10-Q 1 a2029481z10-q.txt FORM 10-Q 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, 2000 [ ] 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 Street, 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(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 13, 2000, there were 2,542,568 shares of BYL Bancorp Common Stock outstanding. 1 BYL Bancorp and Subsidiary September 30, 2000 INDEX

2 Item 1. Financial Statements BYL Bancorp and Subsidiary Unaudited Condensed Consolidated Balance Sheets (Dollar Amounts in Thousands) September 30, December 31, 2000 1999 --------- --------- Cash and Due From Bank $ 37,092 $ 34,119 Federal Funds Sold -- -- --------- --------- TOTAL CASH AND CASH EQUIVALENTS 37,092 34,119 Interest-Bearing Deposits -- 100 Investment Securities 17,520 21,580 Federal Home Loan Bank Stock, at Cost 619 1,113 Loans Held For Sale 34,929 69,756 Loans 178,288 198,884 Allowance for Loan Losses (2,717) (2,610) --------- --------- NET LOANS 175,571 196,274 Premises and Equipment 5,938 6,447 Other Real Estate Owned 767 277 Goodwill 1,234 1,324 Interest-Only Strips Receivable and Servicing Assets 13,516 15,659 Accrued Interest and Other Assets 6,788 7,087 --------- --------- $ 293,974 $ 353,736 ========= ========= Noninterest-Bearing Deposits $ 65,499 $ 66,619 Interest-Bearing Deposits 195,783 256,354 --------- --------- TOTAL DEPOSITS 261,282 322,973 Borrowed Funds Accrued Interest and Other Liabilities 2,392 1,563 --------- --------- TOTAL LIABILITIES 263,674 324,536 Common Shares 12,804 12,788 Retained Earnings 17,099 15,918 Accumulated Other Comprehensive Income 397 494 --------- --------- TOTAL SHAREHOLDERS' EQUITY 30,300 29,200 --------- --------- $ 293,974 $ 353,736 ========= ========= 3 Item 1. Financial Statements - Continued BYL Bancorp and Subsidiary Unaudited Condensed Consolidated Statements of Income (Dollar Amounts in Thousands, Except Per Share Data)

4 Item 1. Financial Statements - Continued BYL Bancorp Unaudited Statement of Changes in Shareholders' Equity (Dollar Amounts in Thousands, Except Per Share Data)

5 Item 1. Financial Statements - Continued BYL Bancorp and Subsidiary Unaudited Condensed Statement of Cash Flows (Dollar Amounts in Thousands)

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 on Form 10K for the year ended December 31, 1999. 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 nine month periods ended September 30, 2000 and 1999, 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 seven 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 nine months ended September 30, 2000 and 1999.

8 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, 1999. 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. Sale of Unguaranteed Interest in SBA Loans On December 10, 1998, the Bank entered into a Pooling and Servicing Agreement dated as of October 1, 1998 (the "SBA Pooling Agreement") between the Bank, as Servicer and Master Servicer, and Marine Midland Bank, as Trustee (the "Trustee") whereby the Bank transferred certain unguaranteed interests (the "Unguaranteed Interests") in loans (the "SBA Loans") partially guaranteed by the U.S. Small Business Administration ("SBA") to a newly-created trust (the "Trust") for the benefit of the SBA and the holders of certificate representing interests in such Trust. The Trust consists of the Unguaranteed Interests in such SBA Loans that are subject to the Pooling Agreement, and the Trust has issued three (3) classes of certificates representing certain fractional undivided ownership interests in the Trust. The Aggregate principal amount of the Unguaranteed Interests delivered to the Trust on October 31, 1998 equaled approximately $38.1 million. Pursuant to the SBA Pooling Agreement, the Trust issued $34.4 million aggregate principal amount of BYL Bank Group SBA Loan-Backed Adjustable Rate Certificate, Series 1998-1, Class A ("Class A Certificate"), $6.02 million aggregate principal amount of BYL Bank Group SBA Loan-Backed Adjustable Rate Certificate, Series 1998-1, Class M. ("Class M Certificate") and $2.58 million aggregate principal amount of BYL Bank Group SBA Loan-Back Adjustable Rate Certificates, Series 1998-1, Class B ("Class B Certificate"). The Class A and Class M Certificates were sold to a limited number of "Qualified Institutional Buyers" as defined in Rule 144A under the Securities Act of 1933, and institutional "Accredited Investors" as defined in Rule 501 under the Securities Act. Pursuant to the requirements of the SBA, the Class B Certificate were retained by the Bank and are subordinate to the Class A and Class M Certificates. The Class M Certificates are subordinate to the Class A Certificates. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Sale of Commercial Loans On August 11, 1999, the Bank entered into a Pooling and Servicing Agreement dated as of September 30, 1999 (the "Business Loan Pooling Agreement") among the Bank, as seller and master servicer, HSBC Bank USA, as Trustee, and Bankers Trust (Delaware) as Delaware Trustee, whereby the Bank has transferred a pool of business loans to a newly-created trust (the "Business Loan Trust") for the benefit of the holders of certificates representing interests in such Business Loan Trust. The Business Loan Trust consists of the Business Loans that are subject to the Business Loan Pooling Agreement, and the Business Loan Trust has issued three (3) classes of certificates representing certain fractional undivided ownership interests in the Business Loan Trust. The aggregate principal amount of the Business Loans delivered to the Business Loan Trust on August 11, 1999 equaled approximately $47.1 million. Pursuant to the Business Loan Pooling Agreement, the Trust issued $16 million aggregate principal amount of BYL Bank Group Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class A-1 ("Class A-1 Certificates"), $12 million aggregate principal amount of BYL Bank Group Business Loan-Backed Pass Through Certificates, Series 1999-1, Class A-2 Certificates ("Class A-2 Certificates"); $27.2 million aggregate principal amount of BYL Bank Group Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class A-3 Certificates ("Class A-3 Certificates"); $4.8 million aggregate principal amount of BYL Bank Group Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class B Certificates ("Class B-1 Certificates"); and BYL Bank Group Business Loan-Backed Pass-Through Certificates, Series 1999-1, Class R Certificates ("Class R Certificates"). The Class A Certificates were sold to a limited number of "Qualified Institutional Buyers" as defined in Rule 144A under the Securities Act of 1933, and institutional "Accredited Investors" as defined in Rule 501 under the Securities Act. The Class B-1 Certificates and the Class R Certificates were retained by the Bank and are subordinate to the Class A-1 Certificates, the Class A-2 Certificates and the Class A-3 Certificates. Restructuring During the fourth quarter of 1999 the Bank evaluated various possible alternatives of increasing capital, including the issuance of various kinds of securities and the divestiture or closing of those operations which were expected to continue to provide rates of return below the Bank's targeted ROA. Also, during the fourth quarter of 1999, the Company determined that the maximum potential value of the Bank's commercial loan originations would be realized through the retention of these loans in the Bank's loan portfolio. This decision was based upon the current and anticipated returns obtainable from either the sale or securitization of these commercial loan originations and the proposed increased capital requirements on loan securitizations. The shift in the Bank's strategy from loan sales or securitizations to portfolio retention will require increasing levels of capital in order to maximize the value of the Bank's ability to generate commercial loans at premium yields. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Restructuring - Continued On February 4, 2000, the Bank completed the sale of its automobile loan portfolio of approximately $38 million and closed its automobile division. On February 22, 2000, the Bank completed the sale of its Diamond Bar Mortgage Division, an originator of Agency conforming residential mortgages. As a result of this restructuring, the Company reported a loss for the first quarter 2000 of approximately $260,000. The Company also suspended quarterly dividends effective January 1, 2000. The Company continues to explore various means to increase capital and shareholder value, including the raising of additional capital, the formation of a holding company subsidiary that would house many of the Bank's current lending activities, and forming strategic alliances with other well-positioned financial firms or institutions. Regulatory Actions, Prompt Corrective Action and Capital Restoration Plan During late 1999 the FDIC completed an examination of the books and records of the Bank. In connection with this exam the FDIC notified the Bank that it had incorrectly calculated the risk-weighted capital requirements of the assets retained in the Bank's 1998 and 1999 securitizations. The FDIC also challenged the assumptions and financial model used by the Bank in valuing these residual assets. Based on the assumptions deemed acceptable by the FDIC, the FDIC believed the Bank's residual assets were overstated by $2.6 million. Although the Bank disagrees with the assumptions recommended by the FDIC, it has agreed to reflect this adjustment in its Quarterly Call Reports, primarily for regulatory capital purposes and also to engage an independent third-party to review the assumptions used by the Bank as well as