UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 / / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . . . . . . . . . Commission file number: 000-23257 BYL BANCORP CALIFORNIA NO. 33-0755794 (State or other jurisdiction of incorporation) (IRS Employer Identification No.) 18206 Imperial Highway, Yorba Linda, California 92686 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 996-1800 Not applicable (Former name or former address, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(c) of the Securities Exchange Act of 1934 during the preceding 12 months (of shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS On May 8, 1998, there were 1,553,196 shares of BYL Bancorp Common Stock outstanding. 1 BYL BANCORP AND SUBSIDIARY MARCH 31, 1998 INDEX PART I - FINANCIAL INFORMATION PAGE ------ Item 1 - Financial Statements Consolidated Condensed Balance Sheet at March 31, 1998 and December 31, 1997......................................... 3 Consolidated Condensed Statement of Income for the three months ended March 31, 1998 and 1997...................... 4 Consolidated Condensed Statement of Changes in Capital from January 1, 1997 through March 31, 1998.................... 5 Consolidated Condensed Statement of Cash Flows for the three months ended March 31, 1998 and 1997...................... 6 Notes to Consolidated Financial Statements..................... 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 7 - 9 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K........................... 10 - 11 2 ITEM 1. FINANCIAL STATEMENTS BYL BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED - DOLLAR AMOUNTS IN THOUSANDS) March 31, December 31, 1998 1997 --------- ------------ Cash and Due From Bank $ 9,831 $ 7,188 Investment Securities 6,480 5,470 Federal Funds Sold - - Loans Held For Sale 45,201 47,150 Loans 108,669 93,516 Allowance for Loan Losses (1,637) (1,521) -------- -------- NET LOANS 107,032 91,995 Premises and Equipment 4,353 4,402 Other Real Estate Owned 671 646 Goodwill 1,517 1,545 Accrued Interest and Other Assets 6,389 6,271 -------- -------- $181,474 $164,667 -------- -------- -------- -------- Noninterest-Bearing Deposits $ 42,248 $ 40,537 Interest-Bearing Deposits 121,777 102,299 -------- -------- TOTAL DEPOSITS 164,025 142,836 Accrued Interest and Other Liabilities 2,059 7,001 -------- -------- TOTAL LIABILITIES 166,084 149,837 Common Shares 10,404 10,372 Undivided Profits 4,986 4,458 -------- -------- TOTAL SHAREHOLDERS' EQUITY 15,390 14,830 -------- -------- $181,474 $164,667 -------- -------- -------- -------- 3 ITEM 1. FINANCIAL STATEMENTS - CONTINUED BYL BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - DOLLAR AMOUNTS IN THOUSANDS, EXCEPT EPS) For the Three Months Ended March 31, -------------------------- 1998 1997 ---------- ----------- Interest Income $3,861 $2,781 Interest Expense 1,333 786 ------ ------ Net Interest Income 2,528 1,995 Provision for Loan Losses 270 80 ------ ------ Net Interest Income after Provision for Loan Losses 2,258 1,915 Noninterest Income 4,721 2,865 Noninterest Expense 5,927 4,011 ------ ------ Income before Taxes 1,052 769 Income Taxes 446 329 ------ ------ Net Income $ 606 $ 440 ------ ------ ------ ------ Per Share Data: Net Income - Basic $ .39 $ .29 Net Income - Diluted $ .36 $ .27 4 ITEM 1. FINANCIAL STATEMENTS - CONTINUED BYL BANCORP STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED - DOLLAR AMOUNTS IN THOUSANDS) Common Shares ------------------- Undivided Number Amount Profits Total -------- -------- --------- ------- Balance at January 1, 1997 1,535,064 10,298 2,640 12,938 Net Income 2,109 2,109 Cash Dividends (291) (291) Exercise of Stock Options 11,466 74 - 74 --------- ------- ------ ------- Balance at December 31, 1997 1,546,530 10,372 4,458 14,830 Net Income 606 606 Cash Dividends (78) (78) Exercise of Stock Options 6,666 32 - 32 --------- ------- ------ ------- Balance at March 31, 1998 1,553,196 $10,404 $4,986 $15,390 --------- ------- ------ ------- --------- ------- ------ ------- 5 ITEM 1. FINANCIAL STATEMENTS - CONTINUED BYL BANCORP AND SUBSIDIARY CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED - DOLLAR AMOUNTS IN THOUSANDS) For the Three Months Ended March 31, -------------------------- 1998 1997 ---------- ---------- OPERATING ACTIVITIES Net Income $ 606 $ 440 Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities: Depreciation and Amortization 271 164 Provision for Loan Losses 270 80 Net Change in Loans Held for Sale 1,949 (19,297) Other Items - Net (5,047) 583 -------- -------- NET CASH USED BY OPERATING ACTIVITIES (1,951) (18,030) INVESTING ACTIVITIES Purchases of Investment Securities (1,000) (1,000) Net Change in Loans (15,307) 11,139 Purchase of Premises and Equipment (217) (91) Other Items - Net (25) - -------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (16,549) 10,048 FINANCING ACTIVITIES Net Change in Deposits 21,189 16,008 Proceeds from Exercise of Options 32 - Dividends (78) (57) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 21,143 15,951 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 2,643 7,969 Cash and Cash Equivalents at Beginning of Period 7,188 12,260 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,831 $ 20,229 -------- -------- -------- -------- 6 ITEM 1. FINANCIAL STATEMENTS - CONTINUED BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION BYL Bancorp (the "Company") was incorporated on April 17, 1997, for the sole purpose of becoming a bank holding company for the Bank of Yorba Linda (the "Bank"). Following regulatory consent and with the approval of the Bank's shareholders, the Bank merged with BYL Merger Company (a wholly-owned subsidiary of the Company) and thereby became a wholly-owned subsidiary of the Company. As the merger was recorded using the pooling of interest method, restatement of prior balances was necessary to meet accounting standards. Accordingly, the financial statements herein contain balances prior to the actual existence of the Company which reflect what the "consolidated" entity would have reported. The accompanying consolidated balance sheets, statements of income, statements of changes in shareholders' equity and statement of cash flows (as restated for the subsequent Merger of the Bank of Yorba Linda by the Company) reflect all material adjustments necessary for fair representation of the Company's financial position as of March 31, 1998 and December 31, 1997 and the results of operations for the three months ended March 31, 1998 and 1997. All such adjustments were of a normal recurring nature. The financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME in June 1997 effective for the periods beginning after December 31, 1997. SFAS No. 130 established standards for reporting and display of comprehensive income and its components. For the periods ended March 31, 1998 and 1997 the Company had no material items of other comprehensive income, and accordingly, no separate Statement of Comprehensive Income has been included. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This analysis is designed to provide a more complete understanding of the material changes and trends related to the Company's financial condition and results of operations. This discussion should be read in conjunction with the Financial Statements included in Item 1, the Bank's 1997 Annual Report, and the Form S-4 dated April 14, 1998. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED PROPOSED ACQUISITION OF DNB FINANCIAL On January 29, 1998, the Company entered into a definitive agreement to merge with DNB Financial (DNBF), the parent company of De Anza National Bank. Under the terms of the agreement, DNBF will be merged with and into the Company, and De Anza National Bank will become an operating division of the Bank of Yorba Linda. The transaction will be structured as a pooling of interests through a tax-free exchange of Company's shares of common stock for all outstanding shares of the DNBF's common stock. The aggregate transaction value for DNBF will be subject to adjustment based upon tangible book value at the date of closing. The aggregate transaction value will be the sum of (a) $19,569,722, or approximately 2.53 times DNBF's tangible book value at December 31, 1997 and (b) 1.5 times the change in tangible book value between December 31, 1997 and the closing. The total number of Company shares to be exchanged will be determined by dividing the aggregate transaction value by the stipulated value of $18.75 per share. The stipulated value per share will be adjusted if the average closing Company stock price during the pricing determination period is greater than $22.50 or less than $15.00 per share. The Agreement has been approved by the boards of directors of both companies and is subject to the approval of the shareholders of both DNBF and the Company and appropriate regulatory agencies. The merger is expected to close by May 31, 1998. OVERVIEW For the three months ended March 31, 1998, the Company reported net income of $606,000, or $.39 per share compared to a net income of $440,000, or $.29 per share for the same three month period in 1997. The annualized return on average assets was 1.40% for 1998 compared to 1.35% for 1997. Annualized return on average shareholders' equity for 1998 and 1997 was 15.9% and 13.3%, respectively. FINANCIAL CONDITION Total assets as of March 31,1998, increased 10.2% to $181.5 million in comparison to total assets of $164.7 million as of December 31, 1997. The majority of this asset growth was centered in the Bank's held-for-investment loan portfolio which increased by $15 million. This growth was funded by a $21.2 million increase in deposits, a portion of which was utilized to pay down short term borrowings of $4 million that were outstanding at December 31, 1997. 