<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, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
-------------------- ---------------------
Commission file number 0-11337
FOOTHILL INDEPENDENT BANCORP
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3815805
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
510 SOUTH GRAND AVENUE, GLENDORA, CALIFORNIA 91741
- -------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(626) 963-8551 or (909) 599-9351
- --------------------------------------------------------------------------------
(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.
5,325,012 shares of Common Stock as of April 24, 2000
<PAGE> 2
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 28,867 $ 23,262
Federal funds sold 13,300 3,600
--------- ---------
Total Cash and Cash Equivalents 42,167 26,862
--------- ---------
Interest-bearing deposits in other financial institutions 2,575 7,919
--------- ---------
Investment Securities Held-To-Maturity (approximate
market value $5,102 in 2000 and $7,245 in 1999
U.S. Treasury 997 2,997
U.S. Government Agencies 1,000 1,000
Municipal Agencies 922 1,062
Other Securities 2,250 2,250
--------- ---------
Total Investment Securities Held-To-Maturity 5,169 7,309
--------- ---------
Investment Securities Available-For-Sale 62,671 56,015
--------- ---------
Loans, net of unearned discount and prepaid points and fees 354,725 343,294
Direct lease financing 1,536 2,341
Less reserve for possible loan and lease losses (6,182) (6,102)
--------- ---------
Total Loans & Leases, net 350,079 339,533
--------- ---------
Bank premises and equipment 6,942 6,779
Accrued interest 2,666 2,928
Other real estate owned, net of allowance for possible
losses of $42 in 1999 and $19 in 1998 2,453 1,714
Cash surrender value of life insurance 5,138 4,997
Prepaid expenses 936 1,618
Deferred tax asset 2,448 2,412
Other assets 480 590
--------- ---------
Total Assets $ 483,724 $ 458,676
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand deposits $ 141,559 $ 133,115
Savings and NOW deposits 105,563 101,839
Money market deposits 77,368 72,400
Time deposits in denominations of $100,000 or more 43,568 40,408
Other time deposits 62,463 49,502
--------- ---------
Total deposits 430,521 397,264
--------- ---------
Accrued employee benefits 1,886 2,002
Accrued interest and other liabilities 1,533 2,152
Short-term debt 4,953 8,800
Long-term debt 5 19
--------- ---------
Total Liabilities 438,898 410,237
--------- ---------
Stockholders' Equity
Capital stock - authorized 12,500,000 shares without
par value; issued and outstanding 5,323,328 shares
in 2000 and 5,772,614 in 1999 36,441 36,415
Additional Paid-in Capital 963 963
Retained Earnings 8,275 11,898
Accumulated Other Comprehensive Income (853) (837)
--------- ---------
Total Stockholders' Equity 44,826 48,439
--------- ---------
Total Liabilities and Stockholders' Equity $ 483,724 $ 458,676
========= =========
</TABLE>
See accompanying notes to financial statements
Page 2
<PAGE> 3
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------ ------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loan $8,419 $6,980
Interest on investment securities
U.S. Treasury 35 161
Obligations of other U.S. government agencies 641 692
Municipal agencies 82 88
Other securities 169 356
Interest on deposits 60 200
Interest on Federal funds sold 111 152
Lease financing income 27 48
------ ------
Total Interest Income 9,544 8,677
------ ------
INTEREST EXPENSE
Interest on savings & NOW deposits 388 382
Interest on money market deposits 716 659
Interest on time deposits in denominations
of $100,000 or more 555 452
Interest on other time deposits 677 631
Interest on borrowings 44 2
------ ------
Total Interest Expense 2,380 2,126
------ ------
Net Interest Income 7,164 6,551
PROVISION FOR LOAN AND LEASE LOSSES 250 156
------ ------
Net Interest Income After Provisions
for Loan and Lease Losses 6,914 6,395
------ ------
OTHER INCOME
Fees and service charges 1,001 1,061
Gain on sale SBA loans 2 28
Other 27 --
------ ------
Total other income 1,030 1,089
------ ------
OTHER EXPENSES
Salaries and benefits 2,695 2,349
Occupancy expenses, net of revenue
of $44 in 2000 and $44 in 1999 543 510
Furniture and equipment expenses 387 405
Other expenses (Note 2) 1,779 1,845
------ ------
Total Other Expenses 5,404 5,109
------ ------
INCOME BEFORE INCOME TAXES 2,540 2,375
------ ------
PROVISION FOR INCOME TAXES 938 867
------ ------
NET INCOME $1,602 $1,508
====== ======
EARNINGS PER SHARE OF COMMON STOCK
Basic $ 0.28 $ 0.25
====== ======
Diluted (Note 3) $ 0.26 $ 0.24
====== ======
</TABLE>