design a financial model to more accurately measure the value of residual assets in future reporting periods. Primarily due to these items, the Bank has been classified as undercapitalized. As a result, the Bank filed a capital restoration plan with the FDIC, which provided that the Bank expects to be adequately capitalized by March 31, 2000. As of March 31, 2000, the Bank was adequately capitalized. The capital restoration plan also provides for increasing levels of capital every quarter until the Bank is well capitalized in 2001. The Bank has eliminated asset securitizations from its business plan. The Bank will continue operations of all traditional retail banking activities through the Bank's existing branch system. As of September 30, 2000, Bank management believes the Bank is adequately capitalized, as the Bank's Tier 1 Capital Ratio was 8.99% and the Total Risk Based Capital Ratio was 9.60% as of September 30, 2000. The Bank has now amended its call reports in order to reflect the proper computation of risk-weighted capital for residual assets and for the $2.6 million adjustment to these residual assets pursuant to the Bank's agreement with the FDIC. All call reports from December 31, 1998 through March 31, 2000 have been restated, also pursuant to the agreement with the FDIC. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Regulatory Actions, Prompt Corrective Action and Capital Restoration Plan- Continued In addition, as a result of the recent FDIC examination, for the purpose of cooperating with the FDIC and without admitting or denying any allegations, effective July 10, 2000, the Bank stipulated to an administrative action with the FDIC that requires the Bank, among other items, to retain qualified management; have and maintain certain Tier 1 capital and total risk based capital ratios; eliminate from its books certain assets classified loss; revise policies concerning the Bank's asset securitization activities; obtain a model to more adequately value its retained interests related to securitized assets; and adopt and implement certain other policies relating to profitability, liquidity and funds management, sensitivity to interest rate risk; revise certain reports to the FDIC; and correct all alleged violations of law. The order became effective July 10, 2000. In order to comply with the FDIC Order, the Bank has engaged PricewaterhouseCoopers ("PWC") to assist the Bank in determining the assumptions used in the valuation of these assets as well as design a new valuation model for ongoing measurement of the changes in valuation of these assets. The Bank has now received the cash flow model from PWC for the 1999-1 Securitization and is in the process of running the model under various assumptions. The Company and the Bank will account for any adjustments generated utilizing these new assumptions as a change in estimates and adjust its financial statements in accordance with the results obtained from the model for both securitizations. As a result of the new model and assumptions the assets for the 1999-1 securitization were written down $800,000 as a permanent decline in value during the quarter ended June 30, 2000. Management does not anticipate a significant write down of the 1998-1 securitization. Further, as a result of a recent FRB examination of the Company, the Company has executed a Memorandum of Understanding with the FRB. The FRB MOU requires that the Company, among other items, refrain from declaring dividends without the prior written approval of the FRB, develop and submit a written capital plan, submission to the FRB of a statement concerning the steps the Board proposes to take to improve the condition of the Bank and the consolidated organization, refrain from increasing debt or renewing existing debt without prior approval of the FRB, and submit written progress reports to the FRB. Formation of Subsidiary and Proposed Transaction As a result of the recent FDIC examination, the Company has determined that it would be in the best interests of the Company and the Bank to transfer the retained assets, including the strips, residuals, servicing rights and other retained interests in the 1999 securitization, as well as most of the personnel of the SBA Department, to a minority-owned subsidiary of the Company. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Formation of Subsidiary and Proposed Transaction - Continued The Company and the Bank executed a definitive agreement dated July 12, 2000, that describes the terms of a proposed joint venture for a Delaware limited liability company to be called CNL Commercial Finance, LLC. The Company and its joint venture partner, CNL Commercial Funding, LP("CFL"), have changed the corporate structure of the subsidiary to a C Corporation to be called CNL Commercial Finance, Inc. ("CCF"). The purpose of the joint venture is to originate, service and securitize commercial loans, some of which are to be guaranteed by the Small Business Administration, which are detailed below. The subsidiary, CCF, would have a total $10 million in equity capital. The Company would have a 25% equity and voting interest in the subsidiary. The Company would execute a note for its $2.5 million contribution, and CFL would hold a 75% ownership interest in the subsidiary. Under the amended definitive agreement, the cash price will be at least equal to the Bank's book value of the strips, residuals, servicing rights and other retained interests that are being transferred from the 1999-1 securitization, as well as other assets, but will not include one certificate that is rated investment grade Baa. Possible Buyout of the Company's Interest CFL has the option to purchase all of the Company's interest in the subsidiary if any banking, credit law, regulation or regulatory decision arising directly from the Company's ownership interest in the subsidiary should significantly impair the subsidiary's profitability. In addition, the CCF Stockholder's Agreement also describes a buyout that could occur as a result of the Company's unwillingness or inability to meet a capital call for additional funds because of expansion or because of insufficient earnings or inadequate credit performance. The Stockholders' Agreement also describes a buyout that could occur if the Company does not agree with major decisions of CCF, CCF decided to enter into a new activity not previously approved by the Federal Reserve Bank, or if the Company is subject to criticism, which will have negative economic consequences for the Company. Business of the Subsidiary The subsidiary's business will include the following: o originating, warehousing and securitizing SBA loans under various SBA programs; o originating, warehousing, selling and securitizing SBL loans or loan pools; o servicing loan pools, including the servicing of the Bank's 1999 securitized SBL loans though either (1) the assignment of BYL Bank's servicing rights with the approval of 51% of the certificate holders in the securitization and the appropriate rating agencies, or (2) the execution of a sub-servicing agreement by and between BYL Bank and the subsidiary; and o providing lending-related services to SBA and SBL borrowers. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Management The current managers of the SBA Division of the Bank will manage the subsidiary. In addition, the policies and procedures currently in effect in the SBA and SBL Departments of the Bank are intended to become the policies and procedures at the subsidiary. Regulatory Applications The Company is currently seeking approval from the FRB pursuant to Section 4(c)(8) of the Federal Reserve Act with this application in order to make its proposed investment in the subsidiary. The subsidiary has obtained a Finance Lenders Law License from the California Department of Corporations in order to conduct the activities described herein. The Company is also discussing the type of applications that may be necessary with the SBA. Completion of First Phase of Transaction On September 14, 2000, the Company and the Bank completed the first phase of the transaction with CCF, in which the Bank sold certain assets and transferred certain personnel of the SBA Division. The Bank also sold 59% of its retained interest in the 1999-1 Securitization. The Bank realized cash in the amount of $3.223 million as a result of the completion of the first phase of the CCF transaction. Following receipt of all necessary regulatory approvals, the Company and the Bank desire to complete the second phase of the transaction which will involve the transfer of the remaining 41% of the retained interest in the 1999-1 Securitization, except for the investment rated security. At that time, the Company intends to execute the $2.5 million note as described above. Subsidiary Will Act As Sub-Servicer for Bank The only relationship between the Bank and the subsidiary would be a sub-servicer relationship in which the subsidiary would service the loans serviced by the Bank under the 1999-1 securitization. The Bank will be retaining a sufficient number of employees from the SBA Department in order to perform the Bank's requirements under the 1998 Securitization. Mergers and Acquisitions by the Company 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 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Mergers and Acquisitions by the Company- Continued 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. Proposed Acquisition by PBOC Holdings, Inc. On November 2, 2000, the Company and PBOC Holdings, Inc. ("PBOC"), parent company of People's Bank of California, announced the signing of an Agreement and Plan of Reorganization (the "Agreement") dated