
acquisition of the Bank of Westminster in June of 1996.
In 1996, net income was $1.2 million or $1.39 per share compared to $1.0 million
or $2.64 per share in 1995.
The Bank's 1996 net income increased by $179,000 compared to the 1995 net
income. This increase was attributable primarily to the acquisition of BOW and
continuing profitability of its SBA and Mortgage Loan Divisions.
Net income for 1995 was $1.0 million or $2.64 per share ($1.85 fully diluted)
compared to $476,000 or $1.11 per share ($0.82 fully diluted) in 1994 and
$120,000 or $0.17 per share ($0.17 fully diluted) in 1993.
FOR THE SIX FOR THE YEAR ENDED
MONTHS ENDED DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
------------- ------- ------
Return on Average Assets 1.35% 1.35% 1.88%
Return on Average Equity 13.32% 13.82% 21.37%
Average Shareholder's Equity to Average
Total Assets (Including Preferred Stock) 10.15% 9.78% 8.12%
DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest-earning assets and the
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed both in dollars and in rates.
Nonaccrual loans are included in the calculation of the average balances of
loans, and interest not accrued is excluded (dollar amounts in thousands).
39
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
1997 1996
------------------------------------ -----------------------------------
AVERAGE AVERAGE
INTEREST YIELD OR INTEREST YIELD OR
AVERAGE EARNED RATE AVERAGE EARNED RATE
BALANCE OR PAID PAID BALANCE OR PAID PAID
--------- ---------- --------- --------- --------- ----------
ASSETS
Interest-Earning Assets:
Investment Securities $ 6,500 $ 194 5.97% $ 4,151 $ 103 4.96%
Federal Funds Sold 6,320 162 5.13% 3,647 97 5.32%
Other Earning Assets - - - - - -
Loans 98,841 5,706 11.55% 44,823 2,540 11.33%
-------- -------- -------- --------
Total Interest-Earning
Assets 111,661 6,062 10.86% 52,621 2,740 10.41%
Cash and Due From
Banks 9,650 5,825
Premises and Equipment 3,771 1,010
Other Real Estate Owned 1,086 725
Accrued Interest and
Other Assets 7,107 2,647
Allowance for Loan
Losses ( 1,073) ( 672)
-------- --------
Total Assets $132,202 $ 62,156
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Money Market and
NOW $ 26,036 $ 327 2.51% $ 17,489 $ 237 2.71%
Savings 17,564 342 3.89% 9,094 143 3.14%
Time Deposits under
$100,000 17,355 530 6.11% 6,286 171 5.44%
Time Deposits of
$100,000 or More 21,421 557 5.20% 4,839 139 5.74%
--------- -------- -------- -------
Total Interest-Bearing
Liabilities 82,376 1,756 4.26% 37,708 690 3.66%
-------- -------
Noninterest-Bearing
Liabilities:
Demand Deposits 34,295 18,899
Other Liabilities 2,118 810
Shareholders' Equity 13,413 4,739
--------- --------
Total Liabilities and
Shareholders' Equity $132,202 $ 62,156
--------- --------
--------- --------
Net Interest Income $ 4,306 $ 2,050
-------- --------
-------- --------
Net Yield on Interest-Earning
Assets 7.71% 7.79%
41
FOR THE YEAR ENDED DECEMBER 31,,
-------------------------------------------------------------------------
1996 1995
------------------------------------ -----------------------------------
AVERAGE AVERAGE
INTEREST YIELD OR INTEREST YIELD OR
AVERAGE EARNED RATE AVERAGE EARNED RATE
BALANCE OR PAID PAID BALANCE OR PAID PAID
--------- --------- --------- ---------- --------- ----------
ASSETS
Interest-Earning Assets:
Investment Securities $ 6,229 $ 356 5.72% $ 4,163 $ 219 5.26%
Federal Funds Sold 4,240 222 5.24% 2,402 138 5.75%
Other Earning Assets - - 23 2 8.70%
Loans 64,155 6,920 10.79% 40,215 4,120 10.24%
------ -------- -------- ---------
Total Interest-Earning
Assets 74,624 7,498 10.05% 46,803 4,479 9.57%
Cash and Due From
Banks 7,839 5,689
Premises and Equipment 2,363 665
Other Real Estate Owned 776 549
Accrued Interest and
Other Assets 4,314 1,357
Allowance for Loan
Losses ( 985) ( 583)
------- -------
Total Assets $88,931 $54,480
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Money Market and
NOW $21,574 $ 576 2.67% $16,732 $ 453 2.71%
Savings 14,329 512 3.57% 9,008 278 3.09%
Time Deposits under
$100,000 9,233 496 5.37% 3,702 182 4.92%
Time Deposits of
$100,000 or More 8,526 476 5.58% 2,418 132 5.46%
------- -------- ------- --------
Total Interest-Bearing
Liabilities 53,662 2,060 3.84% 31,860 1,045 3.28%
-------- --------
Noninterest-Bearing
Liabilities:
Demand Deposits 25,400 17,163
Other Liabilities 1,169 675
Shareholders' Equity 8,700 4,782
------- -------
Total Liabilities and
Shareholders' Equity $88,931 $54,480
------- -------
------- -------
Net Interest Income $ 5,438 $ 3,434
-------- --------
-------- --------
Net Yield on Interest-Earning
Assets 7.29% 7.34%
42
NET INTEREST INCOME
Net interest income for the six months ended June 30, 1997 was $4.3
million compared to $2.1 million for the same period in 1996. This increase
was primarily attributed to increases in earning assets as the net interest
margin was 7.71% in 1997 compared to 7.79% in 1996. Average interest-earning
assets increased to $111.7 million during the first six months of 1997
compared to $52.6 million in 1996.
Net interest income in 1996 was $5.4 million, an increase of $2 million or 58%
from $3.4 million in 1995. This increase was primarily attributable to the
substantial increase in total interest-earning assets which increased from $46.8
million in 1995 to $74.6 million in 1996. (Changing interest rates had a very
minor impact as the net yield on interest-earning assets decreased only 5 basis
points from 7.34% in 1995 to 7.29% in 1996.) The increase in total
interest-earning assets was a result of the acquisition of BOW.
Total interest income in 1996 was $7.5 million compared to $4.5 million in 1995.
Increased loan volume, from the acquisition of BOW and the SBA and Mortgage Loan
Divisions, was accountable for 85% of the increase in total interest income.
The total yield on interest-earning assets also increased 48 basis points
contributing $234,000 to the increase in interest income.
Total interest expense also increased dramatically in 1996, rising to $2.1
million from $1.0 million in 1995. Again this increase was primarily
attributable to increased volume in deposits (primarily acquired from BOW) which
accounted for $951,000 of the total increase. The average rate paid on deposits
also increased 56 basis points increasing interest expense by $64,000.
For 1995, net interest income was $3.4 million, an increase of $312,000 or 10.0%
from $3.1 million in 1994. This increase was primarily attributable to
increases in the net yield on interest-earning assets as the volume of total
interest-earning assets remained fairly stable in 1995. Total interest income
increased $352,000 in 1995 primarily as the result of a 55 basis point increase
in yields on interest-earning assets to 9.57% from 9.02% in 1994. This increase
was comparable to the national trend that saw the prime rate increase from 7.75%
at November of 1994 to 8.75% at December of 1995. Rates paid on deposits also
increased in 1995, but only 28 basis points, to 3.28% from 3.00% in 1994, as
total interest expense increased $40,000 in 1995. The Bank also benefited from
a slight drop in interest-bearing deposits offset partially by an increase in
noninterest-bearing demand deposits. The combination of these factors in 1995
increased the net yield on interest-earning assets 51 basis points from 6.83% in
1994 to 7.34% in 1995.
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).
6 MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
VERSUS VERSUS VERSUS
6 MONTHS ENDED JUNE 30, 1996 YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
------------------------------ ------------------------------ ------------------------------
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO CHANGE IN TO CHANGE IN TO CHANGE IN
------------------------------ ------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- ------- -------- ---------- ------- --------- --------- ------- --------
INTEREST-EARNING ASSETS:
Investment Securities $ 67 $ 24 $ 91 $ 117 $ 20 $ 137 $( 7) $ 36 $ 29
Federal Funds Sold 75 ( 10) 65 97 ( 15) 82 54 35 89
Other Earning Assets - - - - - - ( 3) 2 ( 1)
Loans 3,116 50 3,166 2,571 229 2,800 16 219 235
------- ------- ------- ------- ------ ------- -------- ------- -------
Total Interest Income 3,258 64 3,322 2,785 234 3,019 60 292 352
INTEREST-BEARING LIABILITIES:
Money Market and NOW 139 ( 49) 90 129 ( 6) 123 ( 50) ( 16) ( 66)
Savings 158 41 199 185 49 234 ( 18) ( 1) ( 19)
Time Deposits under $100,000 336 23 359 296 18 314 2 50 52
Time Deposits $100,000
or More 458 ( 40) 418 341 3 344 33 40 73
------- ------- ------- ------- ------ ------- -------- ------- -------
Total Interest Expense 1,091 ( 25) 1,066 951 64 1,015 ( 33) 73 40
------- ------- ------- ------- ------ ------- -------- ------- -------
Net Interest Income $ 2,167 $ 89 $ 2,256 $ 1,834 $ 170 $ 2,004 $ 93 $ 219 $ 312
------- ------- ------- ------- ------ ------- -------- ------- -------
------- ------- ------- ------- ------ ------- -------- ------- -------
43
PROVISION FOR LOAN LOSSES
During 1996, the provision for loan losses was $344,500 an increase of $82,500
from the $262,000 provision in 1995. This increase was primarily due to
increased net charge-offs which totaled $414,000 in 1996 compared to $218,000 in
1995. Charge-offs in 1996 increased primarily due to the increased volume in
loans related to the acquisition of BOW. At December 31, 1996, the allowance
for loan losses was 1.88% of loans, a slight increase over the 1.84% at December
31, 1995.
The provision for loan losses decreased $161,000 to $262,000 in 1995 compared to
the $423,000 provision in 1994. This decrease was primarily due to a decrease
in net loan charge-offs. During the same period, the allowance for loan losses
to total loans decreased slightly to 1.84% at December 31, 1995 compared to
1.90% at December 31, 1994.
NONINTEREST INCOME
The Bank receives noninterest income from three primary sources: service
charges and fees on accounts and banking services, fees and premiums generated
by the Mortgage Loan Division, and fees, premiums, and servicing income
generated by the SBA Loan Division.
For the six-months ended June 30, 1997, noninterest income was $5.7 million
compared to $3.4 million for the same period in 1996. The majority of this
increase ($2.0 million) was generated by the Bank's SBA and Mortgage Loan
Divisions who were able to expand their operations in 1997. The acquisition of
BOW also increased service charge income by $300,000.
During 1996, noninterest income increased $2 million to $7.7 million compared to
$5.7 million in 1995. The majority of this increase ($1.7 million) was
generated by the Bank's SBA and Mortgage Loan Divisions. During 1996, the
Mortgage Loan Division's noninterest income was $4.5 million (representing 58%
of the Bank's total noninterest income), an increase of $1.2 million or 36% more
than the 1995 total of $3.3 million. The SBA Loan Division also experienced a
significant increase in 1996 as total noninterest income from that division
reached $2.4 million, a 26% increase over the 1995 total of $1.9 million.
Service charges, fees and other income also increased in 1996 due to the
acquisition of BOW.
During 1995, total noninterest income was $5.7 million, an increase of 50% over
$3.8 million in 1994. This increase was also generated primarily by increases
in the Mortgage and SBA Loan Divisions.
NONINTEREST EXPENSE
Noninterest expense for the first six months of 1997 was $8.3 million
compared to $4.6 million for the same period of 1996. The acquisition of BOW in
June of 1996 generated the majority of this increase.
Noninterest expenses in 1996 totaled $10.7 million, or approximately a 50%
increase over the 1995 amount of $7.1 million. The majority of this increase
($1.8 million) was created by increased salaries and employee benefits generated
by the acquisition of BOW and the Mortgage and the SBA Loan Divisions.
Compensation in these divisions are primarily incentive-based, therefore,
significant increases in the volume of loan originations results in significant
increases in salaries and incentive payments (see "General" and "Noninterest
Income"). Increases in occupancy expenses and furniture and equipment were
primarily related to the acquisition of BOW. Other expenses increased $1.4
million, primarily due to the acquisition of BOW, increases in OREO expenses and
contracted costs of loan packaging and processing related to the volume
increases in the SBA and Mortgage Loan Divisions.
Noninterest expenses in 1995 totaled $7.1 million, or approximately a 25%
increase over the 1994 amount of $5.7 million. The majority of this increase
was created by increased salaries and employees benefits, especially in the
Mortgage and the SBA Loan Divisions.
44
INCOME TAXES
Income tax expense was $884,000, $717,000, and $335,000 for the years ended
December 31, 1996, December 31, 1995, and December 31, 1994, respectively.
These expenses resulted in an effective tax rate of 42% in 1996 and 41% for 1995
and 1994.
INVESTMENT ACTIVITY
The following table summarizes the amounts and distribution of the Bank's
investment securities held as of the dates indicated, and the weighted average
yields as of June 30, 1997 (dollar amounts in thousands):
JUNE 30, 1997 DECEMBER 31,
------------------------------ ---------------------------------------
1996 1995
WEIGHTED ------------------ -------------------
BOOK MARKET AVERAGE BOOK MARKET BOOK MARKET
VALUE VALUE YIELD VALUE VALUE VALUE VALUE
-------- -------- ----------- -------- -------- -------- ---------
AVAILABLE-FOR-SALE SECURITIES:
OTHER SECURITIES
Within One Year $1,350 $1,350 5.47% $3,000 $3,000
------ ------ ------ ------
Total Other Securities 1,350 1,350 5.47% 3,000 3,000
------ ------ ------ ------
Total Available-for-Sale Securities $1,350 $1,350 5.47% $ - $ - $3,000 $3,000
------ ------ ------- ------- ------ ------
------ ------ ------- ------- ------ ------
HELD-TO-MATURITY SECURITIES:
U.S. TREASURIES:
Within One Year $ 500 $ 500 6.23% $ 500 $ 504
One to Five Years 798 802 6.28% 799 802
------ ------ ------- -------
Total U.S. Treasuries Securities 1,298 1,302 6.26% 1,299 1,306
U.S. GOVERNMENT AND AGENCY SECURITIES:
Within One Year 999 995 4.10% 999 987 951 979
One to Five Years 2,950 2,973 6.24% 2,935 2,957 298 306
------ ------ ------- ------- ------ ------
Total U.S. Government and
Agency Securities 3,949 3,968 5.70% 3,934 3,944 1,249 1,285
MUNICIPAL SECURITIES
One to Five Years 541 536 3.40% 541 533 543 529
------ ------ ------- ------- ------ ------
Total Municipal Securities 541 536 3.40% 541 533 543 529
------ ------ ------- ------- ------ ------
Total Held-to-Maturity Securities $5,788 $5,806 5.54% $ 5,774 $ 5,783 $1,792 $1,814
------ ------ ------- ------- ------ ------
------ ------ ------- ------- ------ ------
Securities may be pledged to meet security requirements imposed as a
condition to receipt of deposits of public funds and other purposes. At
June 30, 1997, December 31, 1996 and 1995, the carrying values of
securities pledged to secure public deposits and other purposes were
$6,138,000, $3,321,000 and $1,792,000, respectively.
---------------------------
(4) Other securities consist of a Cash Fund that invests in U.S.
Government Securities.
(5) The only tax exempt securities held by the Bank are those issued by
municipalities. The weighted average yields for those investments are
not presented on a tax equivalent basis.
45
LOANS HELD FOR SALE
The Bank originates mortgage loans and SBA loans for sale to institutional
investors. Loans held for sale have increased from $10.0 million at December
31, 1994, to $10.2 million at December 31, 1995, to $24.4 million at December
31, 1996 to $41.4 million at June 30, 1997. Generally, the Bank sells these
loans within thirty (30) days of origination, but may hold these loans for
longer periods depending on market conditions.
At December 31, 1996 and 1995, the Bank was servicing approximately $44,194,000
and $23,929,000, respectively, in SBA loans previously sold. In connection with
a portion of these loans, the Bank has capitalized approximately $1,249,000 and
$632,000 in excess servicing receivables at December 31, 1996 and 1995,
respectively. Excess servicing receivables are amortized over the estimated
life of the serviced loan using a method that approximates the interest method.
The Bank evaluates the carrying value of the excess servicing receivables by
estimating the excess future servicing income, based on management's best
estimate of the remaining loan lives.
When the Bank sells the guaranteed portion of SBA loans, the cost allocated to
the portion of the loan retained is based on the relative fair value of all
components of the loan, including excess servicing receivables. The Bank has
recorded discounts of approximately $1,063,000 and $312,000 at December 31, 1996
and 1995, respectively in connection with these loans. These discounts are
amortized over the estimated life of each loan using the interest method.
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,
JUNE 30, ------------------------
1997 1996 1995
---------- -------- ---------
LOANS
Commercial $17,978 $13,577 $ 5,686
Real Estate - Construction 3,254 3,101 17
Real Estate - Other 42,629 44,218 24,129
Consumer 5,659 3,348 1,636
------- ------- --------
Total Loans 69,520 64,244 31,468
Net Deferred Loan Costs 400 305 29
Allowance for Loan Losses (1,182) (1,210) (580)
------- ------- --------
Net Loans $68,738 $63,339 $ 30,917
------- ------- --------
------- ------- --------
COMMITMENTS
Standby Letters of Credit $ 557 $ 96 $ 143
Undisbursed Loans and Commitments to Grant Loans 12,225 11,356 6,016
------- ------- --------
Total Commitments $12,782 $11,452 $ 6,159
------- ------- --------
------- ------- --------
The increase in loans during 1996 was primarily attributable to the acquisition
of BOW.
46
LOAN PORTFOLIO - CONTINUED
The majority of the loans have floating rates tied to the Bank's base rate or
other market rate indicator. This serves to lessen the risk to the Bank from
movement in interest rates, particularly rate increases. The following table
shows the maturity of fixed rate loans and the repricing frequency of floating
rate loans outstanding as of June 30, 1997 (dollar amounts in thousands -
includes loans held for sale):
TOTAL
MATURITY/REPRICING FREQUENCY LOANS PERCENT
- --------------------------------- --------- ----------
Three Months or Less $21,859 31.4%
Over Three Months through 12 Months 6,087 8.8
Over One Year through Five Years 36,648 52.7
Over Five Years 4,926 7.1
--------- ----------
$69,520 100.0%
--------- ----------
--------- ----------
NONPERFORMING ASSETS
The following table provides information with respect to the components of the
Bank's nonperforming assets at the dates indicated (dollar amounts in
thousands):
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995
-------- ------- --------
Loans 90 Days Past Due and Still Accruing $ 730 $ 122 $ 149
Nonaccrual Loans 629 579 760
------ ------ ------
Total Nonperforming Loans 1,359 701 909
Other Real Estate Owned 893 1,030 507
------ ------ ------
Total Nonperforming Assets $2,252 $1,731 $1,416
------ ------ ------
------ ------ ------
Nonperforming Loans as a Percentage of Total Loans 1.94% 1.09% 2.88%
Allowance for Loan Loss as a Percentage of
Nonperforming Loans 86.98% 172.61% 63.81%
Nonperforming Assets as a Percentage of Total Assets 1.48% 1.49% 2.37%
Nonaccrual loans are generally past due 90 days or are loans that management
believes the interest on which may not be collectible. Loans past due 90 days
will continue to accrue interest only when management believes 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. Management believes these properties can be
liquidated at or near their current fair value.
47
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 Bank's loans. The provision
for loan losses was $344,500 in 1996 compared to $262,000 in 1995 and $423,000
in 1994.
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 SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -------------------------------------
JUNE 30, 1997 1996 1995 1994
-------------- ------- ------- -------
OUTSTANDING LOANS(6):
Average for the Period $70,480 $49,017 $31,492 $35,571
End of the Period $69,520 $64,244 $31,468 $28,267
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of Year $ 1,210 $ 580 $ 536 $ 413
Actual Charge-Offs:
Commercial 240 280 133 331
Consumer 4 16 23 7
Real Estate - 144 77 49
------- ------- ------- -------
Total Charge-Offs 244 440 233 387
Less Recoveries:
Commercial 10 15 10 80
Consumer 5 6 2 6
Real Estate 6 5 3 1
------- ------- ------- -------
Total Recoveries 21 26 15 87
------- ------- ------- -------
Net Loans Charged-Off 223 414 218 300
Provision for Loan Losses 195 344 262 423
Allowance on Loans Acquired from BOW - 700 - -
------- ------- ------- -------
Balance at End of Period $ 1,182 $ 1,210 $ 580 $ 536
------- ------- ------- -------
------- ------- ------- -------
RATIOS:(7)
Net Loans Charged-Off to Average Loans 0.63% 0.84% 0.69% 0.84%
Allowance for Loan Losses to Total Loans 1.70% 1.88% 1.84% 1.90%
Net Loans Charged-Off to Beginning Allowance for
Loan Losses 36.86% 71.38% 40.67% 72.64%
Net Loans Charged-Off to
Provision for Loan Losses 114.36% 120.35% 83.21% 70.92%
Allowance for Loan Losses to
Nonperforming Loans 86.98% 172.61% 63.81% 190.07%
- ----------------------------------
(6) Excludes loans held for sale.
