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 September 30, 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 (IRS Employer of incorporation) Identification No.) 1875 North Tustin Avenue, Orange, California 92865 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 685-1317 18206 Imperial Highway, Yorba Linda, California 92686 (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 November ____, 1998, there were ___________ shares of BYL Bancorp Common Stock outstanding. 1 BYL BANCORP AND SUBSIDIARY SEPTEMBER 30, 1998 INDEX PART I - FINANCIAL INFORMATION PAGE ---- Item 1 - Financial Statements Consolidated Condensed Balance Sheet at September 30, 1998 and December 31, 1997........................................... 3 Consolidated Condensed Statement of Income for the three and nine months ended September 30, 1998 and 1997.................... 4 Consolidated Condensed Statement of Changes in Shareholders' Equity from January 1, 1996 through September 30, 1998...... 5 Consolidated Condensed Statement of Cash Flows for the nine months ended September 30, 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 - 11 PART II - OTHER INFORMATION Item 1 - Legal Proceedings........................................... 12 Item 2 - Changes in Securities....................................... 12 Item 3 - Defaults upon Senior Securities............................. 12 Item 4 - Submission of Matters to a Vote of Security Holders......... 12 Item 5 - Other Information........................................... 12 Item 6 - Exhibits and Reports on Form 8-K............................ 12 2 ITEM 1. FINANCIAL STATEMENTS BYL BANCORP AND SUBSIDIARY UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS) September 30, December 31, 1998 1997* ------------- ------------ Cash and Due From Bank $ 17,952 $ 11,894 Federal Funds Sold 18,100 - Interest-Bearing Deposits 972 3,419 Investment Securities 12,669 23,365 Loans Held For Sale 55,384 47,150 Loans 162,838 139,473 Allowance for Loan Losses (2,469) (1,923) ----------- ---------- NET LOANS 160,369 137,550 Premises and Equipment 5,606 5,205 Other Real Estate Owned 1,286 924 Goodwill 1,477 1,567 Accrued Interest and Other Assets 8,483 7,012 ----------- ---------- $ 282,298 $ 238,086 ----------- ---------- ----------- ---------- Noninterest-Bearing Deposits $ 65,512 $ 56,143 Interest-Bearing Deposits 189,122 151,792 ----------- ---------- TOTAL DEPOSITS 254,634 207,935 Borrowed Funds - 4,465 Accrued Interest and Other Liabilities 2,509 3,136 ----------- ---------- TOTAL LIABILITIES 257,143 215,536 Common Shares 12,735 12,623 Retained Earnings 12,420 9,955 Unrealized Loss on Investments Available-for-Sale - (28) ----------- ---------- TOTAL SHAREHOLDERS' EQUITY 25,155 22,550 ----------- ---------- $ 282,298 $ 238,086 ----------- ---------- ----------- ---------- * Restated on a historical basis to reflect the May 29, 1998 acquisition of DNB Financial on a pooling-of-interests basis. 3 ITEM 1. FINANCIAL STATEMENTS - CONTINUED BYL BANCORP AND SUBSIDIARY UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) For the Three Months Ended For the Nine Months Ended September 30, September 30, --------------------------- ------------------------- 1998 1997* 1998 1997* --------- --------- -------- -------- Interest Income $ 6,165 $ 5,127 $ 17,429 $ 13,829 Interest Expense 2,082 1,587 5,918 4,263 --------- --------- -------- -------- Net Interest Income 4,083 3,540 11,511 9,566 Provision for Loan Losses 240 203 780 398 --------- --------- -------- -------- Net Interest Income after Provision for Loan Losses 3,843 3,337 10,731 9,168 Noninterest Income 6,056 4,071 16,384 10,335 Noninterest Expense 7,433 6,174 21,954 16,228 --------- --------- -------- -------- Income before Taxes 2,466 1,234 5,161 3,275 Income Taxes 1,083 501 2,354 1,325 --------- --------- -------- -------- Net Income $ 1,383 $ 733 $ 2,807 $ 1,950 --------- --------- -------- -------- --------- --------- -------- -------- Per Share Data: Net Income - Basic $ .55 $ 0.31 $ 1.12 $ 0.81 --------- --------- -------- -------- --------- --------- -------- -------- Net Income - Diluted $ .52 $ 0.29 $ 1.05 $ 0.78 --------- --------- -------- -------- --------- --------- -------- -------- * Restated on a historical basis to reflect the May 29, 1998 acquisition of DNB Financial on a pooling-of-interests basis. 4 ITEM 1. FINANCIAL STATEMENTS - CONTINUED BYL BANCORP UNAUDITED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS) Net Unrealized Appreciation (Depreciation) Common Shares on Available Preferred -------------------------- Retained for-Sale Stock Number Amount Earnings Securities Total ---------- --------- ------------ ----------- -------------- ---------- Balance at January 1, 1996 $ 1,000 1,331,955 $ 4,219 $ 6,034 $ 20 $ 11,273 Net Income 1,916 1,916 Preferred Dividends (159) (159) Dividends on Common (169) (169) Options Exercised 4,120 23 23 Redemption of Preferred Stock (1,000) (20) (1,020) Common Stock Retired (9,579) (55) (55) Issuance of Common Stock (Net of Related Costs) 1,073,333 7,759 7,759 Net Unrealized Depreciation on Available-for Sale Securities (133) (133) ---------- --------- ----------- ----------- --------- ---------- Balance at December 31, 1996 - 2,399,829 11,946 7,602 (113) 19,435 Net Income 2,854 2,854 Exercise of Stock Option 104,166 683 683 Common Stock Retired (824) (6) (6) Dividends on Common (501) (501) Net Unrealized Appreciation for Available-for-Sale Securities 85 85 ---------- --------- ----------- ----------- --------- ---------- Balance at December 31, 1997 - 2,503,171 12,623 9,955 (28) 22,550 Net Income 2,807 2,807 Exercise of Stock Option 23,065 112 112 Dividends on Common (342) (342) Net Unrealized Appreciation for Available-for-Sale Securities 28 28 ---------- --------- ----------- ----------- --------- ---------- Balance at September 30, 1998 $ - 2,526,236 $ 12,735 $ 12,420 $ - $ 25,155 ---------- --------- ----------- ----------- --------- ---------- ---------- --------- ----------- ----------- --------- ---------- 5 ITEM 1. FINANCIAL STATEMENTS - CONTINUED BYL BANCORP AND SUBSIDIARY UNAUDITED CONDENSED STATEMENT OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) For the Nine Months Ended September 30, ----------------------------- 1998 1997* ---------- ---------- OPERATING ACTIVITIES Net Income $ 2,807 $ 1,950 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 960 721 Provision for Loan Losses 780 398 Net Change in Loans Held for Sale (8,234) (31,442) Other Items - Net (1,986) 2,550 ---------- ---------- NET CASH USED BY OPERATING ACTIVITIES (5,673) (25,823) INVESTING ACTIVITIES Change in Interest-Bearing Deposits 2,447 (154) Purchases of Investment Securities (7,571) (2,851) Maturities of Investment Securities 18,295 2,645 Net Change in Loans (25,078) (12,913) Purchase of Premises and Equipment (1,271) (1,658) Other Items - Net 1,005 574 ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES (12,173) (14,357) FINANCING ACTIVITIES Decrease in Borrowed Funds (4,465) (500) Net Change in Deposits 46,699 40,548 Proceeds from Exercise of Options 112 74 Dividends (342) (374) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 42,004 39,748 ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,158 (432) Cash and Cash Equivalents at Beginning of Period 11,894 15,350 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,052 $ 14,918 ---------- ---------- ---------- ---------- * Restated on a historical basis to reflect the May 29, 1998 acquisition of DNB Financial on a pooling-of-interests basis. 6 ITEM 1. FINANCIAL STATEMENTS - CONTINUED BYL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying financial information has been prepared in accordance with the Securities and Exchange Commission rules and regulations for quarterly reporting and therefore does not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. This information should be read in conjunction with the Company's Annual Report for the year ended December 31, 1997. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. In the opinion of management, the unaudited financial information for the three and nine month periods ended September 30, 1998 and 1997, reflect all adjustments, consisting only of normal recurring accruals and provisions, necessary for a fair presentation thereof. NOTE 2 - EARNINGS PER SHARE Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share." Accordingly, basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share also considers the number of shares issuable upon the assumed exercise of outstanding common stock options. All earnings per common share amounts presented have been restated in accordance with the provisions of this statement. NOTE 3 - STOCK SPLIT During 1997, the Company declared a four for three stock split to stockholders. This resulted in the issuance of 383,644 shares of common stock. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BYL Bancorp (the "Company") has one wholly owned subsidiary, BYL Bank Group, formerly the Bank of Yorba Linda (the "Bank"). The Bank's operations are the only significant operations of the Company. The accompanying financial information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Statements contained in this Report on Form 10Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, intentions, beliefs or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date thereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. Factors that could cause actual results to differ materially from those in such forward-looking statements are included in the discussions below. ACQUISITIONS On May 29, 1998, the Company completed the acquisition with DNB Financial ("DNBF"), parent company of De Anza National Bank on a pooling-of-interests basis , and, accordingly, the Company's historical consolidated results have been restated. Under the terms of the Agreement and Plan of Reorganization, each share of DNBF Common Stock was exchanged for 4.12 shares of the Company's Common Stock. A total of 956,641 shares of the Company's Common Stock was issued to DNBF shareholders. Also, on May 29, 1998, De Anza National Bank, DNBF's only subsidiary, merged with and into BYL Bank Group. The following summarizes the separate results of the combined entities for the periods shown prior to the combination (in thousands, except per share data): Restated BYL Combined Bancorp DNBF Results -------- ------- --------- Three Months Ended September 30, 1997 Net Interest Income $ 2,643 $ 897 $ 3,540 Net Income 536 197 733 Earnings Per Share: Basic 0.35 0.23 0.31 Diluted 0.33 0.22 0.29 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED ACQUISITIONS - CONTINUED Restated BYL Combined Bancorp DNBF Results ---------- --------- ---------- Nine Months Ended September 30, 1997 Net Interest Income $ 6,949 $ 2,617 $ 9,566 Net Income 1,429 521 1,950 Earnings Per Share: Basic 0.93 0.60 0.81 Diluted 0.88 0.59 0.78 As of December 31, 1997 Total Assets $ 164,667 $ 73,419 $ 238,086 Total Shareholders' Equity 14,830 7,720 22,550 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. OVERVIEW For the three months ended September 30, 1998, the Company reported net income of $1,383,000, or $0.52 per share compared to a net income of $733,000, or $0.31 per share for the same three month period in 1997. For the first nine months of 1998, the Company reported net income of $2.8 million compared to $2.0 million in 1997. The annualized return on average assets was 1.41% for 1998 compared to 1.25% in 1997. Annualized return on shareholders equity was 15.80% in 1998 compared to 12.75% in 1997. During the first nine months of 1998, the Company incurred approximately $542,000 in one-time costs associated with the merger of DNBF. 9 FINANCIAL CONDITION Total assets as of September 30, 1998, increased 18.6% to $282.2 million in comparison to total assets of $238.0 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 $23 million. This growth was funded by a $46.6 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. ASSET QUALITY The Company's asset quality has improved slightly in 1998 as evidenced by a decrease in the ratio of nonperforming loans to total loans which declined to .84% at September 30, 1998 from 0.93% at December 31, 1997. The Company added $780,000 to the ALLL for the nine months ended September 30, 1998 as compared to $398,000 for the same period in 1997. The ALLL at September 30, 1998 was 1.52% of total loans and 134.1% of non-performing loans compared to 1.38% and 150.4%, respectively, at December 31, 1997. LIQUIDITY The Bank's liquidity is impacted significantly by the origination and sale of its wholesale loan products. The loan to deposit ratio at September 30, 1998 was 85.7%. Had the Bank actually sold all of the loans it held for sale, this ratio would have declined to 63.9%. 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 September 30, 1998, the Bank's Tier 1 leverage capital ratio was 8.54% compared to 8.63% at December 31, 1997. Management is not aware of any trends, events, uncertainties or recommendations by regulatory authorities that will have or that are likely to have material effects on the liquidity, capital resources or operations of the Company. 