November 1, 2000, attached to a Current Report on Form 8-K filed on November 3, 2000, pursuant to which PBOC will acquire the Company and BYL Bank Group. Upon consummation of the transaction, PBOC will become the surviving corporation, and People's Bank of California will become the surviving bank. Consummation of the Agreement is subject to a number of conditions, including, but not limited to, the approval of the Agreement by the shareholders of the Company and the receipt of requisite regulatory approvals Under the terms of the transaction, the holders of Company Common Stock will receive $15.00 in cash for each share of Company Common Stock owned. The cash amount may be adjusted upward or downward under certain circumstances which are set forth in the Agreement. Concurrently with the execution and delivery of the Agreement, the directors and certain executive officers of the Company entered into a form of letter agreement with PBOC pursuant to which among other things, such persons agreed to vote their shares of Company common stock in favor of approval of the Agreement. A copy of the form of letter agreement was attached to the Form 8-K. In connection with the Agreement, PBOC and the Company entered into a Stock Option Agreement, also attached to the Form 8-K, dated as of November 1, 2000, pursuant to which the Company granted PBOC an option to purchase up to 505,971 shares of the Company's common stock (subject to adjustment as set forth therein), which represents 19.9% of the Company's outstanding shares of common stock, at a purchase price of $10.597 per share (subject to adjustment as set forth therein). The option will become exercisable upon the occurrence of certain events, as specified in the Stock Option Agreement, none of which has occurred as of the date hereof. The transactions are expected to close during the first half of calendar 2001 pending receipt of all necessary regulatory approvals and approval by the Company's shareholders. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Overview For the three months ended September 30, 2000, the Company reported net income of $1.0 million, or $0.40 per share compared to a net income of $1.0 million, or $0.41 per share for the same three month period in 1999. For the first nine months of 2000, the Company reported net income of $1.2 million compared to $2.2 million in 1999. The annualized return on average assets was .47% for 2000 compared to .85% in 1999. Annualized return on shareholders equity was 5.28% in 2000 compared to 10.57% in 1999. During the first quarter of 2000 the Company closed the Diamond Bar Mortgage Division and the Indirect Auto Division. The Company sold the indirect auto loan portfolio and incurred a $1.6 million loss on sale. During the second quarter of 2000 the Company wrote down the 1999-1 secruitization assets by $800,000 as a result of a new valuation model being implemented. During the third quarter of 2000 the Company closed the SBA department and sold, at carrying value, 59% or $3.0 million in residual assets from the 1999-1 securitization. Financial Condition Total assets as of September 30, 2000, decreased 16.89% to $294.0 million in comparison to total assets of $353.7 million as of December 31, 1999. The majority of this decrease was centered in loans held for sale and portfolio loans, which decreased by $35 million and $21 million, respectively. The reduction in assets resulted in the reduction of interest-bearing deposits by $61 million. Asset Quality The following table sets forth the components of non-performing assets and related ratios: (dollar amounts in thousands)

16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Asset Quality - Continued The Company's asset quality has declined in 2000 as evidenced by an increase in the ratio of nonperforming loans to total loans which increased to 1.05% at September 30, 2000 from .84% at December 31, 1999. The allowance for loan losses as a percent of nonperforming loans decreased to 121.46% at September 30, 2000, down from 157.04% at December 31, 1999. A portion of this decline in asset quality is due to the increase in nonaccrual loans and OREO. The ALLL at September 30, 2000 was 1.52% of total loans compared to 1.31% at December 31, 1999. At September 30, 2000, the Company had eight properties of OREO with a total book value of $767,000. 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 September 30, 2000 was 81.6%. Had the Bank actually sold all of the loans it held for sale, this ratio would have declined to 68.2%. Capital Resources Total shareholders equity at September 30, 2000 totaled $30.3 million, which represents a 3.8% increase from $29.2 million at December 31, 1999. 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, 2000, the Bank's Tier 1 leverage capital ratio was 8.99% compared to 7.40% at December 31, 1999.