See accompanying notes to financial statements
Page 3
<PAGE> 4
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Number of Additional Other
Shares Capital Paid-In Comprehensive Retained Comprehensive
Outstanding Stock Capital Income Earnings Income Total
----------- ------- ---------- ------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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 1,508 1,508
Unrealized security holding losses
(Net of taxes $54) (125) (125) (125)
------
Total Comprehensive Income $1,383
--------- ------- ---- ====== ------- ----- -------
BALANCE - March 31, 1999 5,915,263 $36,111 $963 $10,360 $(282) $47,152
========= ======= ==== ======= ===== =======
BALANCE - January 1, 2000 5,772,614 36,415 963 11,898 (837) 48,439
Cash dividend declared 12/21/99 1 1
Exercise of stock options 4,048 24 24
Common stock issued under
employee benefit and dividend
reinvestment plans 145 2 2
Common stock repurchased,
cancelled and retired (453,479) (5,226) (5,226)
Comprehensive Income
Net Income $1,602 1,602 1,602
Unrealized security holding gains
(Net of taxes $38) (16) (16) (16)
------
Total Comprehensive Income $1,586
--------- ------- ---- ====== ------- ----- -------
BALANCE - March 31, 2000 5,323,328 $36,441 $963 $ 8,275 $(853) $44,826
========= ======= ==== ======= ===== =======
</TABLE>
See accompanying notes to financial statements
Page 4
<PAGE> 5
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash Flows From Operating Activities:
Interest and fees received $ 9,774 $ 8,925
Service fees and other income received 889 1,111
Financing revenue received under leases 27 48
Interest paid (2,286) (2,232)
Cash paid to suppliers and employees (5,267) (4,305)
Income taxes paid (599) 365
Net Cash Provided (Used) by Operating Activities 2,538 3,912
--------- ---------
Cash Flows From Investing Activities:
330,325 456,903
Proceeds from maturity of investment securities (AFS)
Purchase of investment securities (AFS) (337,029) (438,138)
Proceeds from maturity of investment securities (HTM) 2,140 3,005
Purchase of investment securities (HTM) (1) (3,005)
Proceeds from maturity of deposits in other financial institutions 6,833 6,433
Purchase of deposits in other financial institutions (1,489) (7,523)
Net (increase) decrease in credit card and revolving credit receivables (17) 313
Recoveries on loans previously written off (141) --
Net (increase) decrease in loans (11,652) (17,134)
Net (increase) decrease in leases 805 657
Proceeds from property, plant and equipment -- 20
Capital expenditures (1,195) (138)
Proceeds from sale of other real estate owned -- 44
Stock repurchased and retired (5,226) (1,183)
--------- ---------
Net Cash Provided (Used) in Investing Activities (16,647) 254
--------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts,
savings accounts, and money market deposits 17,127 7,516
Net increase (decrease) in certificates of deposit
with maturities of three months or less 8,970 (1,752)
Net increase (decrease) in certificates of deposit
with maturities of more than three months 7,151 (6,435)
Net increase (decrease) in short term borrowing (3,847) --
Proceeds from exercise of stock options 24 38
Proceeds from stock issued under employee benefit and
dividend reinvestment plans 2 16
Principal payment on long term debt (14) (13)
Dividends paid 1 (1,481)
--------- ---------
Net Cash Provided by Financing Activities 29,414 (2,111)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 15,305 2,055
Cash and Cash Equivalents at Beginning of Year 16,862 37,482
--------- ---------
Cash and Cash Equivalents at March 31, 2000 and 1999 $ 42,167 $ 39,537
========= =========
</TABLE>
See accompanying notes to financial statements
Page 5
<PAGE> 6
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Net Income $ 1,602 $ 1,508
------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and amortization 328 315
Provision for possible credit losses 250 156
Provision for possible OREO losses 35 (46)
(Gain)/loss on sale of equipment -- 3
Provision for deferred taxes (36) 735
Increase/(decrease) in taxes payable 375 497
(Increase)/decrease in other assets) 101 73
(Increase)/decrease in interest receivable 262 246
Increase/(decrease) in discounts and premiums (5) 50
Increase/(decrease) in interest payable 94 (106)
(Increase)/decrease in prepaid expenses 682 (405)
Increase/(decrease) in accrued expenses and other liabilities (1,009) 967
Increase in cash surrender value of life insurance (141) (81)
------- -------
Total Adjustments 936 2,404
------- -------
Net Cash Provided (Used) by Operating Activities $ 2,538 $ 3,912
======= =======
</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.