10 ANALYSIS OF NET INTEREST INCOME AND MARGIN Net interest income was $4.1 and $7.4 million for the third quarter and first nine months of 1998 compared to $3.5 and $9.6 million for the same periods in 1997. These increases are primarily the result of significant increases in average interest-earning assets as shown by the following table (in thousands): September 30, 1998 ---------------------------- Year Ended Quarter Nine Months December 31, Ended Ended 1997 ----------- ----------- ------------ Interest Income $ 6,165 $ 17,429 $ 18,455 Interest Expense 2,082 5,918 6,057 ----------- ----------- ------------ Net Interest Income $ 4,083 $ 11,511 $ 12,398 ----------- ----------- ------------ ----------- ----------- ------------ Average Earning Assets $ 245,889 $ 234,424 $ 191,909 Net Interest Margin 6.64% 6.54% 6.46% NONINTEREST INCOME Noninterest income was $6.0 million for the quarter ended September 30, 1998 compared to $4.0 million for the same period in 1997. Similarly for the first nine months of 1998, noninterest income was $16.3 million compared to $10.3 million for the same period in 1997. These increases are attributable to the continued expansion of the Bank's wholesale loan divisions. These departments have expanded by adding new products as well as entering new geographic markets. NONINTEREST EXPENSE Noninterest expense was $7.4 million for the quarter ended September 30, 1998 and $21.9 million for the first nine months of 1998 compared to $6.2 million and $16.2 million for the same periods in 1997. A portion of the increase in the nine months of 1998 was related to the one time costs of $542,000 associated with the DNBF merger. The majority of the increases were attributable to the continued expansion of the Bank's wholesale loan divisions. 11 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Subsidiary Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Subsidiary Bank. Item 2 - Changes in Securities None Item 3 - Defaults upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information On November 2, 1998, BYL Bank Group, the wholly owned subsidiary bank of BYL Bancorp, executed an Asset Purchase Agreement and acquired the human resources, marketing network, certain existing property and equipment leases and mortgage loan pipline of All Source Financial, LLC ("ASF"), a subsidiary of Assurance Mortgage Corporation of America. ASF is a mortgage banker specializing in originating, selling and purchasing residential mortgage loans secured by first and second mortgages on single family residences. Based in Diamond Bar, California, ASF currently offers loan products in California, Oregon, Washington, Nevada, Utah, Colorado, New Mexico, Texas, Montana, Idaho, Illinois, Indiana and Oklahoma. ASF predominately originates loans through a wholesale lending network with approximately 60% of its originations consisting of agency (FHA and conventional) loans and the balance in subprime single family mortage loans. During 1998, ASF's average monthly fundings have been approximately $45 million. 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 Written Consent Statement/Prospectus* 3.1 Articles of Incorporation of Registrant* 3.2 Amendment to Articles of Incorporation of Registrant* 3.3 Amendment to Articles of Incorporation of Registrant* 3.4 Bylaws of the Registrant* 10.1 Form of Indemnification Agreement* 10.3 Form of Written Consent* * All documents listed are incorporated by reference and can be found in the Registration Statement of the Company filed on Form S-4. B) Reports on Form 8-K On July 16, 1998, the Company filed an amendment to the Company's Current Report on Form 8-K, originally filed on June 3, 1998, concerning the completion of the acquisition of DNB Financial by the Company, that contained the necessary financial information required by the Form 8-K. 12 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: November 13, 1998 /s/ Robert Ucciferri ------------------------------ Robert Ucciferri President and Chief Executive Officer Date: November 13, 1998 /s/ Barry J. Moore ------------------------------ Barry J. Moore Chief Operating Officer and Senior Executive Vice President 13