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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-11337
Foothill Independent Bancorp
- --------------------------------------------------------------------------------
Exact name of Registrant as specified in its charter)
California 95-3815805
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
510 South Grand Avenue, Glendora, California 91741
- -------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(626) 963-8551 or (909) 599-9351
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(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal
year, if changed, since last year)
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 (or for such 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:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
A total of 5,164,385 shares of Common Stock were outstanding on May 2, 2001
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Cash and due from banks $ 29,436 $ 26,186
Federal funds sold 27,700 12,000
--------- ---------
Total cash and cash equivalents 57,136 38,186
--------- ---------
Interest-bearing deposits in other financial institutions 9,596 8,005
--------- ---------
Investment securities held-to-maturity (approximate market value
$19,008 in 2001 and $20,699 in 2000)
U. S. Treasury 1,000 999
U. S. Government Agencies 14,526 16,379
Municipal 1,053 1,053
Other securities 2,311 2,311
--------- ---------
Total investment securities held to maturity 18,890 20,742
--------- ---------
Investment securities available-for-sale 40,822 50,074
--------- ---------
Loans, net of unearned discount and prepaid points and fees 367,260 367,310
Direct lease financing 771 1,164
Less Reserve for possible loan and lease losses (3,814) (3,692)
--------- ---------
Total Loans 364,217 364,782
--------- ---------
Premises and equipment 6,238 7,013
Accrued interest 2,669 3,247
Other real estate owned (net of reserve for possible losses of
$-0- in 2001 and 2000) 2,170 2,164
Cash surrender value of life insurance 5,734 5,639
Prepaid Expenses 1,862 2,785
Deferred tax assets 1,752 1,801
Federal Home Loan Bank stock, at cost 422 415
Federal Reserve Bank stock, at cost 229 229
Other assets 531 743
--------- ---------
TOTAL ASSETS $ 512,268 $ 505,825
========= =========
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits
Demand deposits $ 149,551 $ 146,868
Savings and NOW deposits 110,537 106,618
Money market deposits 77,975 74,424
Time deposits $100,000 or over 59,215 54,939
Time deposits under $100,000 62,902 71,192
--------- ---------
Total Deposits 460,180 454,041
--------- ---------
Accrued employee benefits 2,209 2,197
Accrued interest and other liabilities 1,021 1,324
--------- ---------
Total Liabilities 463,410 457,562
--------- ---------
Stockholders' Equity
Common Stock - authorized, 25,000,000 shares $.001 par value;
issued and outstanding: 5,219,268 shares at March 31, 2001
and 5,243,863 at December 31, 2000 5 5
Additional paid-in capital 37,820 37,754
Retained earnings 11,148 10,746
Accumulated other comprehensive income (115) (242)
--------- ---------
Total Stockholders' Equity 48,858 48,263
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 512,268 $ 505,825
========= =========
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------ ------
Interest Income
Interest and fees on loan $8,227 $8,422
Interest on investment securities
U.S. Treasury 13 35
Obligations of other U.S. government agencies 601 641
Municipal agencies 69 82
Other securities 283 169
Interest on deposits 125 60
Interest on Federal funds sold 245 111
Lease financing income 12 27
------ ------
Total Interest Income 9,575 9,547
------ ------
Interest Expense
Interest on savings & NOW deposits 404 388
Interest on money market deposits 711 716
Interest on time deposits in denominations of $100,000 or more 830 555
Interest on other time deposits 984 677
Interest on borrowings -- 44
------ ------
Total Interest Expense 2,929 2,380
------ ------
Net Interest Income 6,646 7,167
Provision for loan and lease losses 125 20
------ ------
Net Interest Income after Provisions for Loan and Lease Losses 6,521 7,147
------ ------
Other Income
Fees and service charges 1,240 1,001
Gain on sale SBA loans 1 2
Other 77 27
------ ------
Total other income 1,318 1,030
------ ------
Other Expenses
Salaries and benefits 2,422 2,695
Occupancy expenses, net of revenue of $58 in 2001 and $44 in 2000 596 543
Furniture and equipment expenses 398 387
Other expenses (Note 2) 1,801 2,021
------ ------
Total Other Expenses 5,217 5,646
------ ------
Income before Income Taxes 2,622 2,531
Provision for Income Taxes 964 935
------ ------
NET INCOME $1,658 $1,596
====== ======
EARNINGS PER SHARE OF COMMON STOCK
Basic $ 0.32 $ 0.28
====== ======
Diluted (Note 3) $ 0.30 $ 0.26
====== ======
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
SHARES CAPITAL PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
OUTSTANDING STOCK CAPITAL INCOME EARNINGS INCOME TOTAL
----------- ------- ---------- ------------- -------- ------------- -------
BALANCE - January 1, 2000 5,772,614 $ 6 $ 37,372 $11,898 $(837) $48,439
Cash dividend 1 1
