UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] 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.)
1875 North Tustin Avenue, Orange, California 92865
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 685-1317
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (of shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
On August 13, 1999, there were 2,533,835 shares of BYL Bancorp Common Stock
outstanding.
1
BYL BANCORP AND SUBSIDIARY
JUNE 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1 - Financial Statements
Consolidated Condensed Balance Sheet at June 30, 1999 and
December 31, 1998.................................................................. 3
Consolidated Condensed Statement of Income for the three
months and six months ended June 30, 1999 and 1998................................. 4
Consolidated Condensed Statement of Changes in Shareholders' Equity from
January 1, 1997 through June 30, 1999.............................................. 5
Consolidated Condensed Statement of Cash Flows for the six months ended
June 30, 1999 and 1998............................................................. 6
Notes to Consolidated Financial Statements.................................................. 7 -8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 9-13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.................................. 13-15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................................................ 15
Item 2 - Changes in Securities........................................................................ 15
Item 3 - Defaults upon Senior Securities.............................................................. 15
Item 4 - Submission of Matters to a Vote of Security Holders.......................................... 15
Item 5 - Other Information............................................................................ 16
Item 6 - Exhibits and Reports on Form 8-K............................................................. 16
2
ITEM 1. FINANCIAL STATEMENTS
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
1999 1998
------------ ------------
Cash and Due From Bank $ 18,883 $ 14,214
Federal Funds Sold 3,200 18,700
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS 22,083 32,914
Interest-Bearing Deposits 2,324 --
Investment Securities 19,138 17,244
Loans Held For Sale 127,577 74,598
Loans 146,974 166,454
Allowance for Loan Losses (2,458) (2,300)
------------ ------------
NET LOANS 144,516 164,154
Premises and Equipment 6,563 6,082
Other Real Estate Owned 1,042 971
Goodwill 1,385 1,445
Interest-Only Strips Receivable and Servicing Assets 9,980 9,025
Accrued Interest and Other Assets 5,801 11,580
------------ ------------
$ 340,409 $ 318,013
============ ============
Noninterest-Bearing Deposits $ 68,250 $ 69,863
Interest-Bearing Deposits 230,100 217,343
------------ ------------
TOTAL DEPOSITS 298,350 287,206
Borrowed Funds 13,000 -
Accrued Interest and Other Liabilities 1,404 3,925
------------ ------------
TOTAL LIABILITIES 312,754 291,131
Common Shares 12,772 12,760
Retained Earnings 14,363 13,602
Accumulated Other Comprehensive Income 520 520
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 27,655 26,882
------------ ------------
$ 340,409 $ 318,013
============ ============
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 Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1999 1998* 1999 1998*
---------- ---------- ---------- ---------
Interest Income $ 6,446 $ 6,009 $ 12,938 $ 11,264
Interest Expense 2,568 2,022 5,366 3,836
---------- ---------- ---------- ---------
Net Interest Income 3,878 3,987 7,572 7,428
Provision for Loan Losses 51 270 231 540
---------- ---------- ---------- ---------
Net Interest Income after
Provision for Loan Losses 3,827 3,717 7,341 6,888
Noninterest Income 5,213 5,353 11,181 10,328
Noninterest Expense 7,788 7,644 16,471 14,521
---------- ---------- ---------- ---------
Income Before Taxes 1,252 1,426 2,051 2,695
Income Taxes 570 763 910 1,271
---------- ---------- ---------- ---------
Net Income $ 682 $ 663 $ 1,141 $ 1,424
========== ========== ========== =========
Per Share Data:
Net Income - Basic $ .27 $ 0.26 $ 0.45 $ 0.57
========== ========== ========== =========
Net Income - Diluted $ .27 $ 0.25 $ 0.44 $ 0.54
========== ========== ========== =========
* Restated on a historical basis to reflect the May 29, 1998 acquisition of
DNB Financial on a pooling-of-interests basis.