(7) Analyzed for June 30, 1997.
48
ALLOWANCE FOR LOAN LOSSES - CONTINUED
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans and leases,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, both Federal and state regulators, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses and may recommend additions based upon their evaluation of the portfolio
at the time of their examination.
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):
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- --------------------------- ---------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------- -------------- ---------- -------------- ---------- --------------
Commercial $ 577 26% $ 659 21% $ 256 18%
Real Estate - Construction 22 5% 56 5% 15 1%
Real Estate 372 61% 378 69% 205 76%
Consumer 72 8% 45 5% 27 5%
Unallocated 139 N/A 72 N/A 77 N/A
------- ---- ------- ---- ------- ----
$ 1,182 100% $ 1,210 100% $ 580 100%
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
DEPOSITS
Deposits are the Bank's primary source of funds. At December 31, 1996, the Bank
had a deposit mix of 44% in time and savings deposits, 25% in money market and
NOW deposits, and 31% in noninterest-bearing demand deposits. The Bank's net
interest income is enhanced by its 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,
-------------------------------------------------------
JUNE 30, 1997 1996 1995
------------------------ ------------------------ -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- -------- ---------- -------- -------- --------
NOW Accounts $ 11,972 2.16% $ 11,679 1.95% $ 6,583 2.07%
Savings Deposits 17,564 3.89% 14,329 3.57% 9,008 3.09%
Money Market Accounts 14,064 2.82% 9,895 3.52% 10,149 3.12%
TCD Less than $100,000 17,355 6.11% 9,233 5.37% 3,702 4.92%
TCD $100,000 or More 21,421 5.20% 8,526 5.58% 2,418 5.46%
---------- --------- --------
Total Interest-Bearing Deposits 82,376 4.26% 53,662 3.84% 31,860 3.28%
Noninterest-Bearing Demand
Deposits 34,295 N/A 25,400 N/A 17,163 N/A
---------- --------- --------
Total Average Deposits $ 116,671 3.01% $ 79,062 2.61% $ 49,023 2.13%
---------- ----- --------- ----- -------- -----
---------- ----- --------- ----- -------- -----
49
DEPOSITS - CONTINUED
The scheduled maturity distribution of the Bank's time deposits of $100,000 or
greater, as of June 30, 1997, were as follows (dollar amounts in thousands):
Three Months or Less $ 9,290
Over Three Months to One Year 10,745
Over One Year to Five Years 1,332
-------
$21,367
-------
-------
LIQUIDITY AND LIABILITY MANAGEMENT
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 Bank's shareholders.
The Bank manages its interest rate risk exposure by limiting the amount of
long-term fixed rate loans it holds 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 the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
1996, 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
(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:
Federal Funds Sold $ 500 $ - $ - $ - $ 500
Investment Securities 992 799 3,983 - 5,774
Gross Loans 52,701 4,287 10,772 20,848 88,608
-------- -------- --------- --------- --------
Total 54,193 5,086 14,755 20,848 94,882
INTEREST-BEARING LIABILITIES:
Money Market and NOW
Deposits $ 25,831 $ - $ - $ - $ 25,831
Savings 18,324 - - - 18,324
Time Deposits 11,764 11,898 2,585 - 26,247
-------- -------- --------- --------- --------
Total 55,919 11,898 2,585 - 70,402
-------- -------- --------- --------- --------
Interest Rate Sensitivity Gap $( 1,726) $( 6,812) $ 12,170 $ 20,848 $ 24,480
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
Cumulative Interest Rate
Sensitivity Gap $( 1,726) $( 8,538) $ 3,632 $ 24,480 $ 24,480
Ratio Based on Total Assets ( 1.48%) ( 7.33%) 3.12% 21.02% 21.02%
- ----------------------
(8) Includes loans held for sale.
50
LIQUIDITY AND LIABILITY MANAGEMENT - CONTINUED
Liquidity refers to the Bank's 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 customers and withdrawals from deposit accounts.
The Bank's liquidity ratio is defined as: the sum of cash and due from banks
net of reserve requirements, federal funds sold, interest-bearing deposits with
other financial institutions and investments securities, less amounts pledged to
secure deposits and for other purposes, divided by the sum of total deposits,
less deposits secured by marketable securities and short-term borrowings. Using
this definition at December 31, 1996, the Bank's liquidity ratio was 14.8%,
compared to 24.0% at December 31, 1995. At December 31, 1996, the
loan-to-deposit ratio (including loans held for sale) was 85.7%, as compared to
76.1% at December 31, 1995.
CAPITAL RESOURCES
Shareholders' equity averaged $8.7 million in 1996, an increase of $3.9 million
or 82% compared to 1995. At December 31, 1996, shareholders' equity amounted to
$12.9 million, an increase of $7.7 million or 68% over the prior year.
During 1996, the Bank increased shareholders equity by $7.8 million in a
secondary stock offering and redeemed its outstanding preferred stock for $1.0
million.
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, 1996, the Bank's capital exceeded
all minimum regulatory requirements and the Bank was considered to be "well
capitalized" as defined in the regulations issued by the FDIC. The Bank's
risk-based capital ratios, shown below as of December 31, 1996 and June 30,
1997, have been computed in accordance with regulatory accounting policies.
MINIMUM
REQUIREMENTS JUNE 30, 1997 DECEMBER 31, 1996
------------ ------------- -----------------
Tier 1 Leverage Capital Ratio 4% 8.0% 9.2%
Tier 1 Risk Based Capital Ratio 8% 10.0% 11.8%
Total Risk Based Capital Ratio 4% 11.1% 13.0%
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.
51
INFORMATION CONCERNING THE BUSINESS
AND PROPERTIES OF THE HOLDING COMPANY
ORGANIZATION
The Holding Company was organized under the laws of California on April 17,
1997 at the direction of the Board of Directors of the Bank for the purpose of
becoming a bank holding company by acquiring all of the outstanding Bank Common
Stock. Mr. Robert Ucciferri has provided the Holding Company's initial
capitalization of $1,500 by purchasing 150 shares of Holding Company Common
Stock at $10.00 per share. Upon consummation of the Reorganization, these 150
shares will be repurchased, for the same aggregate sum of $1,500, and cancelled
by the Holding Company, in accordance with the terms of the "BYL Bancorp
Stockholder Agreement" attached hereto as Annex II.
Prior to the Effective Time of the Merger, the Holding Company will
purchase, for $1,000, and will own 100% of the common stock of the Merger Corp.,
a California corporation organized for the sole purpose of facilitating the
Reorganization. At the Effective Time of the Merger, the outstanding shares of
Merger Corp. Common Stock will be cancelled and will cease to be outstanding.
See "BANK HOLDING COMPANY REORGANIZATION - ORGANIZATIONAL TRANSACTIONS."
BUSINESS
The Holding Company has not yet engaged in any substantial business
activity. The Holding Company has filed with the Federal Reserve Board its
notification for prior approval to become a bank holding company through the
acquisition of 100% of the voting shares of the Bank pursuant to the BHC Act.
Furthermore, the Holding Company and the Merger Corp. have filed applications
with the FDIC and the Department of Financial Institutions, providing for the
merger of the Merger Corp. with and into the Bank, and for the acquisition of
the Bank by the Holding Company. See "BANK HOLDING COMPANY REORGANIZATION -
REGULATORY APPROVALS." Upon consummation of the Reorganization, the Holding
Company will own all of the common stock of the Surviving Bank, the Surviving
Bank will be the Holding Company's wholly-owned bank subsidiary and the Holding
Company will be registered as a bank holding company. There can be no
assurances that the required approvals will be obtained, or as to conditions or
timing of such approvals.
Subject to constraints under the BHC Act, the Holding Company may acquire
other financial institutions in the future. See "BANK HOLDING COMPANY
REORGANIZATION - REASONS FOR THE REORGANIZATION." During the initial months
following the consummation of the Reorganization, the principal business
activity of the Holding Company will be to serve as the bank holding company for
the Surviving Bank. At the present time, the Holding Company has no specific
plans to engage in any activities other than acting as a bank holding company
for the Surviving Bank. The Holding Company may, however, seek to raise
additional equity capital through a sale of Holding Company securities shortly
following the Reorganization, although no specific proposals have been made at
this time.
MANAGEMENT
The Board of Directors of the Holding Company consists of Leonard O.
Lindborg, H. Rhoads Martin, Jr., Barry J. Moore, John F. Myers, Robert Ucciferri
and Brent W. Wahlberg, all of whom are presently directors of the Bank and who
will continue to serve as directors of the Holding Company until either the 1998
or 1999 annual meeting of shareholders of the Holding Company, depending when
such director's class is to be elected and until their successors are elected
and qualified, and
52
depending upon the Holding Company becoming a "listed corporation,' which is
intended to occur upon the consummation of the Reorganization. It is
anticipated that, initially, directors of the Holding Company will receive no
fees for their attendance at Holding Company Board of Directors meetings. For
additional information regarding the directors, see "SOLICITATION OF PROXIES -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
The officers of the Holding Company are, and upon consummation of the
Reorganization will continue to be, Mr. Ucciferri, who will serve as President
and Chief Executive Officer, Mr. Moore, who will serve as Executive Vice
President and Chief Financial Officer, and Mr. Myers, who will serve as
Secretary.
It is expected that until the officers of the Holding Company begin to
devote significant time to the separate management of the Holding Company's
business, which is not expected to occur until such time as the Holding Company
becomes actively involved in additional businesses, the officers will only
receive compensation for services as directors, officers and employees of the
Bank, and no separate compensation will be paid for their services to the
Holding Company. At the present time, the Holding Company does not intend to
employ any persons other than its officers. If the Holding Company establishes
or acquires other businesses, it may add additional employees at that time.
EMPLOYEES
Currently, the Holding Company has no full-time or part-time employees. It
is anticipated that the Holding Company will utilize the employees of the
Surviving Bank without payment therefor until it becomes actively engaged in
business. Thereafter, the Holding Company will pay the Surviving Bank for a
fair and reasonable amount for all services furnished to it.
PROPERTIES
Currently, the Holding Company does not own or lease any property. It is
anticipated that the Holding Company will utilize the premises of the Surviving
Bank without payment therefor until it becomes actively engaged in business.
Thereafter, the Holding Company will pay the Surviving Bank for a fair and
reasonable amount for all services furnished to it.
LEGAL PROCEEDINGS
The Holding Company is not a party to any pending legal proceeding and is
unaware of any proceeding being contemplated against it by any governmental
entity.
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE BANK
GENERAL
The Bank is a commercial bank organized under the laws of the State of
California and commenced operations on March 3, 1980. The Bank is not a member
of the Federal Reserve System, and its deposits are insured by the FDIC to the
maximum amount permitted under the Federal Deposit Insurance Act. As of June
30, 1997, the Bank had total assets of $152.1 million, total deposits of $136.4
million, and total shareholders' equity of $13.7 million.
53
MARKET AREA
The Bank engages in the general business of banking throughout its primary
market area of Yorba Linda, California and the surrounding area of Orange County
by offering a wide range of banking products and services, including (i)
originating and selling of Nonconforming Mortgages and SBA guaranteed loans;
(ii) providing many types of business and personal savings, money market and
demand accounts, and other consumer banking services; and (iii) originating
several other types of loans, including secured and unsecured commercial and
consumer loans, commercial real estate loans, and commercial and residential
construction loans. The Bank maintains its main office in Yorba Linda, and
presently operates three (3) full service branches in Costa Mesa, California,
Westminster, California, and Huntington Beach, California, and a limited service
branch office in Laguna Hills, California. Each banking office concentrates on
servicing the local community in which it is located. The Bank also maintains a
mortgage banking office in Tustin, California and a SBA loan office in Mission
Viejo, California.
The Bank's target market is small-to-medium size businesses, professionals,
general retail customers and the local community. The Bank relies almost
entirely on a foundation of locally generated core deposits. Core deposits are
defined as deposits held by the Bank on the basis of a direct and ongoing
relationship between the Bank and depositor, and not solely on the basis of
competitive price considerations. Core deposits include the following types of
deposit accounts: noninterest bearing demand deposits, money market and NOW,
and savings accounts.
OPERATING STRATEGY
The Bank's operating strategy emphasizes (i) expanding its programs for
originating and selling N/C Mortgages and SBA guaranteed loans; (ii) continued
focus on providing personalized, quality banking products to small- and
medium-size businesses, professionals, general retail customers and to the local
community; and (iii) continued expansion of the Bank, primarily in Orange
County, California, through internal growth and through selective acquisitions
of financial institutions or the selective acquisition of branches of such
institutions (the Bank has no written or oral agreements for such acquisitions
at this time).
ACQUISITION
Following the receipt of all necessary regulatory approvals, the Bank
completed the acquisition of Bank of Westminster ("BOW") on June 14, 1996
pursuant to the terms of the Agreement and Plan of Reorganization dated January
12, 1996 in which the Bank organized and established a wholly-owned subsidiary
of the Bank for the sole purpose of facilitating the merger of BOW with the
Bank. The subsidiary was consolidated with BOW under the name and charter of
BOW (the "Consolidation"), and , immediately thereafter, the consolidated
corporation was merged with and into the Bank (the "Merger").
The Bank acquired 100% of the outstanding common stock of BOW for $6.17
million in cash. BOW had total assets of $54.92 million. The acquisition was
accounted for using the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16. "Business Combinations." Under this
method of accounting, the purchase price was allocated to the assets acquired
and deposits and liabilities assumed based on their fair values as of the
acquisition date. The financial statements include the operations of BOW from
the date of the acquisition. Goodwill arising from the transaction totaled
approximately $1.717 million is being amortized over fifteen years on a
straight-line basis.
54
The Bank may consider acquiring other banks and/or additional branches as
permitted by California law. However, the Bank has no other written or oral
agreements regarding any such activities. There can be no assurance, however,
that appropriate acquisition candidates will be located, that the Bank will have
sufficient capital resources to effect the acquisitions, that necessary
regulatory approvals could be obtained, or that the acquisitions, if made, would
be profitable for the Bank.
SECONDARY STOCK OFFERING
During 1996, the Bank completed a secondary stock offering underwritten on
a firm commitment basis by Ryan, Beck & Co. In connection with this offering,
the Bank issued 805,000 shares of common stock generating $7.8 million in
additional capital, net of underwriting discounts and transaction costs of $1.1
million. Proceeds from this offering were used, in part, to fund the
acquisition of BOW.
LENDING ACTIVITIES
Under applicable regulations, the Bank originates, purchases and sells
loans, or participating interests in loans. See "Supervision and Regulation"
for a description of applicable regulations which limit lending in relation to
assets or net worth. The Bank originates, purchases and participates in loans
for its own portfolio and for sale in the secondary market. Lending activities
include the origination and purchase of long-term adjustable-rate and to a
lesser extent fixed-rate conforming and nonconforming residential mortgage
loans, construction loans, commercial business, commercial real estate loans,
SBA loans, and consumer loans. Approximately 80% of the Bank's mortgage loans
are secured by property located in California with the remaining 20% secured by
properties throughout the continental United States.
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 received by the Bank on loans extended to its
customers and securities held in the Bank investment portfolios will comprise
the 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 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.
55
COMPETITION
The Bank faces substantial competition for deposits and loans throughout
its market area. Competition for loans comes from other commercial banks,
saving institutions, mortgage banking firms, credit unions, thrift and loans and
other financial intermediaries. Many of the financial intermediaries operating
in the Bank's market areas offer certain services, such as trust and
international banking services, which the Bank does not offer directly.
Additionally, banks with larger capitalization and financial intermediaries not
subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the credit needs of larger customers.
In order to compete, the Bank relies upon personal contacts by the
officers, directors and employees of the Bank to establish and maintain
relationships with Bank customers. The Bank focuses its efforts on the needs of
professionals, construction businesses and small and medium-sized businesses.
In the event there are customers whose loan demands exceed the Bank's lending
limit, the Bank seeks to arrange for such loans on a participation basis with
other financial institutions and intermediaries. The Bank also assists those
customers requiring other services not offered by the Bank to obtain such
services from its correspondent banks.
Management of the Bank believes that a portion of its customer base is from
customers who were dissatisfied with the level of service provided at larger
financial institutions. While some of such customers have followed officers of
those institutions who were hired by the Bank, others were attracted to the Bank
by referrals from other customers. These personal relationships, providing a
high level of customer service, and referrals from satisfied customers form the
basis of the Bank's competitive approach. The Bank also utilizes advertising,
rate competition and the development of proprietary banking products, services
or programs.
In the past, the principal competition for deposits and loans have been
banks (particularly major banks), savings and loan associations and credit
unions. To a lesser extent thrift and loan companies, mortgage brokerage
companies and insurance companies also have provided competition. Recent
federal and state legislation increased competition by expanding the authority
of savings and loan associations to make consumer and commercial loans.
Legislation has eliminated all interest rate differentials between banks and
savings and loans, further increasing the ability of savings and loan to compete
with commercial banks and thrift and loan companies. In the past several years,
other financial intermediaries have begun to offer financial services
traditionally offered by banks. Institutions, such as brokerage houses and even
retail establishments also offer new investment vehicles such as money-market
funds. Other entities, both public and private, seeking to raise capital
through the issuance and sale of debt or equity securities are also competitors
with banks and savings and loan associations in the acquisition of deposits.
In 1982, federal legislation authorized certain financial institutions to
pay money-market interest rates on certain types of accounts. This has led to
increased competition between financial institutions and money-market funds and
has increased the Bank's relative cost of funds. Within the financial
institution industry, the trend has been towards offering more varied services,
such as discount brokerage services, often through affiliate relationships. The
direction of Federal legislation seems to favor competition between different
types of financial institutions and to foster new entries into the financial
services market.
56
EMPLOYEES
At June 30, 1997, the Bank employed 146 full-time equivalent persons. The
Bank believes that its employee relations are satisfactory. There is no
collective bargaining agreement in place with any of the Bank's employees.
PREMISES
The Bank's principal office is located in a free standing two story
building in the City of Yorba Linda. The building was constructed for the Bank
on 55,000 square feet of land in a shopping center leased in 1981. The lease
runs through 2002, with six five-year options to extend.
The Bank also entered into a lease in May 1993 for approximately 4,742
square feet of space to house its Costa Mesa office. These premises were
already improved to house a financial institution branch office. The lease has
a term of five years with two five-year options to extend.
The Bank owns its branch facility in Westminster, which is a free standing,
two story building of approximately 24,653 square feet constructed in 1979 on
53,317 square feet of land.
The Bank owns its branch facility in Huntington Beach, which is a free
standing building of approximately 8,962 square feet constructed in 1986 on
37,956 square feet of land.
The Bank has also entered into a lease dated March 18, 1997 for
approximately 1869 square feet in Laguna Hills for a limited service branch.
The lease has a term of three years.
The Bank has also entered into a lease dated December 22, 1995 for
approximately 3,330 square feet of space in Mission Viejo to house its SBA
Lending Division. The lease has a term of three years with a three-year option
to extend.
The Bank has also entered into a lease dated June 28, 1996 for
approximately 7,330 square feet in Tustin to house its Mortgage Loan Division.
The lease has a term of six years with two six-year options to extend.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary,
routine litigation incidental to the Bank's business, to which the Bank is a
party or of which any of its property is subject.
SUPERVISION AND REGULATION OF
THE HOLDING COMPANY AND THE BANK
THE HOLDING COMPANY
If the Reorganization is consummated, the Holding Company, as a registered
bank holding company, will be subject to regulation under the BHC Act. The
Holding Company will be required to file with the Federal Reserve Board
quarterly and annual reports and such additional information s the Federal
Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board
may conduct examinations of the Holding Company and its subsidiaries.
57
The Federal Reserve Board may require that the Holding Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
or the subsidiary or affiliate 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 Holding
Company would be required to file written notice and obtain approval from the
Federal Reserve Board prior to purchasing or redeeming its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Holding Company is required by the Federal Reserve Board to maintain certain
levels of capital. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND
THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - CAPITAL
ADEQUACY GUIDELINES."
The Holding Company will be required to obtain the prior approval of the
Federal Reserve Board for the acquisition of more than 5% of the outstanding
shares of any class of voting securities or substantially all of the assets of
any bank or bank holding company. Prior approval of the Federal Reserve Board
will also be required for the merger or consolidation of the Holding Company and
another bank holding company.
The Holding Company will be prohibited by the BHC 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 Holding Company would be
able, subject to the prior approval of the Federal Reserve Board, to 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. In making any such
determination, the Federal Reserve Board is required to consider whether the
performance of such activities by the Holding Company or an affiliate can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve Board is also empowered to differentiate between activities
commenced DE NOVO and activities commenced by acquisition, in whole or in part,
of a going concern and is generally prohibited from approving an application by
a bank holding company to acquire voting shares of any commercial bank in
another state unless such acquisition is specifically authorized by the laws of
such other state.