On March 8, 2000 the Bank was notified by the FDIC that the Bank is under-capitalized for purposes of Prompt Corrective Action. Accordingly, the Bank is prohibited, among other things, from renewing broker deposits, paying dividends and is subject to enforcement actions. Subsequent to the notification by the FDIC, the Bank has filed a capital restoration plan with the FDIC. Effective July 10, 2000, the Bank stipulated to an administrative action with the FDIC which requires the Bank to have Tier 1 Capital Ratio of 7.75% by September 30, 2000, Tier 1 Capital Ratio of 8.00% and Total Risk Based Capital Ratio of 9.5% by December 31, 2000, Total Risk Based Capital Ratio of 10.25% by September 30, 2001 and Total Risk Based Capital Ratio of 11.00% by December 31, 2001. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued 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 $4.4 million for the quarter ended September 30, 2000, compared to $4.1 million for the quarter ended September 30, 1999 and $13.5 million for the nine months ended September 30, 2000 compared to $11.7 million for the nine months ended September 30, 1999. The following table sets forth the components of net interest income, average earning assets and net interest margin: (in thousands)

The net interest margin increased in 2000 compared to the same periods in 1999 due to a 175 basis point increase in prime rate since July of 1999. Provision for Loan Losses BYL Bancorp made a $200,000 and $400,000 contribution to the allowance for loan losses for the three and nine months ended September 30, 2000 compared to $130,000 and $361,000 for the three and nine months ended September 30, 1999. Management believes that the allowance, which equals 1.52% of total loans at September 30, 2000, is adequate to cover future losses. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Provision for Loan Losses - Continued Changes in the allowance for loan losses for the quarter and nine months ended September 30, 2000 and 1999 are as follows (dollar amounts in thousands):

Noninterest Income Noninterest income was $4.9 million for the quarter ended September 30, 2000 compared to $6.9 million for the same period in 1999. Similarly for the first nine months of 2000, noninterest income was $14.3 million compared to $18.0 million for the same period in 1999. This decrease is attributable to the closing of the Diamond Bar Mortgage Division and the $800,000 write-down of the assets retained in the 1999-1 securitization. Noninterest Expense Noninterest expense was $7.4 million for the quarter ended September 30, 2000 and $25.2 million for the first nine months of 2000 compared to $9.1 million and $25.5 million for the same periods in 1999. The decline in noninterest expense for the quarter is attributable to the closing of the Diamond Bar Mortgage Division. Noninterest expense for the nine months has not declined due to the $1.6 million loss on sale of the Bank's indirect auto loan portfolio during the first quarter of 2000. 19 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 September 30, 2000. 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 September 30, 2000, BYL Bancorp had $167 million of assets and $190 million of liabilities repricing within one year. Therefore, $23 million more in interest rate sensitive liabilities than interest rate sensitive assets 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 lesser amount than interest expense and net income would increase. Conversely, if rates were to rise, the reverse would apply, and BYL Bancorp's net income would decrease. 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. The Company expended approximately $113,000 through the periods ended December 31, 1999 in connection with its year 2000 compliance program. The Company experienced no significant problems related to its information technology systems upon arrival of the Year 2000, nor was there any interruption in service to its customers. 