Exercise of stock options 4,048 24 24
Common stock issued under employee benefit
and dividend reinvestment plan 145 2 2
Common stock repurchased, cancelled and
retired (453,479) (5,226) (5,226)
Comprehensive Income
Net Income $1,596 1,596 1,596
Unrealized security holding
losses (net of taxes $38) (16) (16) (16)
------
Total Comprehensive Income $1,580
--------- ---- -------- ====== ------- ----- -------
BALANCE - March 31, 2000 5,323,328 $ 6 $ 37,398 $ 8,269 $(853) $44,820
========= ==== ======== ======= ===== =======
BALANCE - January 1, 2001 5,243,863 5 37,754 10,746 (242) 48,263
Cash dividend (523) (523)
Exercise of stock options 29,905 -- -- --
Common stock issued under employee
benefit and dividend reinvestment
plans 5,367 66 66
Common stock repurchased cancelled
and retired (59,867) (733) (733)
Comprehensive Income
Net Income $1,658 1,658 1,658
Unrealized security holding gains
(Net of taxes $48) 127 127 127
------
Total Comprehensive Income $1,785
======
--------- ---- -------- ------- ----- -------
BALANCE - March 31, 2001 5,219,268 $ 5 $ 37,820 $11,148 $(115) $48,858
========= ==== ======== ======= ===== =======
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
2001 2000
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash Flows From Operating Activities:
Interest and fees received $ 10,271 $ 9,777
Service fees and other income received 1,151 889
Financing revenue received under leases 12 27
Interest paid (2,821) (2,286)
Cash paid to suppliers and employees (4,117) (5,509)
Income taxes paid (965) (606)
--------- ---------
Net Cash Provided (Used) by Operating Activities 3,531 2,292
--------- ---------
Cash Flows From Investing Activities:
Proceeds from maturity of investment securities (AFS) 845,263 330,325
Purchase of investment securities (AFS) (835,973) (337,029)
Proceeds from maturity of investment securities (HTM) 3,800 2,140
Purchase of investment securities (HTM) (1,946) (1)
Proceeds from maturity of deposits in other financial institutions 6,222 6,833
Purchase of deposits in other financial institutions (7,813) (1,489)
Net (increase) decrease in credit card and revolving credit receivables 92 (17)
Recoveries on loans previously written off 27 60
Net (increase) decrease in loans (72) (11,623)
Net (increase) decrease in leases 393 805
Proceeds from property, plant and equipment 1,081 --
Capital expenditures (584) (1,122)
Stock repurchased and retired (733) (5,226)
--------- ---------
Net Cash Provided (Used) in Investing Activities 9,757 (16,344)
--------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in demand, NOW, savings and money market deposits 10,133 17,070
Net increase (decrease) in certificates of deposit with maturities
of three months or less 17,077 8,970
Net increase (decrease) in certificates of deposit with maturities
of more than three months (21,091) 7,151
Net increase (decrease) in short term borrowing -- (3,847)
Proceeds from exercise of stock options -- 24
Proceeds from stock issued under employee benefit and dividend
reinvestment plans 66 2
Principal payment on long term debt -- (14)
Dividends paid (523) 1
--------- ---------
Net Cash Provided by Financing Activities 5,662 29,357
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 18,950 15,305
Cash and Cash Equivalents at Beginning of Year 38,186 26,862
--------- ---------
Cash and Cash Equivalents at March 31, 2001 and 2000 $ 57,136 $ 42,167
========= =========
See accompanying notes to financial statements
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
2001 2000
------- -------
Net Income $ 1,658 $ 1,596
------- -------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation and amortization 344 328
Provision for possible credit losses 125 20
Provision for possible OREO losses -- 35
(Gain)/loss on sale of equipment (72) --
Provision for deferred taxes 49 (36)
Increase/(decrease) in taxes payable (50) 365
(Increase)/decrease in other assets) 207 101
(Increase)/decrease in interest receivable 578 262
Increase/(decrease) in discounts and premiums 130 (5)
Increase/(decrease) in interest payable 108 94
(Increase)/decrease in prepaid expenses 923 682
Increase/(decrease) in accrued expenses and other liabilities (374) (1,009)
Increase in cash surrender value of life insurance (95) (141)
------- -------
Total Adjustments 1,873 696
------- -------
Net Cash Provided (Used) by Operating Activities $ 3,531 $ 2,292
======= =======
DISCLOSURE OF ACCOUNTING POLICY
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one-day periods.
See accompanying notes to financial statements.
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FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
MARCH 31, 2001 AND 2000
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
statement of the results for the interim periods presented have been included.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000. The operating results for the interim period ended March 31, 2001 are
not necessarily indicative of the results to be expected for the full fiscal
year ending December 31, 2001.
NOTE #2 - OTHER EXPENSES
The following is a breakdown of other expenses for the three month periods
ended March 31, 2001 and 2000.
MARCH 31,
--------------------
2001 2000
------ ------
Data processing $ 298 $ 253
Marketing expenses 264 274
Office supplies, postage and telephone 208 269
Bank Insurance 122 138
Supervisory Assessments 27 31
Professional Expenses 406 332
Other Expenses 476 724
------ ------
Total Other Expenses $1,801 $2,021
====== ======
NOTE #3 - EARNINGS PER SHARE
The following is a reconciliation of net income and shares outstanding to
the income and number of shares used to compute EPS (amounts in thousands):
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
2001 2000
-----------------------------------------------
INCOME SHARES INCOME SHARES
------ ------ ------- ------
Net income as reported $1,658 $1,596
Shares outstanding at period end 5,219 5,323
Impact of weighting shares purchased during the period -- 11 439
----- ------ ------ -----
Used in Basic EPS 1,658 5,230 1,596 5,762
Dilutive effect of outstanding stock options -- 350 -- 418
------ ------ ------ -----
Used in Dilutive EPS $1,658 5,580 $1,596 6,180
====== ====== ====== =====
NOTE #4 - INCOME TAXES
Effective as of January 1, 1993, we adopted Statement No. 109 of the
Financial Accounting Standards Board, Accounting for Income Taxes. This
statement superseded Statement No. 96 and among other things, changed the
criteria for the recognition and measurement of deferred tax assets. This
adoption did not create a material change in our financial statements.
NOTE #5 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement 107 is effective for
financial statements for fiscal years ending after December 15, 1992. The
Statement considers the fair value of financial instruments for both assets and
liabilities.
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The following methods and assumptions were used to estimate the fair value
of financial instruments.
Investment Securities
For U.S. Government and U.S. Agency securities, fair values are based on
market prices. For other investment securities, fair value equals quoted market
price if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities as the basis for a
pricing matrix.
Loans
The fair value for loans with variable interest rates is the carrying
amount. The fair value of fixed rate loans is derived by calculating the
discounted value of the future cash flows expected to be received by the various
homogeneous categories of loans. All loans have been adjusted to reflect changes
in credit risk.
Deposits
The fair value of demand deposits, savings deposits, savings accounts and
NOW accounts is defined as the amounts payable on demand at March 31, 2001. The
fair value of fixed maturity certificates of deposit is estimated based on the
discounted value of the future cash flows expected to be paid on the deposits.
Notes Payable
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
Commitments to Extend Credit and Standby Letter of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the parties involved. For
fixed-rate loan commitments, fair value also considered the difference between
current levels of interest rates and committed rates.
The fair value of guarantees and letters of credit are based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with parties involved at March 31,
2001.
The estimated fair value of the Bank's financial instruments are as
follows:
MARCH 31, 2001
---------------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
(DOLLARS IN THOUSANDS)
Financial Assets
Cash and Cash equivalents $ 57,136 $ 57,136
Investment securities and deposits 69,308 67,738
Loans 367,391 369,195
Direct lease financing 771 764
Financial Liabilities
Deposits 460,180 460,623
Unrecognized Financial Instruments
Commitments to extend credit 45,411 45,411
Standby letters of credit 1,621 1,621
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NOTE #6 - NON-PERFORMING LOANS
The following table sets forth information regarding the Bank's
non-performing loans at March 31, 2001 and December 31, 2000.
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN THOUSANDS)
Accruing Loans More Than 90 Days Past Due(1)
Commercial, financial and agricultural $ -- $ --
Real Estate 682 --
Installment loans to individuals -- 17
Aggregate Leases -- --
------ ------
Total Loans Past Due More Than 90 Days 682 17
Troubled Debt Restructurings(2) 1,947 858
Non-accrual loans(3) 2,226 2,319
------ ------
Total Non-Performing Loans $4,855 $3,194
====== ======
- -----------------
(1) Reflects loans for which there has been no payment of interest and/or
principal for 90 days of more. Ordinarily, loans are placed on non-accrual
status (accrual of interest is discontinued) when the Bank has reason to
believe that continued payment of interest and principal is unlikely.
(2) Renegotiated loans are those which have been renegotiated to provide a
deferral of interest or principal.
(3) There were 6 loans on non-accrual status totaling approximately $2,226,000
at March 31, 2001 and 6 loans totaling approximately $2,319,000 at December
31, 2000.
Our policy is to review each loan in the loan portfolio to identify problem
credits. In addition, as an integral part of this review process, the Federal
Reserve Bank and the California Department of Financial Institutions also
classify problem credits. There are three classifications for problem loans:
"substandard", "doubtful", and "loss". Substandard loans have one or more
defined weaknesses or deficiencies and are characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not
corrected. Doubtful loans have weaknesses characteristic of substandard loans
with the additional characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and
values, questionable. A loan classified as "loss" is considered uncollectible
and of such little value that its continuance as an asset is not warranted.
Another category designated "special mention" is assigned to loans which do not
currently expose the Bank to a significant degree of risk to warrant
classification as substandard, doubtful or loss, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
As of March 31, 2001, the Bank's classified loans consisted of
approximately $7,853,000 of loans classified as substandard, which consisted of
approximately $5,627,000 of performing and accruing loans and approximately
$2,226,000 of non-accrual loans. There were no loans classified as doubtful.
NOTE #7 - RESERVE FOR LOAN AND LEASE LOSSES
The reserve for loan and lease losses is a general reserve established to
absorb potential losses inherent in the entire loan and lease portfolio. The
level of and ratio of additions to the reserve are based on regular analyses of
the loan and lease portfolio and, at March 31, 2001, reflected an amount which,
in management's judgement, was adequate to provide for known and inherent loan
losses. In evaluating the adequacy of the reserve, management gives
consideration to the composition of the loan portfolio, the performance of loans
in the portfolio, evaluations of loan collateral, prior loss experience, current
economic conditions and the prospects or worth of respective borrowers or
guarantors. In addition, the Federal Reserve Bank and Department of Financial
Institutions, as an integral part of the examination process, periodically
review the Bank's allowance for possible loan and lease losses. They may require
the Bank to recognize additions to the allowance based upon their judgment of
the information available at the time of examination. The Bank was most recently
examined by the Federal Reserve Bank as of March 31, 2000.
The reserve for loan and lease losses at March 31, 2001, was $3,814,000 or
1.04% of total loans and leases. Additions to the reserve are effected through
the provision for loan losses which is an operating expense of the Company.
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The following table provides certain information with respect to the
Company's allowance for loan losses as well as charge-off and recovery activity.
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
DOLLARS IN THOUSANDS
Allowance for Loan Losses $ 3,692 $ 6,102
------- -------
Balance, Beginning of period
Charge-Offs
Commercial, financial and agricultural (21) (3,762)
Real estate - construction -- --
Real estate - mortgage -- --
Consumer loans (13) (30)
Lease Financing -- --
Other -- --
------- -------
Total Charge-Offs (34) (3,792)
------- -------
Recoveries
Commercial, financial and agricultural 30 134
Real estate - construction -- --
Real estate - mortgage -- 170
Consumer loans 1 8
Lease Financing -- --
Other -- --
------- -------
Total Recoveries 31 312
------- -------
Net Recoveries (Charge-Offs) (3) (3,480)
Provision Charged to Operations 125 1,070
------- -------
Balance, End of period $ 3,814 $ 3,692
======= =======
Net Charge-Offs during Period to Average Loans
Outstanding during the period ended 0.00% 0.96%
======= =======
Allowance for Loan Losses to Total Loans 1.04% 1.00%
======= =======
In accordance with SFAS No. 114 (as amended by SFAS No. 118), "Accounting
by Creditors for Impairment of a Loan," loans identified as "impaired" are
measured on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. A loan is impaired
when it is probable the creditor will not be able to collect all contractual
principal and interest payments due in accordance with the terms of the loan
agreement. Loan impairment is evaluated on a loan-by-loan basis as part of
normal loan review procedures of the Bank.
NOTE #8 - MARKET RISK
The Company's management utilizes the results of a dynamic simulation model
to quantify the estimated exposure of net interest income to sustained interest
rate changes. The simulation model estimates the impact of changing interest
rates on the interest income from all interest earning assets and the interest
expense paid on all interest bearing liabilities reflected on the Company's
balance sheet. This sensitivity analysis is compared to policy limits which
specify maximum tolerance level for net interest income exposure over a one year
horizon assuming no balance sheet growth, given both a 100 and 300 basis point
upward and downward shift in interest rates. A parallel and pro rata shift in
rates over a 12-month period is assumed.
The Company does not engage in any hedging activities and does not have any
derivative securities.
The following reflects the Company's net interest income sensitivity
analysis as of March 31, 2001:
MARKET VALUE
ESTIMATED NET (DOLLARS IN THOUSANDS)
INTEREST ---------------------------
SIMULATED RATE CHANGES INCOME SENSITIVITY ASSETS LIABILITIES
- ---------------------- ------------------ -------- -----------
+100 basis points -5.03% $511,857 $460,700
+300 basis points -11.52% $496,987 $459,590
-100 basis points 1.36% $528,661 $461,836
-300 basis points 0.62% $547,848 $463,000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain information contained in this Report includes statements that are
forward-looking, such as statements relating to our expectations or beliefs
regarding our future financial performance. Such forward-looking information
involves risks and uncertainties that could cause our actual financial
performance to differ, possibly significantly, from our expected future
financial performance. A discussion of those risks and uncertainties follows
Item 3 below and readers of this Report are urged to review that discussion.
GENERAL
Our principal operating subsidiary, Foothill Independent Bank, which is a
California state chartered bank (the "Bank"), accounts for substantially all of
our revenues and income. Accordingly, the following discussion focuses primarily
on its operations and financial condition.
RESULTS OF OPERATIONS
OVERVIEW. During the first quarter of 2001, we generated net earnings of
$1,658,000, which represented an increase of $62,000, or 4%, over net earnings
in the first quarter of 2000. That increase was primarily due to an increase in
non-interest income together with a reduction in non-interest expense, which
offset a 7% decline in net interest income. Net earnings for the three months
ended March 31, 2001 represents an annualized return on average assets of 1.31%
and an annualized return on average equity of 13.66%, as compared to 1.36% and
13.42%, respectively, for the same period of 2000. On a fully diluted per share
basis, net earnings per share increased by 15% to $0.30 for the three months
ended March 31, 2001, from $0.26 for the same period of 2000, due primarily to a
reduction in the weighted average number of shares outstanding to 5,580,000 for
the three months ended March 31, 2001, from 6,180,000 shares for the same three
months of 2000, as a result of stock repurchases that we made under our open
market and private stock purchase program between April 1, 2000 and March 31,
2001.
NET INTEREST INCOME. Net interest income is a principal determinant of a
bank's income. Net interest income represents the difference or "spread" between
the interest earned on interest-earning assets, such as loans and investment
securities, and the interest paid on interest-bearing liabilities, principally
deposits. Net interest income declined by $521,000, or 7% in the three month
period ended March 31, 2001 as compared to the same period of 2000, primarily as
a result of a $549,000, or 23.1%, increase in interest expense. The increase in
interest expense was due primarily to increases in the volume of time
certificates of deposits ("time deposits"), including those in denominations of
$100,000 or more ("TCDs"), on which the Bank pays its highest rates of interest,
compared to the volume of such deposits at the Bank during the quarter ended
March 31, 2000.
RATE SENSITIVITY AND NET INTEREST MARGIN.
RATE SENSITIVITY. Like other banks and bank holding companies, our margins
(that is, the difference between yields we are able to realize on loans and
other interest earning assets and the interest we pay on deposits) are affected
by a number of factors including the relative percentages or the "mix" of:
o our assets, between loans, on the one hand, on which we are able to obtain
higher rates of interest, and investment securities, federal funds sold and
funds held in interest-bearing deposits with other financial institutions,
on the other hand, on which yields are generally lower;
o variable and fixed rate loans in our loan portfolio; and
o demand and savings deposits, on the one hand, and time deposits, on the
other hand.
As a general rule, a bank with a relatively high percentage of fixed-rate loans
will experience a decline in interest income during a period of increasing
market rates of interest, because it will be unable to "reprice" its fixed rate
loans to fully offset the increase in the rates of interest it must offer to
retain maturing time deposits and attract new deposits. Similarly, a bank with a
high percentage of time deposits generally will experience greater increases in
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interest expense, and therefore, a decrease in net interest income, during a
period of increasing market rates of interest than a bank with a greater
percentage of demand and savings deposits which are less sensitive to changes in
market rates of interest. By contrast, during a period of declining market rates
of interest, a bank with a higher percentage of variable loans, as a general
rule, will experience a decline in net interest income because such loans
usually contain automatic repricing provisions that are "triggered" by declines
in market rates of interest; whereas offsetting reductions in the rates of
interest paid on time deposits cannot be implemented until they mature, at which
time a bank can seek their renewal at lower rates of interest or allow such
deposits to be withdrawn in order to reduce interest expense. However, the
impact of changes in interest rates on net interest income can be affected by
changes in the volume of loans or interest bearing deposits. In the case of the
first quarter of 2001, increases in the volume of interest bearing deposits were
the primary cause of the decline in net interest income, rather than changes in
prevailing rates of interest.
NET INTEREST MARGIN. We attempt to reduce our exposure to market risks
associated with interest rate fluctuations and, thereby, at least to maintain
and, if possible, to increase, our net interest margin or spread by seeking (i)
to attract and maintain a significant volume of demand and savings deposits that
are not as sensitive to interest rate fluctuations as are TCDs and other time
deposits, and (ii) to match opportunities to "reprice" earning assets,
particularly loans, in response to changes in market rates of interest which
require or cause repricing of deposits. Last year we initiated new loan programs
to increase loan volume and, at the same time, we increased the volume of TCDs
and other time deposits, by offering higher rates of interest on such deposits,
primarily to fund the increase in loan volume. However, we were able to mitigate
the effect on our net interest margin of the increase in TCDs and other time
deposits by also continuing to actively seek additional demand and savings
deposits. As a result, as a percentage of average total deposits, demand,
savings and money market deposits represented 72% and time deposits, including
TCDs, represented 28%, of average total deposits during the three months ended
March 31, 2001, as compared to 76% and 24%, respectively, for the three months
ended March 31, 2000. However, at the beginning of the current fiscal year, we
decided not to actively seek renewals of maturing TCDs and other time deposits
and, as a result, as a percentage of total deposits, time deposits began to
decline during the three months ended March 31, 2001. We currently expect that,
as a percentage of total deposits, time deposits will continue to decline during
the balance of the current fiscal year.
The Bank's net interest margin (i.e., tax-adjusted net interest income
stated as a percentage of average interest-earning assets) decreased in the
quarter ended March 31, 2001 to 5.88% from 6.81% for the same period of 2000,
largely due to the increase in interest expense resulting from the increases in
time deposits. However, we believe that our net interest margin continues to
exceed the average net interest margin for California-based, publicly traded
banks and bank holding companies with assets ranging from $250-to-$750 million
(the "Peer Group Banks").
The ability to maintain our net interest margin is not entirely within our
control because the interest rates we are able to charge on loans and the
interest rates we must offer to maintain and attract deposits are affected by
national monetary policies established and implemented by the Federal Reserve
Board and by competitive conditions in our service areas. In addition, the
effect on a bank's net interest margin of changes in market rates of interest
will depend on the types and maturities of its deposits and earning assets. For
example, a change in interest rates paid on deposits in response to changes in
market rates of interest can be implemented more quickly in the case of savings
deposits and money market accounts than with respect to time deposits as to
which a change in interest rates generally cannot be implemented until such
deposits mature. In addition, a change in rates of interest paid on deposits can
and often does lead consumers to move their deposits from one type of deposit to
another or to shift funds from deposits to non-bank investments or from such
investments to bank deposit accounts or instruments, which also will affect a
bank's net interest margin. So far during 2001, the Federal Reserve Board has
been attempting to decrease market rates of interest as a means of stimulating
the economy. As a result, we expect that interest on loans will decrease during
the second quarter and possibly during subsequent periods of 2001, which could
result in reductions in our net interest margin. However, we also expect that
the cost of deposits will decrease, which should lessen the overall effect of
the decreases in interest income on our net interest margins.
PROVISION FOR LOAN AND LEASE LOSSES. We follow the practice of maintaining
a reserve for possible losses on loans and leases that occur from time to time
as an incidental part of the banking business. Charge-offs (essentially
reductions in the carrying values) of non-performing loans due to possible
losses on their ultimate recovery are applied against this reserve (the "Loan
Loss Reserve"), which is adjusted periodically to reflect changes in (i) the
volume of outstanding loans, (ii) the risk of potential losses due to a
deterioration in the
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condition of borrowers or in the value of property securing non-performing loans
or changes in economic conditions, and (iii) reductions in the amount of the
Reserve due to loan charge-offs that occur from time to time. Additions to the
Loan Loss Reserve are made through a charge against income referred to as the
"provision for loan and lease losses." We made provisions for potential loan and
lease losses of $125,000 during the first quarter of 2001, as compared to
$20,000 during the same quarter of 2000. Net loan charge-offs (loan charge-offs
less recoveries of previously charged off loans) during the three months ended
March 31, 2001 aggregated $3,000, representing less that one hundredth of one
percent (0.001%) of average loans and leases outstanding, as compared to a net
recovery for the same period in 2000 of $60,000. See Note 7 to our Condensed
Consolidated Financial Statements contained in Part I of this Report for further
information with respect to an analysis of our loan and lease loss experience
for the quarter ended March 31, 2001 and the fiscal year ended December 31,
2000.
At March 31, 2001, the Loan Loss Reserve was approximately $3,814,000 or
1.04% of total loans and leases outstanding, compared to approximately
$6,182,000 or 1.74% of total loans and leases outstanding at March 31, 2000.
This decline was due to charge offs, during the nine months ended December 31,
2000, of loans that had been made to a corporate borrower that later encountered
financial difficulties and eventually filed for bankruptcy. The Loan Loss
Reserve had been increased in periods prior to 2000 to provide for potential
charge-offs of those loans and, as a result, those loan charge offs did not
affect our operating results in 2000.
OTHER INCOME. Other income increased by $288,000, or 28.0%, in the
three-month period ended March 31, 2001, compared to the same period of 2000,
due primarily to increases in transaction fees and service charges collected on
deposits and other banking transactions, and to a lesser extent, a one-time
$72,000 gain on the sale of a parcel of real property that the Bank had been
using as a parking lot, but which it no longer needed.
OTHER EXPENSE. Other expense (also often referred to as "non-interest
expense"), consists primarily of (i) salaries and other employee expenses, (ii)
occupancy and furniture and equipment expenses, and (iii) other operating and
miscellaneous expenses that include insurance premiums, marketing expenses, data
processing costs, and professional expenses.
In order to attract a higher volume of non-interest bearing demand and
lower cost savings and money market deposits as a means of improving the Bank's
net interest margin, it has been our policy to provide a much higher level of
personal service to our customers than the level of services that are provided
by many of our competitors. As a result, our net interest margin has usually
exceeded the average net interest margin of the Peer Group Banks and more than
offset the adverse effects that the higher costs of providing such services
would otherwise have had on Foothill's profitability.
Non-interest expense was approximately $429,000, or 7.6%, lower in the
three-month period ended March 31, 2001, compared to same period of 2000,
primarily due to decreases in salary and benefit expenses and other expenses.
Although we were able to reduce the amount of our non-interest expenses, due to
the decline in net interest income during the quarter ended March 31, 2001, our
efficiency ratio (that is, basically, the ratio of non-interest expense to the
sum of our net interest income and other income, as adjusted to eliminate
non-recurring expenses and income) increased to 66.9% for the three-month period
ended March 31, 2001 compared to 65.9% for the same period of 2000.
INCOME TAXES. Income taxes increased by approximately $29,000 or 3.1%
during the three-month period ended March 31, 2001 compared to the same period
of 2000, primarily as a result of the increase in pre-tax income.
FINANCIAL CONDITION
Our total assets increased during the three months ended March 31, 2001 by
$6,433,000 or 1.3%, when compared to total assets at December 31, 2000. Average
assets at March 31, 2001 were $2,237,000, or 0.4%, higher than total average
assets at December 31, 2000. At March 31, 2001, the volume of demand and savings
deposits at the Bank was $10,153,000, or 3.1%, higher than at December 31, 2000,
while the volume of time deposits, including TCDs, was $4,014,000, or 3.2%,
lower than at December 31, 2000, reflecting our decision, made at the beginning
of the current fiscal year, to allow TCDs to "run off" rather than attempt to
retain them.
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LIQUIDITY MANAGEMENT. Liquidity management policies attempt to achieve a
matching of sources and uses of funds in order to enable us to fund our
customers' requirements for loans and for deposit withdrawals. In conformity
with those policies, we maintain a number of short-term sources of funds to meet
periodic increases in loan demand and deposit withdrawals and maturities. At
March 31, 2001, the principal sources of liquidity consisted of $29,436,000 of
cash and demand balances due from other banks; $27,700,000 in Federal funds
sold; and $15,000,000 in an overnight repurchase agreement, which, together,
totaled $72,136,000, as compared to $38,186,000 at December 31, 2000. Other
sources of liquidity include $40,822,000 in securities available-for-sale, of
which approximately $2,927,000 mature within one year; and $9,596,000 in
interest bearing deposits at other financial institutions, which mature in 6
months or less. We also have established facilities enabling us to borrow up to
$10,100,000 of Federal funds from other banks and we have an unused $21,547,000
line of credit with the Federal Home Loan Bank. We also have approval from the
Federal Reserve Bank of San Francisco to establish an account that will also
allow us to borrow at its discount window should the need arise. Additionally,
substantially all of our installment loans and leases, the amount of which
aggregated $7,521,000 at March 31, 2001, require regular installment payments
from customers, providing us with a steady flow of cash funds. Accordingly, we
believe that we have adequate cash and cash equivalent resources to meet any
increases in demand for loans-and leases and any increase in deposit withdrawals
that might occur in the foreseeable future.
CAPITAL RESOURCES. Between late 1998 and March 31, 2001, we purchased a
total of 884,987 shares of our common stock, in open market and private
transactions, for an aggregate price of approximately $10,7995,000. In addition,
in September of 1999 the Board adopted a cash dividend policy which provides for
the Company to pay quarterly cash dividends, currently $.10 per share. The
seventh such quarterly cash dividend was declared in April 2001 together with a
7% stock dividend, and both will be paid on May 29, 2001 to shareholders of
record as of May 4, 2001.
In has been and continues to be the objective of our Board of Directors to
retain earnings to meet capital requirements under applicable government
regulations and to support our growth. As a result, the Board may change the
amount or frequency of cash dividends to the extent that it deems necessary or
appropriate to achieve these objectives. For example the retention of earnings
in previous years enabled us to fund the opening of four new banking offices and
extend the Bank's market areas, all of which have contributed to our increased
profitability and the maintenance of our capital adequacy ratios well above
regulatory requirements.
We continue to evaluate and explore opportunities to expand our market into
areas such as eastern Los Angeles County, western San Bernardino County, north
Orange County and northern Riverside County, all of which are contiguous to our
existing markets. We believe that the mergers and consolidations of independent
banks that have occurred have created opportunities for us to increase our
market share in those areas. We have taken advantage of those opportunities
within our existing market areas and have established a substantial number of
new customer relationships and increased the volume of our demand, savings and
money market deposit balances obtained largely from customers of the merged
banks who we disaffected by the quality of services they were receiving. We also
opened a branch banking office in the city of Temecula, California, in December
of 2000, which is our 12th banking office, and we believe that there are still
additional expansion and growth opportunities that we will seek to take
advantage of in 2001.
At March 31, 2001, the Bank's Tier 1 leverage ratio and Tier 1 risk-based
capital ratio were 9.49% and 11.82%, respectively, which were in excess of
minimum bank regulatory requirements and categorize the bank as "Well
Capitalized". Our consolidated Tier 1 risk-based capital ratio was 11.93%. The
risk-based capital ratio is determined by weighting our assets in accordance
with certain risk factors and, the higher the risk profile of the assets, the
greater is the amount of capital that is required to maintain an adequate
risk-based capital ratio, which generally is at least 8%. The Tier 1 capital and
Tier 1 risk-based capital ratios of the Bank compare favorably with those of the
Peer Group Banks.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss to future earnings, to fair values of
assets or to future cash flows that may result from changes in the price or
value of a financial instrument. The value of a financial instrument may change
as a result of changes in interest rate and other market conditions. Market risk
is attributed to all market risk sensitive financial instruments, including loan
and investment securities, deposits and borrowings. We do not engage in trading
activities or participate in foreign currency transactions for our own account.
Accordingly, our exposure to market risk is primarily a function of our asset
and liability management activities and of changes in market rates of interest
that can cause or require increases in the rates we pay on deposits that may
take effect more rapidly or may be greater than the increases in the interest
rates we are able to charge on loans and the yields that we can realize on our
investments. The extent of that market risk, depends on a number of variables,
including the sensitivity to changes in market interest rates and the maturities
of our interest earning assets and our deposits. See "Rate Sensitivity" above.
We use a dynamic simulation model to forecast the anticipated impact of
changes in market interest rates on our net interest income. That model is used
to assist management in evaluating, and in determining and adjusting strategies
designed to reduce, our exposure to these market risks, which may include, for
example, changing the mix of earning assets or interest-bearing deposits. See
Note 8 to our Condensed Consolidated Financial Statements contained in Part I of
this Report for further information with respect to that dynamic simulation
model that, based on certain assumptions, attempts to quantify the impact that
simulated upward and downward interest rate changes would have on our net
interest income.
FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING FUTURE PERFORMANCE
This Report, including the Section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains statements
regarding our expectations or beliefs about our future financial performance
(including statements concerning business trends) that are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Our actual financial results in future periods may differ, possibly materially,
from those forecast in this Report due to a number of risks and uncertainties.
Those risks and uncertainties include, but are not limited to, the following:
INCREASED COMPETITION. Increased competition from other financial
institutions, mutual funds and securities brokerage and investment banking firms
that offer competitive loan and investment products could require us to reduce
interest rates and loan fees to attract new loans or to increase interest rates
that we offer on time deposits, either or both of which could, in turn, reduce
our interest income and net interest margins.
POSSIBLE ADVERSE CHANGES IN LOCAL ECONOMIC CONDITIONS. Adverse changes in
local economic conditions could (i) reduce loan demand which could, in turn,
reduce interest income and net interest margins; (ii) adversely affect the
financial capability of borrowers to meet their loan obligations which, in turn,
could result in increases in loan losses and require increases in reserves for
possible loan losses, thereby adversely affecting earnings; and (iii) lead to
reductions in real property values that, due to our reliance on real property to
secure many of our loans, could make it more difficult for us to prevent losses
from being incurred on non-performing loans through the sale of such real
properties.
POSSIBLE ADVERSE CHANGES IN NATIONAL ECONOMIC CONDITIONS AND FRB MONETARY
POLICIES. Changes in national economic conditions, such as increases in
inflation or declines in economic output often prompt changes in Federal Reserve
Board monetary policies that could increase the cost of funds to us or reduce
yields on interest earning assets and, thereby, reduce net interest margins. As
is discussed above in this Report, so far in 2001 the Federal Reserve Board has
been lowering market rates of interest to stimulate the national economy. Those
reductions could cause a decline in our net interest margins and, therefore,
also in our net interest income and earnings.
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CHANGES IN REGULATORY POLICIES. Changes of federal and state bank
regulatory policies, such as increases in capital requirements or in loan loss
reserves, or changes in required asset/liability ratios, could adversely affect
earnings by reducing yields on earning assets or increasing operating costs.
EFFECTS OF GROWTH. It is our intention to take advantage of opportunities
to increase our business, either through acquisitions of other banks, the
establishment of new banking offices or the offering of new products or services
to our customers. If we do acquire any other banks or open any additional
banking offices or begin offering new products or services, we are likely to
incur additional operating costs that may adversely affect our income, at least
on an interim basis.
ELECTRICITY CRISIS IN CALIFORNIA. California is currently experiencing a
tightening in the supply of electricity to the state and there already have been
a few rolling power outages or "blackouts" in the past few months and more are
expected during the summer months when electricity usage is typically at its
peak. Power outages could disrupt our operations, increase our operating costs
and reduce the productivity of staff and operations. Among other things, power
outages could cause a slowdown and delays in processing banking transactions,
which are heavily dependent on the continued functioning of electronic and
automated systems; and abrupt and unscheduled power outages could result in the
shut down of information systems that could cause financial data to be lost. We
have developed contingency plans to deal with such power outages that include
the use of alternative energy generating equipment to provide power to essential
systems and the use of back up systems at other locations to effectuate banking
transactions during power outages in our service areas. However, we do not know
and cannot predict the frequency or duration of the power outages that may occur
and, therefore, despite our contingency plans, such outages could adversely
affect our future operating results. We also expect the cost of the electricity
we use in our operations to increase.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date of this Quarterly Report. The Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 2001 FOOTHILL INDEPENDENT BANCORP
By: /s/ CAROL ANN GRAF
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Carol Ann Graf, Senior Vice President,
Chief Financial Officer and Secretary
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