Page 6
<PAGE> 7
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
MARCH 31, 2000 AND 1999
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, 1999.
NOTE #2 - OTHER EXPENSES
The following is a breakdown of other expenses for the three month
periods ended March 31, 2000 & 1999.
Three Months Ended
March 31,
------------------------
2000 1999
------ ------
Data processing $ 253 $ 225
Marketing expenses 274 280
Office supplies, postage and telephone 269 306
Bank Insurance 138 157
Supervisory Assessments 31 21
Professional Expenses 332 373
Provision for OREO Loss -- 45
Other Expenses 482 438
------ ------
Total Other Expenses $1,779 $1,845
====== ======
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,
---------------------------------------------
2000 1999
------------------- -------------------
Income Shares Income Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income as reported $1,602 $1,508
Shares outstanding at period end 5,323 5,915
Impact of weighting shares purchased during
the period 439 49
------ ----- ------ -----
Used in Basic EPS 1,602 5,762 1,508 5,964
Dilutive effect of outstanding stock options 418 407
------ ----- ------ -----
Used in Dilutive EPS $1,602 6,180 $1,508 6,371
====== ===== ====== =====
</TABLE>
Page 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, 2000.
The fair value of fixed maturity certificates of deposit is estimated based on
the discounted value of the future cash flows expected to be paid on the
deposits.
Notes Payable
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
Commitments to Extend Credit and Standby Letter of Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the parties
involved. For fixed-rate loan commitments, fair value also considered the
difference between current levels of interest rates and committed rates.
The fair value of guarantees and letters of credit are based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with parties involved at March 31,
2000.
Page 8
<PAGE> 9
Notes to Condensed Consolidated Financial Statements (continued)
The estimated fair value of the Bank's financial instruments are as
follows:
March 31, 2000
----------------------------
Carrying Amount Fair Value
--------------- ----------
(dollars in thousands)
Financial Assets
Cash and Cash equivalents $ 42,167 $ 42,167
Investment securities and deposits 70,415 68,076
Loans 355,002 353,884
Direct lease financing 1,536 1,524
Financial Liabilities
Deposits 430,521 435,578
Long term debt 5 5
Unrecognized Financial Instruments
Commitments to extend credit 53,461 53,461
Standby letters of credit 960 960
NOTE #6 - NON-PERFORMING LOANS
The following table sets forth information regarding the Bank's
non-performing loans at March 31, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(dollars in thousands)
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due (1)
Aggregate Loan Amounts
Commercial, financial and agricultural -- 148
Real Estate -- 50
Installment loans to individuals -- 4
Aggregate Leases -- --
Total Loans Past Due More Than 90 Days -- 202
Troubled Debt Restructurings (2) 1,774 1,780
Non-accrual loans (3) 5,403 6,068
----- -----
Total Non-Performing Loans 7,177 8,050
===== =====
</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 10 loans on non-accrual status totaling approximately $5,403,000
at March 31, 2000 and 14 loans totaling approximately $6,068,000 at
December 31, 1999.
Page 9
<PAGE> 10
Notes to Condensed Consolidated Financial Statements (continued)
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 classify problem credits. There are three
classifications for problem loans: "substandard", "doubtful", and "loss".
Substandard loans have one defined weakness and are characterized by the
distinct possibility that the Bank will sustain some loss if the deficiency is
not corrected. