<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________to__________________
Commission file number 0-11337
FOOTHILL INDEPENDENT BANCORP
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3815805
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
510 SOUTH GRAND AVENUE, GLENDORA, CALIFORNIA 91741
(Address of principal executive offices) (Zip Code)
(626) 963-8551 or (909) 599-9351
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES [XX]. NO [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
5,894,682 shares of Common Stock
as of May 5, 1999
Page 1 of 21 Pages
Exhibit Index on sequentially numbered Page 20
<PAGE> 2
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,187 $ 24,482
Federal funds sold 13,350 13,000
--------- ---------
Total Cash and Cash Equivalents 39,537 37,482
--------- ---------
Interest-bearing deposits in other financial institutions 16,133 15,043
--------- ---------
Investment Securities Held-To-Maturity (approximate market
value $12,903 in 1999 and $12,908 in 1998
U.S. Treasury 6,999 6,998
U.S. Government Agencies 1,999 1,999
Municipal Agencies 1,579 1,580
Other Securities 2,250 2,250
--------- ---------
Total Investment Securities Held-To-Maturity 12,827 12,827
--------- ---------
Investment Securities Available-For-Sale 74,424 93,418
--------- ---------
Loans, net of unearned discount and
prepaid points and fees 307,533 290,879
Direct lease financing 3,047 3,704
Less reserve for possible loan and lease losses (5,723) (5,576)
--------- ---------
Total Loans & Leases, net 304,857 289,007
--------- ---------
Bank premises and equipment 6,770 6,970
Accrued interest 2,645 2,891
Other real estate owned, net of allowance for possible losses
of $65 in 1999 and $19 in 1998 2,786 2,876
Cash surrender value of life insurance 4,659 4,578
Prepaid expenses 1,604 1,199
Deferred income taxes 1,651 2,386
Other assets 304 400
--------- ---------
TOTAL ASSETS $ 468,197 $ 469,077
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand deposits $ 140,617 $ 139,939
Savings and NOW deposits 106,915 99,198
Money market deposits 78,884 79,744
Time deposits in denominations of $100,000 or more 57,142 58,066
Other time deposits 32,454 39,717
--------- ---------
Total deposits 416,012 416,664
--------- ---------
Accrued employee benefits 1,774 1,836
Accrued interest and other liabilities 3,198 2,124
Long-term debt 61 74
--------- ---------
Total Liabilities 421,045 420,698
--------- ---------
Stockholders' Equity
Contributed capital
Capital stock - authorized
12,500,000 shares without par value;
issued and outstanding 5,915,263
shares in 1999 and 5,985,244 in 1998 36,111 36,057
Additional Paid-in Capital 963 963
Retained Earnings 10,360 11,516
Accumulated Other Comprehensive Income (282) (157)
--------- ---------
Total Stockholders' Equity 47,152 48,379
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 468,197 $ 469,077
========= =========
</TABLE>
See accompanying notes to financial statements
-2-
<PAGE> 3
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1999 1998
------------ ---------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $6,980 $7,164
Interest on investment securities
U.S. Treasury 161 271
Obligations of other U.S. government
agencies 692 271
Municipal agencies 88 91
Other securities 356 188
Interest on deposits 200 127
Interest on Federal funds sold 152 398
Lease financing income 48 66
------ ------
Total Interest Income 8,677 8,576
------ ------
INTEREST EXPENSE
Interest on savings & NOW deposits 382 341
Interest on money market deposits 659 626
Interest on time deposits in denominations
of $100,000 or more 452 675
Interest on other time deposits 631 780
Interest on borrowings 2 3
------ ------
Total Interest Expense 2,126 2,425
------ ------
Net Interest Income 6,551 6,151
PROVISION FOR LOAN AND LEASE LOSSES 156 275
------ ------
Net Interest Income After Provisions
for Loan and Lease Losses 6,395 5,876
------ ------
OTHER INCOME
Fees and service charges 1,161 1,234
Gain on sale SBA loans 28 --
Other 1
------ ------
Total other income 1,189 1,235
------ ------
OTHER EXPENSES
Salaries and benefits 2,349 2,427
Occupancy expenses, net of revenue
of $44 in 1999 and $34 in 1998 510 532
Furniture and equipment expenses 405 421
Other expenses (Note 2) 1,945 2,160
------ ------
Total Other Expenses 5,209 5,540
------ ------
INCOME BEFORE INCOME TAXES 2,375 1,571
------ ------
PROVISION FOR INCOME TAXES 867 567
------ ------
NET INCOME $1,508 $1,004
====== ======
EARNINGS PER SHARE OF COMMON STOCK
Basic $ 0.25 $ 0.17
------ ------
Diluted $ 0.24 $ 0.16
------ ------
(Note 3)
</TABLE>
See accompanying notes to financial statements
-3-
<PAGE> 4
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