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 or 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.
58
The Holding Company will also be a bank holding company within the meaning
of Section 3700 of the California Financial Code. As such, the Holding Company
and its subsidiaries would be subject to examination by, and may be required to
file reports with, the Commissioner.
Finally, the Holding Company will be subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, including but
not limited to, filing annual, quarterly and other current reports with the
Securities and Exchange Commission.
THE BANK
The Bank, as a California state-chartered bank, is subject to primary
supervision, periodic examination and regulation by the Commissioner. The Bank
is also subject to certain regulations of the Federal Deposit Insurance
Corporation if the FDIC should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of the Bank's operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, various remedies
are available to the FDIC. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in capital, to restrict the
growth of the Bank, to assess civil monetary penalties, to remove officers and
directors and ultimately to terminate the Bank's deposit insurance, which for a
California state-chartered bank, would result in revocation of the Bank's
charter. The Commissioner has many of the same remedial powers.
The Bank is insured by the FDIC, which currently insured deposits of each
member bank to a maximum of $100,000 per depositor. For this protection, the
bank, as is the case with all insured banks, pays a semi-annual statutory
assessment and is subject to the rules and regulations of the FDIC. See
"SUPERVISION AND REGULATION OF HOLDING COMPANY AND BANK - EFFECT OF GOVERNMENTAL
POLICIES AND RECENT LEGISLATION."
Various requirements and restrictions under the laws of California and the
United States affect the operations of the Bank. State and federal statutes and
regulations 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. See
"SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - EFFECT OF
GOVERNMENTAL POLICIES AND RECENT LEGISLATION - CAPITAL ADEQUACY GUIDELINES."
There are statutory and regulatory limitations on the amount of dividends
by state chartered banks to the lesser of retained earnings or the bank's net
income for its last three fiscal years (less any distributions to shareholders
made during such period). In the event a bank has not retained earnings or net
income for its last three fiscal years, cash dividends may be paid in an amount
not exceeding the net income for such bank's last preceding fiscal year only
after obtaining the prior approval of the Commissioner.
Furthermore, the FDIC also has authority to prohibit the Bank from engaging
in what, in the FDIC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial condition
of the bank in questions and other factors, that the FDIC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board
have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding
59
companies under their jurisdiction. Compliance with the standards set forth in
such guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions of the FDIC Improvement Act could limit the amount
of dividends which the Bank may pay. See "SUPERVISION AND REGULATION OF THE
HOLDING COMPANY AND THE BANK - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT
ACT OF 1991 - PROMPT CORRECTIVE REGULATORY ACTION" AND "- CAPITAL ADEQUACY
GUIDELINES" for a discussion of these additional restrictions on capital
distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of its affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral for loans and
the purchase of assets of its affiliates. Such restrictions prevent its
affiliates from borrowing from the Bank unless the loans are secured by
marketable obligations of designated amounts. Further, such secured loans and
investments by the Bank in any other affiliate is limited to 10% of the Bank's
capital and surplus (as defined by federal regulations) and such secured loans
and investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes
certain restrictions with respect to transactions involving controlling persons
of the Bank. Additional restrictions on transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of the FDIC
Improvement Act. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE
BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - FEDERAL DEPOSIT
INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 - PROMPT CORRECTIVE REGULATORY
ACTION."
The Bank is also subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, including, but not limited to,
filing annual, quarterly, and other current reports with the FDIC.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
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
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve Board in these
areas 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 of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial intermediaries are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major changes and the impact such changes might have on
the Bank are impossible to predict. Certain of the potentially significant
changes which have been enacted and proposals which have been made recently are
discussed below.
Federal Deposit Insurance Corporation Improvement Act of 1991. On December
19, 1991, the FDIC Improvement Act was enacted into law. Set forth below is a
brief discussion of certain
60
portions of this law and implementing regulations that have been adopted or
proposed by the Federal Reserve Board, the Comptroller of the Currency
("Comptroller"), the Office of Thrift Supervision ("OTS") and the FDIC
(collectively, the "federal banking agencies").
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIC Improvement Act requires the
federal banking agencies to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating to
internal controls, loan documentation, credit underwriting, interest rate
exposure and asset growth. Standards must also be prescribed for classified
loans, earnings and the ratio of market value to book value for publicly traded
shares. The FDIC Improvement Act also requires the federal banking agencies to
issue uniform regulations prescribing standards for real estate lending that are
to consider such factors as the risk to the deposit insurance fund, the need for
safe and sound operation of insured depository institutions and the availability
of credit. Further, the FDIC Improvement Act requires the federal banking
agencies to establish standards prohibiting compensation, fees and benefit
arrangements that are excessive or could lead to financial loss.
In July 1992, the federal banking agencies issued a joint advance notice of
proposed rule making requesting public comment on the safety and soundness
standards required to be prescribed by the FDIC Improvement Act. The purpose of
the notice is to assist the federal banking agencies in the development of
proposed regulations. In accordance with the FDIC Improvement Act, final
regulations must become effective no later than December 1, 1993.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan-to-value limits that do
not exceed the supervisory limits prescribed by the regulations.
PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires
each federal banking agency to take prompt corrective action to resolve the
problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios. The purpose of this law is to resolve the
problems of insured depository institutions at the least possible long-term cost
to the appropriate deposit insurance fund.
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 (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet any one of the capital requirements),
significantly undercapitalized (significantly below any one capital requirement)
and critically undercapitalized (failing to meet all capital requirements).
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of the FDIC
Improvement Act. Under the regulations, an insured depository institution will
be deemed to be:
- "well capitalized" if it (i) has total risk-based capital of 10% or
greater, Tier 1 risk-based capital of 6% or greater and a leverage
capital ratio of 5% or greater and (ii) is not subject to an order,
written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any
capital measure;
61
- "adequately capitalized" if it has total risk-based capital of 8% or
greater, Tier 1 risk-based capital of 4% or greater and a leverage
capital ratio of 4% or greater (or a leverage capital ratio of 3% or
greater if the institution is rated composite 1 under the applicable
regulatory rating system in its most recent report of examination);
- "undercapitalized" if it has total risk-based capital that is less
than 8%, Tier 1 risk-based capital that is less than 4% or a leverage
capital ratio that is less than 4% (or a leverage capital ratio that
is less than 3% if the institution is rated composite 1 under the
applicable regulatory rating system in its most recent report of
examination);
- "significantly undercapitalized" if it has total risk-based capital
that is less than 6%, Tier 1 risk-based capital that is less than 3%
or a leverage capital ratio that is less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be reclassified to
the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding how to deal with it.
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
62
of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers, subject to certain grandfather provisions for those elected
prior to enactment of the FDIC Improvement Act; (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.
The FDIC has adopted risk-based minimum capital guidelines 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.
In addition to the risk-based guidelines, the FDIC requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total
assets is 3%. For all banks 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 FDIC has the discretion to
set individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the
63
exposure to declines in the economic value of the bank's capital due to changes
in interest rates. The final regulations, however, do not include a measurement
framework for assessing the level of a bank's exposure to interest rate risk,
which is the subject of a proposed policy statement issued by the federal
banking agencies concurrently with the final regulations. The proposal would
measure interest rate risk in relation to the effect of a 200 basis point change
in market interest rates on the economic value of a bank. Banks with high
levels of measured exposure or weak management systems generally will be
required to hold additional capital for interest rate risk. The specific amount
of capital that may be needed would be determined on a case-by-case basis by the
examiner and the appropriate federal banking agency. Because this proposal has
only recently been issued, the Bank currently is unable to predict the impact of
the proposal on the Bank if the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule relating
to capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks, will be required to set aside capital
in excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, 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.
As of September 30, 1996, the Bank had a total risk-based capital ratio of
15.90%, a Tier 1 risk-based capital ratio of 14.65% and a leverage capital ratio
of 9.49%. The Bank is considered to be well capitalized as of September 30,
1996. A subsequent reduction in the Bank's capital could cause it to fall
within a lower capital category and subject it to the mandatory and
discretionary sanctions applicable to that category. Further, as noted above,
an institution that, based upon its capital levels, is well capitalized,
adequately capitalized or undercapitalized can, under certain circumstances, be
reclassified to the next lower capital category.
OTHER ITEMS. The FDIC Improvement Act also, among other things, (i) limits
the percentage of interest paid on brokered deposits and limits the unrestricted
use of such deposits to only those institutions that are well capitalized; (ii)
requires the FDIC to charge insurance premiums based on the risk profile of each
institution; (iii) eliminates "pass through" deposit insurance for certain
employee benefit accounts unless the depository institution is well capitalized
or, under certain circumstances, adequately capitalized; (iv) prohibits insured
state chartered banks from engaging as principal in any type of activity that is
not permissible for a national bank unless the FDIC permits such activity and
the bank meets all of its regulatory capital requirements; (v) directs the
appropriate federal banking agency to determine the amount of readily marketable
purchased mortgage servicing rights that may be included in calculating such
institution's tangible, core and risk-based capital; and (vi) provides that,
subject to certain limitations, any federal savings association may acquire or
be acquired by any insured depository institution.
In addition, the FDIC has issued final and proposed regulations
implementing provisions of the FDIC Improvement Act relating to powers of
insured state banks. Final regulations issued in October
64
1992 prohibit insured state banks from making equity investments of a type, or
in an amount, that are not permissible for national banks. In general, equity
investments include equity securities, partnership interests and equity
interests in real estate. Under the final regulations, non-permissible
investments must be divested by no later than December 19, 1996. The Bank has
no such non-permissible investments.
Regulations issued in December 1993 prohibit insured state banks from
engaging as principal in any activity not permissible for a national bank,
without FDIC approval. The proposal also provides that subsidiaries of insured
state banks may not engage as principal in any activity that is not permissible
for a subsidiary of a national bank, without FDIC approval.
The impact of the FDIC Improvement Act on the Bank is uncertain, especially
since many of the regulations promulgated thereunder have only been recently
adopted and certain of the law's provisions still need to be defined through
future regulatory action. Certain provisions, such as the recently adopted real
estate lending standards and the limitations on investments and powers of state
banks and the rules to be adopted governing compensation, fees and other
operating policies, may affect the way in which the Bank conducts its business,
and other provisions, such as those relating to the establishment of the
risk-based premium system, may adversely affect the Bank's results of
operations. Furthermore, the actual and potential restrictions and sanctions
that apply to or may be imposed on undercapitalized institutions under the
prompt corrective action and other provisions of the FDIC Improvement Act may
significantly adversely affect the operations and liquidity of the Bank, the
value of its Common Stock and its ability to raise funds in the financial
markets.
CAPITAL ADEQUACY GUIDELINES. The FDIC has issued guidelines to implement
the risk-based capital requirements. The guidelines are intended to establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations, takes
off-balance sheet items into account in assessing capital adequacy and minimizes
disincentives to holding liquid, low-risk assets. Under these guidelines,
assets and credit equivalent amounts of off-balance sheet items, such as letters
of credit and outstanding loan commitments, are assigned to one of several risk
categories, which range from 0% for risk-free assets, such as cash and certain
U.S. Government securities, to 100% for relatively high-risk assets, such as
loans and investments in fixed assets, premises and other real estate owned.
The aggregated dollar amount of each category is then multiplied by the
risk-weight associated with that category. The resulting weighted values from
each of the risk categories are then added together to determine the total
risk-weighted assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus
and retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations. At least 50% of
the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25% of risk- weighted assets; (ii) perpetual
preferred stock, cumulative perpetual preferred stock and long-term preferred
stock and related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50% of Tier 1
65
capital. The inclusion of the foregoing elements of Tier 2 capital are subject
to certain requirements and limitations of the federal banking agencies.
The FDIC has also adopted a minimum leverage capital ratio of Tier 1
capital to average total assets of 3% for the highest rated banks. This
leverage capital ratio is only a minimum. Institutions experiencing or
anticipating significant growth or those with other than minimum risk profiles
are expected to maintain capital well above the minimum level. Furthermore,
higher leverage capital ratios are required to be considered well capitalized or
adequately capitalized under the prompt corrective action provisions of the FDIC
Improvement Act.
SAFETY AND SOUNDNESS STANDARDS. In February 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness, as required by FDICIA. The guidelines set forth operational and
managerial standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Guidelines for
asset quality and earnings standards will be adopted in the future. The
guidelines establish the safety and soundness standards that the agencies will
use to identify and address problems at insured depository institutions before
capital becomes impaired. If an institution fails to comply with a safety and
soundness standard, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan or
to implement an accepted plan may result in enforcement action.
In December 1992, the federal banking agency issued final regulations
prescribing uniform guidelines for real estate lending. The regulations require
insured depository institutions to adopt written policies establishing
standards, consistent with such guidelines, for extensions of credit secured by
real estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts. State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A
state-licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally related transactions" must
now comply with the agencies' appraisal standards. Federally related
transactions include the sale, lease, purchase, investment in, or exchange of,
real property or interests in real property, the financing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage backed securities.
PREMIUMS FOR DEPOSIT INSURANCE. Federal law has established several
mechanisms to increase funds to protect deposits insured by the 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 implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that
66
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. As long as BIF's reserve ratio is less than a specified
"designated reserve ratio," 1.25%, the total amount raised from BIF members by
the risk-based assessment system may not be less than the amount that would be
raised if the assessment rate for all BIF members were .023% of deposits. 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
condition 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.
Assembly Bill 3351 (the "Banking Consolidation Bill") became effective July
1, 1997, which creates the California Department of Financial Institutions
("DFI") to be headed by a Commissioner of Financial Institutions out of the
existing California State Banking Department which regulates state chartered
commercial banks and trust companies in California.
The Banking Consolidation Bill, among other provisions, also (i) transfers
regulatory jurisdiction over state chartered savings and loan associations from
the Department of Savings and Loans ("DSL") to the newly created DFI and
abolishes the DSL; (ii) transfers regulatory jurisdiction over state chartered
industrial loan companies and credit unions from the Department of Corporations
to the newly-created DFI; and (iii) establishes within the DFI separate
divisions for credit unions, commercial banks, industrial loan companies and
savings and loans. As the Banking Consolidation Bill has only recently been
enacted, it is impossible to predict with any degree of certainty what impact it
will have on the banking industry in general and the Bank in particular.
Congress has recently passed, and the President has signed into law
provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and
to repay outstanding bonds that were issued to recapitalize the SAIF's successor
as result of payments made due to insolvency of savings and loan associations
and other federally insured savings institutions in the late 1980's and early
1990's. The new law will require savings 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. In 2000, the
banking industry will assume the bulk of the payments. The new law also aims to
merge the Bank Insurance Fund and SAIF by 1999 but not until the bank and
savings and loan charters are combined. The Treasury Department has until March
31, 1997 to deliver to Congress on combining the charters. Additionally, the
new provides "regulatory relief" for the banking industry by effecting
approximately 30 laws and regulations. The costs and benefits of the new law to
the Bank can not currently be accurately predicted.
INTERSTATE BANKING AND BRANCHING. On September 29, 1994, the President
signed in law the Riegle-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 regulatory approval to acquire an existing bank located in
another state without regard to state law. A bank holding company would not be
permitted to make such an acquisition if, upon consummation, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank 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
67
prescribed by state law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction. Effective October 2, 1995, California adopted legislation which
"opts California into" the Interstate Act. However, the California Legislation
restricts out of state banks from purchasing branches or starting a de novo
branch to enter the California banking market. Such banks may proceed only by
way of purchases of whole banks.
The Interstate Act is likely to increase competition in the Bank's market
areas especially from larger financial institutions and their holding companies.
It is difficult to asses the impact such likely increased competition will have
on the Bank' operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's law permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two states. The first state allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
"reciprocal" basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.
On September 28, 1995, Governor Wilson signed Assembly Bill No. 1482, the
Caldera, Weggeland, and Killea California Interstate Banking and Branching Act
of 1995 (the "1995 Act"). The 1995 Act, which was filed with the Secretary of
State as Chapter 480 of the Statutes of 1995, became operative on October 2,
1995.
The 1995 Acts opts in early for interstate branching, allowing out-of-state
banks to enter California by merging or purchasing a California bank or
industrial loan company which is at least five years old. Also, the 1995 Act
repeals the California Interstate (National) Banking Act of 1986, which
regulated the acquisition of California banks by out-of-state bank holding
companies. In addition, the 1995 Act permits California state banks, with the
approval of the Commissioner of Financial Institutions, to establish agency
relationships with FDIC-insured banks and savings associations. Finally, the
1995 Act provides for regulatory relief, including (i) authorization for the
Commissioner to exempt banks from the requirement of obtaining approval before
establishing or relocating a branch office or place of business, (ii) repeal of
the requirement of directors' oaths (Financial Code Section 682), and (iii)
repeal of the aggregate limit on real estate loans (Financial Code Section
1230).
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 financial institutions in meeting the credit needs of their local
community, including low and moderate income neighborhoods. In addition to
substantial penalties
68
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 May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institutions' actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Tax Force on
Fair lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
In February 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are
expected to be issued in the near future.
CHANGES IN ACCOUNTING PRINCIPLES. In March of 1995, the FASB issued SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The statement does not
apply to financial instruments long-term customer relationships of a financial
institution (core deposits), mortgage and other servicing rights, and tax
deferred assets. SFAS 121 requires the review of long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances include, for example, a significant decrease in market value of an
assets, a significant change in use of an asset, or an adverse change in a legal
factor that could affect the value of an asset. If such an event occurs and it
is determined that the carrying value of the asset may not be recoverable, an
impairment loss should be recognized a measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Fair value
can be determined by a current transaction, quoted market prices, or present
value of estimated expected future cash flows discounted at the appropriate
rate. The statement is effective for fiscal years beginning after December 15,
1995. The implementation of SFAS No. 121 did not have a material impact on its
results of operations or financial position.
In May of 1995, the FASB issued SFAS 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS. SFAS No. 122 eliminates distinctions between servicing rights that were
purchased and those that were retained upon the sale of loans. The statement
requires mortgage servicers to recognize as separate assets rights to service
loans, no matter how the rights were acquired. Institutions who sell loans and
retain the servicing rights will be required to allocate the total cost of the
loans to servicing rights and loans based on their relative fair values if the
value can be estimated. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. Further, SFAS No. 122 requires that all capitalized
mortgage servicing rights be periodically evaluated for impairment based upon
the current
69
fair value of these rights. This Statement, which is superseded by SFAS No.125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES, did not have a material effect on the Bank's financial condition
and results of operations.
In October of 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, establishing financial accounting and reporting
standards for stock-based employee compensation plans. This statement
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation pans based on the estimated
fair value of the award at the date it is granted. Companies are, however,
allowed to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting, which generally does not result in
compensation expense recognition for most plans. Companies that elect to remain
with the existing accounting are required to disclose in a footnote to the
financial statements pro forma net income and, if presented, earnings per share,
as if this statement had been adopted. The accounting requirements of this
statement are effective for transactions entered into in fiscal years that begin
after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994. The Bank has elected the proforma disclosure requirements as
noted in the note to the Financial Statements.
In June of 1996, the FASB issued SFAS No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, and in
December, 1996 issued SFAS No. 127, DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN
PROVISIONS OF FASB STATEMENT NO. 125 (AN AMENDMENT OF FASB STATEMENT NO. 125)
establishing accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of the financial-components approach. This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets. Liabilities and derivatives
incurred or obtained by transferors in conjunction with the transfer of
financial assets are required to be measured at fair value, if practicable.
Servicing assets and other retained interests in transferred assets are required
to be measured by allocating the previous carrying amount between the assets
sold, if any, and the interest that is retained, if any, based on the relative
fair values of the assets on the date of the transfer. Servicing assets
retained are subsequently subject to amortization and assessment for impairment.
Management believes the implementation of this statement will not have a
material effect on the Bank's financial condition or results of operations.
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), "EARNINGS PER SHARE." SFAS No. 128 supersedes APB
Opinion No. 15, EARNINGS PER SHARE, and is substantially the same as the
International Accounting Standard 33, EARNINGS PER SHARE, recently issued by the
International Standards Committee. SFAS No. 128 establishes standards for
computing earnings per share (EPS) previously found in APB Opinion No. 15 and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. Under basic EPS,
dilution is excluded and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. It also requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures.
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. Diluted EPS is computed similarly to fully diluted EPS
pursuant to APB Opinion No. 15. SFAS No. 128 will be effective for financial
statements issued for periods ending after December 15,
70
1997, including interim periods; earlier application is not permitted. However,
disclosure of pro forma EPS amounts computed using SFAS No. 128 in the notes to
the financial statements in periods prior to required adoption are permitted.
It is not anticipated that the financial impact of this statement will have a
material effect on the Bank.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 (SFAS No. 129), "DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE." SFAS No. 129 continues the previous requirements to disclose
certain information about an entity's capital structure found in APB Opinion No.
10, OMNIBUS OPINION-1966, APB Opinion No. 15, EARNINGS PER SHARE, and SFAS No.