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP
UNAUDITED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
Accumulated
Common Shares Other
------------------------ Comprehensive Retained Comprehensive
Number Amount Income Earnings Income Total
---------- ------------ ----------- ---------- ----------- ----------
Balance at January 1, 1997 2,399,919 $ 11,945 $ 7,602 $ (113) $19,434
Comprehensive Income:
Net Income $ 2,855 2,855 2,855
Other Comprehensive Income-
Unrealized Gain on
Available-for-Sale Securities, Net 86 86 86
-----------
Total Comprehensive Income $ 2,941
-----------
-----------
Dividends on Common (502) (502)
Options Exercised 104,075 683 683
Common Stock Retired (823) (6) (6)
---------- ------------ ---------- ----------- ----------
Balance at December 31, 1997 2,503,171 12,622 9,955 (27) 22,550
Comprehensive Income:
Net Income $ 4,116 4,116 4,116
Other Comprehensive Income-
Unrealized Gain on
Available-for-Sale Securities, Net 183 183 183
Unrealized Gain on Interest-Only
Strips, Net 364 364 364
-----------
Total Comprehensive Income $ 4,663
-----------
-----------
Exercise of Stock Option 28,131 138 138
Dividends on Common (467) (467)
Fractional Shares from Merger with DANB (2) (2)
---------- ------------ ---------- ----------- ----------
Balance at December 31, 1998 2,531,302 12,760 13,602 520 26,882
Comprehensve Income:
Net Income $ 1,141 1,141 1,141
Other Comprehensive Income-
Unrealized Gain on
Available-for-Sale Securities, Net
-----------
Total Comprehensive Income $ 1,141
-----------
-----------
Exercise of Stock Option 2,533 12 12
Dividends on Common (380) (380)
---------- ------------ ---------- ----------- ----------
Balance at June 30, 1999 2,533,835 $ 12,772 $14,363 $ 520 $27,655
---------- ------------ ---------- ----------- ----------
---------- ------------ ---------- ----------- ----------
5
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
BYL BANCORP AND SUBSIDIARY
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
For the Six Months Ended
June 30,
--------------------------------------
1999 1998*
-------------- ---------------
OPERATING ACTIVITIES
Net Income $ 1,141 $ 1,424
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 892 558
Provision for Loan Losses 231 540
Net Change in Loans Held for Sale (52,979) (3,213)
Other Items - Net 2,331 (2,310)
------------- ---------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (48,384) (3,001)
INVESTING ACTIVITIES
Change in Interest-Bearing Deposits (2,324) 1,084
Purchases of Investment Securities (10,101) (502)
Maturities of Investment Securities 8,222 9,691
Net Change in Loans 19,095 (26,055)
Purchase of Premises and Equipment (1,319) (426)
Other Items - Net 204 (126)
-------------- ---------------
NET CASH PROVIDED (USED) BY
BY INVESTING ACTIVITIES 13,777 (16,334)
FINANCING ACTIVITIES
Net Change in Borrowed Funds 13,000 (2,665)
Net Change in Deposits 11,144 28,349
Proceeds from Exercise of Options 12 112
Dividends (380) (216)
-------------- ---------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 23,776 25,580
-------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,831) 6,245
Cash and Cash Equivalents at Beginning of Period 32,914 11,894
-------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 22,083 $ 18,139
-------------- ---------------
-------------- ---------------
* Restated on a historical basis to reflect the May 29, 1998 acquisition of
DNB Financial on a pooling-of-interests basis.
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 Form 10K filed on March 30, 1999 (file number
- - 000-23257).
The consolidated financial statements include BYL Bancorp and its wholly owned
subsidiary, BYL Bank Group (the "Bank").
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management, the
unaudited financial information for the three month and six month periods ended
June 30, 1999 and 1998, reflect all adjustments, consisting only of normal
recurring accruals and provisions, necessary for a fair presentation thereof.
NOTE 2 - EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Accordingly, basic earnings per share are computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during each period. The computation of diluted earnings per share
also considers the number of shares issuable upon the assumed exercise of
outstanding common stock options. All earnings per common share amounts
presented have been restated in accordance with the provisions of this
statement.
NOTE 3 - SEGMENTS
The Company has two primary reportable segments: its wholesale lending
operations and its retail banking operations. The wholesale lending segment
originates loans for resale to institutional investors. The Company's SBA loan
Division and its Mortgage Loan Division's are included in this segment. The
retail banking segment accepts deposits, originates loans and provides other
banking services to the communities in which its eight branch offices are
located.