SHARES CAPITAL PAID-IN RETAINED COMPREHENSIVE
OUTSTANDING STOCK CAPITAL EARNINGS INCOME TOTAL
----------- ------- ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 5,111,993 $ 22,618 $ 659 $ 19,062 $ (298) $ 42,041
Exercise of stock options 7,730 49 49
Common stock issued under
employee benefit and dividend
reinvestment plans 8,356 143 143
Comprehensive Income
Net Income 1,004
Unrealized security holding losses
(Net of taxes $3) 5
Total Comprehensive Income 1,009
--------- -------- ----- -------- ------ --------
BALANCE, March 31, 1998 5,128,079 $ 22,810 $ 659 $ 20,066 $ (293) $ 43,242
========= ======== ===== ======== ====== ========
BALANCE, January 1, 1999 5,985,242 36,057 963 11,516 (157) 48,379
Cash Dividend
distributed 4/15/99 (1,481) (1,481)
Exercise of stock options 6,419 38 38
Common stock issued under
employee benefit and dividend
reinvestment plans 1,030 16 16
Common stock repurchased,
cancelled and retired (77,428) (1,183) (1,183)
Comprehensive Income
Net Income 1,508
Unrealized security holding gains
(Net of taxes $54) (125)
Total Comprehensive Income 1,383
--------- -------- ----- -------- ------ --------
BALANCE, March 31, 1999 5,915,263 $ 36,111 $ 963 $ 10,360 $ (282) $ 47,152
========= ======== ===== ======== ====== ========
</TABLE>
See accompanying notes to financial statements
-4-
<PAGE> 5
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1999 1998
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Interest and fees received $ 8,925 $ 8,626
Service fees and other income received 1,111 1,160
Financing revenue received under leases 48 66
Interest paid (2,232) (2,495)
Cash paid to suppliers and employees (4,305) (5,849)
Income taxes paid 365 12
--------- ---------
Net Cash Provided (Used) by Operating Activities 3,912 1,520
--------- ---------
Cash Flows From Investing Activities:
Proceeds from maturity of investment securities (AFS) 456,903 24,424
Purchase of investment securities (AFS) (438,138) (40,349)
Proceeds from maturity of investment securities (HTM) 3,005 1,018
Purchase of investment securities (HTM) (3,005) --
Proceeds from maturity of deposits in
other financial institutions 6,433 4,348
Purchase of deposits in other financial
institutions (7,523) (5,340)
Net (increase) decrease in credit card and
revolving credit receivables 313 356
Recoveries on loans previously written off -- 264
Net (increase) decrease in loans (17,134) 19
Net (increase) decrease in leases 657 469
Proceeds from property, plaant & equipment 20
Capital expenditures (138) (193)
Proceeds from sale of other real estate owned 44 (369)
Stock repurchased and retired (1,183)
--------- ---------
Net Cash Provided (Used) in Investing Activities 254 (15,353)
--------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts,
savings accounts, and money market deposits 7,516 12,412
Net increase (decrease) in certificates of deposit
with maturities of three months or less (1,752) (984)
Net increase (decrease) in certificates of deposit
with maturities of more than three months (6,435) (649)
Proceeds from exercise of stock options 38 49
Proceeds from stock issued under employee benefit and
dividend reinvestment plans 16 143
Principal payment on long term debt (13) (12)
Dividends paid (1,481) --
--------- ---------
Net Cash Provided by Financing Activities (2,111) 10,959
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 2,055 (2,874)
Cash and Cash Equivalents at Beginning of Year 37,482 69,350
--------- ---------
Cash and Cash Equivalents at December 31, 1998 & 1997 $ 39,537 $ 66,476
========= =========
</TABLE>
-5-
<PAGE> 6
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1999 1998
------- -------
(dollars in thousands)
<S> <C> <C>
Net Income $ 1,508 $ 1,004
------- -------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization 315 328
Provision for possible credit losses 156 275
Provision for possible OREO losses (46)
(Gain)/loss on sale of equipment 3
Provision for deferred taxes 735 163
Increase/(decrease) in taxes payable 497 416
(Increase)/decrease in other assets 73 (62)
(Increase)/decrease in interest receivable 246 107
Increase/(decrease) in discounts and premiums 50 9
Increase/(decrease) in interest payable (106) (70)
(Increase)/decrease in prepaid expenses (405) (384)
Increase/(decrease) in accrued expenses and other
liabilities 967 (191)
Gain on sale of other real estate owned --
Increase in cash surrender value of life insurance (81) (75)
(Gain)/loss on sale of investments and other assets --
------- -------
Total Adjustments 2,404 516
------- -------
Net Cash Provided (Used) by Operating Activities $ 3,912 $ 1,520
======= =======
</TABLE>
DISCLOSURE OF ACCOUNTING POLICY
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one-day periods.
