BYL Bancorp of Orange, Calif., says it plans to leave the securitization business -- the second Southern California community bank to do so in recent weeks.
"We don't plan to do any more securitizations," said Barry J. Moore, chief financial officer at BYL, a $368 million-asset banking company. "It just doesn't make good business sense."
BYL securitized $100 million of commercial real estate loans for owner-occupied properties in 1998 and 1999. Its decision to leave the business came amid a sweeping review by regulators of small banks and thrifts -- especially subprime lenders -- who have completed loan securitizations in recent years.
Regulators are double checking, in particular, to see whether these companies have adequate Tier 1 capital to support so-called "residual assets" on their balance sheets. Residual assets are essentially a portion of the loan package that a bank must retain and service after the securitization is completed.
Campbell Chaney, an analyst at Sutro & Co. in San Francisco, said BYL's move is a wise one. The regulatory scrutiny, he said, would probably "get uglier before it gets better."
In December, Community West Bancshares in Goleta, Calif., was forced to raise $11.2 million of capital and write off $8 million after regulators questioned the default rate on its residual assets stemming from two loan securitizations. As a result, Community West said in a recent pre-earnings announcement that it expects to report a loss of $3.8 million, or 65 cents per share, for 1999.
Mr. Moore said it is still unclear whether BYL will have to boost its Tier 1 capital or change its accounting methods for residual assets. Regulators did their regularly scheduled exam last month, he said, but he has yet to be handed the final report.
Departing the securitization business may affect BYL's revenue stream. The company said a significant portion of its revenue is derived from the origination of loans and the subsequent wholesaling or securitization of them on the secondary market.
BYL has yet to report its fourth-quarter earnings, but Mr. More said it expects solid results.