8 ASSET QUALITY The Company's asset quality has declined slightly in 1998 as evidenced by an increase in the ratio of nonperforming loans to total loans which rose to 1.36% at March 31, 1998 from 1.02% at December 31, 1997. Management believes the loans creating this increase are adequately secured and will not result in significant losses to the Company. In response to this increase, and other factors, the Company added $270,000 to the ALLL for the quarter ended March 31, 1998 as compared to $80,000 for the same period in 1997. The ALLL at March 31, 1998 was 1.51% of total loans and 78.1% of non-performing loans compared to 1.63% and 160.6%, respectively, at December 31, 1997. LIQUIDITY The Bank liquidity is impacted significantly by the origination and sale of its wholesale loan products. The loan to deposit ratio at March 31, 1998 was 93.8%. Had the Bank actually sold all of the loans it held for sale, this ratio would have declined to 66.3%. CAPITAL RESOURCES The Company and its bank subsidiary are subject to risk-based capital regulations adopted by the federal banking regulators. These guidelines are used to evaluate capital adequacy and are based upon an institution's risk profile and off-balance sheet exposures, such as unused loan commitments and letters of credit. At March 31, 1998, the Bank's Tier 1 leverage capital ratio was 7.89% compared to 7.42% at December 31, 1997. Management is not aware of any trends, events, uncertainties or recommendations by regulatory authorities that will have or that are reasonable likely to have material effects on the liquidity, capital resources or operations of the Company. RESULTS OF OPERATIONS Net interest income was $2.5 million for 1998 compared to $2.0 million for 1997. This increase is primarily due to the significant asset growth experienced by the Company, especially in loans held for investment. Net loans held for investment were $107.0 million and total assets were $181.5 million at March 31, 1998 compared to $52.0 million and $133.5 million, respectively, at March 31, 1997. Noninterest income increased substantially in 1998 reaching $4.7 million compared to $2.9 million in 1997. This increase is attributable to the continued expansion of the Company's wholesale loan divisions. These divisions have expanded by adding new products as well as entering new geographic markets. Noninterest expense increased in 1998 to $5.9 million compared to $4.0 million in 1996. This increase is attributable to the continued expansion of the Company's wholesale loan divisions. 9 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A) Exhibits EXHIBIT NO. EXHIBIT ----------- ------- 2.1 Plan of Reorganization and Merger Agreement -- Annex 1 of Proxy Statement/Prospectus incorporated by reference (A) 4.1 Specimen Certificate evidencing shares of Registrant's Common Stock (A) 4.2 Stockholder Agreement Covering Issuance and Compulsory Repurchase of Organizing Shares of Registrant -- Annex II of Proxy Statement/Prospectus incorporated by reference. 10.1 Form of Indemnification Agreement (A) 10.2 BYL Bancorp 1997 Stock Option Plan and form of Stock Option Agreement (A) 10.3 Form of Proxy (A) 10.4 Employment Agreement -- Mr. Robert Ucciferri (A) 10.5 Employment Agreement -- Mr. Barry J. Moore (A) 10.6 Employment Agreement -- Mr. Michael Mullarky (A) 10.7 Salary Continuation Agreement -- Mr. Robert Ucciferri (A) 10.8 Salary Continuation Agreement -- Mr. Barry J. Moore (A) 10.9 Agreement and Plan of Reorganization with DNB Financial (B) - ------------------ (A) Filed as an Exhibit to the Registrants Registration Statement (File No. 333-34995) filed on September 5, 1997, which exhibit is incorporated herein by this reference. (B) Filed as an Exhibit to Form 8-K filed on January 29, 1998, which exhibit is incorporated herein by this reference. 10 PART II - OTHER INFORMATION - CONTINUED ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - CONTINUED B) Reports on Form 8-K 1) BYL's Current Report on Form 8-K, dated January 16, 1998 announcing year end and quarterly earnings; 2) BYL's Current Report on Form 8-K, dated January 29, 1998 announcing the execution of the Agreement and Plan of Reorganization with DNBF 11 SIGNATURES Pursuant to the requirement of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BYL BANCORP Date: May 14, 1998 /s/ ROBERT UCCIFERRI Robert Ucciferri President and Chief Executive Officer Date: May 14, 1998 /s/ BARRY J. MOORE Barry J. Moore Chief Financial Officer and Executive Vice President 12