See accompanying notes to financial statements
-6-
<PAGE> 7
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
March 31, 1999 AND 1998
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
statement of the results for the interim periods presented have been included.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
NOTE #2 - OTHER EXPENSES
The following is a breakdown of other expenses for the three month period ended
March 31, 1999 & 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------ ------
(dollars in thousands)
<S> <C> <C>
Data processing $ 225 $ 236
Marketing expenses 280 169
Office supplies, postage
and telephone 306 307
Bank Insurance 157 151
Supervisory Assessments 21 28
Professional Expenses 373 315
Provision for OREO Loss 45 343
Provision for Y2K Expense -- --
Other Expenses 538 611
------ ------
Total Other Expenses $1,945 $2,160
====== ======
</TABLE>
NOTE #3 - EARNINGS PER SHARE
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1999 1998
------------------- --------------------
Income Shares Income Shares
------------------- --------------------
<S> <C> <C> <C> <C>
Net income as reported $1,508 $1,004
Shares outstanding at period end 5,915 5,897
Impact of weighting shares
purchased during the period 49 (8)
------ ----- ------ -----
Used in Basic EPS 1,508 5,964 1,004 5,889
Dilutive effect of outstanding
stock options 407 424
------ ----- ------ -----
Used in Dilutive EPS $1,508 6,371 $1,004 6,313
====== ===== ====== =====
</TABLE>
-7-
<PAGE> 8
Notes to Condensed Consolidated Financial Statements (continued)
NOTE #4 - INCOME TAXES
The Bank adopted Statement No. 109 of the Financial Accounting Standards Board,
Accounting for Income Taxes, commencing January 1, 1993. This new statement
supersedes Statement No. 96 and among other things, changes the criteria for the
recognition and measurement of deferred tax assets. This adoption does not
create a material change in the financial statements of the Bank or the Company.
NOTE #5 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement 107 is effective for financial
statements for fiscal years ending after December 15, 1992. The Statement
considers the fair value of financial instruments for both assets and
liabilities.
The following methods and assumptions were used to estimate the fair value of
financial instruments.
Investment Securities
For U.S. Government and U.S. Agency securities, fair values are based on market
prices. For other investment securities, fair value equals quoted market price
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities as the basis for a pricing
matrix.
Loans
The fair value for loans with variable interest rates is the carrying amount.
The fair value of fixed rate loans is derived by calculating the discounted
value of the future cash flows expected to be received by the various
homogeneous categories of loans. All loans have been adjusted to reflect changes
in credit risk.
Deposits
The fair value of demand deposits, savings deposits, savings accounts and NOW
accounts is defined as the amounts payable on demand at March 31, 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.
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.
-8-
<PAGE> 9
Notes to Condensed Consolidated Financial Statements (continued)
Note #5 - Disclosures about Fair Value of Financial Instruments (Continued)
Commitments to Extend Credit and Standby Letter of Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the parties involved. For
fixed-rate loan commitments, fair value also considered the difference between
current levels of interest rates and committed rates.
The fair value of guarantees and letters of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with parties involved at March 31, 1999.
The estimated fair value of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
March 31, 1999
----------------------------
Carrying Amount Fair Value
--------------- ----------
(dollars in thousands)
<S> <C> <C>
Financial Assets
Cash and cash equivalents $ 39,537 $ 39,537
Investment securities and deposits 103,384 121,369
Loans 291,418 299,380
Direct lease financing 3,047 3,590
Financial Liabilities
Deposits 416,011 415,302
Long term debt 61 49
Unrecognized Financial Instruments
Commitments to extend credit 48,807 48,807
Standby letters of credit 2,142 2,142
</TABLE>
-9-
<PAGE> 10
Notes to Condensed Consolidated Financial Statements (continued)
NOTE# 6 - NON-PERFORMING LOANS
The following table sets forth information regarding the Bank's non-performing
loans at March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
(dollars in thousands)
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due (1)
Aggregate Loan Amounts
Commercial, financial and agricultural $ -- $ 8
Real Estate -- --
Installment loans to individuals 3 12
Aggregate Leases -- 17
Total Loans Past Due More Than 90 Days 3 37
Troubled Debt Restructurings (2) 2,990 3,042
Non-accrual loans (3) 6,074 6,347
------ ------
Total Non-Performing Loans $9,067 $9,426
====== ======
</TABLE>
(1) Reflects loans for which there has been no payment of interest and/or
principal for 90 days of more. Ordinarily, loans are placed on non-accrual
status (accrual of interest is discontinued) when the Bank has reason to believe
that continued payment of interest and principal is unlikely. (2) Renegotiated
loans are those which have been renegotiated to provide a deferral of interest
or principal. (3) There were 14 loans on non-accrual status totaling
approximately $6,074,000 at March 31, 1999 and 16 loans totaling approximately
$6,347,000 at December 31, 1998.
The policy of the Company is to review each loan in the loan portfolio to
identify problem credits. In addition, as an integral part of its review process
of the Bank, the Federal Reserve Bank and the California Department of Financial
Institutions also classifies problem credits. There are three classifications
for problem loans: "substandard", "doubtful", and "loss". Substandard loans have
one defined weaknesses and are characterized by the distinct possibility that
the Bank will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weaknesses of substandard loans with the additional
characteristic that the weakensses make collection or liquidation in full, on
the basis of currently existing facts, conditions, and values, questionable. A
loan classified as "loss" is considered uncollectible and of such little value
that the continuance as an asset of the institution is not warranted. Another
category designated "special mention" is maintained for loans which do not
currently expose the Bank to a significant degree of risk to warrant
classification as substandard, doubtful or loss, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
As of March 31, 1999, the Bank's classified loans consisted of approximately
$13,622,000 of loans classified as substandard. The Bank's $13,622,000 of loans
classified as substandard consisted of approximately $7,776,000 of performing
loans and approximately $5,846,000 of non-accrual loans and loans delinquent 90
days or more but still accruing.
-10-
<PAGE> 11
Notes to Condensed Consolidated Financial Statements (continued)
NOTE # 7 - RESERVE FOR LOAN AND LEASE LOSSES
The reserve for loan and lease losses is a general reserve established by
Management to absorb potential losses inherent in the entire portfolio. The
level of and ratio of additions to the reserve are based on a continuous
analysis of the loan and lease portfolio and, at March 31, 1999, reflected an
amount which, in Management's judgement, was adequate to provide for known and
inherent loan losses. In evaluating the adequacy of the reserve, Management
gives consideration to the composition of the loan portfolio, the performance of
loans in the portfolio, evaluations of loan collateral, prior loss experience,
current economic conditions and the prospects or worth of respective borrowers
or guarantors. In addition, the Federal Reserve Bank or Department of Financial
Institutions, as an integral part of their examination process, periodically
reviews the Bank's allowance for possible loan and lease losses. The examiners
may require the Bank to recognize additions to the allowance based upon their
judgement of the information available to it at the time of its examination. The
Bank was most recently examined by the Department of Financial Institutions as
of December 31, 1998.
The reserve for loan and lease losses at March 31, 1999, was $5,723,000 or 1.84%
of total loans and leases. Additions to the reserve are effected through the
provision for loan losses which is an operating expense of the Company.
The following table provides certain information with respect to the Company's
allowance for loan losses as well as charge-off and recovery activity.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- -----------
(dollars in thousands)
<S> <C> <C>
Allowance for Loan Losses $ 5,576 $ 5,165
------- -------
Balance, Beginning of period
Charge-Offs
Commercial, financial and agricultural (62) (423)
Real estate - construction -- --
Real estate - mortgage (45) (274)
Consumer loans (11) (45)
Lease Financing
Other (127)
------- -------
Total Charge-Offs (118) (869)
------- -------
Recoveries
Commercial, financial and agricultural 11 202
Real estate - construction -- --
Real estate - mortgage 93 300
Consumer loans 5 3
Lease Financing -- --
Other -- --
------- -------
Total Recoveries 109 505
------- -------
Net Charge-Offs (9) (364)
Provision Charged to Operations 156 775
------- -------
Balance, End of period $ 5,723 $ 5,576
======= =======
Net Charge-Offs During the Period to Average
Loans Outstanding During the Period Ended 0.003% 0.12%
======= =======
Allowance for Loan Losses to Total Loans 1.84% 1.89%
======= =======
</TABLE>
In accordance with SFAS No. 114 (as amended by SFAS No. 118), "Accounting by
Creditors for Impairment of a Loan", loans identified as"impaired" are measured
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. A loan is impaired when
it is probable the creditor will not be able to collect all contractual
principal and interest payments due in accordance with the terms of the loan
agreement. Loan impairment is evaluated on a loan-by-loan basis as part of
normal loan review procedures of the Bank.
-11-
<PAGE> 12
Notes to Condensed Consolidated Financial Statements (continued)
NOTE # 8 - MARKET RISK
- ----------------------
The Company's management utilizes the results of a dynamic simulation model to
quantify the estimated exposure of net interest income to sustained interest
rate changes. The simulation model estimates the impact of changing interest
rates on the interest income from all interest earning assets and the interest
expense paid on all interest bearing liabilities reflected on the Company's
balance sheet. This sensitivity analysis is compared to policy limits which
specify maximum tolerance level for net interest income exposure over a one year
horizon assuming no balance sheet growth, given both a 200 basis point upward
and downward shift in interest rates. A parallel and pro rata shift in rates
over a 12-month period is assumed.