47, DISCLOSER OF LONG-TERM OBLIGATIONS, for entities that were subject to the
requirements of those standards. SFAS No. 129 eliminates the exemption of
non-public entities from certain disclosure requirements of APB Opinion No. 15
as provided by SFAS No. 21, SUSPENSION OF THE REPORTING OF EARNINGS PER SHARE
AND SEGMENT INFORMATION BY NON-PUBLIC ENTERPRISES. SFAS No. 129 will be
effective for financial statements issued for periods ending after December 15,
1997. It is not anticipated that the financial impact of this statement will
have a material effect on the Bank.
In July 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS No. 130), "Reporting Comprehensive Income," requiring businesses
to disclose comprehensive income and its components in their general-purpose
financial statements. FASB Concepts Statement 6 defines comprehensive income as
"the change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." Accounting principles
generally require all recognized revenues, expenses, gains, and losses be
included in net income. Various FASB statements, however, require companies to
report certain changes in assets or liabilities as a separate component of the
equity section of the balance sheet including foreign currency translation
adjustments, unrealized holding gains and losses on available-for-sale
securities, changes in the market value of a futures contract that qualifies as
a hedge of an asset reported at fair value, and minimum pension liability
adjustments. Such items, along with net income, are components of comprehensive
income.
All items of comprehensive income are to be reported in a "financial
statement that is displayed with the same prominence as other financial
statements." SFAS 130 does not require a specific format for this financial
statement, but does mandate the display of an amount representing total
comprehensive income for the period (companies are not required to use the terms
"comprehensive income" or "total comprehensive income" in their financial
statements). An appendix to SFAS 130 includes example reporting formats.
Additionally, the statement requires the classification of items comprising
other comprehensive income by their nature, and the accumulated balance of other
comprehensive income must be displayed separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. The new
rules will be effective for the fiscal years beginning after December 15, 1997,
with reclassification of comparative (earlier period) financial statements. The
standard is not applicable to not-for-profit organizations. It is not
anticipated that the financial impact of this statement will have a material
effect on the Bank.
In July 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (SFAS No. 131), "Disclosures About Segments of an Enterprise and Related
Information," which calls for new segment information in public companies'
annual financial statements issued to shareholders. The new statement
supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise,"
but retains the disclosure requirements regarding major customers. SFAS No. 131
does not apply to nonpublic companies or not-for-profit organizations. Public
companies will report financial and descriptive information about their
reportable operating segments-"components of an
71
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance." Disclosure of information not
prepared for internal use generally is not required if reporting the information
would be impracticable. SFAS No. 131 mandates disclosure of (1) a measure of
segment profit/loss, (2) certain revenue and expense items, and (3) segment
assets. The standard calls for reconciliations of total segment revenues, total
segment profit/loss, total segment assets, and other amounts disclosed for
segments, to corresponding amounts in the company's general-purpose financial
statements. Additionally, public companies will be required to report
information regarding: (i) the entity's products/services (or groups of similar
products/services); (ii) countries in which the company earns revenues and holds
assets; and (iii) major customers (regardless of whether this information is
used in making operating decisions). SFAS No. 131 also calls for descriptive
information about (1) the way the operating segments were determined, (2)
products/services provided by the operating segments, (3) differences between
the measurements used in reporting segment information and those used in the
company's general-purpose financial statements, and (4) changes in the
measurement of segment amounts from period to period. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years must be
restated. SFAS No. 131 need not be applied to interim statements in the initial
year of application; however, comparative information (i.e., first-year data)
will be required in interim statements for the second year. It is not
anticipated that the financial impact of this statement will have a material
effect on the Board.
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 portfolio of the Bank, conversations with
local authorities and appraisers, and the type of lending currently and
historically done by the Bank (the Bank has generally not made the types of
loans generally associated with hazardous waste contamination problems),
management is not aware of any potential liability for hazardous waste
contamination.
OTHER REGULATIONS AND POLICIES. The federal regulatory agencies have
adopted regulations that implement Section 304 of FDICIA which requires federal
banking agencies to adopt uniform regulations prescribing standards for real
estate lending. Each insured depository institution must adopt and maintain a
comprehensive written real estate lending policy, developed in conformance with
prescribed guidelines, and each agency has specified loan-to-value limits in
guidelines concerning various categories of real estate loans.
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal
regulations include requirements to maintain non-interest bearing reserves
against deposits, limitations on the nature and amount of loans which may be
made, and restrictions on payment of dividends. The California Commissioner of
Financial Institutions approves the number and locations of the branch offices
of a bank. California law exempts banks from the usury laws.
RESTRICTIONS ON TRANSFERS OF FUNDS TO
THE HOLDING COMPANY BY THE BANK
The Holding Company is a legal entity separate and distinct from the Bank.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Holding Company by the Bank. Under California law, no
distribution of dividends is permitted unless: (i) such distribution would not
exceed a bank's retained earnings; or (ii) in the alternative,
72
after giving effect to the distribution, (y) the sum of a bank's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes, income
and other credits), or (z) current assets would not be less than current
liabilities (except that if a bank's average earnings before taxes for the last
two years had been less than average interest expenses, current assets must not
be less than 125% of current liabilities).
The FDIC also has authority to prohibit the Bank from engaging in what, in
the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice. Further, the FDIC has established guidelines with respect
to the maintenance of appropriate levels of capital by bank under their
jurisdiction. Compliance with the standards set forth in such guidelines and
the restrictions that are or may be imposed under the prompt corrective action
provisions of the FDIC Improvement Act could limit the amount of dividends which
the Bank may pay to the Holding Company. See "SUPERVISION AND REGULATION OF THE
HOLDING COMPANY AND THE BANK - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT
ACT OF 1991 - PROMPT CORRECTIVE REGULATORY ACTION" AND "- CAPITAL ADEQUACY
GUIDELINES" for a discussion of these additional restrictions on capital
distributions.
Following the Reorganization, the Bank would be subject to certain
restrictions imposed by federal law on any extensions of credit to, or the
issuance of a guarantee or letter of credit on behalf of, the Holding Company or
other affiliates, the purchase of or investments in stock or other securities
thereof, the taking of such securities as collateral for loans and the purchase
of assets of the Holding Company or other affiliates. Such Restrictions would
prevent the Holding Company and such other affiliates from borrowing from the
bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Holding Company or to in any other affiliate would be limited to 10% of the
Bank's capital and surplus (as defined by federal regulations) and such secured
loans and investments would be limited, in the aggregate, to 20% of the Bank's
capital and surplus (as defined by federal regulations). In addition, following
the Reorganization any transaction with an affiliate of the Bank must be on
terms and under circumstances that are substantially the same as a comparable
transaction with a non-affiliate. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the prompt corrective action
provisions of the FDIC Improvement Act. See "SUPERVISION AND REGULATION OF THE
HOLDING COMPANY AND THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT
LEGISLATION - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 -
PROMPT CORRECTIVE REGULATORY ACTION."
MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY
COMMON STOCK AND BANK COMMON STOCK
MARKET INFORMATION
There is no trading in the Holding Company Common Stock. After
consummation of the Holding Company Reorganization, it is anticipated that the
Holding Company Common Stock will be traded in the over-the-counter market and
most probably will be, in the near term, listed on any exchange or on NASDAQ.
73
Management of the Bank is aware of four (4) securities dealers who maintain
an inventory and make a market in Bank Common Stock. The market makers are
Ryan, Beck & Co. and Wedbush Morgan Securities Inc.
The information set forth in the table below summarizes, for the periods
indicated, the bid and ask prices of Bank Common Stock based upon information
provided by Ryan, Beck & Co., which became the Bank's market maker in the second
quarter of 1996 when the Bank's Common Stock became listed on Nasdaq National
Market. 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.
1996 High Low Trading Volume
---- ---- --- --------------
Second Quarter 11 3/4 11 399,733
Third Quarter 11 1/2 9 3/4 926,028
Fourth Quarter 14 3/4 10 1/4 3,413,338
1997
----
First Quarter 18 1/8 13 7/8 820,026
Second Quarter 21 1/4 16 1/2 1,758,273
Prior to the Bank's Common Stock listing on Nasdaq National Market, there
had been a limited market for the Bank's Common Stock, which was not listed
on any exchange or Nasdaq prior to its list on the Nasdaq National Market.
Management believes that approximately 3,000 shares of Common Stock of the
Bank were traded in 1994, approximately 8,000 shares were traded in 1995, and
no shares were traded n the first three months of 1996. The price at which
these shares were traded is not known to Bank's management, and management
may not be aware of all of the trades that occurred because management did
not receive notification of trades held in nominee name. Although management
cannot confirm the accuracy of this information, it was reported on the
financial data reporting service widely used in the financial community that
approximately 48,000 shares of common stock were traded during the year ended
December 31, 1994 at prices per share which ranged from 4-1/4 to 5-5/16.
Near the year ended December 31, 1995, approximately 3,000 shares of Common
Stock were traded at prices per share which ranged from 4-1/4 to 5-1/4.
During the first five months of 1996, 800 shares traded at 4-3/8. Stock
price data reflects inter-dealer prices, without retail mark-up, mark-down or
commission.
Upon consummation of the Reorganization, the Holding Company will assume
the Bank's rights and obligations under the Bank's Stock Option Plan and under
each of the outstanding options previously granted under the Plan by which
assumption the optionee shall have the right to purchase one share of Holding
Company Common Stock for each share of Bank Common Stock the optionee was
entitled to purchase prior the Holding Company Reorganization.
Upon consummation of the Reorganization, up to 1% of the outstanding shares
of Holding Company Common Stock could be sold pursuant to Rule 144 under the
Securities Act for the account of an affiliate of the Holding Company during a
three month period. For purposes of Rule 144, affiliates including the Holding
Company's directors and executive officers and the Bank's directors and
executive officers.
74
SHAREHOLDERS
As of the Record Date, there were approximately 800 holders of record of
Bank Common Stock. As of the Record Date, there was 1 shareholder of Holding
Company Common Stock.
DIVIDENDS
The Holding Company has never paid a dividend. In January 1997 and April
1997, the Board of Directors of the Bank declared a $.05 per share cash
dividend, and the Bank intends to continue quarterly payments of cash dividends
until the completion of the Reorganization. Following the completion of the
Reorganization, the Holding Company intends to continue the pattern of paying
quarterly dividends on its common stock. However, no assurance can be given
that the pattern of dividends described herein will continue at the Bank, or if
the Reorganization is consummated, at the Holding Company, or if any cash
dividends will be paid in the future either by the Bank, or if the
Reorganization Proposal is approved, by the Holding Company.
On June 30, 1997, the Bank completed a four (4) for three (3) stock split
of the issued and outstanding shares of the Bank.
Upon consummation of the Reorganization, as a bank holding company without
significant assets other than its equity interest in the Surviving Bank, the
Holding Company's ability to pay cash dividends will depend upon the dividends
it receives from the Surviving Bank which, in turn, are subject to certain
limitations. In addition, the Holding Company's and the Bank's ability to pay
dividends are, and the Surviving Bank's ability to pay cash dividends will be,
limited by California law. The Bank's Board of Directors intends to retain
earnings, if any, in order to increase capital, and to pay cash dividends only
when it is prudent to do so and the Bank's performance justifies such action.
See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - THE BANK -
POTENTIAL AND EXISTING ENFORCEMENT ACTIONS."
Since the Bank is a state-chartered bank, its ability to pay dividends or
make distributions to its shareholders is subject to restrictions set forth in
the California Financial Code. The California Financial Code provides that a
bank may not make a distribution to its shareholders in an amount which exceeds
the less of (i) the bank's retained earnings; or (ii) the bank's net income for
its last three fiscal years, less the amount of any distributions made by the
bank to the shareholders of the bank during such period. However, a bank may,
with the prior approval of the Commissioner make a distribution to the
shareholders of the bank in an amount not exceeding the greatest of (i) its
retained earnings; (ii) its net income for its last fiscal year; or (iii) its
net income for its current fiscal year. In the event that the Commissioner
determines that the stockholders' equity of a bank is inadequate or that the
making of a distribution by a bank would be unsafe or unsound, the Commissioner
may order the bank to refrain from making a proposed distribution. Under the
FDIC Improvement Act, additional limitations can be imposed on the Bank with
regard to making capital distributions if after such transaction the Bank would
be undercapitalized. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND
THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - FEDERAL
DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991."
DIRECTORS AND EXECUTIVE OFFICERS OF
THE HOLDING COMPANY AND THE BANK
The following table provides certain information as of the Record Date
with respect to each Director of the Bank and the Holding Company. Reference is
made to the section entitled
75
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" for information
pertaining to stock ownership of the nominees.
YEAR FIRST
NAME OF DIRECTOR APPOINTED
AND OFFICES HELD BUSINESS EXPERIENCE OR ELECTED
(OTHER THAN DIRECTOR) AGE (1) DURING PAST 5 YEARS DIRECTOR
- --------------------- --- ------------------- ----------
Leonard O. Lindborg 61 Retired, manages investments 1996
H. Rhoads Martin, Jr. 50 President, Martin Companies, a real 1990
Chairman of the Board estate investment and property
management firm
John F. Myers, 60 Retired Pharmacist, former owner, 1990
Secretary B&B Pharmacy
Barry J. Moore, 48 Banker (2) 1996
Executive Vice President
Robert C. Ucciferri, 60 Banker (3) 1990
President
Brent W. Wahlberg 75 Retired (formerly Vice President of 1979
Eadington Fruit Company)
There are no family relationships between any of the directors or
executive officers of the Bank. On June 25, 1997, Mr. John C. Coelho, founding
director and Chairman of the Board, retired from the Bank. Mr. H. Rhoads Martin
was thereafter appointed Chairman of the Board of the Bank and the Holding
Company. In connection with Mr. Coelho's retirement, Mr. Coelho's options of
approximately 10,667 shares, of which 9,689 shares are vested, at an average
exercise price of approximately $5.87 per share, under the 1990 Plan, and 5,333
shares, of which 1,779 shares are vested at an average exercise price of $12.75
per share, under the 1997 Plan as adjusted for the four-for-three stock split,
will expire, unless exercised or extended, during the latter part of September,
1997. The Board of Directors may provide additional benefits to Mr. Coelho in
connection with his retirement.
- ----------------------------------
(1) Ages are as of March 31, 1997.
(2) Mr. Moore was first employed by the Bank in 1980 as Vice President
Branch Manager/Commercial Lender. He left shortly thereafter to
relocate to San Diego (Torrey Pines Bank). He returned to the Bank
in 1986 as Executive Vice President/Credit Administrator. After the
departure of the previous Chief Executive Officer, Mr. Moore served
as Acting Chief Executive Officer and Director until the arrival of
Mr. Ucciferri six months later. Mr. Moore was appointed Chief
Financial Officer in 1991 and has served as a Director since January
1996.
(3) Prior to joining the Bank, Mr. Ucciferri served in various positions
with Citizens Bank of Costa Mesa and El Camino Bank, both owned by
the same holding company. His positions included President of both
banks (at different times) and Executive Vice President of Citizens
Bank.
76
THE BOARD OF DIRECTORS AND COMMITTEES
During 1996, the Board of Directors of the Bank held twelve (12)
regular meetings and seven (7) special meetings. In addition to meeting as a
group to review the Bank's business, certain members of the Board of Directors
of the Bank also devoted their time and talents to the following standing
committees:
The Bank's Audit Committee, currently composed of Directors Martin
(Chairman), Myers and Wahlberg, met six (6) times in 1996. The purpose of this
Committee is to direct the audits and credit review activities and to make
certain that these functions are performed with the necessary freedom and
independence to insure the examination of all records, and to recommend to the
Board of Directors the appointment of an outside accounting firm and to meet
with and review the reports of the accounting firm.
The Bank's Compensation Committee, currently composed of Directors
Wahlberg (Chairman), Martin, Myers and Ucciferri, met six (6) times in 1996.
This Committee makes recommendations to the Board of Directors regarding
compensation matters, some of which may be delegated to this Committee.
The Bank does not have a standing Nominating Committee, but the full
Board of Directors acts as a Nominating Committee.
None of the incumbent Directors attended less than seventy-five
percent (75%) of all Board and committee meetings held during the period for
which he has been a Director.
EXECUTIVE OFFICERS
The following table sets forth as to each of the persons who currently
serves as an executive officer of the Bank, such person's age, principal,
occupation, current position with the Bank, and the period during which the
person has served in such position.
BUSINESS EXPERIENCE EXECUTIVE
NAME AND POSITION AGE DURING PAST FIVE YEARS OFFICER SINCE
- ----------------- --- ---------------------- -------------
Robert Ucciferri 60 President and Chief Executive Officer 1990
Barry J. Moore 48 Senior Executive Vice President,
Chief Operating Officer and Chief 1986
Financial Officer
Michael H. Mullarky (1) 50 Executive Vice President and Credit 1990
Administrator
- -------------------------------
(1) Executive Vice President and Credit Administrator Michael Mullarky
joined the Bank in 1991. Mr. Mullarky has a total of 27 years of
banking experience, primarily in lending and credit administration.
He served at Citizens Bank of Costa Mesa for 9 years as part of
senior management and was the S.V.P./Loan Administrator at the time
he left to join the Bank.
77
DIRECTOR COMPENSATION
During 1996, the Bank paid fees of $800 per month for each
director minus the amount of medical insurance premium payments paid
on behalf of each director if a director elects to be covered under
the Bank's medical insurance plan. Effective January 1, 1997, the
Board of Directors changed the amount of compensation to $2,000 per
month for each director minus the amount of medical insurance premium
payments paid on behalf of each director if a director elects to be
covered under the Bank's medical insurance plan, except that Messrs.
Ucciferri and Moore receive $500.00 per month.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth, for the last
three (3) completed fiscal years, the cash and certain other
compensation paid by the Bank to the Bank's President and Chief
Executive Officer and the other Executive Officers of the Bank whose
total annual salary and bonus for the fiscal year ended December 31,
1996 exceeded $100,000.
78
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
------------------------------------------------------- ----------------------------
(A) (B) (C) (D) (E)
AWARDS
STOCK
OTHER ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION (#) ($)
- --------------------------- ----------- --------- -------- ------------ ------- -------
Robert Ucciferri 1996 $ 128,000 $ 95,785 $ -0- -0- $42,469(15)
President and CEO 1995 $ 120,000 $201,016 $ -0- -0- $ 2,832(16)
1994 $ 115,700 $ 10,000 $ -0- -0- $ 2,832(17)
- --------------------------------
(C) Total base salary paid for fiscal years 1996, 1995 and
1994 for the Bank.
(D) The initial portion of Mr. Ucciferri's 1995 bonus
($76,160) was accrued and paid in 1995, and the remainder
of Mr. Ucciferri's 1995 bonus ($124,856) was accrued in
1995 and paid in 1996. The initial portion of Mr. Moore's
1995 bonus ($38,060) was accrued and paid in 1995, and the
remainder of Mr. Moore's 1995 bonus ($67,448) was accrued
in 1995 and paid in 1996. The initial portion of Mr.
Mullarky's 1995 bonus ($38,060) was accrued and paid in
1995, and the remainder of Mr. Mullarky's 1995 bonus
($67,448) was accrued in 1995 and paid in 1996. The
chart also reflects the following bonuses earned in 1996
and paid in 1997: Mr. Ucciferri ($95,785), Mr. Moore
($43,825) and Mr. Mullarky ($40,715).
(E) Represents the dollar value of other annual compensation
not properly categorized as salary or bonus; including (i)
perquisites and other personal benefits, securities or
property unless the aggregate amount of such compensation
is the lesser of either $50,000 or 10% of the total annual
salary and bonus reported for the named executive officer
in columns (C) and (D); (ii) above-market or preferential
earnings on restricted stock, options, stock appreciation
rights ("SARs") or deferred compensation paid during the
fiscal year or payable during that period but deferred at
the election of the named executive officer; (iii)
earnings on long-term incentive plan ("LTIP") compensation
paid during the fiscal year or payable during that period
but deferred at the election of the named executive
officer; (iv) amounts reimbursed during the fiscal year
for the payment of taxes; and (v) the dollar value of the
difference between the price paid by a named executive
officer for any security of the Bank purchased from the
Bank (through deferral of salary or bonus, or otherwise),
and the fair market value of such security at the date of
purchase, unless that discount is available generally,
either to all security holders or to all salaried
employees of the registrant. None of the named officers
had other annual compensation in excess of 10% of the
total annual salary and bonus reported for any of the last
three fiscal years.
(15) Includes $2400 received from the Bank as directors' fees,
$39,661 Salary Continuation Agreement accruals, and $408
as a supplemental life insurance premium.
(16) Includes $2400 received from the Bank as director's fees
and $432 as a supplemental life insurance premium.
(17) Includes $2400 received from the Bank as Director's fees
and $432 as a supplemental life insurance premium.
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
------------------------------------------------------- ----------------------------
(A) (B) (C) (D) (E)
AWARDS
STOCK
OTHER ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION (#) ($)
- --------------------------- ----------- --------- -------- ------------ ------- --------
Barry J. Moore 1996 $ 97,000 $ 43,825 $-0- -0- $11,200(18)
Senior EVP and CFO 1995 $ 85,000 $105,508 $-0- -0- $ 132(19)
1994 $ 81,200 $ 5,000 $-0- -0- $ 132(20)
Michael H. Mullarky 1996 $ 85,000 $ 40,715 $-0- -0- $ 255(21)
EVP and Credit Administrator 1995 $ 85,000 $105,508 $-0- -0- $ 269(22)
1994 $81,200 $ 5,000 $-0- -0- $ 264(23)
- ----------------------------
(18) Includes $2400 received from the Bank as Directors' fees,
$8,668 Salary Continuation Agreement accruals, and $132 as
a supplmental life insurance premium.
(19) Includes $132 as a supplmental life insurance premium.
(20) Includes $132 as a supplmental life insurance premium.
(21) Includes $255 as a supplemental life insurance premium.
(22) Includes $269 as a supplemental life insurance premium.
(23) Includes $264 as a supplemental life insurance premium.
EMPLOYMENT AGREEMENTS
On November 28, 1995, the Bank and Mr. Ucciferri executed a five
(5) year employment agreement commencing January 1, 1996 at a base
salary of $120,000 per annum, which will be reviewed annually by the
Board. Mr. Ucciferri's base salary for 1997 is $149,000. Mr.
Ucciferri is also entitled to the use of a car, and Mr. Ucciferri may
also participate in any bonus, pension or profit sharing plan or other
employee benefit plan that is or may be adopted by the Bank. Mr.
Ucciferri is also entitled to five (5) weeks vacation per year and
appropriate medical and dental insurance. If Mr. Ucciferri is
terminated without cause, he will be entitled to twelve (12) months
severance pay, and if Mr. Ucciferri is terminated within nine (9)
months of a merger, or change of control of more than 25% of the
issued and outstanding stock of the Bank, Mr. Ucciferri will be
entitled to twenty-four (24) months severance pay. The Agreement also
contains provisions regarding disability and dispute resolution
procedures.
On November 28, 1995, the Bank and Mr. Moore executed a five (5)
year employment agreement commencing January 1, 1996 at a base salary
of $85,000 per annum, which will be reviewed annually by the Board.
Mr. Moore's base salary for 1997 is $110,000. Mr. Moore is also
entitled to the use of a car, and Mr. Moore may also participate in
any bonus, pension or profit sharing plan or other employee benefit
plan that is or may be adopted by the Bank. Mr. Moore is also
entitled to five (5) weeks vacation per year and appropriate medical
and dental insurance. If Mr. Moore is terminated without cause, he
will be entitled to twelve (12) months severance pay, and if Mr. Moore
is terminated within nine (9) months of a merger, or change of control
of more than 25% of the issued and outstanding stock of the Bank, Mr.
Moore will be entitled to twenty-four (24) months severance pay. The
Agreement also contains provisions regarding disability and dispute
resolution procedures.
On November 28, 1995, the Bank and Mr. Mullarky executed a five
(5) year employment agreement commencing January 1, 1996 at a base
salary of $85,000 per annum, which will be reviewed annually by the
Board. Mr. Mullarky's base salary for 1997 is $85,000. Mr. Mullarky
is also entitled to the use of a car, and Mr. Mullarky may also
participate in any bonus, pension or profit sharing plan or other
employee benefit plan that is or may be adopted by the Bank. Mr.
Mullarky is also entitled to five (5) weeks vacation per year and
appropriate medical and dental insurance. If Mr. Mullarky is
terminated without cause, he will be entitled to twelve (12) months
severance pay, and if Mr. Mullarky is terminated within nine (9)
months of a merger, or change of control of more than 25% of the
issued and outstanding stock of the Bank, Mr. Mullarky will be
entitled to twenty-four (24) months severance pay. The Agreement also
contains provisions regarding disability and dispute resolution
procedures.
SALARY CONTINUATION AGREEMENTS
On November 28, 1995, the Bank approved a Salary Continuation
Agreement for Mr. Ucciferri effective January 1, 1996 that would
provide an annual sum of $64,700 in equal monthly installments over a
ten (10) year period upon his retirement at age 67. The Bank has
purchased single premium life insurance to cover the retirement
benefits. The Bank must accrue increasing amounts every year in order
to fund various provisions of the Agreement, including provisions
regarding death after retirement, death prior to retirement, and
disability prior to retirement provisions. In 1996, the Bank accrued
$39,661 for Mr. Ucciferri's benefit, and the Bank has accrued a total
of $39,661 through December 31, 1996 for Mr. Ucciferri's benefit. If
Mr. Ucciferri voluntarily terminates his employment, he will receive
the accrued amount under the Agreement within two (2) years of the
termination. If Mr. Ucciferri is terminated without cause, Mr.
Ucciferri will begin
81
receiving the amount accrued in the year of termination at age
sixty-seven (67) in equal monthly installments spread over ten (10)
years. Mr. Ucciferri will receive no benefits under the Agreement if
Mr. Ucciferri's employment is terminated for cause.
On November 28, 1995, the Bank approved a Salary Continuation
Agreement for Mr. Moore effective January 1, 1996 that would provide
an annual sum of $64,800 in equal monthly installments over a ten (10)
year period upon his retirement at age sixty-five (65). The Bank has
purchased single premium life insurance to cover the retirement
benefits. The Bank must accrue increasing amounts every year in order
to fund various provisions of the Agreement, including provisions
regarding death after retirement, death prior to retirement, and
disability prior to retirement provisions. In 1996, the Bank accrued
$8,668 for Mr. Moore's benefit, and the Bank has accrued a total of
$8,668 through December 31, 1996 for Mr. Moore's benefit. If Mr.
Moore voluntarily terminates his employment, he will receive the
accrued amount under the Agreement within two (2) years of the
termination. If Mr. Moore is terminated without cause, Mr. Moore will
begin receiving the amount accrued in the year of termination at age
sixty-five (65) in equal monthly installments spread over ten (10)
years. Mr. Moore will receive no benefits under the Agreement if Mr.
Moore's employment is terminated for cause.
The Bank is considering and may extend similar salary
continuation benefits to Mr. Mullarky.
BANK BONUS POOL
In December 1991, the Board of Directors established a Bank Bonus
Pool which takes effect only if certain threshold tests are met. The
Bonus Pool is calculated based on the Bank's return on equity, loan
losses and income after taxes. In 1994, the 1991 Bonus Pool called
for payment of $170,982 although actual payment was only $28,020 of
which $20,000 was paid to the three Executive Officers and $8,020 was
distributed among 42 staff members. The $142,962 difference between
the calculated and actual bonus was not accepted by executive
management in order to maintain an adequate Tier 1 capital ratio. In
1995, the 1991 Bonus Pool accrued a total of $448,092; $177,370 was
paid in 1995 and the balance of $270,722 was paid in February 1996.
Of the $448,092 total, $412,032 was paid to the three Executive
Officers and $36,090 was distributed among 42 employees.
In April 1996, the Board of Directors adopted the 1996 Executive
Incentive Plan for the top three executive officers of the Bank. The
performance criteria includes return on average shareholders equity,
average loan loss and the short-term objective of limiting depository
runoff following the acquisition of Bank of Westminster, which was
completed on June 14, 1996. In order to be eligible for incentive
payout, the Bank must be satisfactorily rated by its regulatory
agencies. In 1996, the 1996 Executive Incentive Plan accrued a total
of $200,510. The sum of $180,325 was paid in January, 1997.
401(k) PLAN
Effective February 1, 1992, the Bank adopted a 401(k) Plan that
allows eligible employees to contribute, as deferred compensation,
between one percent (1%) and fifteen percent (15%) of their salary to
a trust established pursuant to the 401(k) Plan. The Bank may match
contributions up to a given percentage of each participant's
compensation. In addition, the Bank may make additional contributions
on a discretionary basis as a profit sharing contribution.
Contributions by the Bank would vest over a five-year period. The
Bank did not make any contributions for 1996.
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THE BANK'S 1990 STOCK OPTION PLAN
In 1990, the Bank's Board of Directors adopted the 1990 Stock Option Plan
(the "1990 Plan"), which was approved by the shareholders of the Bank at the
1991 Annual Meeting of Shareholders. The purpose of the 1990 Plan was to secure
for the Bank and its shareholders benefits of the incentives inherent in the
ownership of Common Stock by those directors and key full-time officers and
employees of the Bank who will share responsibility with the management of the
Bank for its future growth and success. The 1990 Plan authorized the granting
of (i) options which qualify as "incentive stock options" under the Code, and
(ii) nonstatutory stock options.
The 1990 Plan provided that incentive stock options and nonstatutory stock
options representing a total of up to 103,926 shares of Common Stock, will be
available for grant to directors and full-time salaried officers and employees
of the Bank.
During 1991, stock options to purchase a total of 102,300 shares were
granted under the 1990 Plan. During 1992, the Board of Directors voted to
cancel the existing stock options and grant new options at $6.50 per share.
There are currently 138,568 option shares that are outstanding under the 1990
Stock Option Plan, and no stock options were granted in 1996 to the named
executive officers.
With the adoption of the Bank's 1997 Stock Option Plan by the Board of
Directors and approved by shareholders, the 1990 Plan was cancelled on May 21,
1997.
THE BANK'S 1997 STOCK OPTION PLAN
At the Bank's 1997 Annual Meeting of Shareholders on May 21, 1997,
shareholders of the Bank approved the Bank of Yorba Linda 1997 Stock Option Plan
(the "Bank's 1997 Plan"), which was adopted by the Board of Directors of Bank on
February 19, 1997, subject to the approval of the holders of a majority of the
issued and outstanding shares of the Bank. The purpose of the Bank's 1997 Plan
is to strengthen the Bank by providing an additional means of attracting and
retaining competent managerial personnel and by providing to participating
officers, key employees and directors, added incentive for high levels of
performance and for unusual efforts to increase the earnings of the Bank. The
Bank's 1997 Plan seeks to accomplish these purposes and achieve these results by
providing a means whereby such officers, key employees and directors, purchase
shares of the Bank's Common Stock pursuant to options granted in accordance with
the Bank's 1997 Plan.
The Board of Directors intended to grant approximately 60% of the options
available for grant under the Bank's 1997 Plan to the management personnel in
the Bank's Mortgage and SBA Departments, with the remaining options to be
granted to the Bank's directors and executive officers, and the Board of
Directors has granted under the Bank's 1997 Plan a total of 125,000 stock
options. The Board of Directors intends to establish a stock option plan at the
holding company, and the stock option allocations to directors, executive
officers and other bank officers will be absorbed under the holding company
stock option plan.
SUMMARY OF PLAN
The purpose of the Bank's 1997 Plan is to strengthen the Bank by providing
an additional means of attracting and retaining competent managerial personnel.
The Bank's 1997 Plan provides to participants added incentive for high levels of
performance and for unusual efforts to increase the earnings of the Bank. It is
intended that the Bank's 1997 Plan was intended to assist in
83
accomplishing these objectives and facilitate in achieving these results by
providing a means whereby directors, officers and key employees of the Bank may
purchase shares of the Common Stock of the Bank pursuant to options granted in
accordance with the 1997 Plan. 460,519 unissued shares of the Bank, including
the 138,568 option shares outstanding under the 1990 Stock Option Plan,
approximately 30% of the issued and outstanding shares of the Bank, will be
reserved for issuance to directors, officers and employees of the Bank
("Eligible Participants"). Options granted pursuant to the 1997 Plan may be
non-qualified options or incentive stock options within the meaning of Section
422A of the Internal Revenue Code.
The Bank's 1997 Plan is intended to be administered by the Board of
Directors of the Bank or by a committee appointed from time to time by the
Board. The Board of Directors or the committee will determine with respect to
the Eligible Participants in the Bank's 1997 Plan and the extent of their
participation.
The purchase price of stock subject to each option shall be not less than
one hundred (100%) of the fair market value of such stock at the time such
option is granted. An Eligible Participant owning more than ten percent (10%)
of the total combined voting power of all classes of stock of the Bank may only
be granted an option with an exercise price at least 110% of the fair value of
Bank stock at the date of grant. The purchase price of any shares exercised
shall be paid in full in cash or, with the prior written approval of the
committee, in shares of the Bank or on a deferred basis evidenced by a
promissory note. In addition, the optionee shall have the right upon exercise
of an option to surrender for cancellation a portion of the option for the
number of shares exercised. Options may be granted pursuant to the Bank's 1997
Plan for a term of up to ten (10) years. Each option shall be exercisable
according to the determination of the Board or committee.
Options granted under the Bank's 1997 Plan shall not be transferable by the
optionee during the optionee's lifetime. In the event of termination of
employment as a result of the optionee's disability or in the event of an
employee's death during the exercise period, to the extent the option is
exercisable on the date employment terminates or the date the employee dies, the
option shall remain exercisable for up to one (1) year (but not beyond the end
of the original option term) by the disabled optionee or, in the event of death
of the optionee, a non-qualified option shall be exercisable by the person or
persons to whom rights under the option shall have passed by will or the laws of
descent and distribution.
If an optionee's employment is terminated, unless termination was by reason
of disability or death, the optionee shall have the right, for a 3-month period
after termination, to exercise that portion of the option which was exercisable
immediately prior to such termination. If an optionee's employment is
terminated for cause, the optionee shall have the right for a 30 day period
after termination, to exercise that portion of the option which was exercisable
immediately prior to such termination. In no event may the option be exercised
after the end of the original option term. If an option expires or is otherwise
cancelled without being exercised, the number of option shares subject to such
option will again become available for grant under the 1997 Plan.
In the event of certain changes in the outstanding Common Stock of the Bank
without receipt of consideration by the Bank, such as stock dividends, stock
splits, recapitalization, reclassification, reorganization, merger, stock
consolidation, or otherwise, appropriate and proportionate adjustments shall be
made in the number, kind and exercise price of shares covered by any unexercised
or partially unexercised options which were already granted. Optionees will
receive prior notice of any pending dissolution or liquidation of the Bank, or
reorganization, merger or dissolution or liquidations of the Bank, or
reorganization, merger or consolidation where the Bank is not the surviving
corporation or
84
sale of substantially all the assets of the Bank or other form of corporate
reorganization in which the Bank is not a surviving entity, or the acquisition
of stock representing more than 50% of the voting power of the stock of the Bank
then outstanding ("Terminating Event"). Optionees have thirty (30) days from
the date of mailing of such notices to exercise any option, whether or not fully
exercisable, in full. After such thirty (30) days, any option not exercised
shall terminate and upon the occurrence of the Terminating Event, the Bank's
1997 Plan shall terminate, unless some other provision is made in connection
with the Terminating Event.
The Board reserves the right to suspend, amend, or terminate the Bank's
1997 Plan, and, with the consent of the optionee, make such modifications, of
the terms and conditions of his or her option as it deems advisable, such as
changing the number of shares or the period such shares are vested, except that
the Board may not, without further approval of a majority of the shares,
increase the maximum number of shares covered by the Bank's 1997 Plan, change
the minimum option price, increase the maximum term of options under the Bank's
1997 Plan or permit options to be granted to any one other than an officer,
employee or director of the Bank.
Unless previously terminated by the Board of Directors, the Bank's 1997
Plan shall terminate ten years from the date the Bank's 1997 Plan was adopted by
the Board of Directors of the Bank, or February 19, 2007. If, and when, the
formation of the Bank's Holding Company is completed and the Holding Company's
1997 Stock Option Plan is established, the Bank's 1997 Plan will be terminated.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END (#) AT FY-END (#)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE (1) UNEXERCISABLE (2)
- ---- --------------- ------------ ----------------- -----------------
Robert Ucciferri -0- N/A 25,000/0 $190,625/0
Barry J. Moore -0- N/A 12,500/0 $ 95,313/0
Michael H. Mullarky -0- N/A 12,500/0 $ 95,313/0
As of December 31, 1996, there were options outstanding to purchase a total
of 94,400 shares (not adjusted for the four-for-three stock split effective June
30, 1997) of the Bank's Common Stock, and no options under the 1990 Plan were
exercised in 1996, and no options were granted to any of the persons specified
in the chart above in 1996. On February 19, 1997, the Board of Directors
granted additional options under the 1990 Stock Option Plan and approved the
1997 Stock Option Plan that was designed to replace the 1990 Stock Option Plan.
On February 19, 1997, Mr. Moore was granted an additional stock option for 2,000
shares, and Mr. Mullarky was granted an
- --------------------------
(1) Shares not adjusted for four-for-three stock split effective June 30,
1997.
(2) As a result of trades on December 31, 1996 at $14.1252 per share.
85
additional stock option for 500 shares. Please see The Bank's 1997 Stock Option
Plan for a description of the Bank's 1997 Stock Option Plan. When the Bank's
1997 Plan was approved by shareholders, the 1990 Stock Option Plan was cancelled
and no further options were granted under the 1990 Stock Option Plan. Please
see Proposal 2 for a description of the Holding Company's 1997 Stock Option
Plan. When the Holding Company's 1997 Stock Option Plan is approved by
shareholders of the Bank as prospective shareholders of the Holding Company, the
Bank's 1997 Stock Option Plan is intended to be cancelled and no further options
are intended to be granted under the Bank's 1997 Stock Option Plan.
CERTAIN TRANSACTIONS
During the previous three (3) years, the Bank has had, and expects to have
in the future, banking transactions in the ordinary course of its business with
directors, officers and their associates. These transactions have been (and
those in the future are intended to be) on substantially the same terms,
including interest rates, collateral and repayment terms on extensions of
credit, as those prevailing at the same time for comparable transactions with
others and did not involve more than the normal risk of collectability or
present other unfavorable features. During the period from January 1, 1996
through December 31, 1996, the maximum aggregate extensions of credit to
directors, executive officers and persons with which they are financially or
otherwise closely associated was approximately $1,367,134 or 10.5%% essential of
the Bank's equity capital.
Loans to directors, officers and employees or their related interests are
permitted, but must be made in compliance with all applicable laws and
regulations including Regulation O, Section 215.4(b) of the Financial
Institutions Regulatory and Interest Rate Control Act of 1978, and Section 3372
of the California Financial Code. These laws require that all director and
director related loan requests are granted with interest rates and terms based
on the same criteria as comparable credit risks within the Bank. All loans to
executive officers and directors must be approved by the Senior Loan Committee
prior to submission to the Board of Directors. All loans made to any member of
the Board of Directors or the Executive Officers of the Bank on behalf of
himself or any related entity, or immediate family member requires prior
approval of the majority of the full Board of Directors. At December 31, 1996,
the Bank had $1,367,134 in loan commitments to directors and executive officers
with an aggregate outstanding balance of $1,359,984.
On July 15, 1986, 10,000 units of the Bank were sold for an aggregate of $1
million to certain members of the Board of Directors of the Bank. Each unit was
composed of one (1) share of the Bank's Cumulative Non-Voting Convertible Series
A Preferred Stock and a five (5)-year warrant that would allow the holder to
purchase the same number of shares of Common Stock of the Bank as the holder
would acquire upon conversion of the Preferred Stock. The warrants expired in
1991. Based on shareholder approval and the necessary regulatory approvals
obtained subsequently, the terms and conditions of the issued and outstanding
Preferred Stock were amended in 1992 to provide for noncumulative dividends. On
December 31, 1995, the Bank paid $162,000 of the unpaid cumulative dividends.
On February 29, 1996, following necessary regulatory approvals, the Bank
redeemed the Preferred Stock and paid $150,111 in remaining unpaid accrued
dividends.
APPROVAL OF BYL BANCORP 1997 STOCK OPTION PLAN
INTRODUCTION
Shareholders of the Bank, as prospective shareholders of the Holding
Company, are being asked to approve the proposed BYL Bancorp 1997 Stock Option
Plan (the "1997 Plan"), which was
86
adopted by the Board of Directors of Holding Company on April 23, 1996, subject
to the approval of the California Commissioner of Corporations and the holders
of a majority of the issued and outstanding shares of the Bank as prospective
shareholders of the Holding Company. The purpose of the 1997 Plan is to
strengthen the Holding Company and its prospective wholly-owned subsidiary bank,
BANK OF YORBA LINDA (the "Bank"), by providing an additional means of attracting
and retaining competent managerial personnel and by providing to participating
officers, key employees, directors and consultants added incentive for high
levels of performance and for unusual efforts to increase the earnings of the
Company and the Bank. The 1997 Plan seeks to accomplish these purposes and
achieve these results by providing a means whereby such officers, key employees,
directors and consultants may purchase shares of the Company's Common Stock
pursuant to options granted in accordance with the 1997 Plan.
The Board of Directors believes the 1997 Plan is beneficial to the Holding
Company, the Bank and the Holding Company's shareholder and prospective
shareholders. The 1997 Plan is subject to approval of the California
Commissioner of Corporations and the holders of a majority of the issued and
outstanding shares of the Bank as prospective shareholders of the Holding
Company, subject to any required changes of any regulatory agency.