The company evaluates performance based on profit or loss from operations before
allocation of the provision for loan losses, administrative costs, amortization
of goodwill and income taxes. The retail segment charges the wholesale segments
for use of excess funds based on the estimated cost of outside financing.
7
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - SEGMENTS - CONTINUED
The following tables summarize segment operations for the six months ended June
30, 1999 and 1998.
Six Months Ended June, 1999
----------------------------------------------------------
Wholesale Segments
-------------------------- Retail Total
Mortgage SBA Segment Company
---------- ----------- ----------- -----------
CONDENSED INCOME STATEMENT
Net Interest Income $ 1,258 $ 1,570 $ 4,744 $ 7,572
Noninterest Income 7,527 3,081 573 11,181
Operating Expense (7,698) (2,263) (4,404) (14,365)
---------- ----------- ----------- -----------
OPERATIONAL PROFIT 1,087 2,388 913 4,388
Provision for Loan Losses (231)
Administrative Costs (2,046)
Goodwill Amortization (60)
Income Taxes (910)
-----------
NET INCOME $ 1,141
-----------
-----------
Loans Originated for Sale During 1999 $ 269,000 $ 87,000
Loans Sold during 1999 $ 265,000 $ 35,000
Six Months Ended June, 1998
----------------------------------------------------------
Wholesale Segments
-------------------------- Retail Total
Mortgage SBA Segment Company
---------- ----------- ----------- -----------
CONDENSED INCOME STATEMENT
Net Interest Income $ 1,233 $ 1,421 $ 4,774 $ 7,428
Noninterest Income 6,747 2,137 1,444 10,328
Operating Expense (5,512) (1,889) (5,206) (12,607)
---------- ----------- ----------- -----------
OPERATIONAL PROFIT 2,468 1,669 1,012 5,149
Provision for Loan Losses (540)
Administrative Costs (1,854)
Goodwill Amortization (60)
Income Taxes (1,271)
-----------
NET INCOME $ 1,424
-----------
-----------
Loans Originated for Sale During 1998 $ 129,000 $ 32,000
Loans Sold during 1998 $ 123,000 $ 32,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BYL Bancorp (the "Company") has one wholly owned subsidiary, BYL Bank Group,
formerly the Bank of Yorba Linda (the "Bank"). The Bank's SBA loan division and
a Mortgage Loan Division operate under the name of Bank of Yorba Linda. The
Bank's operations are the only significant operations of the Company. The
accompanying financial information should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
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.
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 June 30, 1999, the Company reported net income of
$682,000, or $0.27 per share compared to a net income of $663,000, or $0.26 per
share for the same three month period in 1998. During the quarter in 1998, the
Company incurred approximately $542,000 in one-time costs associated with the
merger of DNBF.
For the first half of 1999, the Company reported net income of $1.1 million
compared to $1,4 million in 1998. The annualized return on average assets was
.68% for 1999 compared to 1.10% in 1998. Annualized return on shareholders
equity was 8.37% in 1999 compared to 12.23% in 1998.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
FINANCIAL CONDITION
Total assets as of June 30, 1999, increased 7.04% to $340.4 million in
comparison to total assets of $318.0 million as of December 31, 1998. The
majority of this asset growth was centered in loans held for sale, which
increased, by $53 million. This growth was funded by a $11.1 million increase in
deposits and by a $13 million increase in borrowed funds.
ASSET QUALITY
The following table sets forth the components of non-performing assets and
related ratios: (dollar amounts in thousands)
June 30, December 31,
---------------------------- ------------
1999 1998 1998
-------- ------- ----------
Loans 90 day past due and still accruing $ 189 $ 194 $ 223
Loans on nonaccrual 2,452 2,525 1,807
------- ------- --------
Nonperforming Loans 2,641 2,719 2,030
Other real estate owned (OREO) 1,042 1,050 971
------- ------- --------
Nonperforming Assets $ 3,683 $ 3,769 $ 3,001
------- ------- --------
------- ------- --------
Nonperforming Loans as a Percent
of Total Loans 0.96% 1.26% 1.23%
Allowance for Loan Losses as a Percent
of Nonperforming Loans 93.07% 85.47% 113.30%
Nonperforming Assets as a Percent
of Total Assets 1.08% 1.42% 0.94%
The Company's asset quality has remained the same in 1999 as evidenced by a
decrease in the ratio of nonperforming loans to total loans which decreased to
.96% at June 30, 1999 from 1.23% at December 31, 1998. Conversely, the allowance
for loan losses as a percent of nonperforming loans decreased to 93.07% at June
30, 1999, down from 113.30% at December 31, 1998. A portion of this decrease is
due to the increase in nonaccrual loans and OREO. The ALLL at June 30, 1999 was
1.67% of total loans compared to 1.38% at December 31, 1998. At June 30, 1999,
the Company had ten properties of OREO with a total book value of $1,042,000.
The Company believes all properties will be liquidated without any significant
losses.
LIQUIDITY
The origination and sale of its wholesale loan products impact the Bank's
liquidity significantly. The loan to deposit ratio at June 30, 1999 was 92.0%.
Had the Bank actually sold all of the loans it held for sale, this ratio would
have declined to 49.2%.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
CAPITAL RESOURCES
Total shareholders equity at June 30, 1999 totaled $27.6 million, which
represents a 2.9% increase from $26.8 million at December 31, 1998.
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. BYL Bancorp maintains capital ratios above the Federal regulatory
guidelines for a "well-capitalized" bank. The ratios are as follows:
June 30, December 31,
Ratio 1999 1998
--------------- ---------------- ---------------
Tier 1 Capital (to Average Assets) 4.00% 7.72% 7.90%
Tier 1 Capital (to Risk Weighted Assets) 4.00% 9.47% 10.00%
Total Capital (to Risk Weighted Assets) 8.00% 10.39% 10.94%
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.
ANALYSIS OF NET INTEREST INCOME AND MARGIN
Net interest income is the amount by which the interest and amortization of fees
generated from loans and other earning assets exceeds the cost of funding those
assets, usually deposit account interest expense. Net interest income depends on
the difference (the "interest rate spread") between gross interest and fees
earned on the loans and investment portfolios and the interest rates paid on
deposits and borrowings. Net interest income was $3.9 million for the quarter
ended June 30, 1999, compared to $4.0 for the quarter ended June 30, 1998 and
$7.6 million for the six months ended June 30, 1999 compared to $7.4 million for
the six months ended June 30, 1998.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
ANALYSIS OF NET INTEREST INCOME AND MARGIN -CONTINUED
The following table sets forth the components of net interest income, average
earning assets and net interest margin: (in thousands)
Three Months Ended Six Months Ended
June 30, June 30, Year Ended
-------------------------- ------------------------ December 31,
1999 1998 1999 1998 1998
---------- --------- --------- --------- ---------
Interest Income $ 6,446 $ 6,009 $ 12,938 $ 11,264 $ 24,016
Interest Expense 2,568 2,022 5,366 3,836 8,406
--------- --------- --------- --------- ---------
Net Interest Income $ 3,878 $ 3,987 $ 7,572 $ 7,428 $ 15,610
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average Earning Assets $ 285,671 $ 236,482 $ 289,768 $ 228,691 $ 243,901
Net Interest Margin 5.43% 6.74% 5.23% 6.50% 6.40%
The net interest margin declined in 1999 compared to the same periods in 1998
due to the increase in lower yielding earning assets and the 75 basis point
decline in the prime rate during the fourth quarter of 1998. The prime rate was
8.50% for the first nine months of 1998, and then experienced 25 basis points
declines in September, October and November to end the year at 7.75%. The prime
rate increased 25 basis points on July 1, 1999 to 8.00%.
PROVISION FOR LOAN LOSSES
BYL Bancorp made a $180,000 and $51,000 contribution to the allowance for loan
losses in the first and second quarters of 1999 compared to $270,000 for each of
the first two quarters in 1998. Management believes that the allowance, which
equals 1.67% of total loans at June 30, 1999, is adequate to cover future
losses.
Changes in the allowance for loan losses for the quarter and six months ended
June 30, 1999 and 1998 are as follows (dollar amounts in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1999 1998 1999 1998
--------- -------- -------- --------
Allowance, Beginning of Period $ 2,444 $ 2,037 $ 2,300 $ 1,923
Provision for Loan Losses 51 270 231 540
Loans Charged Off - net of Recoveries ( 37) 17 ( 73) ( 139)
--------- -------- -------- --------
Allowance, End of Period $ 2,458 $ 2,324 $ 2,458 $ 2,324
--------- -------- -------- --------
--------- -------- -------- --------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
NONINTEREST INCOME
Noninterest income was $5.2 million for the quarter ended June 30, 1999 compared
to $5.4 million for the same period in 1998. Similarly for the first half of
1999, noninterest income was $11.1 million compared to $10.3 million for the
same period in 1998. This increase is attributable to the 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 $7.8 million for the quarter ended June 30, 1999 and
$16.5 million for the first six months of 1999 compared to $7.6 million and
$14.5 million for the same periods in 1998. The majority of the increases were
attributable to the expansion of the Bank's wholesale loan divisions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
In Management's opinion there has not been a material change in BYL Bancorp's
market risk profile during the three months ended June 30, 1999. Market risk is
the risk of loss in a financial instrument arising from adverse changes in
market prices and rates, foreign currency exchange rates, commodity prices and
equity prices. BYL Bancorp's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities and market risk in
loans originated for sale as a result of changes in interest rates. To that end,
management actively monitors and manages its inherent rate risk exposure. BYL
Bancorp manages its interest rate sensitivity by matching the repricing
opportunities on its earning assets to those on its funding liabilities.
Management uses various asset/liability strategies to manage the repricing
characteristics of its assets and liabilities to ensure that exposure to
interest rate fluctuations is limited within BYL Bancorp's guidelines of
acceptable levels of risk-taking.
At June 30, 1999, BYL Bancorp had $261 million of assets and $237 million of
liabilities repricing within one year. Therefore, $24 million more in interest
rate sensitive assets than interest rate sensitive liabilities will change to
the then current rate (changes occur due to the instruments being at a variable
rate or because the maturity of the instrument requires its replacement at the
then current rate). Generally, if rates were to fall during this period,
interest income would decline by a greater amount than interest expense and net
income would decrease. Conversely, if rates were to rise, the reverse would
apply, and BYL Bancorp's net income would increase.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
CONTINUED
YEAR 2000 RISK
OVERVIEW
The Year 2000 issue is the result of computer programs being written using two
digits rather that four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date using "00" as the
year 1900 rather than the year 2000.
This could result in a system failure or other disruption of operations and
impede normal business activities. In June 1996, the Federal Financial
Institutions Examination Council ("FFIEC") alerted the banking industry of the
serious challenges that would be encountered with Year 2000 issues. The FDIC has
also implemented a plan to require compliance with Year 2000 issues and
regularly examines out progress.
STATE OF READINESS
In accordance with FDIC guidelines, the Company developed a comprehensive plan
which management believes will result in timely and adequate modifications of
Company's systems and technology to address Year 2000 issues, which contemplates
all system conversions and testing to be substantially completed by December 31,
1999. Management has completed a top-down assessment of all mission-critical and
other systems for Year 2000 compliance and are currently in the third and fourth
of the five phases for compliance, "renovation and validation", as defined by
the FFIEC. Management has also tested non-information technology systems, such
as microprocessors controlling environmental and alarm systems, and found them
to be Year 2000 compliant.
To determine the readiness of the Company's clients, management sent a
questionnaire to, and received responses from, significant borrowers and
depositors to determine the extent of risk created by any failure by them to
remediate their own Year 2000 issues. Each borrower and depositor is categorized
according to their state of readiness based on their response to the
questionnaire and a review of the client. The Company has also taken steps to
ensure liquidity for depositors with high Year 2000 risks. Re-assessment of each
client's risk will be made on a regular basis.
To determine the readiness of the Company's vendors, letters were sent to each
vendor inquiring about their compliance with Year 2000. For those vendors that
have responded that they are Year 2000 compliant and that were determined to not
have a material impact on the Bank's operations, no further work is performed.