The Company does not engage in any hedging activities and does not have any
derivative securities in its portfolio.
The following reflects the Company's net interest income sensitivity analysis as
of March 31, 1999:
<TABLE>
<CAPTION>
ESTIMATED NET MARKET VALUE
SIMULATED INTEREST INCOME ------------------------
RATE CHANGES SENSITIVITY ASSETS LIABILITIES
- --------------- --------------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C>
+200 basis points (7.28)% $451,840 $416,118
- -200 basis points 3.52% $492,142 $417,413
</TABLE>
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's principal operating subsidiary is Foothill Independent
Bank, a California state chartered bank (the "Bank"), which accounts for
substantially all of the Company's revenues and income. Accordingly, the
following discussion focuses primarily on the operations and financial condition
of the Bank.
RESULTS OF OPERATIONS
OVERVIEW. During the first quarter of 1999, Foothill generated net
earnings of $1,508,000, which represented an increase of $504,000, or 50%, over
net earnings in the first quarter of 1998. That increase was due primarily to an
increase in net interest income and a reduction in non-interest expense. Net
earnings for the quarter ended March 31, 1999 represented an annualized return
on average assets of 1.30% and generated an annualized return on average equity
of 12.46%.
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 $400,000, or 6.5%, in the quarter
ended March 31, 1999, as compared to the same period of 1998 primarily as a
result of a $101,000, or 1.2%, increase in interest income and a $299,000, or
12.3%, decline in interest expense. The increase in interest income was
primarily due to an increase in interest earned on investment securities and
interest-bearing deposits at other financial institutions. The decline in
interest expense was due primarily to a decrease in the volume of time
certificates of deposits ("time deposits), including those in denominations of
$100,000 or more ("TCDs") on which the Bank pays its highest rates of interest.
RATE SENSITIVITY AND EFFECT ON NET INTEREST INCOME. A bank's net
interest income is affected by a number of factors including the relative
percentages or the "mix" of (i) the Bank's assets, between loans, on the one
hand, on which the Bank is 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; (ii) variable and fixed rate loans in its loan portfolio;
and (iii) demand and savings deposits, on the one hand, and time deposits, on
the other hand. As a general rule, a bank with a relatively high percentage of
fixed-rate loans will experience a decline in interest income during a period of
increasing market rates of interest, because it will be unable to "reprice" its
fixed rate loans to fully offset the increase in the rates of interest it must
offer to retain maturing time deposits and attract new deposits. Similarly, a
bank with a high percentage of time deposits generally will experience greater
increases in interest expense, and therefore, a decrease in net interest income,
during a period of increasing market rates of interest than a bank with a
greater percentage of demand and savings deposits which are less sensitive to
changes in market rates of interest. By contrast, during a period of declining
market rates of interest, a bank with a higher percentage of variable loans, as
a general rule, will experience a decline in net interest income because such
loans usually contain automatic repricing provisions that are "triggered" by
declines in market rates of interest; whereas offsetting reductions in the rates
of interest paid on 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.
The Bank attempts to reduce its exposure to interest rate fluctuations,
and thereby at least to maintain and, if possible, to increase its 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 Bank's management has elected to allow maturing TCDs to "run-off"
and has instituted marketing programs designed to attract additional demand and
savings deposits. As a result of these efforts the average volume of demand and
savings (including money market) deposits increased by $33,856,000, or 11.9% in
the three months ended March 31, 1999 compared to the same period in 1998 and,
at March 31, 1999 such deposits represented 77.1% of the Bank's average volume
of total deposits as compared to 72.2% at March 31, 1998.
-13-
<PAGE> 14
However, at the same time, the Bank experienced a somewhat slower growth
in loan demand during the first quarter of 1999, as compared to the first
quarter of 1998. Consequently, even though average earning assets increased in
the first quarter of 1999, as compared to same quarter of 1998, investment
securities, federal funds sold and funds held in interest bearing deposits with
other financial institutions constituted 29.6% of average earning assets in that
quarter as compared to 24.2% for the first quarter of 1998. The combination of
changes in the mix of average earning assets, together with somewhat lower
interest rates, caused a decline in the Bank's net interest margin (i.e.,
tax-adjusted net interest income stated as a percentage of average
interest-earning assets) for the three months ended March 31, 1999 to 6.28%
compared to 6.43% at March 31, 1998. However, the Bank was able to mitigate the
impact of these changes on its net interest margin in the first quarter of 1999,
by lowering the interest rates its offered on renewals of maturing TCDs, which
resulted in a reduction in the volume of such deposits and, therefore, also in
the Bank' interest expense in the first quarter of 1999. As a result, in the
quarter ended March 31, 1999 the Bank's net interest margin exceeded the average
net interest margin, of 5.45%, for the 32 California based, publicly traded
banks and bank holding companies with assets ranging from $250-to-$750 million
(the "Peer Group Banks").