SUMMARY OF PLAN
The purpose of the 1997 Plan is to strengthen the Holding Company and the
Bank by providing an additional means of attracting and retaining competent
managerial personnel. The 1997 Plan provides to participants added incentive
for high levels of performance and for unusual efforts to increase the earnings
of the Holding Company and the Bank. It is intended that the 1997 Plan will
assist in accomplishing these objectives and facilitate in achieving these
results by providing a means whereby directors, officers, key employees and
consultants may purchase shares of the Common Stock of the Holding Company
pursuant to options granted in accordance with the 1997 Plan. 460,519 unissued
shares of the Holding Company, or approximately 30% of the issued and
outstanding shares of the Holding Company, will be reserved for issuance to
directors, officers and employees ("Eligible Participants"). Options granted
pursuant to the 1997 Plan may be non-qualified options or incentive stock
options within the meaning of Section 422A of the Internal Revenue Code.
The 1997 Plan will be administered by the Board of Directors of the Holding
Company or by a committee appointed from time to time by the Board. The Board
of Directors or the committee will determine with respect to the Eligible
Participants in the 1997 Plan and the extent of their participation.
The purchase price of stock subject to each option shall be not less than
one hundred (100%) of the fair market value of such stock at the time such
option is granted. An Eligible Participant owning more than ten percent (10%)
of the total combined voting power of all classes of stock of the Holding
Company may only be granted an option with an exercise price at least 110% of
the fair value of Holding Company stock at the date of grant. The purchase
price of any shares exercised shall be paid in full in cash or, with the prior
written approval of the committee, in shares of the Holding Company or on a
deferred basis evidenced by a promissory note. In addition, the optionee shall
have the right upon exercise of an option to surrender for cancellation a
portion of the option for the number os shares exercised. Options may be
granted pursuant to the 1997 Plan for a term of up to ten (10) years. Each
option shall be exercisable according to the determination of the Board or
committee, except that options granted to employees that are not directors or
officers shall be exercisable at a minimum of 20% per year over a five year
period.
87
Options granted under the 1997 Plan shall not be transferable by the
optionee during the optionee's lifetime. Except for options granted to
consultants, in the event of termination of employment as a result of the
optionee's disability or in the event of an employee's death during the exercise
period, to the extent the option is exercisable on the date employment
terminates or the date the employee dies, the option shall remain exercisable
for up to one (1) year (but not beyond the end of the original option term) by
the disabled optionee or, in the event of death of the optionee, a non-qualified
option shall be exercisable by the person or persons to whom rights under the
option shall have passed by will or the laws of descent and distribution.
Except for options granted to consultants, if an optionee's employment is
terminated, unless termination was by reason of disability or death, the
optionee shall have the right, for a 3-month period after termination, to
exercise that portion of the option which was exercisable immediately prior to
such termination. If an optionee's employment is terminated for cause, except
for options granted to consultants and business advisors, the optionee shall
have the right for a 30 day period after termination, to exercise that portion
of the option which was exercisable immediately prior to such termination. In
no event may the option be exercised after the end of the original option term.
However, such termination provisions shall not apply for options granted to
consultants.
In the event of certain changes in the outstanding Common Stock of the
Holding Company without receipt of consideration by the Holding Company, such as
stock dividends, stock splits, recapitalization, reclassification,
reorganization, merger, stock consolidation, or otherwise, appropriate and
proportionate adjustments shall be made in the number, kind and exercise price
of shares covered by any unexercised or partially unexercised options which were
already granted. Optionees will receive prior notice of any pending dissolution
or liquidation of the Holding Company, or reorganization, merger or dissolution
or liquidations of the Holding Company, or reorganization, merger or
consolidation where the Holding Company is not the surviving corporation or sale
of substantially all the assets of the Holding Company or other form of
corporate reorganization in which the Holding Company is not a surviving entity,
or the acquisition of stock representing more than 50% of the voting power of
the stock of the Holding Company then outstanding ("Terminating Event").
Optionees have thirty (30) days from the date of mailing of such notices to
exercise any option in full. After such thirty (30) days, any option not
exercised shall terminate and upon the occurrence of the Terminating Event, the
1997 Plan shall terminate, unless some other provision is made in connection
with the Terminating Event.
The Board reserves the right to suspend, amend, or terminate the 1997 Plan,
and, with the consent of the optionee, make such modifications, of the terms and
conditions of his or her option as it deems advisable, such as changing the
number of shares or the period such shares are vested, except that the Board may
not, without further approval of a majority of the shares, increase the maximum
number of shares covered by the 1997 Plan, change the minimum option price,
increase the maximum term of options under the 1997 Plan or permit options to be
granted to any one other than an officer, employee, director, or consultant of
the Holding Company.
Unless previously terminated by the Board of Directors, the 1997 Plan shall
terminate ten years from the date the 1997 Plan was adopted by the Board of
Directors of the Holding Company, or April 23, 2007.
Shares of the Holding Company's Common Stock to be issued upon exercise of
stock options need not be registered with the SEC. However, the Holding Company
has applied for a permit from the California Commissioner of Corporations and
the Holding Company intends to register the
88
Common Stock reserved for issuance under the 1988 Plan with the SEC prior to
issuing any of its Common Stock upon exercise thereof.
COMPARISON TO THE BANK OF YORBA LINDA 1997 STOCK OPTION PLAN
The Holding Company's 1997 Plan differs from the Bank's 1997 Stock Option
Plan (the "Bank's 1997 Plan"), which will terminate in February 1997, and will
be terminated by the Bank upon the assumption of the Bank's Stock Options by the
Holding Company under the 1997 Plan, in several important respects. The 1997
Plan reserves up to 460,519 shares or approximately 30% of the currently issued
and outstanding shares of the Holding Company. By comparison, the Bank's 1997
Plan reserves 322,000 shares of the Bank's Common Stock, and an additional
138,568 shares were previously outstanding under the Bank's 1990 Stock Option
Plan. The Bank's 1997 Plan will expire in February, 2007, and the establishment
of the 1997 Plan is designed to replace the Bank's 1997 Plan. Currently, there
are 125,000 shares outstanding under the Bank's 1997 Plan, and there are 138,568
shares outstanding under the Bank's 1990 Plan. The total number of shares under
the 1997 Plan will be equal to 30% of the issued and outstanding shares of the
Holding Company, which is within the administrative standards of the California
Commissioner of Corporations.
The 1997 Plan allows for options to be exercised with cash, a promissory
note, or the surrender of a portion of the option being exercised by applying
the appreciated value of the shares being surrendered to payment of the exercise
price. The Bank's 1997 Plan also allows options to be exercised with cash, a
promissory note, or the surrender of a portion of the option being exercised by
applying the appreciated value of the shares being surrendered to payment of the
exercise price.
The 1997 Plan also allows for the granting of options to consultants, and
options granted to such consultants may not be terminated before the expiration
of such option. The Bank's Plan currently allows options to be granted to
directors, officers and key employees only.
Except for optionees that are directors and officers of the Holding Company
and any of its subsidiaries, the 1997 Plan requires full-time employees to
receive a minimum exercise period of a stock option of at least 20% per year
over five years from the date the option is granted. In comparison, the Bank's
1997 Plan allows the Bank and the optionee complete discretion in the vesting of
such options.
Except for optionees that are consultants, the 1997 Plan and the Bank's
1997 Plan both provide that options will terminate subject to possible
reinstatement by the Stock Option Committee if an optionee is terminated for
cause.
FEDERAL INCOME TAX CONSEQUENCES
To the extent that options granted under the 1997 Plan qualify as incentive
stock options and (i) the optionee does not sell the stock acquired upon
exercise of the options within two (2) years of the date of grant and one (1)
year from the date of exercise and (ii) the optionee was employed by the Holding
Company or a subsidiary for the entire period beginning on the date of grant of
option and ending three (3) months prior to the exercise of the option, then the
optionee will not recognize compensation income to the extent of any "bargain
element" determined as of the time of grant or exercise, and the Holding Company
will not be entitled to a corresponding tax deduction. However, the bargain
element is a time of tax preference for the purpose of determining the
employee's alternative minimum tax.
89
If the optionee disposes of the stock acquired through the exercise of the
incentive stock option prior to satisfaction of the holding period or fails to
satisfy the employment requirement, the optionee will recognize compensation
income and the Holding Company will be entitled to a corresponding tax deduction
to the extent of the lesser of (i) the excess of the fair market value of the
stock at the date of exercise over the exercise price or (ii) the amount
realized in excess of the tax basis of the stock if disposed in a taxable
transaction.
If the options granted under the 1997 Plan are nonqualified, the optionee
will not recognize taxable income, and the Holding Company will not be entitled
to a corresponding tax deduction, at the time of grant or exchange. Upon the
exercise of a non-qualified stock option, however, the optionee will recognize
taxable income equal to the "bargain element" or the "spread", the difference
between the fair market value determined as of the time of exercise of the
Holding Company's Common Stock acquired by the optionee and the option price
paid for the stock. The Holding Company will be entitled to a corresponding tax
deduction equal to the income recognized by the optionee provided that the
income tax withholding attributable to the optionee's recognized income is
collected from the optionee.
Shares of the Holding Company's Common Stock to be issued upon exercise of
stock options need not be registered with the Securities and Exchange
Commission. However, the Holding Company has applied for a permit from the
California Commissioner of Corporations and the Holding Company intends to
register the Common Stock reserved for issuance under the 1997 Plan with the SEC
prior to issuing any of its Common Stock upon exercise thereof.
Approval of the 1997 Plan requires the affirmative vote of a majority of
the issued and outstanding shares of the Bank as prospective shareholders of the
Holding Company, and the 1997 Plan is subject to the approval of the California
Commissioner of Corporations.
The description herein is intended to highlight and summarize the principle
terms of the 1997 Plan. For further information, shareholders are referred to a
copy of the 1997 Plan which is available for inspection at the Holding Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE HOLDING
COMPANY'S 1997 STOCK OPTION PLAN
COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Holding
Company, the Holding Company has been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
EXPERTS
The financial statements of the Bank, as of December 31, 1996 and 1995, and
for the years then ended included in this Proxy Statement/Prospectus have been
so included in reliance upon the report of Vavrinek, Trine Day and Co.,
independent certified accountants, for 1996, and Dayton & Associates,
independent certified accountants, for 1995, to the extent set forth in their
report included herein, given on the authority of those firms as an expert in
auditing and accounting. Dayton & Associates was merged into Vavrinek, Trine,
Day and Co. in 1996.
90
LEGAL MATTERS
The validity of the Holding Company Common Stock being registered with the
Commission will be passed upon for the Holding Company and the Bank by Knecht &
Hansen, Newport Beach, California. The opinion given under "Certain Federal
Income Tax Consequences" has been rendered by Vavrinek, Trine, Day & Co.
ANNUAL REPORT
UPON WRITTEN REQUEST OF ANY PERSON ENTITLED TO VOTE AT THE MEETING,
ADDRESSED TO BANK OF YORBA LINDA, 18206 IMPERIAL HIGHWAY, YORBA LINDA,
CALIFORNIA 92686, ATTENTION: MR. BARRY J. MOORE, FIRST EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER, THE BANK WILL PROVIDE, WITHOUT CHARGE, A COPY OF
ITS 1996 ANNUAL REPORT TO SHAREHOLDERS.
91
ANNEX I: PLAN OF REORGANIZATION AND MERGER AGREEMENT
A copy of the Plan of Reorganization and Merger Agreement entered into as
of May 2, 1997 by the Bank, Holding Company and the Merger Company is attached
hereto.
PLAN OF REORGANIZATION AND MERGER AGREEMENT
This Plan of Reorganization and Merger Agreement is entered into as of May
2, 1997, by and between Bank of Yorba Linda ("Bank"), BYL Merger Corporation
("Subsidiary"), and BYL Bancorp ("Holding Company").
RECITALS AND UNDERTAKINGS
A. Bank is a California banking corporation with its principal office in
the City of Yorba Linda, County of Orange, California. Subsidiary and Holding
Company are each corporations duly organized and existing under the laws of the
State of California with their principal offices in the City of Yorba Linda,
County of Orange, California.
B. As of March 31, 1997, Bank had 5,000,000 shares of no par value Common
Stock authorized and 1,151,420 shares outstanding, and 1,000,000 shares of
Preferred Stock authorized and 0 shares outstanding.
C. As of the date hereof, Subsidiary has an authorized maximum number of
shares of capital stock of 1,000,000 shares of no par value Common Stock, and at
the time of the merger referred to herein 100 of such shares of Common Stock
will be outstanding, all of which outstanding shares will be owned by Holding
Company.
D. As of the date hereof, Holding Company has an authorized maximum
number of shares of capital consisting of 50,000,000 shares of no par value
Common Stock, and 25,000,000 shares of no par value Preferred Stock, of which
150 shares of Common Stock will be outstanding and no shares of Preferred Stock
will be outstanding at the time of the merger referred to herein.
E. The Boards of Directors of Bank and Subsidiary have, respectively,
approved this Agreement and authorized its execution; and the Board of Directors
of Holding Company has approved this Agreement and has authorized the Holding
Company to join in and be bound by this Agreement, and authorized the
undertakings and representations made herein by Holding Company.
NOW, THEREFORE, in consideration of the promises and the mutual covenants,
agreements and undertakings of the parties herein set forth and for the purpose
of prescribing the terms and conditions of the merger, the parties hereto agree
as follows:
SECTION 1. GENERAL
1.1 THE MERGER. On the Effective Date, Subsidiary shall be merged into
Bank, which shall be the Surviving Corporation (the "Surviving Corporation") and
a subsidiary of Holding Company, and its name shall continue to be "Bank of
Yorba Linda."
-1-
1.2 EFFECTIVE DATE. The merger described herein shall become effective,
and actions to consummate such merger shall commence, at the close of
business on the date (the "Effective Date") upon which an executed counterpart
of this Agreement (as amended, if necessary, to conform to any requirements of
law or governmental authority or agency, which requirements are not materially
in contravention of any of the substantive terms hereof) shall have been filed
with the Office of the Secretary of State of the State of California, in
accordance with Section 1103 of the California Corporations Code.
1.3 ARTICLES OF INCORPORATION, BYLAWS AND CERTIFICATE OF AUTHORITY. At the
close of business on the Effective Date, the Articles of Incorporation of Bank,
as in effect immediately prior to such time on the Effective Date, shall be and
remain the Articles of Incorporation of the Surviving Corporation, the Bylaws of
Bank shall be and remain the Bylaws of the Surviving Corporation until altered,
amended or repealed; the Certificate of Authority of Bank issued by the
Superintendent of Banks of the State of California shall be and remain the
Certificate of Authority of the Surviving Corporation; and Bank insurance of
deposits coverage by the Federal Deposit Insurance Corporation shall be and
remain the deposit insurance of the Surviving Corporation.
1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. At the close of
business on the Effective Date, the directors and officers of Bank immediately
prior to such time on the Effective Date shall be and remain the directors and
officers of the Surviving Corporation. Directors of the Surviving Corporation
shall serve until the next Annual Meeting of Shareholders of the Surviving
Corporation or until such time as their successors are elected and have
qualified.
1.5 EFFECT OF THE MERGER.
(a) ASSETS AND RIGHTS. At the close of business on the Effective Date
and thereafter, all rights, privileges, franchises and property of Subsidiary,
and all debts and liabilities due or to become due to Subsidiary, including
things in action and every interest or asset of conceivable value or benefit,
shall be deemed fully and finally and without any right of reversion
transferred to and vested in the Surviving Corporation without further act or
deed, and the Surviving Corporation shall have and hold the same in its own
right as fully as the same was possessed and held by Subsidiary.
(b) LIABILITIES. At the close of business on the Effective Date and
thereafter, all debts, liabilities, and obligations due or to become due of, and
all claims and demands for any cause existing against, Subsidiary shall be and
become the debts, liabilities or obligations of, or the claims and demands
against, the Surviving Corporation in the same manner as if the Surviving
Corporation had itself incurred or become liable for them.
(c) CREDITORS' RIGHTS AND LIENS. At the close of business on the
Effective Date and thereafter, all rights of creditors of Subsidiary, and all
liens upon the property of Subsidiary, shall be preserved unimpaired, and shall
be limited to the property affected by such liens immediately prior to the
Effective Date.
-2-
(d) PENDING ACTIONS. At the close of business on the Effective Date
and thereafter, any action or proceeding pending by or against Subsidiary shall
not be deemed to have abated or been discontinued, but may be pursued to
judgment with the full right to appeal or review. Any such action or proceeding
may be pursued as if the merger described herein had not occurred, or with the
Surviving Corporation substituted in place of Subsidiary, as the case may be.
1.6 FURTHER ASSURANCES. Bank and Subsidiary each agree that at any time,
or from time to time, as and when requested by the Surviving Corporation, or by
its successors and assigns, it will execute and deliver, or cause to be executed
and delivered, in its name by its last acting officers, or by the corresponding
officers of the Surviving Corporation, all such conveyances, assignments,
transfers, deeds or other instruments, and will take or cause to be taken such
further or other action as the Surviving Corporation, its successors or assigns
may deem necessary or desirable in order to evidence the transfer, vesting or
devolution of any property right, privilege or franchise or to vest or perfect
in or confirm to the Surviving Corporation, its successors and assigns, title to
and possession of all the property rights, privileges, powers, immunities,
franchises and interests referred to in this Section 1, or otherwise to carry
out the intent and purposes of this Agreement.
SECTION 2. CAPITAL STOCK OF THE SURVIVING CORPORATION
2.1 STOCK OF SUBSIDIARY. At the close of business on the Effective Date,
each share of Common Stock of Subsidiary issued and outstanding immediately
prior thereto shall, by virtue of the merger described herein, be deemed to be
exchanged for and converted into one fully paid share, assessable in accordance
with Section 662 of the California Financial Code, of Common Stock of Bank as
the Surviving Corporation.
2.2 STOCK OF BANK. At the close of business on the Effective Date, each
share of Common Stock of Bank issued and outstanding immediately prior thereto
shall, by virtue of the merger described herein, and without any action on the
part of the holder thereof, be exchanged for and converted into one share of
fully paid nonassessable Common Stock of Holding Company, in accordance with the
provisions of Paragraph 2.3.
2.3 EXCHANGE OF STOCK BY BANK SHAREHOLDERS. The conversion of the shares
of Bank provided in Paragraph 2.2 above shall occur automatically at the close
of business on the Effective Date without action by the holders thereof. Each
share certificate evidencing ownership of shares of Bank Common Stock thereupon
shall be deemed to evidence one share of Common Stock of the Holding Company.
Each holder of shares of Bank Common Stock may but is not required to surrender
his share certificate or certificates to the Holding Company, or an Exchange
Agent appointed by the Holding Company, and shall be entitled to receive in
exchange therefor a certificate or certificates representing the number of
shares into which his shares theretofore represented by a certificate or
certificates so surrendered shall have been converted.
-3-
2.4 EMPLOYEE STOCK OPTIONS. At the close of business on the Effective
Date, the Holding Company will assume Bank's rights and obligations under Bank's
Stock Option Plan (the "Plan") and under each of the outstanding options
previously granted under the Plan (each such option existing immediately prior
to the Effective Date being an "existing option" and each such option so assumed
by the Holding Company being called an "assumed option"), by which assumption
the optionee shall have the right to purchase one share of Holding Company
Common Stock for each share of Common Stock of Bank he was entitled to purchase
under such existing option, except that no option shall survive to purchase
fractional shares. Each assumed option, subject to such modification as may be
required, shall constitute a continuation of the existing option substituting
the Holding Company for Bank and employment by the Holding Company or any of its
subsidiaries for employment by the Bank. The price per share of Holding Company
Common Stock at which the assumed option (or any installment) may be exercised
shall be the price as was applicable to the purchase of the Bank Common Stock
pursuant to the existing option, and all other terms and conditions applicable
to the assumed options shall, except as herein provided, be unchanged. Each
option granted under the Plan after the close of business on the Effective Date
shall evidence the right to purchase shares of Common Stock of the Holding
Company rather than shares of Common Stock of the Bank and the Plan shall be
modified to so provide.
2.5 OTHER RIGHTS TO STOCK. From time to time, as and when required by the
provisions of any agreement to which Bank or Holding Company shall become a
party after the date hereof providing for the issuance of shares of Common Stock
or other equity securities of Bank or Holding Company in connection with a
merger into Bank of any other banking institution or other corporation, or the
acquisition by the Bank of the assets or stock of any other banking institution
or corporation, Holding Company shall issue in accordance with the terms of any
such agreement, its Common Stock or other equity securities as required by such
agreement, or in substitution of the shares of Common Stock or other equity
securities of Bank required to be issued by such agreement, as the case may be,
which the shareholders of any other such banking institution or other
corporation shall be entitled to receive by virtue of any such agreement.
SECTION 3. OBLIGATIONS OF THE PARTIES PENDING THE EFFECTIVE DATE OF MERGER
3.1 STOCKHOLDER APPROVALS. As soon as practicable, this Agreement shall be
duly submitted to stockholders of Bank, Subsidiary and the Holding Company for
the purpose of considering and acting upon this Agreement in the manner required
by law. Each of the parties shall use its best efforts to obtain the requisite
approval of its stockholders to this Agreement and the transactions contemplated
herein.
