1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 0-11337
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FOOTHILL INDEPENDENT BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3815805
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
510 South Grand Avenue, Glendora, California 91741
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(626) 963-8551
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Rights to Purchase Common Stock
-------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of March 22, 2001 the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $49,540,846.
As of March 1, 2001, there were 5,218,090 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K is incorporated by reference form the
Registrant's Definitive Proxy Statement for its 2001 Annual Meeting which will
be filed with the Commission on or before April 30, 2001.
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FOOTHILL INDEPENDENT BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page No.
--------
Forward Looking Statements .................................................................... 2
Part I.
Item 1. Business .................................................................... 2
Item 2. Properties .................................................................. 15
Item 3. Legal Proceedings ........................................................... 15
Item 4. Submission of Matters to a Vote of Securities Holders ....................... 15
Item 4A. Executive Officers of the Registrant ........................................
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....... 16
Item 6. Selected Financial Data ..................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................... 19
Item 8. Financial Statements and Supplementary Data ................................. 31
Consolidated Balance Sheets at December 31, 2000 and 1999 ................... 33
Consolidated Statements of Operations
for the Years ended December 31, 2000, 1999 and 1998 ........................ 34
Consolidated Statements of Stockholders' Equity
for the Years ended December 31, 2000, 1999 and 1998 ........................ 35
Consolidated Statements of Cash Flows
for the Years ended December 31, 2000, 1999 and 1998 ........................ 36
Notes to Consolidated Financial Statements .................................. 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures ....................................................... 57
Part III.
Item 10. Directors and Executive Officers of the Restaurant .......................... 57
Item 11. Executive Compensation ...................................................... 57
Item 12. Security Ownership of Certain Beneficial Ownership and Management ........... 57
Item 13. Certain Relationships and Related Party Transactions ........................ 57
Part IV.
Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K ................ 58
Signature Page ................................................................................ S-1
Index to Exhibits ............................................................................. E-1
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FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not historical facts or
that discuss our expectations or beliefs regarding our future operations or
financial performance constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "1933 Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act").
Forward-looking statements are estimates of, or expectations or beliefs
regarding our future financial performance that are based on current information
and that are subject to a number of risks and uncertainties that could cause our
actual operating results in the future to differ significantly from those
expected at the current time. Those risks and uncertainties are described in
Part II of this Report under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Cautionary Statements
Regarding Expectations About Our Future Financial Performance" and readers of
this Report are urged to read the cautionary statements contained in that
Section of this Report.
PART I
ITEM 1. BUSINESS
Foothill Independent Bancorp (the "Company") is a one-bank holding
company which owns all of the capital stock of Foothill Independent Bank, a
California state-chartered bank (the "Bank"), that was organized and commenced
business operations in 1973 and conducts a commercial banking business in the
counties of Los Angeles, San Bernardino and Riverside, California. The Company,
which was organized in 1982, is a Delaware corporation and is registered under
the Bank Holding Company Act of 1956, as amended. The Company, like other bank
holding companies in the United States, is subject to regulation, supervision
and periodic examination by the Board of Governors of the Federal Reserve System
(commonly known as the "Federal Reserve Board"). See "Supervision and
Regulation."
Until July 18, 2000, the Company was a California corporation. With the
approval of the Company's shareholders, on that date the Company was
re-incorporated as a Delaware corporation and its articles of incorporation were
amended in several respects. Reference is hereby made to the Company's Current
Report on Form 8-K dated July 18, 2000 for additional information regarding the
Delaware reincorporation and those amendments to the Company's articles of
incorporation.
No changes were made to the state of incorporation or to the articles of
incorporation of the Bank.
THE BANK
The Bank offers a full range of commercial banking services including
the acceptance of checking and savings deposits, and the making of various types
of commercial and business loans, including credit lines and accounts receivable
and inventory financing, real estate mortgage and construction loans and
consumer installment loans. In addition, the Bank provides safe deposit,
collection, travelers checks, notary public and other customary non-deposit
banking services. The Bank currently operates 12 banking offices, one in each of
the communities of Glendora, Upland, Claremont, Irwindale, Ontario, Rancho
Cucamonga, Covina, Glendale, Corona, Chino, Monrovia, and Temecula California,
which are located in the area of Southern California that includes (i) the San
Gabriel Valley of Los Angeles County, and (ii) the western portions of San
Bernardino and the western and southern portions of Riverside Counties, which
together are commonly known as the "Inland Empire." The Bank's organization and
operations have been designed to meet the banking needs of individuals and
small-to-medium sized businesses. The Bank emphasizes personalized service and
convenience of banking and attracts banking customers by offering services that
are designed to meet the banking requirements of the customers in its
communities. Drive-up or walk-up facilities and 24-hour Automated Teller
Machines ("ATM's") are available at all of its banking offices. The Bank also
offers a computerized telephone service which enables customers to obtain
information concerning their bank deposit accounts telephonically at any time
day or night, and the Bank will begin offering Internet banking services in
2001. The Bank's deposit accounts are insured by the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent allowed by law. The Bank also is a
member of the Federal Reserve System.
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As a California state-chartered bank that is a member of the Federal
Reserve System (a "state member bank"), the Bank is subject to regulation,
supervision and periodic examination, at the state level, by the California
Department of Financial Institutions (the "DFI"), and, at the Federal level, by
the Federal Reserve Board. See "Supervision and Regulation."
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIALS
The following table sets forth the Company's condensed average balances
for each principal category of its assets and liabilities and also for its
stockholders' equity for each of the years in the three year period ended
December 31, 2000. Average balances are based on daily averages for the Bank and
quarterly averages for the Company, since the Company did not maintain daily
average information. We believe that the difference between quarterly and daily
average data (where quarterly data has been used) is not significant.
YEAR ENDED DECEMBER 31,
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2000 1999 1999
---------------------- ---------------------- ----------------------
AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT
BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Investment Securities -- Taxable .......... $ 52,330 10.8% $ 56,083 12.0% $ 53,808 11.7%
Investment Securities -- Non-Taxable ...... 5,636 1.2 6,454 1.4 6,846 1.5
Federal Funds Sold & Repos ................ 17,436 3.6 18,071 3.9 30,219 6.6
Due from Banks -- Time Deposits ........... 4,175 0.9 16,306 3.5 11,787 2.5
Loans ..................................... 359,866 74.1 324,553 69.5 306,381 66.8
Direct Lease Financing .................... 1,443 0.3 2,835 0.6 4,086 0.9
Reserve for Loan and Lease Losses ......... (4,798) (1.0) (5,865) (1.3) (5,252) (1.1)
--------- ----- --------- ----- --------- -----
Net Loans and Leases ...................... 356,511 73.4 321,523 68.8 305,215 66.6
--------- ----- --------- ----- --------- -----
Total Interest Earning Assets ........... 436,088 89.9 418,437 89.6 407,875 88.9
Cash and Non-interest Earning Assets ...... 26,531 5.5 26,300 5.6 30,746 6.7
Net Premises, Furniture and Equipment ..... 6,550 1.3 6,888 1.5 7,392 1.6
Other Assets .............................. 16,484 3.3 15,403 3.3 12,982 2.8
--------- ----- --------- ----- --------- -----
TOTAL ASSETS ............................ $ 485,653 100.0% $ 467,028 100.0% $ 458,995 100.0%
========= ===== ========= ===== ========= =====
LIABILITIES AND STOCKHOLDERS EQUITY
Savings Deposits(1) ....................... $ 179,465 37.0% $ 184,122 39.4% $ 169,617 37.0%
Time Deposits ............................. 111,405 22.9 88,848 19.0 106,855 23.3
Short-term Borrowings ..................... 1,508 0.3 351 0.1 0
Long-term Borrowings ...................... 4 -- 49 -- 101 --
--------- ----- --------- ----- --------- -----
Total Interest-Bearing Liabilities ...... 292,382 60.2 273,370 58.5 276,573 60.3
Demand Deposits ........................... 142,133 29.3 141,554 30.3 134,141 29.2
Other Liabilities ......................... 4,067 0.8 3,804 0.9 3,532 0.8
--------- ----- --------- ----- --------- -----
Total Liabilities ....................... 438,582 90.3 418,728 89.7 414,246 90.3
Stockholders' Equity ........................ 47,071 9.7 48,300 10.3 44,749 9.7
--------- ----- --------- ----- --------- -----
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ........................ $ 485,653 100.0% $ 467,028 100.0% $ 458,995 100.0%
========= ===== ========= ===== ========= =====
- ----------
(1) Includes NOW, Super NOW and Money Market Account.
DEPOSITS
Deposits represent the Bank's primary source of funds that it uses to
make loans and purchase investment securities. The following table sets forth,
as of December 31, 2000, the different categories of deposits maintained at the
Bank and the number of deposit accounts, the average balance of each account and
the aggregate amount of the deposits in each such category:
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NUMBER OF AVERAGE
TYPE OF ACCOUNT ACCOUNTS ACCOUNT BALANCE TOTAL DEPOSITS
- ---------------------------- --------- --------------- --------------
Demand ..................... 15,911 $ 9,231 $146,868,000(1)
Money Market(2) ............ 8,981 15,969 143,415,000
Savings .................... 9,958 3,779 37,627,000
TCDs(3) .................... 336 175,003 58,801,000(4)
Other Time Deposits(3) ..... 3,410 19,745 67,330,000
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(1) Includes $2,190,000 of municipal and other government agency deposits.
(2) Includes "NOW" checking accounts.
(3) As used in this Report, the term "TCDs" means time certificates of
deposit in denominations greater than $100,000, the term "other time
deposits" means certificates of deposits in denominations of $100,000 or
less and the term "time deposits" means TCDs and other time deposits,
collectively.
(4) Includes $348,000 of municipal and other government agency deposits.
During the twelve months ended December 31, 2000, average demand
deposits increased by approximately $579,000 or 0.4%; average money market & NOW
checking accounts deposits decreased by approximately $5,346,000 or 3.6%;
average savings deposits increased by approximately $688,000 or 1.9%; and
average time deposits increased by approximately $22,558,000 or 25.4%, which was
the result of an increase of $13,016,000 in TCD's in denominations of $100,000
or more and an increase of approximately $9,541,000 in TCD's of less than
$100,000 ( other time deposits").
Although there are some public agency depositors that carry large
deposits with the Bank, the Bank does not believe it is dependent on a single
customer or a few customers for its deposits. Most of the Bank's deposits are
obtained from individuals and small and moderate size businesses. This results
in relatively small average deposit balances, but makes the Bank less subject to
the adverse effect on liquidity which can result from the loss of a substantial
depositor. No individual, corporate or public agency depositor accounted for
more than approximately 1% of the Bank's total deposits and the five largest
deposit accounts represented, collectively 4% of total deposits.
THE LOAN PORTFOLIO
Loan Products. We offer a diverse line of loan products, including
commercial loans and credit lines, SBA guaranteed business loans, accounts
receivable and inventory financing, real estate mortgage and construction loans
and consumer loans. The following table sets forth the types of loans made by
the Bank and the amounts of the loans, by type, that were outstanding at
December 31, 2000, 1999 and 1998.
DECEMBER 31,
-----------------------------------------
Types Of Loans(1) 2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Commercial, Financial and Agricultural .... $ 44,269 $ 41,091 $ 42,106
Real Estate Construction ................... 12,647 11,144 15,602
Real Estate Mortgage(2) .................... 303,456 283,735 224,530
Consumer Loans ............................. 6,400 5,916 7,011
Lease Financing(3) ......................... 1,164 2,341 3,704
All other Loans(including overdrafts) ...... 679 1,707 2,169
--------- --------- ---------
Subtotal: .................................. 368,615 339,533 295,122
Less:
Unearned Discount ......................... (141) (299) (539)
--------- --------- ---------
Reserve for Loan and Lease Losses ......... (3,692) (6,102) (5,576)
--------- --------- ---------
Total ................................. $ 364,782 $ 339,533 $ 289,007
========= ========= =========
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(1) All of the Bank's loans have been made to borrowers in the United
States.
(2) A portion of these loans were made, not for the purpose of financing
real properties, but for commercial or agricultural purposes. However,
in accordance with the Bank's credit policies, such loans were secured
by deeds of trust on real properties and, therefore, are classified as
real mortgage loans.
(3) Lease financing includes residual values of $0 for 20000; $0 for 1999;
$0 for 1998; $0 for 1997 and $33,000 for 1996, and is net of unearned
income of $72,000 for 2000; $248,000 for 1999; $249,000 for 1998;
$694,000 for 1997 and $329,000 for 1996.
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Commercial Loans. The commercial loans we offer include short-term
secured and unsecured loans with maturities ranging from 12 to 24 months; SBA
guaranteed business loans with terms not to exceed 10 years; accounts receivable
financing for terms not exceeding 12 months; and equipment and automobile loans
and leases which generally amortize over a period not to exceed 15 years. In
order to mitigate the risk of borrower default, we generally require collateral
to support the credit or personal guarantees from the owners of the borrowers,
or both. In addition, all loans must have a well-defined primary and secondary
source of repayment. Generally, lines of credit are granted for no more than a
12-month period and are subject to a more frequent periodic review.
We also offer asset-based lending products which involve a higher degree
of risk in that the loan is designed for those borrowers who do not quality for
unsecured lending. Typically, these borrowers consist of companies that are
growing rapidly, are profitable but cannot internally fund their growth without
borrowings. In addition, the collateral usually consists of accounts receivable.
We control our risk by requiring loan-to-value ratios of not more than 80% and
by closely and regularly monitoring the amount and value of the collateral in
order to maintain that ratio.
Commercial loans, including accounts receivable financing, are generally
made to businesses that have been in operation for at least three years. In
addition, these companies have debt-to-worth ratios that generally do not exceed
four-to-one. Operating cash flow of these borrowers must be sufficient to
demonstrate the ability to pay obligations as they become due. The borrowers
also must have good payment histories as evidenced by credit reports.
Real Estate Loans. Our real estate loan portfolio consists primarily of
nonresidential real estate loans, substantially all of which are secured by
first trust deeds.
Loans secured by nonresidential real estate often involve loan balances
to single borrowers or groups of related borrowers, and generally involve a
greater risk of nonpayment, than do mortgage loans secured by single and
multi-family dwellings. Payments on these loans depend to a large degree on
results of operations and dependable cash flows for the borrowers generated from
a wide variety of businesses and industries. In addition, repayment of these
loans may be affected adversely by changes in the economy in general or by the
real estate market more specifically. Accordingly, the nature of this type of
loan makes it more difficult to monitor and evaluate. Consequently, personal
guarantees from the owners of the borrowers are typically required.
Customers wishing to obtain a commercial real estate loan must have good
payment records with a debt coverage ratio generally of at least 1.25 to 1. In
addition, we require adequate insurance on the property to protect the
collateral value. Generally, these types of loans are written for maximum terms
of 10 years with loan-to-value ratios of not more than 70%.
Consumer Loans. We offer a wide variety of products to consumers
including personal installment loans, lines of credit and credit cards. We
design these products to meet the needs of our customers and some are made at
fixed rates of interest and others at adjustable rates. Consumer loans often
entail greater risk than real estate mortgage loans, particularly in the case of
consumer loans which are unsecured or are secured by rapidly depreciable assets,
such as automobiles. Further, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance. Consumer loan collections are dependent on borrowers' ongoing
financial stability. Furthermore, bankruptcy and insolvency laws may limit the
amount which can be recovered on such loans. Consumer loans require a good
payment record and, typically, debt ratios of not more than 40%.
Past Due, Restructured and Non-Accrual Loans. The risk that borrowers
will fail or be unable to repay their loans is an inherent part of the banking
business. We follow the practice of specifically identifying loans that have
become past due, either as to interest or principal, for more than 90 days. Such
loans are given special attention by our credit officers and additional efforts
are made to get the borrowers to bring the loans current or to provide
additional collateral to reduce the risk of potential losses on those loans. The
Bank sometimes renegotiates the payment terms of loans to permit the borrower to
defer interest or principal payments in instances where it appears that the
borrower is encountering temporary or short-term financial difficulties and such
deferrals will reduce the likelihood that the Bank will incur an eventual loss
on the loan. When we have reason to believe that continued payment of interest
and principal on any loan is unlikely, the loan is placed on non-accrual status
(that is,
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accrual of interest on the loan is discontinued) and we increase our efforts to
recover the amounts due us, including the initiation of foreclosure proceedings
against the collateral securing the loan.
The following table sets forth, as of the end of each of the years in
the five year period ended December 31, 2000, the amounts of the Bank's loans
(i) that were more than 90 days past due, (ii) as to which the terms of payment
had been renegotiated (referred to as "troubled debt restructurings"), and (iii)
that had been placed on non-accrual status.
DECEMBER 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------- ------- -------
(IN THOUSANDS)
Loans More Than 90 Days Past Due(1):
Aggregate Loan Amounts:
Commercial ............................ $-- $ 148 $ 8 $-- $ 500
Real Estate ........................... -- 50 -- -- 2,328
Consumer .............................. 17 4 12 7 1
Aggregate Leases ...................... -- -- 17 -- --
Troubled Debt Restructurings(2) .......... 858 1,780 3,042 2,880 4,787
Non-Accrual Loans(3) ..................... 2,319 6,068 6,347 11,458 11,623
------ ------ ------- ------- -------
$3,194 $8,050 $ 9,426 $14,345 $19,239
====== ====== ======= ======= =======
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(1) Reflects loans for which there has been no payment of interest and/or
principal for 90 days or more.
(2) The terms of the restructured loans did not involve any deferrals of
interest and interest collected in 2000, 1999, 1998, 1997 and 1996 and
were the same amounts that would have been collected in accordance with
the original terms of the loans.
(3) There were six loans on non-accrual status at December 31, 2000;
fourteen loans at December 31, 1999; sixteen loans at December 31, 1998;
twenty-seven loans at December 31, 1997 and twenty-one loans at December
31, 1996. The amount of interest that would have been collected on these
loans had they remained current in accordance with their original terms
was $644,000 in 2000, $819,000 in 1999, $967,000 in 1998, $981,000 in
1997 and $1,488,000 in 1996.
Effective January 1, 1995 we adopted Statement of Financial Accounting
Standards N. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114"), as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e., both
principal and interest) according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted at the loans'
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had
no material impact on the Company's consolidated financial statements as the
Bank's existing policy of measuring loan impairment is consistent with methods
prescribed in these standards.
We consider a loan to be impaired when, based upon current information
and events, we believe it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement. In
determining impairment, we primarily evaluate those loans, both performing and
non-performing, that are large non-homogenous loans in its commercial and real
estate mortgage and construction loan portfolios which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage ratios, or other
indications that the borrowers are experiencing increased levels of financial
difficulty. In general, payment delays of less than 90 days or payment
shortfalls of less than 1% are deemed insignificant and would not necessarily
result in classification of a loan as impaired. However, we consider all
non-accrual loans to be impaired. However, we do not consider smaller balance,
homogenous loans in determining loan impairment. These loans include consumer
installment, credit card and direct lease financing.
Loans identified as impaired are placed on non-accrual status and are
evaluated for write-off, write-down or renegotiations with the borrower.
Impaired loans are charged-off when the possibility of collecting the full
balance of the loan becomes remote. The reserves set aside for possible losses
related to impaired loans totaled approximately, $1,638,000 for the year ended
December 31, 2000 and were included in the Bank's Reserve for Loan Losses at
December 31, 2000. The average balance of the impaired loans amounted to
approximately $5,770,000
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for the year ended December 31, 2000. Cash receipts during 2000 applied to
reduce principal balances and recognized as interest income were approximately
$52,000 and $-0-, respectively. For additional information regarding SFAS 114,
see Note 5 to the Company's Consolidated Financial Statements set forth in Part
II, Item 8 of this Report.
Potential Problem Loans. At December 31, 2000, there were no loans on
accrual status where there were serious doubts as to the ability of the borrower
to comply with then present loan repayment terms.
Loan Concentrations. The Bank does not have loans made to borrowers who
are engaged in similar activities where the aggregate amount of the loans
exceeds 10% of their loan portfolio that are not broken out as a separate
category in the loan portfolio.
Other Interest-Bearing Assets. The Bank does not have any
interest-bearing assets as to which management believes that recovery of
principal or interest thereon is at significant risk.
THE RESERVE FOR LOAN LOSSES
The risk that borrowers will fail or be unable to repay their loans is
an inherent part of the banking business. In order to recognize on a timely
basis, to the extent practicable, losses that can result from such failures,
banks establish a reserve for loan losses by means of periodic charges to income
known as "provisions for loan losses." Loans are charged against the loan loss
reserve for loan losses when management believes that collection of the carrying
amount of the loan, either in whole or in part, has become unlikely. Periodic
additions are made to the loan loss reserve (i) to replenish and thereby
maintain the adequacy of the reserve following the occurrence of loan losses,
and (ii) to increase the reserve in response to increases in the volume of
outstanding loans or the deterioration in economic conditions or in the
financial condition of borrowers. At December 31, 2000 the loan loss reserve was
approximately $3,692,000 or 1.00% of total loans and leases outstanding.
As is set forth in the following table, the loan loss reserve is
allocated among the different loan categories because there are differing levels
of risk associated with each such loan category. The allocation is made based on
historical loss experience within each category and management's periodic review
of loans in the loan portfolio. However, the reserves allocated to specific loan
categories are not the total amounts available for future losses that might
occur within such categories because the total reserve is the general reserve
applicable to the entire portfolio.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF
RESERVE LOANS RESERVE LOANS RESERVE LOANS RESERVE LOANS RESERVE LOANS
LOAN TO TOTAL LOAN TO TOTAL LOAN TO TOTAL LOAN TO TOTAL LOAN TO TOTAL
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Commercial, Financial
and Agricultural ......... $1,762 12.01% $4,854 11.88% $3,745 14.27% $2,128 14.90% $1,148 13.87%
Real Estate-construction . 97 3.43 68 3.22 91 5.29 302 3.67 169 4.06
Real Estate-mortgage ..... 1,765 81.38 1,125 82.02 1,630 76.08 2,415 76.92 2,899 78.20
Installment loans ........ 48 1.74 30 1.71 76 2.38 79 2.17 77 2.76
Lease financing .......... 20 0.32 25 0.68 34 1.26 96 1.60 17 0.97
Other .................... -- 1.13 -- 0.48 -- 0.72 145 0.74 434 0.14
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$3,692 100.00 $6,102 100.00 $5,576 100.00 $5,165 100.00 $4,744 100.00
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
THE INVESTMENT PORTFOLIO
As a customary part of its business, the Bank purchases investment grade
securities, consisting primarily of securities issued by the United States
government and its agencies and by state and local government agencies, in order
to diversify its investment risks and provide a source of liquidity for its
operations. The objectives of the Bank's investment policy is to manage interest
rate risk, provide adequate liquidity and reinvest in the Bank's market areas,
while maximizing earnings with a portfolio of investment-grade securities. Each
security purchased is subject to the credit and maturity guidelines defined in
the Bank's investment policy and the securities are reviewed regularly to verify
their continued credit worthiness.
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Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") and reclassified its investment security
portfolio to differentiate between Investment Securities Held-to-Maturity and
Investment Securities Available-For-Sale. Previously, the investment securities
were carried at cost, adjusted for the accretion of discounts and amortization
of premiums. The classification of securities is made by management at the time
of acquisition.
The following table summarizes the components of the Company's
investment securities at the dates indicated (in thousands):
DECEMBER 31,
-------------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------
Investment Securities - Held-To-Maturity
U.S. Treasury and Agency .................. $17,378 $17,325 $ 3,997 $ 3,950 $ 8,997 $ 9,054
State and Political Subdivisions .......... 1,053 1,063 1,062 1,045 1,580 1,604
Other Securities .......................... 2,311 2,311 2,250 2,250 2,250 2,250
------- ------- ------- ------- ------- -------
Total Investment Securities ............. $20,742 $20,699 $ 7,309 $ 7,245 $12,827 $12,908
======= ======= ======= ======= ======= =======
Investment Securities - Available-For-Sale
U.S. Treasury and Agency .................. $29,567 $29,557 $44,275 $43,601 $65,444 $65,620
State and Political Subdivisions(1) ....... 4,390 4,530 5,029 5,065 5,057 5,079
Other Securities .......................... 16,366 15,987 6,019 5,573 21,415 21,128
------- ------- ------- ------- ------- -------
Total Investment Securities ............. $50,323 $50,074 $55,323 $54,239 $91,916 $91,827
======= ======= ======= ======= ======= =======
- -------
(1) Includes, in 2000 and 1999, non-rated certificates of participation
evidencing ownership interests in the California Statewide communities
Development Authority - San Joaquin County Limited Obligation Bond Trust
with amortized cost values of $3,640,000 and $3,961,000 and market
values of $3,777,000 and $4,044,000 at December 31, 2000 and 1999,
respectively.
The following table presents the maturities of the Bank's investment
securities at December 31, 2000, and the weighted average yields of those
securities (which, in the case of tax-exempt obligations are presented on a
fully taxable basis assuming a 36.9% tax rate).
WITHIN AFTER ONE BUT WITHIN AFTER FIVE BUT
ONE YEAR FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
----------------- -------------------- ---------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------ ----- ------ ----- ------ -----
Investment Securities Held to Maturity
U.S. Treasury and Agency .................. $ 6,000 6.39% $11,379 6.38% $ -- --% $ -- --%
State and Political Subdivisions .......... -- -- 899 4.41% 153 4.91 -- --
Other Securities .......................... 2,311 -- -- -- -- -- -- --
------- ---- ------- ---- ------ ---- ------ ----
Total Securities Held to Maturity .... $ 8,311 4.50% $12,278 6.15% -- 4.91% -- --%
------- ---- ------- ---- ------ ---- ------ ----
Investment Securities Available
for Sale ................................
U.S. Treasury and Agency .................. $ 7,987 5.65% $20,076 6.46% $1,494 6.81% $ 360 7.89%
State and Political Subdivisions .......... 877 6.40 2,901 6.40% 241 4.40 511 4.57
Other Securities .......................... 13,997 6.60 -- -- -- -- 1,628 --
------- ---- ------- ---- ------ ---- ------ ----
Total Securities Available for Sale .. 22,863 6.26 22,977 6.43 1,735 6.34% $2,499 2.07%
------- ---- ------- ---- ------ ---- ------ ----
TOTAL INVESTMENT SECURITIES ............... $31,173 5.79% $35,254 6.33% $1,888 6.46% $2,499 2.07%
======= ==== ======= ==== ====== ==== ====== ====
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COMPETITION
The banking business in California generally, and in our market areas in
particular, is highly competitive with respect to both loans and deposits and is
dominated by a relatively small number of large multi-regional and large
out-of-state banks which have offices operating over wide geographic areas. We
compete for deposits and loans with such banks as well as other independent and
community banks that are based or have branch offices in our market areas, and
with savings and loan associations, credit unions, mortgage companies, money
market and other mutual funds, stock brokerage firms, insurance companies and
other traditional and nontraditional financial institutions. We also compete for
customers' funds with governmental and private entities issuing debt or equity
securities or other forms of investments which may offer different and
potentially higher yields than those available through bank deposits.
Major financial institutions that operate throughout California and that
have offices in our service areas include Wells Fargo Bank, Bank of America,
Union Bank, Sanwa Bank California, Washington Mutual Savings Bank, U. S.
Bancorp, Comerica Bank and California Federal Savings. With the exception of
Union Bank, all of these banks are now headquartered outside of California.
Independent banks or financial institutions with offices in our service area
include, among others, City National Bank, Citizens Business Bank, Pomona First
Federal Savings Bank and Imperial Bank.
The larger banks and some of the independent institutions have the
financial capability to conduct extensive advertising campaigns and to shift
their resources to regions or activities of greater potential profitability.
Many of them also offer diversified financial services which we do not presently
offer directly, such as trust services and international banking services. The
larger banks also have substantially more capital and higher lending limits,
which enables them to meet the lending needs of larger borrowers that exceed our
lending limits.
In order to compete with the financial institutions operating in our
market areas, we rely on our independent status to provide flexible and greater
personalized service to customers. We emphasize personal contacts with customers
by our executive officers, directors and employees; develop local promotional
activities; and seek to develop specialized or streamlined services for
customers. To the extent customers desire loans in excess of our lending limit
or services not offered by us, we attempt to assist customers in obtaining such
loans or other services through participations with other banks or assistance
from our correspondent banks or third party vendors.
Additionally, a growing number of banks and financial services companies
are offering customers the ability to effectuate banking transactions with them
over the internet. We intend to begin offering such internet banking services to
our customers during 2001.
Existing and future state and federal legislation could significantly
affect the cost of doing business, the range of permissible activities and
competitive balance among major and smaller banks and other financial
institutions. We cannot predict the impact such developments may have on
commercial banking in general or on our business in particular. For additional
information regarding these matters, see the discussion in below under the
caption "Supervision and Regulation."
SUPERVISION AND REGULATION
GENERAL. Both federal and state laws extensively regulate bank holding
companies and banks. This regulation is intended primarily for the protection of
depositors and the FDIC's deposit insurance fund and not for the benefit of our
shareholders. Set forth below is a summary description of the material laws and
regulations which affect our operations. The description does not purport to be
complete and is qualified in its entirety by reference to the applicable laws
and regulations.
In recent years, significant legislative proposals and reforms affecting
the financial services industry have been discussed and evaluated by Congress
and certain of these proposals have been adopted, including legislation that
expands the insurance and other activities in which bank holding companies and
their subsidiaries may engage. We cannot predict whether any other of these
proposals, or any form of them, will be introduced in the current Congress and
become law. Consequently, we cannot presently determine what effect, if any,
those other proposals may have on us.
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FOOTHILL INDEPENDENT BANCORP. We are a registered bank holding company
subject to regulation under the Bank Holding Company Act and, pursuant to that
Act we are required to file with the Federal Reserve Board periodic reports, and
we are subject to Federal Reserve Board examinations.
Among the powers conferred on the Federal Reserve Board is the power to
require any bank holding company to terminate an activity or terminate control
of or liquidate or divest subsidiaries or affiliates that the Federal Reserve
Board determines constitutes a significant risk to the financial safety,
soundness or stability of the bank holding company or any of its banking
subsidiaries. The Federal Reserve Board also has the authority to regulate
provisions of a bank holding company's debt, including authority to impose
interest ceilings and reserve requirements on such debt. Subject to certain
exceptions, bank holding companies also are required to file written notice and
obtain approval form the Federal Reserve Board prior to purchasing or redeeming
the holding company's common stock or other equity securities.
Under the Bank Holding Company Act and related regulations adopted by
the Federal Reserve Board, a bank holding company and its non-banking
subsidiaries are prohibited from requiring tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services. Additionally, the Federal Reserve Board requires all bank holding
companies to maintain capital at or above certain prescribed levels. See
"Capital Standards" below. As a bank holding company, the Bancorp must obtain
the prior approval of the Federal Reserve Board for the acquisition of more than
5% of the outstanding shares of any class of voting securities, or of
substantially all of the assets, of any bank or other bank holding company and
for any merger of the Bancorp with any other bank holding company.
The Bank Holding Company Act also prohibits any bank holding company
from acquiring direct or indirect ownership or control of more than 5% of the
outstanding voting shares of any company that is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks or furnishing services to its
subsidiaries, except in statutorily permitted instances. However, we may,
subject to the prior approval of the Federal Reserve Board, engage in, or
acquire shares of companies engaged in, activities that are deemed by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Additionally, under
statutory amendments adopted by Congress and enacted into law in 2000, subject
to certain prior notice requirements bank holding companies may establish or
acquire companies that engage in a number of financial service activities,
including insurance brokerage services.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that, in serving
as a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
The Bancorp also is a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Bancorp is subject to
examination by, and may be required to file reports with, the California
Commissioner of Financial Institutions.
Our shares of common stock are registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended and,
therefore, we are subject to the information, proxy solicitation, insider
trading, and other requirements and restrictions of the Securities Exchange Act.
FOOTHILL INDEPENDENT BANK. As a California state chartered bank, the
Bank is subject to primary supervision, periodic examination and regulation by
the California Commissioner of Financial Institutions. As a member of the
Federal Reserve Bank of San Francisco, the Bank also is subject to regulation by
the Federal Reserve Board, which is its primary federal banking regulator.
Because its deposits are insured by the FDIC, the Bank also is subject to
regulations promulgated by the FDIC. If, as a result of an examination of the
Bank, the Federal Reserve Board should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity, or
other aspects of the Bank's operations are unsatisfactory or that the Bank or
its management is violating or has violated
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any law or regulation, the Federal Reserve Board has various remedies available.
These remedies include the power to enjoin "unsafe or unsound" practices, to
require affirmative action to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially
enforced, to direct an increase in capital, to restrict the growth of the Bank,
to assess civil monetary penalties, to remove officers and directors and
ultimately to terminate the Bank's deposit insurance, which would result in a
revocation of the Bank's charter. The California Commissioner of Financial
Institutions has many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain capital at or above
stated levels. See the more detailed discussion regarding capital requirements
that are applicable to us and our banking subsidiaries below under the caption
"Capital Standards and Prompt Corrective Action."
Dividends and Other Transfers of Funds. Dividends from the Bank
constitute our principal source of cash. Foothill Independent Bancorp (the
"Bancorp") is a legal entity separate and distinct from the Bank and the Bank is
subject to various statutory and regulatory restrictions on its ability to pay
cash dividends to us. In addition, the California Department of Financial
Institutions and the Federal Reserve Board have the authority to prohibit the
Bank from paying dividends, if either of those agencies deem payment of
dividends by the Bank to be an unsafe or unsound practice.
The Federal Reserve Board and the California Department of Financial
Institutions also have authority to prohibit the Bank from engaging in
activities that, in their opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the future financial
condition of the Bank and other factors, that either of those agencies could
assert that the payment of dividends or other payments might, under some
circumstances, constitute an unsafe or unsound practice. Additionally, the
Federal Reserve Board has established guidelines with respect to the maintenance
of appropriate levels of capital by banks and bank holding companies under its
jurisdiction. Compliance with the standards set forth in those guidelines and
the restrictions that are or may be imposed under the prompt corrective action
provisions of federal law could limit the amount of dividends which the Bank or
Bancorp may pay. An insured depository institution is prohibited from paying
management fees to any controlling persons or, with limited exceptions, paying
dividend if, after the transaction, the institution would be undercapitalized.
See "Capital Standards and Prompt Corrective Action" for a discussion of these
additional restrictions.
The Bank is subject to restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Bancorp or its other affiliates; the purchase of, or investments
in, Bancorp stock or other Bancorp securities; and the taking of such securities
as collateral for loans and the purchase of our assets or those of our other
affiliates. Such restrictions prevent the Bancorp's affiliates from borrowing
from the Bank unless the loans are secured by marketable obligations of
designated amounts, and such secured loans and investments by the Bank to or in
Bancorp or any other Bancorp affiliates are limited, individually, to 10% of the
Bank's capital and surplus (as defined by federal regulations) and, in the
aggregate, to 20% of the Bank's capital and surplus. California law also imposes
restrictions with respect to transactions involving Bancorp and other
controlling persons of the Bank. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law.
Capital Standards and Prompt Corrective Action.
Capital Standards. The Federal Reserve Board as well as other federal
bank regulatory agencies, have adopted uniform risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets, and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjusted percentages, which range from zero percent for assets with low credit
risk, such as U.S. Treasury securities, to 100% for assets with relatively high
credit risk, such as commercial loans.
The Federal Reserve Board, as well as other federal bank agencies,
requires a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In
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addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be 3%. In addition to these uniform risk-based capital guidelines and leverage
ratios that apply across the industry, the regulators have the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
Prompt Corrective Action and Other Enforcement Mechanisms. Federal
banking agencies possess broad powers to take corrective and other supervisory
action to resolve the problems of insured depository institutions, including;
those institutions that fall below one or more prescribed minimum capital
ratios. Each federal banking agency, including the Federal Reserve Board, has
promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on its capital ratios:
- well capitalized;
- adequately capitalized;
- undercapitalized;
- significantly undercapitalized; and
- critically undercapitalized.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
The following table sets forth, as of December 31, 2000, the capital
ratios of the Bancorp and the Bank and compares those capital ratios to the
federally established capital requirements that must be met for a bank holding
company or a bank to be deemed adequately capitalized and to be deemed a "well
capitalized institution" under the prompt corrective action regulations
described below:
Capital To be Classified
Adequacy as Well
At December 31, 2000 Actual Requirements Capitalized
- --------------------------------------- ------ ------------- --------------
Total Capital to Risk Weighted Assets
Bancorp 12.6% (> or =) 8.0% (> or =) 10.0%
Bank 12.6% (> or =) 8.0% (> or =) 10.0%
Tier I Capital to Risk Weighted Assets
Bancorp 11.7% (> or =) 4.0% (> or =) 6.0%
Bank 11.7% (> or =) 4.0% (> or =) 6.0%
Tier I Capital to Average Assets
Bancorp 9.5% (> or =) 4.0% (> or =) 5.0%
Bank 9.5% (> or =) 4.0% (> or =) 5.0%
As the table indicates, at December 31, 2000 the Bancorp and the Bank
exceeded the capital ratios required for classification as adequately
capitalized institutions, under federally mandated capital standards and as
"well capitalized" institutions under the federally established prompt
corrective action regulations.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with the
agency.
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Safety and Soundness Standards. The federal banking agencies have
adopted guidelines designed to identify and address potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to the following:
- internal controls, information systems and internal audit
systems;
- loan documentation;
- credit underwriting;
- asset growth;
- earnings; and
- compensation, fees and benefits.
In addition, the federal banking agencies have adopted safety and
soundness guidelines with respect to asset quality and earnings standards. These
guidelines provide six standards for establishing and maintaining a system to
identify problem assets and prevent those assets from deteriorating. Under these
standards, an insured depository institution is expected to:
- conduct periodic asset quality reviews to identify problem
assets;
- estimate the inherent losses in problem assets and establish
reserves that are sufficient to absorb estimated losses;
- compare problem asset totals to capital;
- take appropriate corrective action to resolve problem assets;
- consider the size and potential risks of material asset
concentrations; and
- provide periodic asset quality reports with adequate information
for management and the board of directors to assess the level of
asset risk.
These guidelines also establish standards for evaluating and monitoring earnings
and for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves.
FDIC Deposit Insurance. The FDIC's Bank Insurance Fund insures the
Bank's deposit accounts up to the maximum amount permitted by law. The FDIC may
terminate insurance of deposits upon a finding that an insured institution has
engaged in unsafe or unsound practices, is in too unsafe or unsound a condition
to continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary federal
regulatory agency. California does not permit commercial banks to operate
without FDIC insurance. As a result, termination of FDIC insurance of a
California bank will result in its closure.
The FDIC charges an annual assessment for the insurance of deposits,
which as of December 31, 2000, ranged from 0 to 27 basis points per $100 of
insured deposits, based on the risk a particular institution poses to its
deposit insurance fund. The risk classification is based on an institution's
capital group and supervisory subgroup assignment.
Interstate Banking and Branching. As a result of amendments to the Bank
Holding Company Act, that Act permits bank holding companies from any state to
acquire banks and bank holding companies located in any other state, subject to
conditions including nationwide- and state-imposed concentration limits. These
amendments have, during the past few years, led to increased competition among
banks, particularly in California. See "Competition" above. The Bank also has
the ability, subject to certain restrictions, to acquire branches outside
California either by acquisition from or a merger with another bank. The
establishment by a state bank of new bank branches (often referred to as "de
novo" branches) in other states is also possible in states with laws that
expressly permit it. Interstate branches are subject to laws of the states in
which they are located. Consolidations of and competition among banks has
increased as banks have begun to branch across state lines and enter new
markets. We do not have any current plans to acquire or establish any banks or
branch offices in any other states.
Community Reinvestment Act and Fair Lending Developments. The Bank is
subject to fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act activities. The
Community Reinvestment Act generally requires the federal banking agencies to
evaluate the record of a financial institution in meeting the credit needs of
its local communities, including low- and moderate-income
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neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of fair lending laws. The federal banking agencies may
take compliance with those laws and Community Reinvestment Act obligations into
account when regulating and supervising other activities.
A bank's compliance with its Community Reinvestment Act obligations is
based on a performance-based evaluation system which bases Community
Reinvestment Act ratings on an institution's lending service and investment
performance. When a bank holding company applies for approval to acquire a bank
or other bank holding company, the Federal Reserve Board will review the
assessment of each subsidiary bank of the applicant bank holding company, and
those records may be the basis for denying the application.
Comprehensive Bank Reform Legislation. In November 12, 1999, Congress
enacted and the President signed into law the Gramm-Leach-Bliley Act (the "Gramm
Act"). The Gramm Act is expected to have a major impact on cross-industry
mergers, customer privacy and lending to lower-income communities. The Gramm Act
repeals the Glass Steagal Act of 1937, which separated commercial and investment
banking, and eliminates the Bank Holding Company Act's prohibition on insurance
underwriting activities. The Gramm Act allows both holding company subsidiaries
and national bank operating subsidiaries to offer a wide range of new financial
services, including insurance or securities sales. However, real estate
development and insurance underwriting cannot be performed by bank subsidiaries
of holding companies and, therefore, such business activities may be engaged in
only by non-bank subsidiaries of bank holding companies. State laws will govern
insurance sales, but states cannot discriminate against national banks by
preventing national banks from conducting insurance activities that non-banks
may conduct. The Gramm Act bars a bank holding company from merging with
insurance or securities firms, or embarking on new powers, if any of its banks
earned less than a "satisfactory" Community Reinvestment Act rating in its most
recent examination. The Gramm Act also provides that customers will have the
right to prevent banks from sharing information with third parties. The Gramm
Act is expected to further increase competition in providing financial services.
EMPLOYEES
At December 31, 2000, the Bank had approximately 154 full-time and 72
part-time employees.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information regarding the current executive
officers of the Company and the Bank:
NAME AGE POSITION WITH THE COMPANY POSITION WITH THE BANK
- ---- --- ------------------------- ----------------------
George E. Langley.......... 60 President and Chief Executive Officer President and Chief Executive Officer
Donna Miltenberger......... 45 Executive Vice President Executive Vice President
and Chief Operating Officer and Chief Operating Officer
Carol Ann Graf............. 55 Senior Vice President, Senior Vice President,
Chief Financial Officer and Secretary Chief Financial Officer and Secretary
All officers hold office at the pleasure of the Board of Directors,
except that Mr. Langley is employed under an Employment Agreement with the Bank.
GEORGE E. LANGLEY. Mr. Langley has been the President and Chief
Executive Officer of the Company and the Bank since April 1992. From 1982 to
April 1992, Mr. Langley served as the Executive Vice President, Chief Financial
Officer and Secretary of the Company and the Bank. From 1976 to 1982, which
preceded the formation of the Company, Mr. Langley held various executive
positions with the Bank.
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DONNA MILTENBERGER. Ms. Miltenberger has been an Executive Vice
President and Chief Operating Officer of the Company since 1996 and Executive
Vice President of the Bank since November 1993. She also served as the Chief
Administrative Officer of the Bank from 1994 until 1997 when, due to an increase
in the scope of her responsibilities, she was appointed to the position of Chief
Operating Officer of the Bank. From June 1992 to November 1993, Ms. Miltenberger
held the position of Senior Vice President of the Bank. Prior to June 1992, Ms.
Miltenberger held various management positions with Chino Valley Bank, in Chino,
California, including Executive Vice President - Cashier.
CAROL ANN GRAF. Ms. Graf was appointed Chief Financial Officer of the
Company and First Vice President and Chief Financial Officer of the Bank in
January 1993 and Senior Vice President and Chief Financial Officer of the Bank
in January 1997. From April 1988 to January 1993, Ms. Graf served as Vice
President and Comptroller, and from 1984 to April 1988 as Assistant Comptroller,
of the Bank.
ITEM 2. PROPERTIES
The Company's executive offices are located at the Bank's main banking
office at 510 South Grand Avenue, Glendora, California. The Bank owns the
building and the land on which its main banking office is located; owns the
building and leases, under a 20-year ground lease, the land on which its
Claremont banking office is located; and occupies its ten other banking offices,
and the facilities where its service center are located, under leases expiring
at various dates through 2014. Management believes that the Bank's present
facilities are adequate for its present purposes and anticipated growth in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Company or the Bank
is a party or to which any of their respective properties are subject other than
ordinary routine litigation incident to the Bank's business, the outcome of
which is not expected to be material to the Company or its operating results or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Trading Market for Shares. The Company's common stock is traded on the
NASDAQ National Market System under the symbol "FOOT". The following table sets
forth the high and low closing sales prices per share of the Company's Common
Stock as reported on the NASDAQ National Market System for all four quarters of
2000 and 1999. On March 22, 2001 the closing per share price was $12.125 and, as
of that same date, there were 1,149 record shareholders of the Company.
TRADE PRICES OF
COMMON STOCK(1)
-------------------------- CASH DIVIDENDS
HIGH LOW DECLARED
---------- ---------- ----------
2000
First Quarter .... $ 13.2500 $ 9.0000 $ 0.08
Second Quarter ... 10.5000 8.8750 0.08
Third Quarter .... 10.2500 9.0000 0.08
Fourth Quarter ... 12.000 9.5000 0.10
1999
First Quarter .... $ 15.8750 $ 14.5000 $ --
Second Quarter ... 15.3750 13.1250 0.25
Third Quarter .... 13.8125 11.8750 --
Fourth Quarter ... 14.1250 11.7500 0.08
Dividends and Repurchases of Shares
Dividend Policy. Prior to 1999, it was the policy of the Board of
Directors to retain earnings to support the Company's growth and, as a result,
no cash dividends were paid during the four year period ended December 31, 1998.
In 1999, the Board changed that policy, deciding to pay cash dividends when
internally generated funds exceeded the cash required to meet applicable capital
requirements and to support the Company's growth. Pursuant to that new policy,
the Company paid a $.25 per share cash dividend in the second quarter of 1999
and, beginning with the fourth quarter of that year, the Board approved the
payment of quarterly cash dividends of $0.08 per share. In the fourth quarter of
2000, the Board approved an increase in the amount of the quarterly cash
dividend to $0.10 per share, and cash dividends in that per share amount were
paid in the fourth quarter of 2000 and the first quarter of 2001. It is
anticipated that similar cash dividends will be paid in the second, third and
fourth quarters of 2001.
Stock Repurchases. On October 21, 1998, the Company announced that the
Board of Directors had authorized a program for repurchases of up to 300,000
shares, or 5%, of the Company's outstanding Common Stock. Repurchases were made
in the open market or in privately negotiated transactions in compliance with
Securities and Exchange Commission guidelines. All shares repurchased were
retired and cancelled. Additionally, on February 28, 2000, and again on June 27,
2000, the Company announced that the Board of Directors had extended that
repurchase program and authorized the repurchase of an additional 5%, or 300,000
shares, of its outstanding Common Stock with the repurchases made under the same
guidelines. Between the commencement of that program in late 1998 and March 22,
2001, the Company has repurchased 884,987 shares at a total cost of
$10,795,237.
Restrictions Applicable to the Payment of Dividends and Stock
Repurchases. The principal source of funds available to the Company for cash
dividends and stock repurchases, at least until such time, if any, as it may
acquire or develop other businesses, is cash dividends from the Bank. Therefore,
government regulations, including the laws of the State of California, as they
pertain to the payment of cash dividends by state chartered banks, limit the
amount of funds that will be available to the Company to pay cash dividends and
repurchase shares. California law places a statutory restriction on the amounts
of cash dividends a bank may pay to its shareholders. Under that law, dividends
declared by the Bank may not exceed, in any calendar year, without approval of
the California Department of Financial Institutions, the lesser of (i) net
income of the Bank for the year and retained net income from the preceding two
years (after deducting all dividends paid during the period), or (ii) the Bank's
retained earnings. However, because the payment of cash dividends has the effect
of reducing capital, as a practical matter capital requirements imposed on
federally insured banks operate to preclude the payment of cash dividends in
amounts that might otherwise be permitted
16
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by California law; and the Federal bank regulatory agencies, as part of their
supervisory powers, generally requires insured banks to adopt dividend policies
which limit the payment of cash dividends much more strictly than do applicable
laws.
In addition, Section 23(a) of the Federal Reserve Act restricts any
banking subsidiary of the Company from extending credit to the Company unless
the loans are secured by specified obligations and are limited in amount to an
aggregate of no more than 10% of the banking subsidiary's contributed capital
and retained earnings.
A more detailed discussion of those capital requirements and other
restrictions is contained in the Section of Part I of this Report entitled
"BUSINESS -- Supervision and Regulation."
RIGHTS DIVIDEND
On February 25, 1997, the Board of Directors of the Company adopted a
Rights Agreement (the "Rights Agreement") pursuant to which it declared a
dividend distribution of rights (the "Rights") to purchase shares of the
Company's common stock and, under certain circumstances, other securities, to
the holders of record of the outstanding shares of the Company's common stock.
The Rights dividend was made to holders of record of shares of the
Company's common stock at the close of business on March 18, 1997. Each Right
entitles the registered holder, on certain events, to purchase from the Company,
at an initial exercise price of $48.00 per Right (subject to adjustment), such
number of newly issued shares of the Company's common stock or the common stock
of the acquiring or surviving company, depending on the type of triggering
event, equal to an aggregate market value as of the date of the triggering event
of two (2) times the exercise price of the Right.
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19
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the fiscal years
ended December 31, 2000, 1999 and 1998, and the selected balance sheet data as
of December 31, 2000 and 1999, are derived from the audited consolidated
financial statements of the Company examined by Vavrinek, Trine, Day and
Company, L.L.P, certified public accountants, that are included elsewhere in
this Report and should be read in conjunction with those consolidated financial
statements. The selected income statement data for the fiscal years ended
December 31, 1997 and 1996, and the selected balance sheet data as of December
31, 1998, 1997 and 1996, are derived from audited consolidated financial
statements examined by Vavrinek, Trine, Day and Company, L.L.P. which are not
included in this Report.
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA
Interest Income ....................... $ 38,983 $ 35,551 $ 36,237 $ 35,028 $ 35,147
Interest Expense ...................... 11,103 8,333 9,827 9,738 9,869
Net Interest Income ................... 27,880 27,218 26,410 25,290 25,278
Provision for Possible Loan Losses .... (1,070) (485) (775) (1,681) (2,200)
Net Interest Income after
Provision for Possible Loan Losses .... 26,810 26,733 25,635 23,609 23,078
Other Income .......................... 4,604 4,521 5,086 6,040 5,264
Other Expense ......................... (20,794) (21,342) (22,573) (22,599) (21,700)
Income Before Income Taxes ............ 10,620 9,912 8,148 7,050 6,642
Applicable Income Taxes ............... 3,920 3,662 3,084 2,532 2,459
Net Income ......................... $ 6,700 $ 6,250 $ 5,064 $ 4,518 $ 4,183
PER COMMON SHARE DATA
Net Income -- Basic(1)(2) ............. $ 1.24 $ 1.06 $ 0.85 $ 0.78 $ 0.75
Net Income -- Diluted(1)(2) ........... 1.16 1.00 0.80 0.74 0.73
Cash Dividends(3) ..................... 0.34 0.33 -- -- --
Book Value (At year-end)(1) ........... $ 9.20 $ 8.39 $ 8.08 $ 7.15 $ 6.34
Number of Shares used in
Per Share Calculation -- Basic(1)(2) .. 5,434,013 5,886,164 5,946,908 5,795,070 5,568,502
BALANCE SHEET DATA
Investment Securities ................. $ 70,816 $ 61,548 $ 104,654 $ 46,069 $ 45,052
Loans and Leases (net) ................ 364,782 339,533 289,007 291,393 289,886
Assets ................................ 505,825 458,676 469,077 435,708 410,505
Deposits .............................. 454,041 397,264 416,665 390,146 370,966
Other Debt(4) ......................... -- 8,819 74 123 168
Shareholders' Equity .................. $ 48,263 $ 48,439 $ 48,379 $ 42,041 $ 36,222
- -----------
(1) Retroactively adjusted for stock dividends.
(2) For information regarding the determination of basic and diluted
earnings per share, see Note 17 to the Company's Consolidated Financial
Statements.
(3) For information regarding restrictions affecting the ability of the
Company to pay cash dividends, see Note 13 to the Company's Consolidated
Financial Statements.
(4) For information regarding other debt, see Note 9 to the Company's
Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with our audited
consolidated financial statements, and the footnotes thereto, contained
elsewhere in this report and the statements regarding forward-looking
information and the uncertainties that could affect our future performance
described below in this Report.
Our principal operating subsidiary is Foothill Independent Bank, which
is a California state chartered bank (the "Bank"), which accounts for
substantially all of our revenues and income. Accordingly, the following
discussion focuses primarily on the Bank's operations and financial condition.
RESULTS OF OPERATIONS
OVERVIEW. In 2000, we generated net earnings of $6,700,000, an increase
of $450,000, or 7%, over net earnings for 1999. That increase was due primarily
to an increase in interest income and reductions in non-interest expenses. As
indicated in the following table, net earnings for 2000 represent a return on
average assets of 1.38% and a return on average equity of 14.23%, compared to
1.34% and 12.94%, respectively, for 1999.
2000 1999 1998
------ ------ ------
Return on Assets .......... 1.38% 1.34% 1.10%
Return on Equity .......... 14.23% 12.94% 11.32%
Dividend Payout Ratio ..... 27.42% 31.13% --
Equity to Asset Ratio ..... 9.69% 10.34% 9.75%
The increase in interest income was largely due to increases in loan
volume that resulted from new marketing programs first instituted in the latter
half of 1999. To fund the increased loan volume, we implemented programs to
attract additional time certificates of deposits ("time deposits"), including
those in denominations over $100,000 (which, for convenience, we will refer to
in the following discussion as "TCDs"). Although this led to increases in
interest expense, that increase was more than offset by the increase in interest
income generated as a result of our new marketing and loan programs.
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 increased by $662,000, or 2.4%, in 2000 as
compared to 1999. The increase was primarily attributable to an increase in
interest income that more than offset an increase in interest expense. The
increase in interest income was due primarily to increases in interest and fees
on loans as a consequence, largely, of increases in the average volume of loans
outstanding during 2000, as compared to 1999. The increase in interest expense
was due primarily to increases in the volume of time deposits, including TCDs,
and on the higher interest rates that the Bank paid to attract and maintain
those deposits.
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Information concerning average interest earning assets and interest
bearing liabilities, along with the average interest rates earned and paid
thereon is set forth in the following table. Averages were computed based upon
daily balances.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- ------- ---- -------- ------- ---- -------- ------- ----
(Dollars in Thousands)
EARNING ASSETS:
Investment Securities
U.S. Treasury ...................... $ 1,405 $ 74 5.3% $ 7,308 $ 421 5.8% $ 15,896 $ 950 6.0%
U.S. Government Agencies ........... 43,419 2,712 6.2 45,485 2,701 5.9 34,564 1,974 5.7
Municipal Leases(1) ................ 5,636 502 8.9 6,454 550 8.5 6,788 584 8.6
Other Securities ................... 14,502 947 6.5 3,290 195 5.9 3,546 257 7.2
-------- ------- -------- ------- -------- -------
Total Investment Securities ....... 64,962 4,235 6.5 62,537 3,867 6.2 60,794 3,765 6.2
Federal Funds Sold ................... 10,440 652 6.2 18,071 901 5.0 30,219 1,560 5.2
Due form Banks -- Time ............... 4,175 273 6.5 16,306 849 5.2 11,787 662 5.6
Loans(2) ............................. 359,867 34,079 9.5 324,553 30,072 9.3 306,381 30,232 9.9
Lease Financing(1) ................... 1,443 125 8.7 2,835 272 9.6 4,086 384 9.4
-------- ------- -------- ------- -------- -------
Total Interest-Earning Assets(1) ..... 440,887 39,364 8.9% $424,302 $35,961 8.5% $413,267 $36,603 8.9%
======== ======= ======== ======= ======== =======
INTEREST BEARING LIABILITIES:
Domestic Deposits and Borrowed Funds:
Savings Deposits(3) ................ $179,465 $ 4,646 2.6% $184,122 $ 4,325 2.3% $169,617 $ 4,232 2.5%
Time Deposits ...................... 111,405 6,360 5.7 88,848 3,982 4.5 106,855 5,585 5.2
Short-Term borrowings .............. 1,508 97 6.4 351 21 -- -- -- --
Long-Term borrowings ............... 4 -- 0.0 49 5 10.2 101 10 9.9
-------- ------- -------- ------- -------- -------
Total Interest-Bearing
Liabilities ..................... $292,382 $11,103 3.8% $273,370 $ 8,333 3.0% $276,573 $ 9,827 3.6%
======== ======= ======== ======= ======== =======
The following table sets forth the net interest earnings and the net
yield on average earning assets:
2000 1999 1998 1997
-------- -------- -------- --------
(Dollars in thousands)
Total Interest Income(1)(2) ....................... $ 38,983 $ 35,961 $ 36,603 $ 35,385
Total Interest Expense(3) ......................... $ 11,103 $ 8,333 $ 9,827 $ 9,738
Net Interest Earnings(1)(2) ....................... $ 27,880 $ 27,628 $ 26,776 $ 25,647
Net Average Earning Assets(2) ..................... $440,887 $424,302 $413,267 $371,885
Net Yield on Average Earning Assets(1)(2) ......... 6.3% 6.5% 6.5% 6.9%
Net Yield on Average Earning Assets (excluding Loan
Fees)(1)(2) ...................................... 6.1% 6.1% 6.0% 6.4%
- ----------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates that approximate 36.9
percent for 2000, 36.9 percent for 1999 and 37.8 percent for 1998.
(2) Loans, net of unearned discount, do not reflect average reserves for
possible loan losses of $4,798,000 in 2000, $5,865,000 in 1999 and
$5,252,000 in 1998. Loan fees of $1,064,000 in 2000, $1,846,000 in 1999
and $1,925,000 in 1998 are included in loan interest income. Average
loan balances include loans placed on non-accrual status during the
periods presented, but interest on such loans is excluded. There were 6
non-accruing loans at December 31, 2000, 14 at December 31, 1999 and 16
at December 31, 1998.
(3) Includes NOW, Super NOW, and Money Market Deposit Accounts.
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RATE SENSITIVITY, NET INTEREST MARGINS AND MARKET RISK.
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:
- our assets, between loans, on the one hand, on which banks 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 generally are lower;
- variable and fixed rate loans in the loan portfolio; and
- 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 net interest margins 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; but will generally experience an increase in its net interest margin
during periods of declining rates of interest, because yields on fixed interest
loans will continue unchanged, while the costs of deposits generally will
decline. Similarly, a bank with a high percentage of time deposits generally
will experience greater increases in interest expense and, therefore, a decrease
in net interest margins, during periods 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
margins because such loans often contain automatic repricing provisions that are
"triggered" by declines in market rates of interest; whereas offsetting
reductions in the rates of interest paid on TCDs 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 terminate or "run-off" in order to reduce
interest expense.
We attempt to reduce our exposure to 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.
The following table sets forth changes in interest earned, including
loan fees, and interest paid in each of the years ended December 31, 2000 and
1999 and the extent to which those changes were attributable to changes in the
volume and mix of interest earning assets and in the volume and mix of interest
bearing liabilities. Changes in interest earned and interest paid due to both
rate and volume have been allocated to the change due to volume and the change
due to rate in proportion to the relationship of the absolute dollar amounts of
the changes in each.
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Investment Securities
---------------------
Non- Federal Direct Lease Time
Taxable Taxable(1) Funds Sold Loans(2) Financing Deposits Total
------- ---------- ---------- -------- ------------ -------- -----
(In thousands)
Interest Earned On:
2000 compared to 1999:
Increase (decrease) due to:
Volume Changes $193 $(91) $(441) $ 3,332 $(123) $(752) $ 2,118
Rate Changes 223 43 192 675 (24) 176 1,285
---- ---- ----- ------- ----- ----- -------
Net Increase (Decrease) $416 $(48) $(249) $ 4,007 $(147) $(576) $ 3,403
==== ==== ===== ======= ===== ===== =======
1999 compared to 1998
Increase (decrease) due to:
Volume Changes $123 $(44) $(608) $ 1,912 (120) $ 238 $1,5019
Rate Changes 13 10 (51) (2,072) 8 (51) (2,143)
---- ---- ----- ------- ----- ----- -------
Net Increase (Decrease) $136 $(34) $(659) $ (160) $(112) $ 187 $ (642)
==== ==== ===== ======= ===== ===== =======
Savings Other Time Long Term Short Term
Deposits Deposits Borrowings(3) Borrowings(4) Total
- ------------------------------------------------------------------------------------------------
(In thousands)
Interest Paid On:
2000 compared to 1999
Increase (decrease) due to:
Volume Changes $(111) $ 1,144 $(5) $74 $ 1,102
Rate Changes 432 1,234 -- 2 1,668
----- ------- --- --- -------
Net Increase (Decrease) $ 321 $ 2,378 $(5) $76 $ 2,770
===== ======= === === =======
1999 compared to 1998
Increase (decrease) due to:
Volume Changes $ 350 $ (868) $(5) $21 $ (502)
Rate Changes (257) (735) -- -- (992)
----- ------- --- --- -------
Net Increase (Decrease) $ 93 $(1,603) $(5) $21 $(1,494)
===== ======= === === =======
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 market areas. In addition, the effect
on a bank's net interest margins 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.
NET INTEREST MARGIN IN 2000 AND 2001. In order to provide
additional funds, primarily to enable us to increase loan activity, at the end
of 1999 we made the decision to offer programs designed to bring additional time
deposits, including TCDs, into the Bank, after two years of allowing those
deposits to "run-off". As a result, as a percentage of average total deposits,
demand and savings (including money market) deposits declined to 74% and time
deposits, including TCDs, increased to 26% in 2000 as compared to 79% and 21%,
respectively, in 1999. As a result, our net interest margin (i.e., tax-adjusted
net interest income stated as a percentage of average interest-earning assets)
was 6.41% for the year ended December 31, 2000 compared to 6.51% for the year
ended December 31, 1999. However, our net interest margin continued 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"), because we have been able to maintain the ratio of demand and
savings deposits to total deposits at a higher level than that of our Peer Group
Banks and we were able, in 2000, to use a significant portion of the additional
time deposits to fund increases in the volume of our loans which generate higher
yields than do our other interest earning assets.
We have instituted new sales and marketing programs for 2001
that are designed to increase our loan volume and also the volume of our demand
and savings deposits. However, we may find it necessary or prudent to increase
time deposits, as well, to fund some of the increases in loan volume. We
currently believe that our net interest
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margin in 2001 will remain at approximately the same level as in 2000, because
we currently expect that any resulting increases in interest income we are able
to generate in 2001 will be largely offset by a combination of (i) the increase
in interest expense that will result from the increase in the volume of our
deposits and (ii) declining rates of interest that we are able to charge on
loans due to reductions in market rates of interest that are attributable to a
slowing of economic conditions in the United States and actions by the Federal
Reserve Board that are designed to stimulate economic activity in response to
these conditions. However, there are a number of uncertainties and risks that
could adversely affect our net interest margin in 2001, including (i) increased
competition in our market areas, both from banks and other types of financial
institutions as well as from securities brokerage firms and mutual funds that
offer competing investment products, and (ii) the possibility that the economic
slowdown will be more severe than is currently anticipated, which could result
in reduced loan activity and in a greater decline in market rates of interest.
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 financial instruments. The value of a financial instrument
may changes as a result of changes in interest rate and other market conditions.
Market risk is attributed to all market risk sensitive financial instruments,
including loans 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.
PROVISION FOR LOAN AND LEASE LOSSES. Like virtually all banks and other
financial institutions, we follow the practice of maintaining a reserve (the
"Loan Loss Reserve") for possible losses on loans and leases that occur from
time to time as an incidental part of the banking business. Charge-offs of loans
(essentially reductions in the carrying values of non-performing loans due to
possible losses on their ultimate recovery) are charged against the Loan Loss
Reserve and additions are made periodically to the Reserve to replenish it
following reductions due to loan charge-offs. The amount of that Reserve also is
increased periodically to reflect changes in (i) the volume of outstanding
loans, and (ii) the risk of potential losses due to a deterioration in the
condition of borrowers or in the value of property securing non-performing loans
or changes in economic conditions. Those increases are made through a charge
against income referred to as the "provision for loan and lease losses." During
2000 we made provisions totaling $1,070,000 as compared to $485,000 during 1999
and, at December 31, 2000 the Loan Loss Reserve was approximately $3,692,000 or
1.00% of total loans and leases outstanding, compared to approximately
$6,102,000 or 1.76% of total loans and leases outstanding at December 31, 1999.
The increase in the provision for loan and lease losses in 2000 was attributable
primarily to the increase in the volume of outstanding loans. In 1999,
provisions for loan and lease losses totaled $485,000 as compared to $775,000 in
1998. That reduction was primarily attributable to a decline in the total number
of non-performing assets in 1999 as compared to 1998.
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The following table sets forth an analysis of the Bank's loan and lease
loss experience, by category, for the past three years.
2000 1999 1998
-------------------------------------------
Average amount of loans and leases outstanding(1) $ 361,310 $ 327,388 $ 310,467
========= ========= =========
Loan and lease loss reserve at beginning of year 6,102 5,576 5,165
--------- --------- ---------
Charge-Offs -- Domestic Loans(2):
Commercial, financial and agricultural (3,762) (112) (423)
Real Estate-construction -- -- --
Real Estate-mortgage -- (45) (274)
Consumer (30) (39) (45)
Other -- -- (127)
--------- --------- ---------
Total Charge-Offs (3,792) (196) (869)
Recoveries -- Domestic Loans(2):
Commercial, financial and agricultural 134 44 202
Real Estate-construction -- -- --
Real Estate-mortgage 170 188 300
Consumer 8 5 3
--------- --------- ---------
Total Recoveries 312 237 505
--------- --------- ---------
Net Recoveries (Net Charge-Offs) (3,480) 41 (364)
Additions charged to operations 1,070 485 775
--------- --------- ---------
Loan and lease loss reserve -- balance at end of year $ 3,692 $ 6,102 $ 5,576
========= ========= =========
Ratios:
- -------
Net charge-offs during the year to average
loans and leases outstanding during the year 0.96% -0.01% 0.12%
Loan loss reserve to total gross loans 1.00% 1.76% 1.89%
Net loan charge-offs to loan loss reserve 94.26% -0.67% 6.53%
Net loan charge-offs to provision for loan losses 325.23% -8.45% 46.97%
Loan loss reserve to non-performing loans 115.59% 97.32% 87.34%
- ----------
(1) Net of unearned discount.
(2) We do not have any loans outstanding to borrowers in foreign countries
and therefore there are no foreign loan charge-offs or recoveries to
report for any of the periods presented in the table above.
During 2000, we charged off $3,750,000 of non-accrual loans due to the
bankruptcy of a large corporate borrower. The charge-off of these loans accounts
for the significant increase in loan charge-offs in 2000 and the changes in the
ratios of net loan charge-offs to loan loss reserve and to the provision for
loan losses shown in the above table. However, the charge-off of these loans had
no effect on our operating results during 2000, because we had set aside
specific reserves for potential losses on these loans during previous fiscal
years. Moreover, due primarily to the charge-off of these loans, the amount of
non-performing loans (which consist primarily of loans for which there have been
no payments of principal or interest for more than 90 days) declined by 49% to
$3,194,000, or 0.9% of total loans outstanding at December 31, 2000, from
$6,270,000, or 1.8% of total loans outstanding at December 31, 1999 and
$6,383,000 or 2.2% of total loans outstanding at December 31, 1998. That decline
in the volume of non-performing loans, in turn, led to an improvement in the
ratio of the Loan Loss Reserve to non-performing loans to 115.6% at December 31,
2000, as compared to 97.3% and 87.3% at December 31, 1999 and 1998,
respectively.
Due to the charge-off of the loans to this one borrower, loan
charge-offs in the year ended December 31, 2000, net of recoveries of previously
charged-off loans of $134,000, totaled $3,480,000, which represented ninety-six
hundredths of one percent (0.96%) of average loans and leases outstanding during
the year. However, but for this charge-off, recoveries of previously charged-off
loans would have exceeded loan charge-offs by $270,000 in 2000. In 1999
recoveries of previously charged off loans exceeded loan charge-offs, resulting
in net recoveries of $41,000, and in 1998, loan charge-offs, net of recoveries,
totaled $364,000, which represented twelve hundredths of one percent (0.12%) of
average loans and leases outstanding.
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26
OTHER INCOME. In 2000, other income increased by $83,000 or 1.8% as
compared to 1999. The increase was primarily attributable to increases in
transaction fees and service charges on deposit accounts and other banking
transactions. In 1999, other income declined by $565,000 or 11.1% as compared to
1998, primarily as a result of decreases in transaction fees and service charges
and other banking transactions.
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, professional expenses, and charges that are periodically made
to establish reserves for possible losses on the disposition or declines in
market values of real properties acquired on or in lieu of foreclosure of
defaulted loans (commonly referred to as "other real estate owned" or "OREO").
In order to attract a higher volume of non-interest bearing demand and
lower cost savings and money market deposits and, thereby, improve our net
interest margin, it has been our policy to provide a higher level of personal
service to our customers than the level of services that are provided by many of
our competitors. Although this practice has caused us to incur a higher level of
non-interest expense than many other of our Peer Group Banks, we believe that
this practice has enabled us to maintain our net interest margin at levels
higher than the average net interest margin of the Peer Group Banks with which
we compete.
Nevertheless, during 1999 and continuing through 2000, we implemented a
number of cost reduction programs designed to reduce non-interest expense and,
thereby increase operating efficiencies, without adversely affecting the quality
of service we provide to our customers. As a result of those programs, in 2000
we reduced our operating expenses by $548,000 compared to 1999. Those expense
reductions resulted in an improvement in our efficiency ratio (that is,
basically, the ratio of non-interest expense to the sum of our net interest
income and other income) to 62.7% from 67.2% in 1999. In 1999, our non-interest
expense decreased by approximately $1,231,000 as compared to 1998, due primarily
to decreases in salary and employee benefit expenses and in other (or
miscellaneous) expenses.
During 2001 we intend to continue our efforts to take advantage of
opportunities to reduce non-interest expense without sacrificing the quality or
level of service that we are able to provide to our customers.
INCOME TAXES. Income taxes increased by approximately $258,000 or 7.5%
in 2000 and $1,186,000 or 23.4% as compared to 1999, in each case as compared to
the prior year, primarily as a result of the increases in pre-tax income in
those two years over each of the prior years.
FINANCIAL CONDITION
Our average total assets increased during 2000 by approximately
$18,625,000, or 3.9%, when compared to average total assets for 1999. However,
total assets at December 31, 2000 were $47,149,000, or 10.3%, higher than total
assets at December 31, 1999. The increase in average total assets was primarily
due to an increase of $48,913,000, or 15.6%, in the average loans and leases
outstanding, offset to a large extent by reductions in the average volume of
investment securities and in the average volume of time deposits held at other
banks of $20,082,000 and $12,131,000 respectively. Those reductions were made to
provide a portion of the funds needed to increase our outstanding loans which,
as a general rule, generate higher yields than other earning assets. See the
discussion above under the captions "Results of Operations -- Rate Sensitivity,
Net Interest Margins and Market Risk."
25
27
Set forth below is information regarding the average volume of our
loans, by type or category of loan, for each of the years in the five year
period ended December 31, 2000:
December 31,
-------------------------------------------------------------------------
TYPES OF LOANS 2000 1999 1998 1997 1996
- -------------- --------- --------- --------- --------- ---------
(In Thousands)
Commercial, financial and agricultural $ 44,269 $ 41,091 $ 42,106 $ 44,296 $ 40,979
Real Estate construction 12,647 11,144 15,602 10,895 12,008
Real Estate mortgage(1) 303,456 283,735 224,530 228,630 231,012
Consumer 6,400 5,916 7,011 6,450 8,157
Lease Financing(2) 1,164 2,341 3,704 4,749 2,864
All other (including overdrafts) 679 1,707 2,169 2,203 407
--------- --------- --------- --------- ---------
Subtotal: $ 368,615 $ 345,934 $ 295,122 $ 297,223 $ 295,427
Less:
- -----
Unearned Discount (141) (299) (539) (665) (797)
Reserve for loan and lease losses (3,692) (6,102) (5,576) (5,165) (4,744)
--------- --------- --------- --------- ---------
Total $ 364,782 $ 339,533 $ 289,007 $ 291,393 $ 289,886
========= ========= ========= ========= =========
The maturities of our loans, as of December 31, 2000, presented by type
or category of loan, is set forth below:
MATURING
---------------------------------------------------------------
Within One Year One to Five Years After Five Years Total
--------------- ----------------- ---------------- --------
(In thousands)
Commercial, financial and agricultural $ 9,812 $ 6,948 $ 27,509 $ 44,269
Real Estate construction 228 187 12,232 12,647
Real Estate mortgage 97,877 50,089 155,490 303,456
Consumer 1,911 3,996 493 6,400
Lease Financing 399 765 -- 1,164
All other 660 9 10 679
-------- ------- -------- --------
Total $110,887 $61,994 $195,734 $368,615
======== ======= ======== --------
During 2000 we also conducted programs by which we were able to increase
deposits to provide an additional source of funds that also were used to
increase loan volume. Overall, in 2000 the average volume of deposits increased
by $18,479,000, or 4.5%, as compared to the average volume of deposits during
1999. This increase was attributable to increases in the volume of time deposits
(including those in denominations of $100,000 or more) which accounted for 25.7%
of average total deposits in 2000 as compared to 21.4% in 1999. Demand deposits,
which do not bear interest, and savings and money market deposits, on which we
pay lower rates of interests than on time deposits represented 74.3% of average
total deposits in 2000 as compared to 78.6% in 1999. The increases in the volume
of time deposits, together with increases in interest rates that we paid,
primarily in response to increases in market rates of interest, resulted in an
increase in increase expense in 2000 as compared to 1999. See the discussion
above under the captions "Results of Operations -- Net Interest Income" and
"Results of Operations -- Rate Sensitivity, Net Interest Margins and Market
Risk."
The average amounts (in thousands) of and the average rates paid on
deposits in each of 2000, 1999 and 1998 are summarized below:
2000 1999 1998
--------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
Noninterest bearing demand deposits $142,132 -- $141,554 -- $131,141 --
Savings Deposits(1) 179,465 2.59% 184,122 2.35% 169,617 2.50%
Time Deposits(2) 111,405 5.71% 88,848 4.48% 106,855 5.23%
-------- -------- --------
Total Deposits $433,002 2.54% $414,524 2.01% $407,613 2.41%
======== ======== ========
(1) Includes NOW, Super NOW, and Money Market Deposit Accounts.
(2) Includes time certificates of deposit in denominations greater than and
less than $100,000.
26
28
Set forth below is maturity schedule of domestic time certificates of
deposits of $100,000 or more (with amounts stated in thousands) as of December
31, 2000:
Three Months or Less $33,839
Over Three through Six Months 10,943
Over Six through Twelve Months 8,143
Over Twelve Months 2,014
-------
$54,939
=======
We currently anticipate that there will be modest growth in the Bank's
total assets in the year ending December 31, 2001, which is expected to result
from increased lending and deposit activity generated by new marketing programs
being implemented by the Bank.
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
December 31, 2000, the principal sources of liquidity consisted of $26,186,000
in cash and demand balances due from other banks, $12,000,000 of Federal funds
sold, $10,000,000 under an overnight repurchase agreement and $2,000,000 in
short-term (maturities of 45 days or less) commercial paper, which, together,
totaled $50,186,000. Other sources of liquidity include $37,718,000 in
securities available for sale, of which approximately $10,868,000 of such
securities mature within one year, $6,000,000 in securities held to maturity
which mature within one year, and $8,005,000 in interest-bearing deposits at
other financial institutions, which mature in 6 months or less. We also have
established loan facilities that would enable us to borrow up to $10,100,000 of
Federal funds from other banks and we have an account with the Federal Reserve
Bank of San Francisco that will also allow us to borrow at their discount window
should the need arise. In addition, we have a currently unused line of credit
from the Federal Home Loan Bank under which we may borrow up to approximately
$21,727,000. Furthermore, substantially all of the Bank's installment loans and
leases, the amount of which aggregated $7,565,000 at December 31, 2000, 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.
The table below sets forth information concerning the interest rate
sensitivity of our consolidated assets and liabilities as of December 31, 2000.
Assets and liabilities are classified by the earliest possible repricing date or
maturity, whichever comes first.
27
29
Generally, where rate-sensitive assets (principally loans, investment
securities and other interest earning assets) exceed rate-sensitive liabilities
(principally interest bearing deposits), the net interest margin will be
positively impacted during periods of increasing interest rates and negatively
impacted during periods of decreasing interest rates. When rate-sensitive
liabilities exceed rate-sensitive assets, the net interest margin generally will
be negatively affected during periods of increasing interest rates and
positively affected during periods of decreasing interest rates.
Over Three Over One
Three Through Year Over Non-
Months Twelve Through Five Interest
or Less Months Five Years Years Bearing Total
--------- --------- -------- -------- --------- --------
(Dollars in Thousands)
Assets
Interest-bearing deposits in banks $ 5,727 $ 2,278 $ -- $ -- $ -- $ 8,005
Investment securities 24,898 14,576 27,577 3,765 644 71,460
Federal Funds Sold 12,000 -- -- -- -- 12,000
Net loans 104,849 6,037 61,994 191,902 -- 364,782
Noninterest-earning assets -- -- -- -- 49,578 49,578
--------- --------- -------- -------- --------- --------
Total assets $ 147,474 $ 22,891 $ 89,571 $195,667 $ 50,222 $505,825
--------- --------- -------- -------- --------- --------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits $ -- $ -- $ -- $ -- $ 146,868 $146,868
Interest-bearing deposits 254,878 46,891 5,378 26 -- 307,173
Short-term borrowings -- -- -- -- -- --
Long-term borrowings -- -- -- -- -- --
Other liabilities -- -- -- -- 3,521 3,521
Stockholders' equity -- -- -- -- 48,263 48,263
--------- --------- -------- -------- --------- --------
Total liabilities and
stockholders equity $ 254,878 $ 46,891 $ 5,378 $ 26 $ 198,652 $505,825
--------- --------- -------- -------- --------- --------
Interest rate sensitivity gap $(107,404) $ (24,000) $ 81,193 $195,641 $(148,430) $ --
========= ========= ======== ======== ========= ========
Cumulative interest rate
sensitivity gap $(107,404) $(131,404) $(47,211) $148,430 $ -- $
========= ========= ======== ======== ========= ========
CAPITAL RESOURCES. During the period from 1995 to 1999, it was our
policy to retain earnings to meet capital requirements under applicable
government regulations and to support our growth. During that period we opened
four new banking offices, all of which have contributed to our increased
profitability, and at the same time we increased our capital to levels well
above regulatory requirements.
It is our current policy to retain a substantial portion of our earnings
to support further growth and we plan to continue to evaluate and explore
opportunities to expand 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.
However, the increases in earnings achieved in 1997 and 1998 caused our
capital ratios to increase even further in relation to regulatory capital
requirements and caused our return on average equity to remain relatively fixed
despite those increases in earnings. As a result, in 1998 the Board of Directors
authorized an open market stock repurchase program to be funded out of earnings.
Between the commencement of that program in late 1998 and December 31, 2000, we
had purchased a total of 825,120 shares of our common stock for an aggregate
price of approximately $10,886,742. In addition, in March 1999, the Board
declared a $0.25 per share cash dividend and, in September of 1999, the Board
modified the dividend policy to provide for the payment of quarterly cash
dividends. Pursuant to that policy, cash dividends of $0.08 per share were paid
in the fourth quarter of 1999 and in the first, second and third quarters of
2000. Beginning in the fourth quarter of 2000, the Board increased the quarterly
cash dividend to $0.10 per share and, cash dividends of $0.10 per share were
paid in the fourth quarter of 2000 and in the first quarter of 2001,
respectively. It is anticipated that similar quarterly cash dividends will be
paid during the balance of 2001.
Federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital
(essentially, the sum of a bank's capital stock and retained earnings, less any
28
30
intangibles) to risk-adjusted assets of 4%. In addition to the risked-based
guidelines, federal banking regulators require banking organizations to maintain
a minimum amount of Tier 1 capital to total assets, referred to as the leverage
ratio. For a banking organization rated in the highest of the five categories
used by regulators to rate banking organizations, the minimum leverage ratio of
Tier 1 capital to total assets must be 3%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, federal bank regulatory agencies have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
The risk-based capital ratio is determined by weighting the bank's
assets in accordance with certain risk factors and, the higher the risk profile
of a bank's 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 Bank's Tier 1 capital and risk-based capital ratios compare favorably with
those of the Peer Group Banks and exceed minimum regulatory requirements.
Additionally, the level of supervision to which a bank will be subject
by federal bank regulatory authorities will depend largely on extent to which a
bank meets or exceeds federally mandated leverage capital ratios. A bank that
maintains a leverage capital ratio of 5% or more will generally be categorized
by federal bank regulatory agencies as "well capitalized" and, therefore, as a
general matter will be subject to less extensive regulatory supervision that
banks with lower leverage capital ratios
The following table compares, as of December 31, 2000, the actual
capital ratios of the Bank to the capital ratios that the Bank is required to
meet under applicable banking regulations:
For Capital To Be Categorized
Actual Adequacy Purposes as Well Capitalized
----------------- ----------------- -------------------
Total Capital to Risk Based Assets 12.6% 8.0% 10.0%
Tier 1 Capital to Risk Weighted Assets 11.7% 4.0% 6.0%
Tier 1 Capital to Average Assets 9.5% 4.0% 5.0%
Under accounting principles that address the financial reporting
requirements for investments in certain equity and debt securities held by
financial institutions, any unrealized gain on such securities is required to be
credited to, and any unrealized losses are required to be charged against,
stockholders' equity. At December 31, 2000, we recorded valuation reserve for
unrealized losses on such securities aggregating approximately $242,000. The
greatest portion of this amount is related to certain investments in mutual
funds, which are classified as investments in marketable equity securities, but
which we have held for several years and intend to continue to hold for the
foreseeable future.
FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING FUTURE PERFORMANCE
Statements contained in this Annual Report that are not historical facts
or that discuss our expectations regarding our financial performance in the
future constitute "forward-looking statements." Forward-looking statements are
estimates of future performance that are based upon current information and that
are subject to a number of risks and uncertainties that could cause our actual
operating results in future periods to differ significantly from those expected
at the current time. Those risks and uncertainties include, although they 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
the Bank to reduce interest rates and loan fees to attract new loans or to
increase interest rates that it offers on time deposits, either or both of which
could, in turn, reduce 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.
29
31
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 and reduce
net interest margins, particularly if we are unable, due to competitive
pressures or the rate insensitivity of earning assets, to effectuate
commensurate increases in the rates we are able to charge on existing or new
loans.
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 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
operating results, 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 such forward-looking statements, which
speak only as of the date of this Annual Report. We also disclaim any obligation
to update forward looking information contained in this Report.
30
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Foothill Independent Bancorp and Subsidiaries:
Independent Auditor's Report ................................................................ 32
Consolidated Balance Sheets at December 31, 2000 and 1999 ................................... 33
Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998 ...... 34
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998 .......................................................... 35
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 .. 36
Notes to Consolidated Financial Statements .................................................. 38
31
33
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Foothill Independent Bancorp and Subsidiaries
Glendora, California
We have audited the accompanying consolidated balance sheets of Foothill
Independent Bancorp and Subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income and changes in stockholders' equity
and statements of cash flows for the three years ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foothill Independent
Bancorp and Subsidiaries as of December 31, 2000 and 1999, and the results of
its operations and cash flows for the three years ended December 31, 2000, in
conformity with generally accepted accounting principles.
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
February 16, 2001
32
34
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
--------- ---------
2000 1999
--------- ---------
(dollars in thousands)
Cash and due from banks $ 26,186 $ 23,262
Federal funds sold 12,000 3,600
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 38,186 26,862
--------- ---------
Interest-bearing deposits in other financial institutions 8,005 7,919
Investment securities held-to-maturity 20,742 7,309
Investment securities available-for-sale 50,074 54,239
--------- ---------
TOTAL INVESTMENTS 78,821 69,467
--------- ---------
Federal Home Loan Bank stock, at cost 415 1,547
--------- ---------
Loans, net of unearned income 367,310 343,294
Direct lease financing 1,164 2,341
Provision for Loan Losses (3,692) (6,102)
--------- ---------
TOTAL LOANS 364,782 339,533
--------- ---------
Premises and equipment 7,013 6,779
Other real estate owned 2,164 1,714
Cash surrender value of life insurance 5,639 4,997
Deferred tax assets 1,801 2,412
Federal Reserve Bank stock, at cost 229 229
Accrued interest and other assets 6,775 5,136
--------- ---------
TOTAL ASSETS $ 505,825 $ 458,676
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
--------- ---------
Liabilities
Demand deposits $ 146,868 $ 133,115
Savings and NOW deposits 106,618 101,839
Money market deposits 74,424 72,400
Time deposits $100,000 or over 58,801 40,408
Time deposits under $100,000 67,330 49,502
--------- ---------
TOTAL DEPOSITS 454,041 397,264
Accrued employee benefits 2,197 2,002
Accrued interest and other liabilities 1,324 2,152
Other debt -- 8,819
--------- ---------
TOTAL LIABILITIES 457,562 410,237
--------- ---------
Commitments and Contingencies - Note #18
Stockholders' Equity
Common Stock - authorized, 25,000,000 shares $.001 par value; issued and
outstanding, 5,243,863 shares in 2000 and 5,772,614 shares in 1999 5 5
Additional paid-in capital 37,754 37,373
Retained earnings 10,746 11,898
Accumulated other comprehensive income - Net unrealized losses on available for
sale securities, net of taxes of $168 in 2000 and $582 in 1999 (242) (837)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 48,263 48,439
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 505,825 $ 458,676
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
33
35
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(dollars in thousands, except per share
amounts)
INTEREST INCOME
Interest and fees on loans $ 33,928 $ 29,209 $ 29,501
Interest on Investment Securities
Taxable 3,733 4,454 3,912
Exempt from federal taxes 317 347 363
Interest on deposits 273 849 662
Interest on federal funds sold 652 520 1,560
Lease financing income exempt from federal taxes 80 172 239
-------- -------- --------
TOTAL INTEREST INCOME 38,983 35,551 36,237
-------- -------- --------
INTEREST EXPENSE
Interest on savings, NOW and money market deposits 4,646 4,325 4,232
Interest on time deposits over $100,000 2,695 1,530 2,521
Interest on time deposits under $100,000 3,665 2,452 3,064
Interest on borrowings 97 26 10
-------- -------- --------
TOTAL INTEREST EXPENSE 11,103 8,333 9,827
-------- -------- --------
NET INTEREST INCOME 27,880 27,218 26,410
Provision for Loan Losses (1,070) (485) (775)
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 26,810 26,733 25,635
NON INTEREST INCOME
Services fees 4,487 4,346 4,982
Gain on sale of SBA loans 31 115 32
Other 86 60 72
-------- -------- --------
4,604 4,521 5,086
-------- -------- --------
NON INTEREST EXPENSES
Salaries and employee benefits 9,579 9,984 10,579
Net occupancy expense of premises 2,229 2,131 2,158
Furniture and equipment expenses 1,544 1,647 1,715
Other expenses 7,442 7,580 8,121
-------- -------- --------
20,794 21,342 22,573
-------- -------- --------
INCOME BEFORE INCOME TAXES 10,620 9,912 8,148
-------- -------- --------
INCOME TAXES 3,920 3,662 3,084
-------- -------- --------
NET INCOME $ 6,700 $ 6,250 $ 5,064
======== ======== ========
EARNINGS PER SHARE
Basic $ 1.24 $ 1.06 $ 0.85
======== ======== ========
Diluted $ 1.16 $ 1.00 $ 0.80
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
34
36
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accumulated
Number of Additional Other
Shares Common Paid-in Comprehensive Retained Comprehensive
Outstanding Stock Capital Income Earnings Income Total
----------- ---------- ---------- ------------- ---------- ------------- ----------
(dollars in thousands)
BALANCE, JANUARY 1, 1998 5,111,993 $ 5 $ 23,272 $ 19,062 $ (298) $ 42,041
15% stock dividend 779,314 12,469 (12,469)
Cash paid in lieu of fractional shares (9) (9)
Exercise of stock options 86,687 1,018 1,018
Common stock issued under employee
benefit and dividend reinvestment
and optional investment plans 16,248 256 256
Common stock repurchased,
cancelled and retired (9,000) (132) (132)
COMPREHENSIVE INCOME:
Net income $ 5,064 5,064 5,064
Net unrealized security holding gains
on available-for-sale securities
(Net of taxes of $86) 141 141 141
==========
TOTAL COMPREHENSIVE INCOME $ 5,205
---------- ---------- ---------- ========== ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 5,985,242 5 37,015 11,516 (157) 48,379
Cash Dividend (2,408) (2,408)
Exercise of stock options 17,579 124 124
Common stock issued under employee
benefit and dividend reinvestment
and optional investment plans 17,035 234 234
Common stock repurchased,
cancelled and retired (247,242) (3,460) (3,460)
COMPREHENSIVE INCOME:
Net income 6,250 6,250 6,250
Net unrealized holding losses
on available-for-sale securities
(Net of taxes of $305) (680) (680) (680)
==========
TOTAL COMPREHENSIVE INCOME $ 5,570
---------- ---------- ---------- ========== ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 5,772,614 5 37,373 11,898 (837) 48,439
Cash Dividend (1,383) (1,383)
Exercise of stock options 4,048 24 24
Common stock issued under employee
benefit and dividend reinvestment
and optional investment plans 36,079 357 357
Common stock repurchased,
cancelled and retired (568,878) (6,469) (6,469)
COMPREHENSIVE INCOME:
Net income 6,700 6,700 6,700
Net unrealized holding gains
on available-for-sale securities
(Net of taxes of $240) 595 595 595
==========
TOTAL COMPREHENSIVE INCOME $ 7,295
---------- ---------- ---------- ========== ---------- ---------- ----------
BALANCE, DECEMBER 31, 2000 5,243,863 $ 5 $ 37,754 $ 10,746 $ (242) $ 48,263
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
35
37
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 38,405 $ 35,326 $ 35,733
Service fees and other income received 3,952 4,105 4,550
Financing revenue received under leases 80 172 239
Interest paid (10,783) (8,463) (9,929)
Cash paid to suppliers and employees (22,478) (19,909) (22,227)
Income taxes paid (3,554) (3,881) (3,190)
----------- ----------- -----------
Net Cash Provided By Operating Activities 5,622 7,350 5,176
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of held-to-maturity securities 2,140 11,563 7,854
Purchase of held-to-maturity securities (193) (6,041) (5,498)
Proceeds from maturity of available-for-sale securities 1,815,301 2,110,841 161,815
Purchase of available-for-sale securities (1,824,370) (2,074,411) (224,134)
Proceeds from maturity of deposits in other financial institutions 13,962 40,580 20,482
Purchase of deposits in other financial institutions (14,048) (33,456) (27,216)
Net (increase)decrease in credit card and revolving credit receivables (300) 356 241
Recoveries and deferred recoveries on loans previously written off 80 102 865
Net increase in loans (27,557) (53,181) (222)
Net decrease in leases 1,177 1,363 1,045
Capital expenditures (1,035) (1,130) (681)
Proceeds from sale of other real estate owned 12 1,139 732
Proceeds from sale of property, plant and equipment 21 30 73
----------- ----------- -----------
Net Cash Used In Investing Activities (34,810) (2,245) (64,644)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits 56,802 (18,960) 26,516
Net increase(decrease) in short term borrowing (8,800) 8,800 --
Proceeds from exercise of stock options 24 124 1,018
Proceeds from stock issuance 357 234 256
Principal payments on long-term debt (19) (55) (49)
Dividends paid (1,383) (2,408) (9)
Stock repurchased and retired (6,469) (3,460) (132)
----------- ----------- -----------
Net Cash Provided(Used) By Financing Activities 40,512 (15,725) 27,600
----------- ----------- -----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 11,324 (10,620) (31,868)
CASH AND CASH EQUIVALENTS, Beginning of Year 26,862 37,482 69,350
=========== =========== ===========
CASH AND CASH EQUIVALENTS, End of Year $ 38,186 $ 26,862 $ 37,482
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
36
38
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------- ------- -------
(dollars in thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Income $ 6,700 $ 6,250 $ 5,064
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Cash Provided By Operating Activities
Depreciation and amortization 370 1,288 1,289
Provision for possible credit losses 1,070 485 775
Provision for possible OREO losses 42 (23) 350
Provision(credit) for deferred taxes 611 (26) (16)
Loss on sale of equipment 2 3 53
Increase(decrease) in taxes payable (245) 402 (90)
(Increase)decrease in other assets (104) (59) 11
Increase in interest receivable (319) (37) (237)
Decrease in discounts and premiums (179) (16) (28)
Increase(decrease) in interest payable 320 (130) (102)
Increase in prepaid expenses (1,167) (419) (656)
Increase(decrease) in accrued expenses and other liabilities (825) 51 (616)
Gain on sale of other real estate owned (12) -- (52)
Increase in cash surrender value of life insurance (642) (419) (537)
Gain on sale of investments and other assets -- -- (32)
------- ------- -------
Total Adjustments (1,078) 1,100 112
======= ======= =======
Net Cash Provided By Operating Activities $ 5,622 $ 7,350 $ 5,176
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements
37
39
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Foothill
Independent Bancorp and its wholly owned subsidiaries, Foothill Independent Bank
("Bank"), and Foothill BPC, Inc., collectively referred to herein as the
"Company". Intercompany balances and transactions have been eliminated.
Nature of Operations
The Bank has been organized as a single operating segment and operates twelve
branches in various locations in the Los Angeles, Riverside, and San Bernardino
Counties of Southern California. The Bank's primary source of revenue is from
providing loans to customers, who are predominately small and middle market
businesses and individuals.
Foothill BPC, Inc. is the entity that accounts for leasing of certain bank
branches.
On December 18, 2000, the Company formed Platinum Results, Inc., a data
processing subsidiary. Platinum Results, Inc. has no operations or assets as of
December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks and federal funds sold. Generally, federal funds are sold for one
day periods.
Cash and Due From Banks
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank. The
Bank complied with the reserve requirements as of December 31, 2000.
Investment Securities
Securities held-to-maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts over the period to maturity, or to an
earlier call, if appropriate, on a straight-line basis. Such securities include
those that management intends and has the ability to hold into the foreseeable
future.
38
40
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Investment Securities, Continued
Securities are considered available-for-sale if they would be sold under certain
conditions, among these being changes in interest rates, fluctuations in deposit
levels or loan demand, or need to restructure the portfolio to better match the
maturity or interest rate characteristics of liabilities with assets. Securities
classified as available-for-sale are accounted for at their current fair value
rather than amortized historical cost. Unrealized gains or losses are excluded
from net income and reported as an amount net of taxes as a separate component
of other comprehensive income included in shareholders' equity.
Loans and Interest on Loans
Loans are stated at unpaid principal balances, net of deferred loan fees and
unearned discounts. The Bank recognizes loan origination fees to the extent they
represent reimbursement for initial direct costs, as income at the time of loan
boarding. The excess of fees over costs, if any, is deferred and recognized as
an adjustment to yield of the loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to make all payments due according to the
contractual terms of the loan agreement. When interest accrual is discontinued,
all unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
For impairment recognized in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118,
the entire change in the present value of expected cash flows is reported as
either provisions for loan losses in the same manner in which impairment
initially was recognized, or as reduction in the amount of provision for loan
losses that otherwise would be reported.
Provision for Loan Losses
The allowance for loan losses is increased by charges to income and decrease by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situation that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions. The provision for the current increase to loan
losses is charged to expense.
Direct Lease Financing
The investment in lease contracts is recorded using the finance method of
accounting. Under the finance method, an asset is recorded in the amount of the
total lease payments receivable and estimated residual value, reduced by
unearned income. Income, represented by the excess of the total receivable over
the cost of the related asset, is recorded in income in decreasing amounts over
the term of the contract based upon the principal amount outstanding. The
financing lease portfolio consists of equipment with terms from three to seven
years.
39
41
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives, which ranges from three to
ten years for furniture and fixtures and twenty to thirty for buildings.
Leasehold improvements are amortized using the straight-line method over the
estimated useful lives of the improvements or the remaining lease term,
whichever is shorter. Expenditures for betterments or major repairs are
capitalized and those for ordinary repairs and maintenance are charged to
operations as incurred.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost or fair value
minus estimated costs to sell. Revenue and expenses form operations and
additions to the valuation allowance are included in other expenses.
Loan Sales and Servicing
Gains and losses from the sale of participating interests in loans guaranteed by
the Small Business Administration (SBA) are recognized based on the premium
received or discount paid and the cost basis of the portion of the loan sold.
The cost basis of the portion of the loan sold was arrived at by allocating the
total cost of each loan between the guaranteed portion of the loan sold and the
unguaranteed portion of the loan retained, based on their relative fair values.
The book value allocated to the unguaranteed portion of the loan, if less than
the principal amount, is recorded as a discount on the principal amount
retained. The discount is accreted to interest income over the remaining
estimated life of the loan. The Bank retains the servicing on the portion of the
loans sold and recognizes income on the servicing fees when they are received.
Income Taxes
Deferred income taxes are computed using the asset and liability method, which
recognizes a liability or asset representing the tax effects, based on current
tax law, of future deductible or taxable amounts attributable to events that
have been recognized in the consolidated financial statements. A valuation
allowance is established to reduce the deferred tax asset to the level at which
it is "more likely than not" that the tax asset or benefits will be realized.
Realized of tax benefits of deductible temporary differences and operating loss
carryforwards depends on having sufficient taxable income of an appropriate
character within the carryforward periods.
Comprehensive Income
Beginning in 1998, the Bank adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", which requires the disclosure of
comprehensive income and its components. Changes in unrealized gain (loss) on
available-for-sale securities net of income taxes is the only component of
accumulated other comprehensive income for the Bank.
40
42
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Earnings Per Share (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation costs for stock-based employee
compensation plans at fair value. The Bank has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation costs for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Disclosure About Fair Value of Financial Instruments
SFAS No. 107 specifies the disclosure of the estimated fair value of financial
instruments. The Company's estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies.
However, considerable judgment is required to develop the estimated of fair
value. Accordingly, the estimated are not necessary indicative of the amounts
the Company could have realized in a current market exchange. The use of
different market assumptions and/or estimates of methodologies may have a
material effect on the estimated fair value amounts.
Although management is not aware of any factor that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the balance sheet date
and, therefore, current estimated of fair value may differ significantly from
the amounts presented in the accompanying Notes.
Current Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (as amended by SFAS No. 138 in 2000). This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard was originally
effective for 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral Date of FASB Statement
No. 133". This establishes the effective date of SFAS No. 133 for 2001. SFAS No.
133 is not expected to have a material impact on the Bank's financial
statements.
Reclassifications
Certain reclassifications were made to prior years' presentations to conform to
the current year.
41
43
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #2 - INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amounts of securities and
their approximate fair market values at December 31, were as follows (in
thousands):
Held-To-Maturity Securities December 31, 2000
- --------------------------------------------- -------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value(a)
--------- ---------------- ---------------- -------------
U.S. Treasury Securities $ 999 $ 2 $ 997
Other Government Agency Securities 16,379 51 16,328
Municipal Agencies 1,053 $ 10 1,063
Other Securities 2,311 2,311
------- ------- ------- -------
Total Held-to-Maturity Securities $20,742 $ 10 $ 53 $20,699
======= ======= ======= =======
December 31, 1999
-----------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value(a)
--------- ---------------- ---------------- -------------
U.S. Treasury Securities $2,997 $ 1 $ 11 $2,987
Other Government Agency Securities 1,000 37 963
Municipal Agencies 1,062 17 1,045
Other Securities 2,250 2,250
------ ------ ------ ------
Total Held-to-Maturity Securities $7,309 $ 1 $ 65 $7,245
====== ====== ====== ======
Available-For-Sale Securities December 31, 2000
- ------------------------------------ ---------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value(a)
--------- ---------------- ---------------- -------------
Government Agency Securities $29,567 $ 10 $29,557
Certificates of Participation(b) 3,640 $ 137 3,777
Municipal Agencies 750 3 753
Repurchase Agreement 10,000 10,000
Mortgage-Back Securities 357 3 360
Other Securities 6,009 4 386 5,627
------- ------- ------- -------
Total Available-for-Sale $50,323 $ 147 $ 396 $50,074
======= ======= ======= =======
December 31, 1999
---------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value(a)
--------- ---------------- ---------------- -------------
Government Agency Securities $44,275 $ 674 $43,601
Certificates of Participation(b) 3,961 $ 83 4,044
Municipal Agencies 1,068 47 1,021
Other Securities 6,019 446 5,573
------- ------- ------- -------
Total Available-for-Sale $55,323 $ 83 $ 1,167 $54,239
======= ======= ======= =======
(a) The Bank's portfolio of securities primarily consists of
investment-grade securities. The fair value of actively traded
securities is determined by the secondary market, while the fair value
for non-actively-traded securities is based on independent broker
quotations.
(b) Non-rated certificates of participation evidencing ownership interest in
the California Statewide Communities Development Authority - San Joaquin
County Limited Obligation Bond Trust with book values of $3,640,000 and
$3,961,000 and market values of $3,777,000 and $4,044,000 at December
31, 2000 and 1999, respectively.
42
44
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #2 - INVESTMENT SECURITIES, Continued
Proceeds from maturities of investment securities held-to-maturity during 2000,
were $2,140,000. Proceeds from maturities of investment securities
available-for-sale during 2000, were $1,815,301,000. There were no gains or
losses recognized.
Proceeds from maturities of investment securities held-to-maturity during 1999,
were $11,563,000. Proceeds from maturities of investment securities
available-for-sale during 1999, were $2,110,841,000. There were no gains or
losses recognized.
Securities with a book value of $13,075,000 and $11,898,000 and market value of
$13,073,000 and $11,893,000 at December 31, 2000 and 1999, respectively, were
pledged to secure public deposits and for other purposes as required or
permitted by law.
The amortized cost, estimated fair value and average yield of securities at
December 31, 2000, by contractual maturity were as follows (in thousands):
Held-to-Maturity Securities
-------------------------------------------
Maturities Schedule of Securities Amortized Average
at December 31, 2000 Cost Fair Value Yield(a)
- -------------------------------------- --------- ---------- ---------
Due in one year or less $ 8,311 $ 8,297 4.50%
Due after one year through five years 12,278 12,246 6.15%
Due after five years 153 156 4.91%
------- ------- ----
Carried at Amortized Cost $20,742 $20,699 5.48%
======= ======= ====
(a) The average yield is based on effective rates of book balances at the
end of the year. Yields are derived by dividing interest income,
adjusted for amortization of premiums and accretion of discounts, by
total amortized cost.
Available-for-Sale Securities
------------------------------------------
Amortized Average
Maturities Schedule of Securities at December 31, 2000 Cost Fair Value Yield(a)
- ------------------------------------------------------ --------- ---------- ---------
Due in one year or less $22,884 $22,863 6.26%
Due after one year through five years 22,832 22,977 6.43%
Due after five through ten years 1,740 1,735 6.46%
Due after ten years 2,867 2,499 2.07%
------- ------- ----
Carried at Fair Value $50,323 $50,074 6.11%
======= ======= ====
(a) The average yield is based on effective rates of book balances at the
end of the year. Yields are derived by dividing interest income,
adjusted for amortization of premiums and accretion of discounts, by
total amortized cost.
43
45
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #3 - LOANS
The composition of the loan portfolio at December 31, 2000 and 1999, was as
follows (in thousands):
2000 1999
--------- ---------
Commercial, financial and agricultural $ 44,269 $ 41,091
Real Estate -- construction 12,647 11,144
Real Estate -- mortgage
Commercial 275,557 252,189
Residential 27,899 31,546
Loans to individuals for household, family
and other personal expenditures 6,400 5,916
All other loans (including overdrafts) 679 1,707
--------- ---------
367,451 343,593
Deferred income on loans (141) (299)
--------- ---------
Loans, net of deferred income $ 367,310 $ 343,294
========= =========
Nonaccruing loans totaled approximately $2,319,000 and $6,068,000 at December
31, 2000 and 1999, respectively. Interest income that would have been recognized
on nonaccrual loans if they had performed in accordance with the terms of the
loans was approximately $644,000, $819,000, and $967,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.
At December 31, 2000 and 1999, the Bank had approximately $17,000 and $202,000
of loans that were past due 90 days or more in interest or principal but which
were still accruing interest. These loans are collateralized and in the process
of collection.
NOTE #4 - DIRECT LEASE FINANCING
The Bank leases equipment to parties under agreements which range generally from
three to seven years. Executory costs are paid by the lessee and leases do not
include any contingent rental features. The net investment in direct lease
financing at December 31, 2000 and 1999, consists of the following (in
thousands):
2000 1999
------- -------
Lease payments receivable $ 1,236 $ 2,589
Unearned income (72) (248)
------- -------
$ 1,164 $ 2,341
======= =======
At December 31, 2000, the Bank had no outstanding lease commitments.
At December 31, 2000, future minimum lease payments receivable under direct
financing leases are as follows:
Year (In thousands)
- --------------------
2001 $ 600
2002 160
2003 270
2004 140
2005 47
Thereafter 19
------
1,236
Less unearned income (72)
------
$1,164
======
44
46
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #5 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows
(in thousands):
2000 1999 1998
------- ------- -------
Balance, Beginning of Year $ 6,102 $ 5,576 $ 5,165
Recoveries on loans previously charged off 312 237 505
Provision charged to operating expense 1,070 485 775
Loans charged off (3,792) (196) (869)
------- ------- -------
Balance, End of Year $ 3,692 $ 6,102 $ 5,576
======= ======= =======
The Bank treats all nonaccruing loans and troubled debt restructurings as
impaired loans. The allowances for loan losses related to impaired loans
amounted to approximately $1,638,000 and $1,363,000 for the years ended December
31, 2000 and 1999, respectively, and those allowances are included in the above
balances. The average balance of these loans amounted to approximately
$5,770,000 and $8,111,000 for the years ended December 31, 2000 and 1999,
respectively. During 2000, cash receipts totaling approximately $52,000 were
applied to reduce the principal balances of, but no interest income was
recognized on, impaired loans. During 1999, cash receipts of approximately
$452,000 were applied to reduce the principal balances of, and approximately
$528,000 of interest income was recognized on, impaired loans.
NOTE #6 - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows
(in thousands):
2000 1999
-------- --------
Buildings $ 2,424 $ 2,424
Furniture and equipment 8,742 8,677
Leasehold improvements 3,424 2,944
-------- --------
14,590 14,045
Less: Accumulated depreciation and amortization (8,807) (8,478)
-------- --------
5,783 5,567
Land 1,230 1,212
-------- --------
Total $ 7,013 $ 6,779
======== ========
The Bank leases land and buildings under noncancelable operating leases expiring
at various dates through 2014. The following is a schedule of future minimum
lease payments based upon obligations at year-end (in thousands):
Year
- --------------------------
2001 $1,308
2002 1,202
2003 1,199
2004 1,195
2005 994
Thereafter 3,868
-------
Total $9,766
=======
Total rental expense for the three years ended December 31, 2000, 1999, and
1998, was $1,269,000, $1,246,000 and $1,231,000, respectively.
45
47
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #7 - OTHER REAL ESTATE OWNED
Other Real Estate Owned is carried at the estimated fair value of the real
estate. An analysis of the transactions for December 31, 2000 and 1999, were as
follows (in thousands):
2000 1999
------- -------
Balance, Beginning of Year $ 1,714 $ 2,876
Additions 1,038 --
Valuation adjustments and other reductions (588) (1,162)
------- -------
Balance, End of Year $ 2,164 $ 1,714
======= =======
The balances at December 31, 2000 and 1999 are shown net of reserves of $0 and
$387,000, respectively.
Transactions in the reserve for other real estate owned are summarized for
December 31, 2000 and 1999 as follows (in thousands):
2000 1999
----- -----
Balance, Beginning of Year $ 387 $ 503
Provision charged to other expense -- 23
Charge-offs and other reductions (387) (139)
----- -----
Balance, End of Year $ -- $ 387
===== =====
NOTE #8 - DEPOSITS
At December 31, 2000, the scheduled maturities of time deposits are as follows
(in thousands):
2001 $120,609
2002 5,120
2003 168
2004 40
2005 167
Thereafter 27
---------
Total $126,131
=========
NOTE #9 - OTHER DEBT
In 1999, other debt consisted of a short term borrowing of $8,800,000 at a fixed
rate representing an advance from the Federal Home Loan Bank of San Francisco
with a due date of January 31, 2000, and interest payable at 6.12%. This advance
was repaid on January 31, 2000. The other debt also included one obligation in
the amount of $19,000. This note was a secured obligation and bears interest at
10%. Principal and interest were payable monthly in installments of $4,956,
beginning October 1, 1990, until May 1, 2000, when this note was paid in full.
46
48
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #10 - STOCK OPTION PLAN
The Company maintains an employee incentive and nonqualified stock option plan
which was approved by its stockholders in 1993 (the "1993 Option Plan"). The
Company applies APB Opinion No. 25 and related interpretations in accounting
with respect to this Option Plan. Accordingly, no compensation cost has been
recognized with respect to options granted under the 1993 Option Plan.
The 1993 Option Plan provides for the issuance of up to an aggregate of
1,147,041 shares of the Company Common Stock (which number gives retroactive
effect to stock dividends issued prior to December 31, 2000). Options to
purchase those shares may be granted to officers, key employees and directors of
the Company and its subsidiaries, including the Bank, at prices not less than
the fair market value of such shares at dates of grant. Options granted expire
within a period of not more than ten years from the dates on which the options
are granted.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 2000, 1999
and 1998, respectively: risk-free rates of 5.08%, 4.67%, and 5.70%; dividend
yields of 2%, 2%, and 0%; expected life of five years; and volatility of 33%,
34%, and 34%.
Information with respect to the number of shares of Common Stock that were
subject to options that were granted or exercised, and those that expired
without exercise, under the 1993 Option Plan during December 31, 2000, 1999 and
1998, the weighted exercise prices thereof, and the number of shares subject to
exercisable options at the end of each of those years, is presented below:
2000 1999 1998
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- -------------- -------- -------------- ---------- --------------
Outstanding, Beginning of Year 789,095 $ 8.49 758,861 $ 8.49 780,410 $ 7.92
Granted 81,000 10.17 64,700 13.12 92,800 15.42
Exercised (4,048) 6.00 (17,579) (7.05) (86,687) (8.14)
Forfeited (19,150) 13.29 (16,887) (13.95) (27,662) (11.17)
------- ------- -------
Outstanding, End of Year 846,897 9.21 789,095 8.84 758,861 8.49
======= ======= =======
Options exercisable at year end 773,907 8.60 717,887 8.27 652,793 7.61
Weighted average fair value of
options granted during year $ 3.15 $ 4.36 $ 5.86
47
49
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #10 - STOCK OPTION PLAN, Continued
The following table summarizes information about fixed stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------
Weighted Average Weighted Weighted
Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------- ----------- ---------------- --------------- ----------- --------------
$5.21 to $6.82 373,690 4.28 $ 5.99 373,690 $ 5.99
$9.09 to $10.75 296,557 6.96 9.43 245,933 9.31
$11.75 to $13.38 104,475 7.65 12.47 90,984 12.43
$14.00 to $15.38 60,675 7.72 15.42 51,800 15.34
$17.50 11,500 7.33 17.50 11,500 17.50
------- -------
$5.21 to $17.50 846,897 773,907
======= =======
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Bank's net income would
have been reduced to the following pro forma amounts (in thousands, except per
share data):
2000 1999 1998
--------- --------- ---------
Net income:
As reported $ 6,700 $ 6,250 $ 5,064
Pro forma 6,470 6,005 4,710
Per share data:
Net income -- Basic
As reported $ 1.24 $ 1.06 $ 0.85
Pro forma $ 1.19 $ 1.02 $ 0.79
Net income -- diluted
As reported $ 1.16 $ 1.00 $ 0.80
Pro forma $ 1.12 $ 0.96 $ 0.74
NOTE #11 - DEFINED CONTRIBUTION PLAN (401K)
The Company sponsors a defined contribution pension plan that covers all
employees with 1,000 or more hours worked in a year. Contributions to the plan
are based on the employee's gross salary less the IRS Section 125 flex plan. For
the years ending December 31, 2000, 1999, and 1998, the amount of pension
expense was $272,000, $259,000, and $270,000, respectively.
NOTE #12 - DEFERRED COMPENSATION
The Bank maintained a nonqualified, unfunded deferred compensation plan for
certain key management personnel whereby they may defer compensation which will
then provide for certain payments upon retirement, death, or disability. The
plan provides for payments for ten years commencing upon retirement. The plan
provides for reduced benefits upon early retirement, disability, or termination
of employment. The deferred compensation expense for 2000 was $324,000 ($190,836
net of income taxes), 1999 was $324,000 ($190,836 net of income taxes), and 1998
was $328,970 ($194,085 net of income taxes).
48
50
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #13 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT
There are legal limitations on the ability of the Bank to provide funds to the
Company. Dividends declared by the Bank may not exceed, in any calendar year,
without approval of the California Commissioner of Financial Institutions, net
income for the year and the retained net income for the preceding two years.
Section 23A of the Federal Reserve Act restricts the Bank from extending credit
to the Company and other affiliates of the Company amounting to more than 20% of
its contributed capital and retained earnings. At December 31, 2000, the maximum
combined amount of funds that were available from these two sources was
approximately $16,055,000 or 33% consolidated stockholders' equity.
NOTE #14 - STOCK DIVIDENDS
On April 16, 1998, the Board of Directors declared a 15% stock dividend payable
on July 7, 1998, to stockholders of record on June 15, 1998. As a result, the
Bank distributed 779,314 shares of common stock and the common stock was
increased and retained earnings was decreased by $12,469,000. All references in
the accompanying financial statements to the number of common shares and per
share amounts for 1998 have been restated to reflect the stock dividends.
NOTE #15 - OTHER EXPENSES
The following is a breakdown of other expenses for the years ended December 31,
2000, 1999, and 1998 (amounts in thousands):
2000 1999 1998
------ ------ ------
Data processing $1,077 $ 970 $ 934
Marketing expenses 940 1,109 707
Office supplies, postage and telephone 1,071 1,136 1,162
Bank insurance 492 562 582
Supervisory assessments 126 94 108
Professional fees 1,334 1,742 1,309
Operating losses 66 71 142
OREO expenses 39 140 586
Other 2,297 1,756 2,591
------ ------ ------
Total $7,442 $7,580 $8,121
====== ====== ======
NOTE #16 - INCOME TAXES
The provisions for income taxes consist of the following (amounts in thousands):
2000 1999 1998
------- ------- -------
Tax provision applicable to income
before income taxes $ 3,920 $ 3,662 $ 3,084
======= ======= =======
Federal Income Tax
Current 2,469 2,621 2,520
Deferred 282 (49) (366)
State Franchise Tax
Current 1,080 1,067 1,061
Deferred 89 23 (131)
------- ------- -------
Total $ 3,920 $ 3,662 $ 3,084
======= ======= =======
49
51
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #16 - INCOME TAXES, Continued
The following is a summary of the components of the deferred tax assets accounts
recognized in the accompanying statements of financial condition as of December
31 (amounts in thousands):
2000 1999
------- -------
Deferred Tax Assets
Allowance for loan losses due to tax limitations $ 909 $ 1,709
Deferred compensation plan 1,026 863
Allowance for other real estate owned 47 38
Other assets and liabilities 338 184
Net unrealized loss on available-for-sale securities 6 246
------- -------
Total Deferred Tax Assets 2,326 3,040
Deferred Tax Liabilities
Premises and equipment due to depreciation difference (525) (628)
------- -------
Net Deferred Tax Assets $ 1,801 $ 2,412
======= =======
Deferred tax expense results from timing differences in the recognition of
revenues and expenses for tax and financial statement purposes. The sources of
these differences and the tax effect of each are as follows (amounts in
thousands):
2000 1999 1998
----------------- ------------------ -----------------
Federal State Federal State Federal State
------- ----- ------- ----- ------- -----
Tax Effect of:
Nonaccrual loan interest computed differently
on tax returns than for financial statements $ (12) $ (4) $ (30) $ (6) $ 74 $ 26
Depreciation computed differently on tax
on tax returns than for financial statements (65) (38) (78) (23) (34) (12)
OREO transactions computed differently
on tax return than for financial statements (6) (3) 134 45 (48) (17)
Deferred compensation plan (109) (54) 3 1 (43) (15)
Provision for loan loss deduction on tax return
(over) amount charged for financial statements purposes 575 225 38 20 (223) (80)
Other assets and liabilities (101) (37) (116) (14) (92) (33)
----- ----- ----- ----- ----- -----
Total $ 282 $ 89 $ (49) $ 23 $(366) $(131)
===== ===== ===== ===== ===== =====
As a result of the following items, the total tax expenses for 2000, 1999 and
1998, were less than the amount computed by applying the statutory U.S. Federal
income tax rate to income before taxes (dollars in thousands):
2000 1999 1998
--------------------- --------------------- ----------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ---------- ------- ---------- ------- ----------
Federal rate $ 3,611 34.0 $ 3,370 34.0 $ 2,770 34.0
Changes due to State income tax,
net of Federal tax benefit 754 7.1 704 7.1 579 7.1
Exempt interest (517) (4.9) (438) (4.5) (296) (3.6)
Other 72 0.7 26 0.3 31 0.3
------- ---- ------- ---- ------- ----
Total $ 3,920 36.9 $ 3,662 36.9 $ 3,084 37.8
======= ==== ======= ==== ======= ====
50
52
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #17 - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute earnings per share ("EPS"). All
amounts in the table are in thousands.
2000 1999 1998
------------------ ------------------ ------------------
Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------
Net income as reported $6,700 $6,250 $5,064
Shares outstanding at year end 5,244 5,773 5,985
Impact of weighting shares purchased during year 190 113 (38)
------ ------ ------ ------ ------ ------
Used in Basic EPS 6,700 5,434 6,250 5,886 5,064 5,947
Dilutive effect of outstanding stock options 366 367 423
------ ------ ------ ------ ------ ------
Used in Dilutive EPS $6,700 5,800 $6,250 6,253 $5,064 6,370
====== ====== ====== ====== ====== ======
NOTE #18 - COMMITMENTS AND CONTINGENCIES
The Bank is involved in various litigation that has arisen in the ordinary
course of its business. In the opinion of management, the disposition of pending
litigation will not have a material effect on the Company's financial
statements.
In the normal course of business, the Bank is a party to financial instruments
with off-balance-sheet risk. These financial instruments include commitments to
extend credit and standby commercial letters of credit. To varying degrees,
these instruments involve elements of credit and interest rate risk in excess of
the amount recognized in the statement of financial position. The Bank's
exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. At
December 31, 2000 and 1999 , the Bank had commitments to extend credit of
$17,393,000 and $48,503,000, respectively, and obligations under standby letters
of credit of $903,000 and $644,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, income-producing commercial
properties, residential properties and properties under construction.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
NOTE #19 - REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by federal banking agencies. Under
applicable law and government regulations, a failure by the Company or the Bank
to meet certain minimum capital requirements would result in the imposition of
operational restrictions and other requirements and the possible initiation of
additional discretionary actions by government regulatory agencies that could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
requirements that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. The most recent notification from the federal
regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. Prompt corrective action provisions are
not applicable to bank holding companies.
51
53
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #19 - REGULATORY MATTERS, Continued
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts (set forth in the table below) of
total capital and Tier 1 capital (as defined in the regulations) and ratios of
total capital and Tier 1 capital and to risk-weighted assets (as defined), and
to average assets (as defined). The following table compares, as of December 31,
2000 and December 31, 1999, the total capital and Tier 1 capital of the Company
(on a consolidated basis), and that of the Bank, to the capital requirements
imposed by government regulations (with amounts stated in thousands):
FOOTHILL INDEPENDENT BANCORP Capital Needed
----------------------------------------------------
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Provisions
--------------------- ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------ ----------- ------ -------- ------
AS OF DECEMBER 31, 2000:
Total capital to risk-weighted assets $51,783 12.6% $32,767 8.0% $40,959 10.0%
Tier 1 capital to risk-weighted assets 48,091 11.7% 16,383 4.0% 24,575 6.0%
Tier 1 capital to average assets 48,091 9.5% 20,290 4.0% 25,363 5.0%
AS OF DECEMBER 31, 1999:
Total capital to risk-weighted assets $53,470 14.2% $26,304 8.0% $37,578 10.0%
Tier 1 capital to risk-weighted assets 48,756 13.0% 15,031 4.0% 22,547 6.0%
Tier 1 capital to average assets 48,756 10.4% 18,812 4.0% 23,515 5.0%
FOOTHILL INDEPENDENT BANK Capital Needed
----------------------------------------------
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Provisions
---------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ----------- ------- ----------- ---------
AS OF DECEMBER 31, 2000:
Total capital to risk-weighted assets $51,658 12.6% $32,763 8.0% $40,954 10.0%
Tier 1 capital to risk-weighted assets 47,966 11.7% 16,382 4.0% 24,572 6.0%
Tier 1 capital to average assets 47,966 9.5% 20,168 4.0% 25,210 5.0%
AS OF DECEMBER 31, 1999:
Total capital to risk-weighted assets $53,163 14.2% $30,033 8.0% $37,542 10.0%
Tier 1 capital to risk-weighted assets 48,453 12.9% 15,017 4.0% 22,525 6.0%
Tier 1 capital to average assets 48,453 10.4% 18,689 4.0% 23,361 5.0%
52
54
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below presents the carrying amounts and fair values of financial
instruments at December 31, 1999 (with dollars in thousands). FASB Statement
107, "Disclosures about Fair Value of Financial Instruments," defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Fair value estimates are made at a specific
point-in-time based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire holding of a
particular financial instrument. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based
on judgments regarding current economic conditions, risk characteristics of
various financial instruments, future expected loss experience and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment, and therefore can not be determined with precision. Changes
and assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Investment Securities
For U.S. Treasury and U.S. Government 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 from
the various homogeneous categories of loans. All loans have been
adjusted to reflect changes in credit risk.
Deposits
The fair value of demand deposits, money market deposits, savings
accounts and NOW accounts is defined as the amounts payable on demand at
December 31, 2000 and December 31, 1999. 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.
Long-term Debt - 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.
December 31, 2000 December 31, 1999
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------- -------------- -------------
Financial Assets
Cash and cash equivalents $38,186 $38,186 $26,862 $26,862
Investment securities and deposits 79,465 77,088 71,243 71,244
Loans 367,450 357,448 343,593 346,649
Direct lease financing 1,164 1,158 2,341 2,346
Cash surrender value 5,639 5,639 4,997 4,997
Financial Liabilities
Deposits 454,041 454,278 397,264 397,676
Other debt -- -- 8,819 8,822
Unrecognized Financial Instruments
Commitments to extend credit 48,304 4,830 48,503 48,503
Standby letters of credit 924 92 644 644
53
55
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #21 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP
(PARENT COMPANY)
BALANCE SHEETS
2000 1999 1998
------------- ------------ ------------
(dollars in thousands)
ASSETS
Cash $198 $704 $261
Investment in subsidiaries 47,975 47,785 47,475
Time certificates of deposit -- -- 97
Accounts receivable 174 317 413
Excess of cost over net assets of company acquired (net) 42 85 128
Prepaid expenses 19 11 5
------------- ------------ ------------
Total Assets $48,408 $48,902 $48,379
============= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $145 -- --
Dividends payable -- $463 --
------------- ------------ ------------
145 463 --
------------- ------------ ------------
STOCKHOLDERS' EQUITY
Common stock 5 5 5
Additional paid-in capital 37,754 37,373 37,015
Retained earnings 10,504 11,061 11,359
------------- ------------ ------------
Total Stockholders' Equity 48,263 48,439 48,379
------------- ------------ ------------
Total Liabilities and Stockholders Equity $48,263 $48,902 $48,379
============= ============ ============
STATEMENTS OF INCOME
INCOME
Equity in undistributed income of subsidiaries $6,992 $6,739 $5,261
Interest and other income -- -- 18
------------ ------------ ------------
6,992 6,739 5,279
------------ ------------ ------------
EXPENSE
Amortization and other expenses 467 806 323
------------ ------------ ------------
Total Operating Income 6,525 5,933 4,956
Tax benefit of parent's operating expenses 175 317 108
------------ ------------ ------------
Net Income $6,700 $6,250 $5,064
============ ============ ============
54
56
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #21 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP
(PARENT COMPANY), Cont'd
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------- ------- -------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received for tax benefit from Foothill Independent Bank $ 317 $ 413 $ 108
Interest and other income received -- -- 18
Cash paid for operating expenses (286) (770) (551)
------- ------- -------
Net Cash Provided(Used) By Operating Activities 31 (357) (425)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans -- -- 13
(Purchase)redemption of deposits in other financial institutions -- 97 297
Capital contributed to subsidiary -- -- (900)
------- ------- -------
Net Cash Provided(Used) By Investing Activities -- 97 (590)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,846) (1,945) (9)
Dividends received from Foothill Independent Bank 7,397 5,750 --
Capital stock purchased 357 234 256
Proceeds from exercise of stock options 24 124 1,018
Capital stock repurchased (6,469) (3,460) (132)
------- ------- -------
Net Cash Provided(Used) By Financing Activities (537) 703 1,133
------- ------- -------
NET INCREASE(DECREASE) IN CASH (506) 443 118
CASH, Beginning of Year 704 261 143
======= ======= =======
CASH, End of Year $ 198 $ 704 $ 261
======= ======= =======
RECONCILIATION OF NET INCREASE TO NET CASH PROVIDED BY OPERATING ACTIVITIES
NET INCOME $ 6,700 $ 6,250 $ 5,064
------- ------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Amortization 43 42 42
Undistributed earnings of subsidiaries (6,992) (6,739) (5,261)
(Increase)Decrease in accounts receivable 143 96 (270)
(Increase)Decrease in prepaid expenses (8) (6) --
Increase in accounts payables 145 -- --
------- ------- -------
Total Adjustments (6,669) (6,607) (5,489)
------- ------- -------
Net Cash Provided(Used) by Operating Activities $ 31 $ (357) $ (425)
======= ======= =======
55
57
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE #22 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the Company and its
subsidiaries for the two years ended December 31, 2000 and 1999, is summarized
below:
2000
-------------------------------------------------------
First Second Third Fourth
------- ------- ------- -------
(dollars in thousands, except per share amounts)
Summary of Operations
Interest income $ 9,544 $ 9,488 $ 9,839 $10,112
Interest expense 2,380 2,716 2,920 3,087
Net interest income 7,164 6,772 6,919 7,025
Provision for loan losses 250 455 190 175
Net interest income after provision for loan losses 6,914 6,317 6,729 6,850
Other income 1,030 1,172 1,193 1,209
Other expense 5,404 4,910 5,152 5,328
Income before taxes 2,540 2,579 2,770 2,731
Applicable income taxes 938 953 1,023 1,006
------- ------- ------- -------
Net Income $ 1,602 $ 1,626 $ 1,747 $ 1,725
======= ======= ======= =======
Earnings Per Share -- Basic $ 0.28 $ 0.30 $ 0.33 $ 0.33
======= ======= ======= =======
Earnings Per Share -- Diluted $ 0.26 $ 0.29 $ 0.30 $ 0.31
======= ======= ======= =======
1999
---------------------------------------------------
First Second Third Fourth
------ ------ ------ ------
(dollars in thousands, except per share amounts)
Summary of Operations
Interest income $8,677 $8,993 $8,837 $9,044
Interest expense 2,126 2,060 2,098 2,049
Net interest income 6,551 6,933 6,739 6,995
Provision for loan losses 156 124 205 --
Net interest income after provision for loan losses 6,395 6,809 6,534 6,995
Other income 1,189 1,249 1,125 958
Other expense 5,209 5,606 5,092 5,435
Income before taxes 2,375 2,452 2,567 2,518
Applicable income taxes 867 895 937 963
------ ------ ------ ------
Net Income $1,508 $1,557 $1,630 $1,555
====== ====== ====== ======
Earnings Per Share - Basic $ 0.25 $ 0.26 $ 0.28 $ 0.27
====== ====== ====== ======
Earnings Per Share - Diluted $ 0.24 $ 0.25 $ 0.26 $ 0.25
====== ====== ====== ======
56
58
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding our executive officers which is
included in Part I of this Report, the information called for by Item 10 is
incorporated herein by reference from the Company's definitive proxy statement,
for the Company's 2001 annual meeting of shareholders, to be filed with the
Commission on or before April 30, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 2001 for the Company's 2001 annual shareholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 2001 for the Company's 2001 annual shareholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 2001 for the Company's 2001 annual shareholders' meeting.
57
59
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
(1) Financial Statements:
See Index to Financial Statements in Item 8 on Page 31 of this
Report.
(2) Financial Statement Schedules:
All schedules are omitted as the information is not required, is
not material or is otherwise furnished.
(3) Exhibits:
See Index to Exhibits on Page E-1 of this Form 10-K.
(4) Reports on Form 8-K:
None
58
60
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes George E.
Langley or Carol Ann Graf, individually, as attorney-in-fact, to sign in his
behalf and in each capacity stated below, and to file, all amendments and/or
supplements to this Annual Report on form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 20th day of
March 2001.
FOOTHILL INDEPENDENT BANCORP
By: /s/ GEORGE E. LANGLEY
-------------------------------------
George E. Langley, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following officers and directors of the
registrant in the capacities indicated on March 20, 2001.
/s/ GEORGE E. LANGLEY President, Chief Executive Officer (Principal
- --------------------------------------- Executive Officer) and Director
George E. Langley
/s/ CAROL ANN GRAF Chief Financial Officer (Principal Financial and
- --------------------------------------- Accounting Officer)
Carol Ann Graf
/s/ DONNA L. MILTENBERGER Executive Vice President and Director
- ---------------------------------------
Donna L. Miltenberger
/s/ WILLIAM V. LANDECENA Chairman of the Board of Directors
- ---------------------------------------
William V. Landecena
/s/ RICHARD GALICH Director
- ---------------------------------------
Richard Galich
/s/ O. L. MESTAD Director
- ---------------------------------------
O. L. Mestad
/s/ GEORGE SELLERS Director
- ---------------------------------------
George Sellers
/s/ MAX E. WILLIAMS Director
- ---------------------------------------
Max E. Williams
S-1
61
EXHIBIT INDEX
Exhibit No Description of Exhibit
--------- -----------------------
2.1 Agreement and Plan of Merger dated May 4, 2000 between Foothill
Independent Bancorp, Inc("Foothill Delaware") and Foothill
Independent Bancorp ("Foothill California") pursuant to which
the Company's state of incorporation was changed from California
to Delaware.*
2.2 Certificate of Merger filed with the Delaware Secretary of State
on July 18, 2000 effectuating the reincorporation of the Company
in Delaware.*
3.1 Certificate of Incorporation of the Company as filed in
Delaware.*
3.2 Bylaws of the Company, as in effect under Delaware Law.*
4.1 Rights Agreement between the Company and ChaseMellon
Shareholders Services setting forth the rights of the holders of
Rights to Purchase Common Stock of the Company.*
21 Subsidiaries of the Company.
23.1 Consent of Independent Public Accountants.
* All of these Exhibits are incorporated by reference from the Company's
Current Report on Form 8-K dated July 18, 2000.
E-1