The ability of the Bank to maintain its net interest margin is not
entirely within its control because the interest rates the Bank is able to
charge on loans and the interest rates it 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 the Bank's service
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.
PROVISION FOR LOAN AND LEASE LOSSES. The Bank follows the practice of
maintaining a reserve for possible losses on loans and leases that occur from
time to time as an incidental part of the banking business. Write-offs of loans
(essentially reductions in the carrying values of non-performing loans due to
possible losses on their ultimate recovery) are charged against this reserve
(the "Loan Loss Reserve"), which is adjusted 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 general economic conditions.
Additions to the Loan Loss Reserve are made through a charge against income
referred to as the "provision for loan and lease losses." The Bank made
provisions for potential loan and lease losses of $156,000 for the first quarter
of 1999, as compared to $275,000 for the corresponding quarter of 1998 and, at
March 31, 1999, the Loan Loss Reserve was approximately $5,723,000 or 1.84% of
total loans and leases outstanding, compared to approximately $5,164,000 or
1.75% of total loans and leases outstanding at March 31, 1998. The decrease in
the provision made in 1999 was primarily attributable to a decline in the total
number of non-performing assets at March 31, 1999 as compared to March 31, 1998,
reflecting at least in part the strength of the economy in the Bank's service
areas . Net loan charge-offs for the three months ended March 31, 1999,
aggregated $9,000, representing less three one-thousandths one percent (0.003%)
of average loans and leases outstanding, as compared to net loan charge-offs for
the same period in 1998 of $276,000, which represented nine hundredths of one
percent (0.09%) of average loans and leases outstanding.
OTHER INCOME. Other income declined by $46,000 or 3.7% in the three
month period ended March 31, 1999, compared to the same period in 1998. The
decline was primarily attributable to decreases in transaction fees and service
charges collected on deposits 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 and charges that are periodically made against income 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").
-14-
<PAGE> 15
It has been management's policy that Foothill provide a much higher
level of personal service to Foothill's customers than many of its competitors,
in order to attract a higher volume of non-interest bearing demand and lower
cost savings and money market deposits and, thereby, improve the Bank's net
interest margin. As a result, Foothill's net interest margin generally exceeds
the average net interest margin of the Peer Group Banks and its higher net
interest margin generally has more than offset the adverse effects that the
higher costs of providing such services would otherwise have had on Foothill's
profitability.
During 1998, Foothill implemented a number of cost reduction programs
designed to reduce non-operating expenses and increase its profitability,
without adversely affecting the quality of service it provides to its customers.
As a result of those programs, in the first quarter of 1999, Foothill reduced
its operating expenses by $330,000, or 6.0%, its fifth consecutive quarterly
reduction in non-interest expense since December 31, 1997, and it improved its
efficiency ratio (essentially, the ratio of non-interest expense to the sum of
its net interest income and other income) to 65.65%, which was better than the
average efficiency ratio of the Peer Group Banks. These reductions in
non-interest expense were achieved without adversely affecting Foothill's
services to its customers.
INCOME TAXES. Income taxes increased by approximately $300,000 or 52.9%
during the three month period ended March 31, 1999 compared to the same periods
of 1998, primarily as a result of the increase in pre-tax income.
FINANCIAL CONDITION
As described above in the preceding Section, beginning in the latter
part of 1998 Foothill reduced the interest rates it offered to pay for TCDs in
order to encourage withdrawals of those higher cost deposits as a means of
reducing interest expense and maintaining it interest rate margin. At the same
time, it implemented programs designed to attract non-interest bearing checking
and lower cost savings and money market deposits. As a result, at March 31,
1999, the volume of demand deposits and savings deposits at the Bank was
$7,535,000, or 2.4%, higher than at December 31, 1998. By contrast the volume of
outstanding TCDs, including those in denominations of more than $100,000,
declined by $8,187,000, or 8.4%, from the volume of such deposits that were
outstanding at December 31, 1998.
During the first quarter of 1999, Foothill used proceeds from the sale
of some of the investment securities that it was holding for sale in order to
fund the increased withdrawals of TCDs. Primarily as a result of the sales of
those investment securities, Foothill's average total assets decreased during
the first quarter of 1999 by $10,949,000 or 2.3%.
LIQUIDITY MANAGEMENT. Liquidity management policies attempt to achieve a
matching of sources and uses of funds in order to enable the Bank to fund its
customers' requirements for loans and for deposit withdrawals. In conformity
with those policies, the Bank maintains short-term sources of funds to meet
periodic increases in loan demand and deposit withdrawals and maturities. At
March 31, 1999, the principal source of liquidity consisted of $26,187,000 cash
and demand balances due from other banks, $13,350,000 in Federal funds sold,
$13,972,000 in short-term (maturities of 45 days or less) commercial paper and
$8,000,000 in an overnight repurchase agreement, which, together totaled
$61,509,000 as compared to $56,846,000 at December 31, 1998. Other sources of
liquidity include $52,452,000 in securities available-for-sale, of which
approximately $21,975,000 of such securities mature within one year and
$16,133,000 in interest bearing deposits at other financial institutions, which
mature in 6 months or less. The Bank also has established facilities to borrow
Federal funds from other banks that total $10,100,000 and has an unused line of
credit with the Federal Home Loan Bank in the amount of approximately
$10,000,000. Furthermore, substantially all of the Bank's installment loans and
leases, the amount of which aggregated $9,603,000 at March 31, 1999, require
regular installment payments from customers, providing a steady flow of cash
funds to the Bank. Accordingly, the Company believes that the Bank has 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.
-15-
<PAGE> 16
MARKET RISK. Market risk is the risk of loss to future earnings, to fair
values or to future cash flows that may result from changes in the price of a
financial instrument. The value of a financial instrument may change as a result
of changes in interest rate and other market conditions. Market risk is
attributed to all market risk sensitive financial instruments, including
investment securities, loans, deposits and borrowings.
Foothill does not engage in trading activities or participate in foreign
currency transactions for its own account. Accordingly, Foothill's exposure to
market risk is primarily a function of its asset and liability management
activities. As a result, the primary market risk to Foothill is that, as
described above, changes in market rates of interest will cause or necessitate
increases in the rates it pays on its deposits that may take effect more rapidly
or may be greater than the increases in the interest rates it is able to charge
on its loans and the earnings that it can realize on its 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 its interest earning
assets and its deposits. See "Rate Sensitivity and Effect on Net Interest
Income."
Foothill uses a dynamic simulation model to measure the projected impact
of changes in market interest rates on its net interest income. That model is
used to assist management in evaluating, and in determining and adjusting
strategies designed to reduce, Foothill's exposure to such market risks, which
may include, for example, changing the mix of earning assets or interest bearing
deposits. See Note 8 to Foothill's Condensed Consolidated Financial Statements
contained in Part I of this Report for further information with respect to that
dynamic simulation model that, based on certain assumptions, attempts to
quantify the impact that simulated upward and downward interest rate changes
would have on Foothill's net interest income.
CAPITAL RESOURCES. It is the policy of Foothill's Board of Directors to
retain earnings to meet capital requirements under applicable government
regulations and to support Foothill's growth. The Board will consider paying
cash dividends to the extent that earnings exceed those capital and growth
requirements. The retention of earnings made it possible for Foothill to open
two new banking offices during 1995, and a third new banking office in 1996, all
of which have contributed to Foothill's increased profitability in 1998 and in
the first quarter of 1999 and the maintenance of its capital adequacy ratios
well above regulatory requirements.
An additional banking office, in Monrovia, California, was opened in
April 1999 and Foothill continues to evaluate opportunities to expand the Bank's
market into areas such as eastern Los Angeles County, western San Bernardino
County, north Orange County and northern Riverside County, all of which are
contiguous to the Bank's existing markets. Management believes that the merger
and consolidation of a number of banking institutions that occurred in those
areas in 1997, created opportunities to increase market share. The Company took
advantage of those opportunities within its existing market areas in 1998 during
which the Bank established a substantial number of new customer relationships
and increased the volume of its demand, savings and money market deposit
balances. Management believes that there are still expansion and growth
opportunities that it will seek to take further advantage of in 1999.
The increases in earnings achieved in 1997 and 1998 caused the Bank's
capital ratios to increase in relation to regulatory requirements. However,
those increases in capital also caused Foothill's return on average equity to
remain relatively fixed despite the increases in earnings. As a result, in 1998,
Foothill's Board of Directors authorized an open market stock repurchase program
to be funded out of earnings. As of March 31, 1999, Foothill had purchased a
total of 86,430 shares for an aggregate price of approximately $1,315,100. In
addition, in March 1999, the Board declared a $.25 per share cash dividend
payable on April 15, 1999 to shareholders of record April 5, 1999. The decrease
in total shareholder's equity at March 31, 1999, was a direct result of the cash
dividend and stock repurchases.