3.2 REGULATORY APPROVALS. Each of the parties hereto shall execute and
file with the appropriate regulatory authorities all necessary documents and
instruments and shall take every reasonable and necessary step and action to
comply with and to secure such regulatory approval of this Agreement and the
transactions contemplated herein as may be required by all applicable statutes,
rules and regulations, including
-4-
without limitation the consents and approvals referred to in Paragraphs 4.1(b),
4.1(c) and 4.1(d).
SECTION 4. CONDITIONS PRECEDENT, TERMINATION AND PAYMENT OF EXPENSES
4.1 CONDITIONS PRECEDENT TO THE MERGER. Consummation of the merger
described herein is subject to satisfaction of the following conditions:
(a) Ratification and confirmation of this Agreement by the respective
stockholders of Bank, the Subsidiary and the Holding Company, in accordance with
the applicable provisions of law;
(b) Obtaining all other consents and approvals, on terms and
conditions satisfactory to each of the parties hereto, and satisfying all other
requirements, prescribed by law or otherwise, which are necessary for the merger
described herein to be consummated, including without limitation: approvals from
the Federal Deposit Insurance Corporation, the Superintendent of Banks of the
State of California, and the Board of Governors of the Federal Reserve System
under the Bank Holding Company Act of 1956, approval from the California
Commissioner of Corporations under the California Corporate Securities Law of
1968 and authorizations, to the extent necessary under applicable blue sky laws
with respect to the securities of the Holding Company issued upon consummation
of the merger, and the declaration as effective by the Securities and Exchange
Commission of a registration statement under the Securities Act of 1933 with
respect to the securities of the Holding Company issuable upon consummation of
the merger,
(c) Issuance (unless waived by each of the parties hereto) of a
favorable ruling by the Internal Revenue Service of the United States Department
of the Treasury, in form and substance satisfactory to each of the parties
hereto and their counsel, with respect to the tax consequences to the parties
and their stockholders of the merger described herein;
(d) Procuring all other consents or approvals, governmental or
otherwise, which in the opinion of counsel for Bank are or may be necessary to
permit or to enable the Surviving Corporation to conduct, upon and after the
merger described herein, all or any part of the business and other activities in
which Bank will be engaged up to the time of such merger, in the same manner and
to the same extent Bank engages in such businesses and other activities
immediately prior to such merger; and
(e) Performance by each of the parties hereto of all obligations under
this Agreement which are to be performed prior to the consummation of the merger
described herein.
4.2 TERMINATION OF THE MERGER. If any condition specified in Paragraph 4.1
has not been fulfilled, or prior to the Effective Date a majority of the members
of the Board of Directors of any of the parties hereto has determined that:
-5-
(a) The number of shares of Common Stock of Bank voting against the
merger makes consummation of the merger inadvisable; or
(b) Any action, suit, proceeding or claim relating to the merger
described herein has been instituted, made or threatened which makes
consummation of the merger inadvisable; or
(c) For any other reason consummation of the merger is inadvisable;
then this Agreement may be terminated at any time before the merger becomes
effective. Upon termination, this Agreement shall be void and of no further
effect, and there shall be no liability by reason of this Agreement or the
termination thereof on the part of the parties or their respective directors,
officers, employees, agents or shareholders.
4.3 EXPENSES OF THE MERGER. All expenses of the merger, described herein,
including, without limitation, filing fees, printing costs, mailing costs,
accountant's fees and legal fees, shall be borne jointly by the Surviving
Corporation and the Holding Company; provided, however, that if the merger is
abandoned for any reason, then all of such expenses, including but not limited
to, the Holding Company's obligation to repurchase the shares issued to its
initial shareholders, shall be paid by Bank.
SECTION 5. MISCELLANEOUS
5.1 ENTIRE AGREEMENT. This Agreement embodies the entire agreement among
the parties and there have been and are no agreements, representations or
warranties among the parties with respect to the subject matter of this
Agreement other than those set forth herein or those provided for herein.
5.2 GOVERNING LAW. This Agreement has been executed in the State of
California and the laws of such State shall govern the validity and the
interpretation hereof and the performance by the parties hereto.
5.3 COUNTERPARTS. To facilitate the filing of this Agreement, any number
of counterparts hereof maybe executed and each such counterpart shall be deemed
to be an original instrument, but all such counterparts together shall
constitute but one instrument.
-6-
IN WITNESS WHEREOF, the parties hereto have caused this Plan of
Reorganization and Merger Agreement to be executed by their duly authorized
officers as of the day and year first above written.
BANK OF YORBA LINDA
By: /s/ Robert Ucciferri
---------------------------------------
Robert Ucciferri,
President and Chief Executive Officer
By: /s/ John F. Myers
---------------------------------------
John F. Myers, Secretary
BYL MERGER CORPORATION
By: /s/ Robert Ucciferri
---------------------------------------
Robert Ucciferri,
President and Chief Executive Officer
By: /s/ Barry J. Moore
---------------------------------------
Barry J. Moore, Secretary
BYL BANCORP
By: /s/ Robert Ucciferri
---------------------------------------
Robert Ucciferri,
President and Chief Executive Officer
By: /s/ John F. Myers
---------------------------------------
John F. Myers, Secretary
-7-
ANNEX II: BYL BANCORP STOCKHOLDER AGREEMENT
A copy of the BYL Bancorp Stockholder Agreement entered into as of April
23, 1997 by the Holding Company and Mr. Robert Ucciferri is attached hereto.
STOCKHOLDER AGREEMENT
THIS AGREEMENT is entered into this 23rd day of April, 1997 by and between
Robert Ucciferri ("Shareholder") and BYL Bancorp ("Corporation"), a California
corporation with its principal executive office in Yorba Linda, California
92686.
A. WHEREAS, the Articles of Incorporation of the Corporation currently
authorize the issuance of up to 50,000,000 of its no par value Common Stock
("Common Stock") and 25,000,000 of its no par value Preferred Stock.
B. WHEREAS, the Board of Directors of the Corporation have authorized the
sale and issuance of 150 shares of the Corporation's Common Stock at the
purchase price of $10.00 per share to Shareholder pursuant to the terms of
Corporation Code Section 25102(f);
C. WHEREAS, Shareholder desires to purchase 150 shares of the
Corporation's Common Stock for the purchase price of $10.00 per share pursuant
to the terms and conditions herein set forth;
IT IS MUTUALLY AGREED by and between the parties hereto as follows:
1. PURCHASE. The Corporation agrees to sell and Shareholder agrees to
for each purchase 150 shares of the Corporation's Common Stock at the price of
$10.00 per share for an aggregate purchase price of $1500.00
2. TRANSFER OF SHARES. The Shareholder agrees not to sell, assign,
transfer, encumber, hypothecate, or make any other disposition of any of the
shares of the Common Stock to be purchased except with the prior written consent
of the Corporation and except in accordance with the terms of this Stockholder
Agreement. This Stockholder Agreement shall be binding upon and shall operate
for the benefit of the Corporation and the Shareholder and the respective
executors or administrators and any transferees or assignees of the Shareholder,
whether such transfers or assignments are in accordance with or in violation of
the provisions of this Stockholder Agreement.
3. THE PURCHASE BY THE CORPORATION. Upon consummation of the merger
between the Corporation's wholly-owned subsidiary, BYL Merger Corporation, and
pursuant to which this Corporation will issue shares of its Common Stock to the
shareholders of Bank of Yorba Linda ("the Merger"), the Corporation shall be
obligated to repurchase for cash and the Shareholder shall be obligated to
resell to the Corporation the above-mentioned shares at the repurchase price of
$10.00 per share, for a total repurchase price of $1,500. The repurchase and
repayment therefor shall
-1-
occur simultaneously with the consummation of the Merger, at which time
Shareholder's share certificates shall be returned and cancelled.
4. TERMINATION. This Stockholder Agreement shall terminate upon the
occurrence of any of the following events:
(a) The bankruptcy, receivership, or dissolution of the Corporation;
(b) Mutual agreement of the Corporation and Shareholder; or
(c) The failure of the consummation of the Merger for any reason
whatsoever.
5. LEGEND. Upon execution of this Stockholder Agreement, the certificate
representing the number of shares of Stock to be issued shall be endorsed as
follows:
"It is unlawful to consummate a sale or transfer of this
security, or any interest therein, or to receive any
consideration therefor, without the prior written consent of
the Commissioner of Corporations of the State of California,
except as permitted by the Commissioner's rules.
Additionally, this certificate is transferable only upon
compliance with provisions of a Stockholder Agreement dated
April 23, 1997."
6. GOVERNING LAW. This Stockholder Agreement shall be construed and
governed by the laws of the State of California. The offer and sale of this
stock will not be accompanied by the publication of any advertisement, that no
selling expenses will be given, paid or incurred in connection therewith, that
no promotional considerations will be given, paid or incurred in connection
therewith, that a notice in the form prescribed by the rules of Commissioner of
Corporations ("Commissioner") shall be filed with the Commissioner, and that a
copy of Section 260.141.11 of the Corporate Securities Rules is attached hereto
and is hereby acknowledged as received by shareholder.
7. ENTIRE AGREEMENT. This Stockholder Agreement constitutes the sole and
only agreement of the parties hereto respecting the sale and purchase of the
shares of the Corporation and the resale and repurchase of the shares of the
Corporation's Common Stock and correctly sets forth the rights, duties, and
obligations of each party to the other in relation thereto as of this date. Any
prior agreements, promises, negotiations or representations concerning the
subject matter of this Stockholder Agreement not expressly set forth in this
Stockholder Agreement are of no force or effect.
-2-
IN WITNESS WHEREOF, the parties hereto have executed this Stockholder
Agreement in Yorba Linda, California on the date first above written.
BYL BANCORP
By /s/ John C. Coelho
---------------------------------------
John C. Coelho
Chairman of the Board
By /s/ Barry J. Moore
---------------------------------------
Barry J. Moore
Chief Financial Officer
By /s/ Robert Ucciferri
---------------------------------------
Robert Ucciferri
"Shareholder"
-3-
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report
Financial Statements of BANK OF YORBA LINDA
Statements of Financial Condition as of December 31, 1996 and 1995
and June 30, 1997 (unaudited)
Statements of Income for the Years Ended December 31, 1996, 1995 and 1994
and Six Months Ended June 30, 1997 and 1996 (unaudited)
Statements of Changes in Shareholders' Equity for the Years Ended December
31, 1996, 1995 and 1994 and Six Months Ended June 30, 1997 (unaudited)
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and
1994 and Six Months Ended June 30, 1997 and 1996 (unaudited)
Notes to Financial Statements
Financial Statements of the Holding Company are not presented herein
because BYL Bancorp has no assets and liabilities
and has not conducted any business other
than of an organizational nature.
All schedules are omitted because the required information
is not applicable or is included in the
Financial Statements of BANK OF YORBA LINDA
and the related notes.
To the Board of Directors and Shareholders
of Bank of Yorba Linda
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying statement of condition of Bank of Yorba Linda
as of December 31, 1996 and the related statements of income, changes in
shareholders' equity, and cash flows of the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit. The
financial statements as of December 31, 1995 and 1994, were audited by Dayton &
Associates, who merged with Vavrinek, Trine, Day & Co. as of September 1, 1996,
and whose report dated January 4, 1996 expressed an unqualified opinion on
those statements.
We conducted our audit 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 audit provides 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 Bank of Yorba Linda as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO.
February 5, 1997, except for Note P
as to which the date is June 30, 1997.
Laguna Hills, California
F-1
BANK OF YORBA LINDA
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1997 (UNAUDITED)
June 30,
1997 1996 1995
------------ ------------ ------------
(Unaudited)
ASSETS
Cash and Due from Banks $ 11,490,000 $ 11,760,461 $ 6,400,869
Investment Securities - Note B:
Available for Sale 1,350,000 - 3,000,000
Held to Maturity 5,788,000 5,773,634 1,791,593
------------ ------------ ------------
TOTAL INVESTMENT SECURITIES 7,138,000 5,773,634 4,791,593
Federal Funds Sold 12,100,000 500,000 3,400,000
Loans Held for Sale 41,423,000 24,363,386 10,186,064
Loans - Note C:
Commercial 17,978,000 13,577,349 5,685,792
Real Estate 45,883,000 47,318,946 24,146,266
Consumer 5,659,000 3,347,850 1,635,735
------------ ------------ ------------
TOTAL LOANS 69,520,000 64,244,145 31,467,793
Net Deferred Loan Costs 400,000 305,320 29,435
Allowance for Credit Losses (1,182,000) (1,210,000) (580,000)
------------ ------------ ------------
NET LOANS 68,738,000 63,339,465 30,917,228
Premises and Equipment - Note D 4,520,000 3,706,933 672,292
Other Real Estate Owned 893,000 1,029,861 506,800
Cash Surrender Value of Life Insurance 883,000 861,956 818,300
Goodwill - Note O 1,603,000 1,659,868 -
Accrued Interest and Other Assets 3,293,000 3,471,448 2,090,622
------------ ------------ ------------
$152,081,000 $116,467,012 $ 59,783,768
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-2
BANK OF YORBA LINDA
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1997 (UNAUDITED)
June 30,
1997 1996 1995
(Unaudited)
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits - Note E:
Noninterest-Bearing Demand $ 40,059,000 $ 31,964,976 $ 19,271,848
Money Market and NOW 28,411,000 25,831,214 18,123,129
Savings 17,438,000 18,324,403 7,527,460
Time Deposits Under $100,000 29,171,000 11,912,358 5,276,354
Time Deposits $100,000 and Over 21,367,000 14,335,005 3,826,599
------------ ------------ ------------
TOTAL DEPOSITS 136,446,000 102,367,956 54,025,390
Accrued Interest and Other Liabilities 1,941,000 1,160,672 601,115
------------ ------------ ------------
TOTAL LIABILITIES 138,387,000 103,528,628 54,626,505
Commitments and Contingencies - Note H
Shareholders' Equity - Notes J, K, and L:
Serial Preferred Stock, No Par Value -
Authorized 1,000,000 Shares, Series A;
Issued and Outstanding 10,000 Shares in 1995 - - 1,000,000
Common Shares - Authorized 5,000,000
Shares; Issued and Outstanding 1,535,064
Shares in 1997 and 1996 and 461,731
Shares in 1995 10,298,000 10,298,485 2,539,630
Undivided Profits, Including Transfer of
$735,006 from Common Shares on
December 31, 1988 3,396,000 2,639,899 1,617,633
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 13,694,000 12,938,384 5,157,263
------------ ------------ ------------
$152,081,000 $116,467,012 $ 59,783,768
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-3
BANK OF YORBA LINDA
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 AND
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
Six Months Ended
June 30, Year Ended December
----------------------- ------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Unaudited)
INTEREST INCOME
Interest and Fees on Loans $5,706,000 $2,540,000 $6,919,824 $4,120,407 $3,885,254
Interest on Investment Securities 194,000 103,000 355,932 219,103 189,991
Other Interest Income 162,000 97,000 222,184 139,874 51,540
---------- ---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 6,062,000 2,740,000 7,497,940 4,479,384 4,126,785
INTEREST EXPENSE
Interest on Money Market and NOW 327,000 237,000 576,264 453,625 518,219
Interest on Savings Deposits 342,000 143,000 511,854 278,445 297,635
Interest on Time Deposits 1,087,000 310,000 971,653 312,838 188,772
---------- ---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,756,000 690,000 2,059,771 1,044,908 1,004,626
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME 4,306,000 2,050,000 5,438,169 3,434,476 3,122,159
Provision for Credit Losses 195,000 123,000 344,500 262,000 423,000
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 4,111,000 1,927,000 5,093,669 3,172,476 2,699,159
NONINTEREST INCOME
Gains, Fees, and Servicing Income on Loans Sold 5,049,000 3,006,000 6,859,948 5,157,436 3,377,074
Service Charges, Fees, and Other Income 682,000 373,000 793,183 504,431 421,969
---------- ---------- ---------- ---------- ----------
5,731,000 3,379,000 7,653,131 5,661,867 3,799,043
---------- ---------- ---------- ---------- ----------
9,842,000 5,306,000 12,746,800 8,834,343 6,498,202
NONINTEREST EXPENSE
Salaries and Employee Benefits 5,144,000 2,675,000 6,158,400 4,399,141 3,140,798
Occupancy Expenses 419,000 277,000 717,025 537,553 499,836
Furniture and Equipment 647,000 271,000 666,995 434,597 424,508
Other Expenses - Note F 2,072,000 1,322,000 3,118,798 1,723,725 1,622,133
---------- ---------- ---------- ---------- ----------
8,282,000 4,545,000 10,661,218 7,095,016 5,687,275
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,560,000 761,000 2,085,582 1,739,327 810,927
Income Taxes - Note G 667,000 310,000 884,000 717,000 335,000
---------- ---------- ---------- ---------- ----------
NET INCOME $ 893,000 $ 451,000 $1,201,582 $1,022,327 $ 475,927
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net Income Per Share:
Primary $ 0.54 $ 0.69 $ 1.05 $ 1.98 $ 0.83
Fully Diluted $ 0.54 $ 0.65 $ 1.04 $ 1.39 $ 0.62
Shares Used in Computation:
Primary 1,647,485 609,048 1,120,147 461,731 461,731
Fully Diluted 1,647,485 693,846 1,160,880 737,129 770,359
The accompanying notes are an integral part of these financial statements.
F-4
BANK OF YORBA LINDA
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
Serial Common Shares
Preferred Number of Undivided
Stock Shares Amount Profits Total
----------- ----------- ----------- ----------- ------------
BALANCE AT JANUARY 1, 1994 $ 1,000,000 461,731 $ 2,539,630 $ 480,666 $ 4,020,296
Net Income 475,927 475,927
Preferred Dividends (91,006) (91,006)
----------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1994 1,000,000 461,731 2,539,630 865,587 4,405,217
Net Income 1,022,327 1,022,327
Preferred Dividends (270,281) (270,281)
----------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1995 1,000,000 461,731 2,539,630 1,617,633 5,157,263
Net Income 1,201,582 1,201,582
Preferred Dividends (159,316) (159,316)
Redemption of Preferred Stock (1,000,000) (20,000) (1,020,000)
Issuance of Common Shares, Net
of Expenses of $1,096,145 1,073,333 7,758,855 7,758,855
----------- ----------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 - 1,535,064 10,298,485 2,639,899 12,938,384
Net Income 893,094 893,094
Dividends (134,324) (134,324)
Payment for Fractional Shares
Related to Stock Split (3,256) (3,256)
----------- ----------- ----------- ----------- ------------
BALANCE AT JUNE 30, 1997 $ - 1,535,064 $10,298,485 $ 3,395,413 $13,693,898
(UNAUDITED)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
The accompanying notes are an integral part of these financial statements.
F-5
BANK OF YORBA LINDA
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 AND
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
Six Months Ended
June 30, Year Ended December
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
-------------- ------------ -------------- ------------- ------------
(Unaudited)
OPERATING ACTIVITIES
Net Income $ 893,000 $ 451,000 $ 1,201,582 $ 1,022,327 $ 475,927
Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 425,000 131,000 405,351 256,637 250,352
Deferred Income Taxes (294,000) (86,000) (234,000) (224,000) (305,000)
Loans Originated for Sale (102,190,000) (52,115,000) (111,080,174) (87,344,000) (7,285,890)
Proceeds from Loan Sales 85,130,000 48,016,000 96,902,852 87,127,177 59,934,110
Provision for Credit Losses 195,000 123,000 344,500 262,000 423,000
Other Real Estate Owned Losses 33,000 - 207,425 53,289 165,318
Other Items - Net 1,218,000 585,000 (638,325) (700,136) 38,247
------------- ------------ -------------- ------------- ------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES (14,590,000) (2,895,000) (12,890,789) 453,294 (6,238,046)
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits - - - 99,000 (99,000)
Proceeds from Sales of Other Real Estate Owned 381,000 - 264,465 120,911 187,163
Purchases of Available-for-Sale Securities (1,350,000) (7,000,000) (7,000,000) (5,000,000) (1,975,586)
Purchases of Held-to-Maturity Securities - (994,000) (994,283) (950,741) (5,508,691)
Proceeds from Maturities of Available-for-Sale Securities - 6,000,000 10,000,000 3,995,333 -
Proceeds from Maturities of Held-to-Maturity Securities - 1,000,000 3,250,000 1,250,000 5,300,000
Net Change in Loans (5,871,000) 3,422,000 546,721 (3,440,986) 10,243,873
Net Cash Received from Purchase of Bank of Westminster - 4,618,000 4,617,819 - -
Purchases of Premises and Equipment (1,181,000) (242,000) (570,511) (357,622) (92,801)
Purchase of Life Insurance - - - (818,300) -
Proceeds from Sale of Premises and Equipment - - 34,563 69,900 -
------------- ------------ -------------- ------------- ------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (8,021,000) 6,804,000 10,148,774 (5,032,505) 8,054,958
FINANCING ACTIVITIES
Net Change in Demand Deposits and Savings Accounts 9,788,000 549,000 (2,189,127) 176,192 3,241,668
Net Change in Time Deposits 24,290,000 (493,000) 811,195 5,155,957 (2,513,640)
Proceeds from Stock Offering - 7,787,000 7,758,855 - -
Redemption of Preferred Stock - (1,020,000) (1,020,000) - -
Dividends Paid (137,000) (159,000) (159,316) (270,281) (91,006)
------------- ------------ -------------- ------------- ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 33,941,000 6,664,000 5,201,607 5,061,868 637,022
------------- ------------ -------------- ------------- ------------
INCREASE IN CASH
AND CASH EQUIVALENTS 11,330,000 10,573,000 2,459,592 482,657 2,453,934
Cash and Cash Equivalents at Beginning of Year 12,260,000 9,801,000 9,800,869 9,318,212 6,864,278
------------- ------------ -------------- ------------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 23,590,000 $ 20,374,000 $ 12,260,461 $ 9,800,869 $ 9,318,212
------------- ------------ -------------- ------------- ------------
------------- ------------ -------------- ------------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Used During the Year for Interest $ 1,018,000 $ 656,000 $ 1,962,523 $ 979,102 $ 1,009,540
Cash Used During the Year for Income Taxes $ 1,688,000 $ 399,000 $ 1,109,000 $ 976,000 $ 498,000
The accompanying notes are an integral part of these financial statements.