20 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 September 27, 2000, the Company held its annual meeting. At the annual meeting, shareholders of the Company elected the four directors nominated by the Company's Board of Directors. Item 5 - Other Information None 21 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 I of Proxy Statement/Prospectus incorporated by reference (A) 2.2 Agreement and Plan of Reorganization, and ancillary documents, among BYL Bancorp, BYL Bank Group, PBOC Holdings, Inc. and People's Bank of California dated November 1, 2000 (J) 3.1 Articles of Incorporation of the Registrant (A) 3.2 Amendment to Articles of Incorporation of Registrant (A) 3.3 Bylaws of the Registrant (A) 4.1 Specimen Certificate evidencing shares of Registrant's Common Stock (A) 4.2 Stockholder Agreement Covering Issuance and Compulsory Repurchase of Organizing Shares of Registrant - Annex II of Proxy Statement/Prospectus incorporated by reference (A) 10.1 Form of Indemnification Agreement (A) 10.2 BYL Bancorp 1997 Stock Option Plan, as amended in 1998 (C) 10.3 Form of Proxy, Proxy Statement and Notice of Annual 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) 10.7.1 Employment Agreement - Ms. Gloria Van Kampen (D) 10.8 Employment Agreement - Mr. Gary Strachn (G) 10.9 Salary Continuation Agreement - Mr. Robert Ucciferri (A) 10.10 Salary Continuation Agreement - Mr. Barry J. Moore (A) 10.11 Salary Continuation Agreement - Mr. Michael Mullarky (F) 10.12 Salary Continuation Agreement - Ms. Gloria Van Kampen (F) 10.13 Agreement and Plan of Reorganization with DNB Financial (B) 10.14 Agreements, as amended, for formation of CNL Financial Services, Inc. (H) 10.15 Agreement by and among BYL Bancorp, BYL Bank Group, JAM Partners, L.P., Sy Jacobs, Everest Partners Limited Partnership, Everest Managers, L.L.C., David M. W. Harvey and Nick Becker dated September 7, 2000 (I) B) Reports on Form 8-K (a) Form 8-K filed on July 13, 2000 regarding CNL transaction and Administrative Actions. (b) Form 8-K filed on September 8, 2000 regarding Agreement by and among BYL Bancorp, BYL Bank Group, JAM Partners, L.P., Sy Jacobs, Everest Partners Limited Partnership, Everest Managers, L.L.C., David M. W. Harvey and Nick Becker. (c) Form 8-K filed on November 3, 2000 regarding Agreement and Plan of Reorganization and related documents, among BYL Bancorp, BYL Bank Group, PBOC Holdings, Inc. People's Bank of California dated November 1, 2000. 22 --------------------------------- (A) Filed as an Exhibit to the Registrant's Registration Statement (File No. 333-34995) filed on September 5, 1997, which exhibit is incorporated herein by this reference. (B) Filed as an Exhibit to Form 8-K filed on January 29, 1998, which exhibit is incorporated herein by this reference. (C) Filed as an Exhibit to the Registration Statement on Form S-8 filed on May 15, 1998. (D) Filed as an Exhibit to the Annual Report on Form 10-K as of December 31, 1998. (E) Filed as an exhibit to the Annual Report on Form 10-K as of December 31, 1998, incorporating Schedule 14 A information pursuant to Section 14(a) of the Securities Exchange Act of 1934, filed on May 18, 1999. (F) Filed as an Exhibit to Form 10-Q filed on November 15, 1999, which Exhibit is incorporated herein by this reference. (G) Filed on an Exhibit to the Annual Report on Form 10-K as of December 31, 1999. (H) Filed as an Exhibit to Form 10-Q on August 17, 2000. (I) Filed as an Exhibit to Form 8-K filed on September 8, 2000 (J) Filed as Exhibits to Form 8-K filed on November 3, 2000 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, 2000 /s/ Robert Ucciferri --------------------- Robert Ucciferri President and Chief Executive Officer Date: November 13, 2000 /s/ Barry J. Moore --------------------- Barry J. Moore Senior Executive Vice President Chief Operating Officer and 23

BYL BANCORP 10-Q