At March 31, 1999, the Bank's Tier 1 leverage ratio was 9.95% and the
Bank's Tier 1 risk-based capital ratio was 13.12%, while the Company's Tier 1
risk-based capital ratio was 13.30%. 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 Tier 1 risk-based
capital ratios compare favorably with other Peer Group Banks.
-16-
<PAGE> 17
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 March 31, 1999, the Company recorded a valuation
reserve for unrealized losses on such securities aggregating approximately
$282,000. Substantially all of this amount is related to certain investments in
mutual funds, which are classified as investments in marketable equity
securities, and which the Company has held for several years and intends to
continue to hold for the foreseeable future.
YEAR 2000. In 1998 Foothill commenced a "Y2K" compliance program to
identify and to take the actions necessary to prevent miscalculations and
computer problems or failures in the processing of time sensitive data that
could arise beginning in 2000 because most computer programs were written using
two digits (rather that four) to define the applicable year. The Company has
completed most of the testing phase of its Y2K compliance program and currently
anticipates having all testing completed and all systems Y2K compliant by June
30, 1999. It is currently believed that the costs of addressing potential Y2K
problems will not have a material adverse impact on the Company's financial
position, results of operations or liquidity in future periods. However, there
is no assurance that customers who utilize computer information systems to
effectuate banking transactions, or vendors (including financial institutions
with which Foothill does business), will not encounter problems that could
adversely affect Foothill's business. Accordingly, Foothill is also in the
process of assessing the Y2K readiness of its major customers and its vendors to
determine any risks that may exist in those areas.
FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING FUTURE PERFORMANCE
This Report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains certain forward-looking
information, which reflects Management's current views of future financial
performance. The forward-looking information is subject to certain risks and
uncertainties, including but 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 to the Bank 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
reduction in real property values that, due to the Bank's reliance on
real property to secure many of its loans, could make it more difficult
for the Bank to prevent potential losses on non-performing loans through
the sale of such real properties.
Possible Adverse Changes in National Economic Conditions and FRB
Monetary Policies. Changes in national economic conditions, such as
increases in inflation or declines in economic output often prompt
changes in FRB monetary policies that could increase the cost of funds
to the Bank and reduce net interest margins, particularly if the Bank is
unable, due to competitive pressures or the rate insensitivity of
earning assets, to effectuate commensurate increases in the rates it is
able to charge on existing or new loans.
-17-
<PAGE> 18
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 the intention of the Company to take
advantage of opportunities to increase the Bank's business, either
through acquisitions of other banks or the establishment of new banking
offices. If the Bank does acquire any other banks or opens any
additional banking offices it is likely to incur additional operating
costs that may adversely affect the Company's operating results, at
least on an interim basis until any acquired bank is integrated into the
Company's operations or the new banking office is able to achieve
profitability.
Year 2000. The costs of resolving potential Y2K data processing
problems could prove to be greater than is currently anticipated or
efforts to resolve such problems in a timely manner could prove to be
unsuccessful.
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, or to make predictions based solely on
historical financial performance.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
ITEM 6, EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
27. Financial Data Schedule
(B) Reports on Form 8-K:
The Company filed a Report on Form 8-K dated January 26, 1999 to
report certain amendments to its Bylaws under Item 5 of that Form.
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999 FOOTHILL INDEPENDENT BANCORP
By: /s/ Carol Ann Graf
---------------------------
CAROL ANN GRAF
Senior Vice President
Chief Financial Officer
Assistant Secretary
S-1
<PAGE> 20
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered Page
------- -------------
Exhibit 27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF MARCH 31, 1999 AND THE STATEMENT OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 26,187
<INT-BEARING-DEPOSITS> 16,133
<FED-FUNDS-SOLD> 13,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,424
<INVESTMENTS-CARRYING> 12,827
<INVESTMENTS-MARKET> 12,903
<LOANS> 310,580
<ALLOWANCE> (5,723)
<TOTAL-ASSETS> 468,197
<DEPOSITS> 416,012
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,972
<LONG-TERM> 61
0
0
<COMMON> 37,074
<OTHER-SE> 10,078
<TOTAL-LIABILITIES-AND-EQUITY> 468,197
<INTEREST-LOAN> 7,028
<INTEREST-INVEST> 1,297
<INTEREST-OTHER> 352
<INTEREST-TOTAL> 8,677
<INTEREST-DEPOSIT> 2,124
<INTEREST-EXPENSE> 2,126
<INTEREST-INCOME-NET> 6,551
<LOAN-LOSSES> 156
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,209
<INCOME-PRETAX> 2,375
<INCOME-PRE-EXTRAORDINARY> 2,375
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,508
<EPS-PRIMARY> .25
<EPS-DILUTED> .24
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