F-6
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Bank operates four retail branches in Orange 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 EQUIVALENTS
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the statements of
financial condition captions "Cash and Due from Banks" and "Federal Funds Sold".
SECURITIES HELD TO MATURITY
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.
SECURITIES AVAILABLE FOR SALE
Available-for-sale securities consist of bonds, notes, debentures, and certain
equity securities not classified as trading securities nor as held-to-maturity
securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
F-7
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LOANS HELD FOR SALE
Mortgage and SBA 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 No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN (SFAS No. 114), 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.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
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.
F-8
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost less accumulated depreciation and amortization.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit, and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
NET INCOME PER SHARE
Net income per share of common stock has been computed on the basis of the
weighted average number of shares of common stock outstanding plus shares
issuable upon the assumed exercise of outstanding stock options.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", as amended
by SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125, establishing accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of the financial-components approach. This
approach requires the recognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets. Liabilities and derivatives
incurred or obtained by transferors in conjunction with the transfer of
financial assets are required to be measured at fair value, if practicable.
Servicing assets and other retained interests in transferred assets are
required to be measured by allocating the previous carrying amount between the
assets sold, if any, and the interest that is retained, if any, based on the
relative fair values of the assets on the date of the transfer. Servicing
assets retained are subsequently subject to amortization and assessment for
impairment. Management has not determined the potential impact this statement
will have, however, management believes that there will be no material effect
on the Bank's financial condition or results of operations. SFAS No. 125 is
effective for transactions occurring after December 31, 1996.
F-9
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
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 statements of financial
condition according to management's intent. The carrying amount of securities
and their approximate fair values at December 31 were as follows:
Gross
Unrealized
Amortized Gains Fair
Cost (Losses) Value
---------- --------- ----------
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1995:
Other $3,000,000 $ - $3,000,000
---------- --------- ----------
---------- --------- ----------
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1996:
U.S. Treasuries $1,298,644 $ 7,356 $1,306,000
U.S. Government and Agency Securities 3,933,500 10,500 3,944,000
Municipal Securities 541,490 (8,490) 533,000
---------- --------- ----------
$5,773,634 $ 9,366 $5,783,000
---------- --------- ----------
---------- --------- ----------
DECEMBER 31, 1995:
U.S. Government and Agency Securities $1,248,986 $ 36,014 $1,285,000
Municipal Securities 542,607 (13,607) 529,000
---------- --------- ----------
$1,791,593 $ 22,407 $1,814,000
---------- --------- ----------
---------- --------- ----------
The Bank did not sell any investment securities for the years ended December 31,
1996, 1995, and 1994.
Investment securities carried at approximately $3,321,000 and $1,792,000, at
December 31, 1996 and 1995, respectively, were pledged to secure public deposits
and other purposes as required by law.
F-10
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE B - INVESTMENT SECURITIES - CONTINUED
The scheduled maturities of securities held to maturity and securities available
for sale at December 31, 1996, were as follows:
HELD-TO-MATURITY SECURITIES
---------------------------
Amortized Fair
Cost Value
------------ -----------
Due in One Year or Less $1,785,842 $1,790,000
Due from One Year
to Five Years 3,987,792 3,993,000
------------ -----------
$5,773,634 $5,783,000
------------ -----------
------------ -----------
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within
Orange 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.
The Bank also originated 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, 1996 and 1995, the Bank was servicing approximately $44,194,000
and $23,929,000, respectively, in SBA loans previously sold. In connection
with a portion of these loans, the Bank has capitalized approximately
$1,249,000 and $632,000 in excess servicing receivables at December 31, 1996
and 1995, respectively. Excess servicing receivables are amortized over the
estimated life of the serviced loan using a method that approximates the
interest method. The Bank evaluates the carrying value of the excess servicing
receivables by estimating the excess future servicing income, based on
management's best estimate of the remaining loan lives.
F-11
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE C - LOANS - CONTINUED
When the Bank sells the guaranteed portion of SBA loans, the cost allocated
to the portion of the loan retained is based on the relative fair value of
all components of the loan, including excess servicing receivables. The Bank
has recorded discounts of approximately $1,063,000 and $312,000 at December
31, 1996 and 1995, respectively in connection with these loans. These
discounts are amortized over the estimated life of each loan using the
interest method.
A summary of the changes in the allowance for credit losses as of December 31
follows:
1996 1995 1994
---------- ---------- ----------
Balance at Beginning of Year $ 580,000 $ 536,000 $ 413,000
Additions to the Allowance Charged to Expense 344,500 262,000 423,000
Recoveries on Loans Charged Off 25,500 15,000 87,000
Allowance on Loans Acquired from
Bank of Westminster 700,000 - -
---------- ---------- ----------
1,650,000 813,000 923,000
Less Loans Charged Off (440,000) (233,000) (387,000)
---------- ---------- ----------
$1,210,000 $ 580,000 $ 536,000
---------- ---------- ----------
---------- ---------- ----------
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:
1996 1995
---------- ---------
Recorded Investment in Impaired Loans $1,991,000 $ 760,000
Related Allowance for Impaired Losses $ 415,000 $ 163,000
Average Recorded Investment in Impaired Loans $1,591,000 $ 847,000
Interest Income Recognized for Cash Payments $ 19,000 $ None
Loans having carrying values of $994,951, $18,000 and $50,237 were
transferred to other real estate owned in 1996, 1995 and 1994, respectively.
F-12
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
1996 1995
---------- -----------
Land $ 821,188 $ -
Buildings 1,826,737 -
Furniture, Fixtures, and Equipment 2,918,103 2,207,710
Leasehold Improvements 678,812 615,476
---------- -----------
6,244,840 2,823,186
Less Accumulated Depreciation and
Amortization (2,537,907) (2,150,894)
---------- -----------
$3,706,933 $ 672,292
---------- -----------
---------- -----------
NOTE E - DEPOSITS
At December 31, 1996, the scheduled maturities of time deposits are as follows:
1997 $23,661,908
1998 through 2000 2,585,455
-----------
$26,247,363
-----------
-----------
NOTE F - OTHER EXPENSES
A summary of other expenses for the years ended December 31 is as follows:
1996 1995 1994
------------ ------------ -----------
Regulatory Assessments $ 29,082 $ 81,854 $ 148,064
Other Real Estate Owned 323,528 122,280 240,360
Commissions 199,585 124,280 135,236
Professional Fees and Outside Services 687,325 271,718 159,046
Loan Expenses 246,916 139,498 146,586
Office Expenses 748,199 533,278 554,227
Other 884,163 450,817 238,614
------------ ------------ -----------
$ 3,118,798 $ 1,723,725 $ 1,622,133
------------ ------------ -----------
------------ ------------ -----------
F-13
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE G - INCOME TAXES
The provisions for income taxes included in the statements of income consist
of the following:
1996 1995 1994
----------- ----------- -----------
Current:
Federal $ 806,000 $ 686,000 $ 471,000
State 312,000 255,000 169,000
----------- ----------- -----------
1,118,000 941,000 640,000
Deferred (234,000) (224,000) (305,000)
----------- ----------- -----------
$ 884,000 $ 717,000 $ 335,000
----------- ----------- -----------
----------- ----------- -----------
Deferred taxes are a result of differences between income tax accounting and
generally accepted accounting principles with respect to income and expense
recognition. The Bank'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 statements of financial condition:
1996 1995
----------- ----------
Deferred Tax Assets:
Allowance for Loan Losses $ 260,000 $ 99,000
Premises and Equipment - 33,000
Gain on Sale of Loans 649,000 383,000
California Franchise Tax 106,000 87,000
Other Assets/Liabilities 183,000 4,000
----------- ----------
1,198,000 606,000
Deferred Tax Liabilities:
Premises and Equipment (478,000) -
----------- ----------
$ 720,000 $ 606,000
----------- ----------
----------- ----------
A comparison of the federal statutory income tax rates to the Bank's
effective income tax rates for the years ended December 31 follows:
1996 1995 1994
---------------------- ----------------------- ----------------------
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
Federal Tax Rate 709,000 34.0% 591,000 34.0% $276,000 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 159,000 7.6 132,000 7.6 63,000 7.8
Tax Savings from Exempt
Interest (5,000) (0.2) (15,000) (0.9) (11,000) (1.3)
Other Items - Net 21,000 1.0 9,000 0.5 7,000 0.8
-------- ----- -------- ----- -------- -----
Bank's Effective Rate $884,000 42.4% $717,000 41.2% $335,000 41.3%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
F-14
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE H - COMMITMENTS AND CONTINGENCIES
The Bank has entered into various operating lease agreements, primarily
covering its branch locations. These agreements expire at various times
through the year 2003.
The approximate future minimum annual payments for these leases by year are
as follows:
1997 $ 476,000
1998 461,000
1999 416,000
2000 416,000
2001 433,000
Thereafter 194,000
----------
$2,396,000
----------
----------
The minimum rental payments shown above are given for the existing lease
obligations and are not a forecast of future rental expense.
Total rental expense included in occupancy expense and furniture and
equipment expense was approximately $445,000 in 1996, $378,000 in 1995, and
$352,000 in 1994.
The Bank 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, 1996, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
Commitments to Extend Credit $11,356,000
Standby Letters of Credit 96,000
-----------
$11,452,000
-----------
-----------
F-15
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE H - 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 I - 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 balance of these loans outstanding at December 31, 1996 was approximately
$1,367,000 and approximately $460,000 at December 31, 1995.
NOTE J - PREFERRED STOCK
The Bank is authorized to issue 1,000,000 shares of its preferred stock in
series. The rights, preferences, privileges and restrictions of each series
of preferred stock are determined upon issuance.
On July 16, 1986, the Bank issued 10,000 shares of its Series A preferred
stock at a price of $100 per share for a total consideration of $1,000,000 to
members of the Board of Directors.
During 1996 the Bank redeemed all outstanding preferred stock for $1,020,000.
NOTE K - STOCK OPTION PLAN
At December 31, 1996, the Bank has an option plan which is described below.
The Bank applies APB Opinion 25 and related interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized for its fixed
stock option plan. Had compensation costs for this plan been determined
based on the fair value at the grant dates consistent with the method of SFAS
123, the impact would not have materially affected net income.
In 1990, the Bank adopted an incentive stock option plan under which up to
138,568 shares of the Bank'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.
F-16
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE K - STOCK OPTION PLAN - CONTINUED
A summary of the status of the Bank's fixed stock option plan as of December
31, 1996, 1995, and 1994, and changes during the years ending on those dates
is presented below:
1996 1995 1994
----------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
Outstanding at beginning of Year 130,400 $4.88 130,400 $4.88 133,067 $4.88
Forfeited (4,533) 4.88 (2,667) 4.88
------- ------- -------
Outstanding at end of year 125,867 4.88 130,400 4.88 130,400 4.88
------- ------- --------- ---------
------- ------- --------- ---------
Options exercisable at year-end 125,867 4.88 129,867 4.88 124,507 4.88
As of December 31, 1996, all outstanding options had a weighted-average
remaining contractual life of 5.8 years.
NOTE L - QUASI REORGANIZATION
On December 31, 1988 the Bank effected a quasi reorganization whereby
$735,006 was transferred from common shares to undivided profits to eliminate
the accumulated deficit. Subsequent to that date the Bank has transferred
from undivided profits to common shares $195,000 of benefits from net
operating losses and investment tax credits.
NOTE M - 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.
F-17
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the
realization of the unrealized gains and losses can have a potential effect on
fair value estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash, short term investments, due from customers on
acceptances, and Bank acceptances outstanding are considered to approximate
fair value. Short term investments include federal funds sold, securities
purchased under agreements to resell, and interest bearing deposits with
Banks. The fair values of investment securities, including
available-for-sale, are generally based on quoted market prices. The fair
value of loans are estimated using a combination of techniques, including
discounting estimated future cash flows and quoted market prices of similar
instruments where available.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand, commercial
paper, and other borrowed funds are considered to approximate fair value.
For fixed maturity deposits, fair value is estimated by discounting estimated
future cash flows using currently offered rates for deposits of similar
remaining maturities. The fair value of long term debt is based on rates
currently available to the Bank for debt with similar terms and remaining
maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit
is estimated using the fees currently charged to enter into similar
agreements. The fair value of these financial instruments is not material.
F-18
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair value of financial instruments at December 31, 1996 is
summarized as follows (dollar amounts in thousands):
Carrying Value Fair Value
-------------- ------------
FINANCIAL ASSETS:
Cash and Due From Banks $ 11,760 $ 11,760
Federal Funds Sold $ 500 $ 500
Investment Securities $ 5,774 $ 5,783
Loans Held for Sale $ 24,363 $ 25,410
Loans $ 63,339 $ 62,858
Cash Surrender Value - Life Insurance $ 862 $ 862
FINANCIAL LIABILITIES:
Deposits $102,368 $102,343
NOTE N - 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). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
F-19
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE N - REGULATORY MATTERS - CONTINUED
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action (there are no
conditions or events since that notification that management believes have
changed the Bank's category). To be categorized as well-capitalized, the
Bank must maintain minimum ratios as set forth in the table below.
Required Capital
-------------------------------------------------
To Be Well-
Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Provisions
------------------- -------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- ------
AS OF DECEMBER 31, 1996:
Total Capital (to Risk-Weighted Assets) $11,882 13.0% $7,303 8.0% $9,128 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $10,741 11.8% $3,651 4.0% $5,477 6.0%
Tier 1 Capital (to Average Assets) $10,741 9.2% $4,648 4.0% $5,810 5.0%
AS OF DECEMBER 31, 1995:
Total Capital (to Risk-Weighted Assets) $ 5,286 11.8% $3,602 8.0% $4,502 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $ 4,723 10.5% $1,801 4.0% $2,701 6.0%
Tier 1 Capital (to Average Assets) $ 4,723 8.1% $2,327 4.0% $2,909 5.0%
At December 31, 1996, Tier 1 Capital was comprised of stockholders equity
less goodwill of $1,660,000 and other regulatory adjustments of $538,000.
Tier 1 Capital at December 31, 1995 was stockholders equity less regulatory
adjustments of $434,000.
The California Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of the lesser of the Bank's
undivided profits or the Bank's net income for its last three fiscal years
less the amount of any distribution made by the Bank to shareholders during
the same period.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit at the Federal Reserve Bank. At
December 31, 1996, required reserves were approximately $860,000.
F-20
BANK OF YORBA LINDA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE O - MERGER WITH BANK OF WESTMINSTER
On June 13, 1996, the Bank acquired 100% of the outstanding common stock of
Bank of Westminster (BOW) for $6,174,000 in cash. BOW had total assets of
approximately $54,923,000. The acquisition was accounted for using the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16. "Business Combinations". Under this method of accounting,
the purchase price was allocated to the assets acquired and deposits and
liabilities assumed based on their fair values as of the acquisition date.
The financial statements include the operations of BOW from the date of the
acquisition. Goodwill arising from the transaction totaled approximately
$1,717,000 and is being amortized over fifteen years on a straight-line basis.
The following table sets forth selected unaudited pro forma combined
financial information of the Bank and BOW for the years ended December 31,
1996 and 1995. The pro forma operating data reflects the effect of the
acquisition of BOW as if it was consummated at the beginning of each year
presented. The pro forma results are not necessarily indicative of the
results that would have occurred had the acquisition been in effect for the
full years presented, nor are they necessarily indicative of the results of
future operations (amounts in thousands, except per share data).
Year Ended
--------------------------------------
December 31, 1996 December 31, 1995
----------------- -----------------
Interest and Noninterest Income $17,560 $15,761
Net Income $ 1,068 $ 1,160
Net Income per Share:
Primary $ 0.97 $ 1.10
Fully Divided $ 0.97 $ 0.88
These proforma disclosures include adjustment to interest income from the
payment of the purchase price in cash, goodwill amortization and adjustments
to net income per share to reflect the issuance of common stock to affect the
purchase. No adjustments have been reflected in these amounts for the
expected cost savings to be derived from this merger.
NOTE P - STOCK SPLIT
On June 30, 1997, the Bank's Common Shares were split, four shares for three
shares. The per share data in the statements of income and the information
in Note K have been adjusted to give retroactive affect to this transaction.
F-21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article V of the Registrant's Articles of Incorporation provides
that the liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
Article VI of the Registrant's Articles of Incorporation provides that the
corporation is authorized to provide for the indemnification of agents (as
defined in Section 317 of the California General Corporation Law) of the
corporation in excess of that expressly permitted by such Section 317 for
breach of duty to the corporation and its shareholders to the fullest extent
permissible under California law.
Article III of the Registrant's Bylaws provides, in pertinent part,
that each person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic
corporation or other entity, shall be indemnified by the Registrant to the
full extent permitted by the General Corporation Law of the State of
California or any other applicable laws. Article III also authorizes the
registrant to enter into one or more agreements with any person which
provides for indemnification greater or different than that provided for in
that Article.
Both the Registrant and its proposed wholly-owned subsidiary, Bank
of Yorba Linda, have entered into indemnification agreements with their
respective officers and directors in the forms incorporated by reference as
Exhibit 10.1 to this Registration Statement.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted pursuant to the foregoing provisions
to directors, officers or persons controlling the Registrant, the Registrant
has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in
said Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT NO. EXHIBIT
----------- -------
2.1 Plan of Reorganization and Merger Agreement - Annex I of
Proxy Statement/Prospectus incorporated by reference
3.1 Articles of Incorporation of the Registrant.
3.2 Amendment to Articles of Incorporation of Registrant
3.3 Bylaws of the Registrant
II-1
EXHIBIT NO. EXHIBIT
----------- -------
4.1 Specimen Certificate evidencing shares of Registrant's
Common Stock
4.2 Stockholder Agreement Covering Issuance and Compulsory
Repurchase of Organizing Shares of Registrant - Annex II
of Proxy Statement/Prospectus incorporated by reference
5.1 Opinion of Knecht & Hansen
8.1 Tax Opinion of Vavrinek, Trine, Day & Co.
10.1 Form of Indemnification Agreement
10.2 BYL Bancorp 1997 Stock Option Plan and form of Stock
Option Agreement
10.3 Form of Proxy
10.4 Employment Agreement - Mr. Robert Ucciferri
10.5 Employment Agreement - Mr. Barry J. Moore
10.6 Employment Agreement - Mr. Michael Mullarky
10.7 Salary Continuation Agreement - Mr. Robert Ucciferri
10.8 Salary Continuation Agreement - Mr. Barry J. Moore
21.1 Subsidiary of BYL Bancorp
23.1 Consent of Vavrinek, Trine, Day & Co.
23.2 Consent of Knecht & Hansen (included in Exhibit 5.1)
_________________________________________
(b) Financial Statement Schedules
All schedules are omitted because the required information is
not applicable or is included in the Financial Statements of the Bank and the
related notes.
(c) Not applicable.
II-2
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to file, during
any period in which offers or sales are being made, a post-effective
amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officer and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Item 4 of this form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by mans
of a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Yorba
Linda, State of California, on August 20, 1997.
BYL BANCORP
a California corporation
By /s/ Robert Ucciferri
--------------------------------------
Robert Ucciferri, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Robert Ucciferri President and Chief Executive August 20, 1997
- --------------------------- Officer (Principal Executive
Robert Ucciferri Officer and Director)
/s/ Barry J. Moore Executive Vice President and August 20, 1997
- --------------------------- Chief Financial Officer (Principal
Barry J. Moore Financial Officer and Accounting
Officer)
/s/ Leonard O. Lindborg Director August 20, 1997
- ---------------------------
Leonard O. Lindborg
/s/ H. Rhoads Martin, Jr. Chairman of the Board, Director August 20, 1997
- ---------------------------
H. Rhoads Martin, Jr.
/s/ John F. Myers Director August 20, 1997
- ---------------------------
John F. Myers
/s/ Brent W. Walhberg Director August 20, 1997
- ---------------------------
Brent W. Wahlberg
II-4