For those vendors that have responded they are working towards Year 2000
compliance and that are determined to be significant, including mission critical
vendors, the Company will follow up on a regular basis through 1999. These
vendors have advised the Company that they expect to be Year 2000 compliant
prior to December 31, 1999. If those vendors do not demonstrate compliance by a
certain date, the Company will seek other alternatives in accordance with its
contingency plan, which may include seeking replacement vendors.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
CONTINUED
YEAR 2000 RISK - CONTINUED
COSTS AND RISKS
A few computer hardware and software applications were modified or replaced in
order to maintain their functionality as the year 2000 approaches. The Company
has spent approximately $32,000 as of June 30, 1999 to address Year 2000 issues
and estimate total costs over the two year period 1999-2000 to be approximately
$107,000, which will come from general funds. None of these costs, however, are
expected to materially impact the Company's result of operations in any one
reporting period.
Ultimately, the potential impact of the Year 2000 issue will depend not only on
the corrective measures the Company undertakes, but also on the way in which the
Year 2000 issue is addressed by governmental agencies, businesses, and other
entities who provide data, receive data, or whose financial condition or
operational capability is important to the Company, such as suppliers or
clients. At worst, clients and vendors will face severe Year 2000 issues, which
may cause borrowers to become unable to service their loans. The Company may
also be required to replace non-compliant vendors with more expensive Year
2000-compliant vendors. At this time management cannot determine the financial
effect if significant client and/or vendor remediation efforts are not resolved
in a timely manner.
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
On June 29, 1999, the Company held its annual meeting. At that
meeting the Company elected the five directors nominated by the
Company's Board of Directors.
15
PART II - OTHER INFORMATION -CONTINUED
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits
EXHIBIT NO. EXHIBIT
2.1 Plan of Reorganization and Merger Agreement - Annex 1 of
Written Consent Statement/Prospectus (A)
3.1 Articles of Incorporation of Registrant (A)
3.2 Amendment to Articles of Incorporation of Registrant (A)
3.3 Bylaws of the Registrant (A)
4.1 Specimen Certificate evidencing shares of Registrant's
Common Stock (A)
4.2 Stockholder Agreement Covering Issuance and Compulsory
Repurchase of Organizing Share of Registrant- Annex II of
Proxy Statement/Prospectus incorporated by reference (A)
10.1 Form of Indemnification Agreement (A)
10.2 BYL Bancorp 1997 Stock Option Plan ( C )
10.3 Form of Proxy, Proxy Statement and Notice of Annual
Meeting (E)
10.4 Employment Agreement - Mr. Robert Ucciferri (A)
10.5 Employment Agreement - Mr. Barry J. Moore (A)
10.6 Employment Agreement - Mr. Michael Mullarky (A)
10.7 Employment Agreement - Ms. Gloria Van Kampen (D)
10.8 Salary Continuation Agreement - Mr. Robert Ucciferri (A)
10.9 Salary Continuation Agreement - Mr. Barry J. Moore (A)
10.10 Agreement and Plan of Reorganization with DNB Financial (B)
(A) Filed as an Exhibit to the Registrant's Registration Statement (File
No. 333-34995) filed on September 5, 1997, which exhibit is
incorporated herein by this reference.
(B) Filed as an Exhibit to Form 8-K filed on January 29, 1998, which
exhibit is incorporated herein by this reference.
(C) Filed as an Exhibit to the Registration Statement on Form S-8 filed
on May 15, 1999.
(D) Filed as an Exhibit to the Annual Report on Form 10-K as of
December 31, 1998.
(E) Filed as an exhibit to the Annual Report on Form 10-K as of
December 31, 9998, incorporating Schedule 14 A information pursuant
to Section 14(a) of the Securities Exchange Act of 1934, filed on
May 18, 1999.
B) Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BYL BANCORP
Date: August 13, 1999 /s/ ROBERT UCCIFERRI
------------------------------
Robert Ucciferri
President and
Chief Executive Officer
Date: August 13, 1999 /s/ BARRY J. MOORE
-------------------------------
Barry J. Moore
Chief Operating Officer and
Senior Executive Vice President
17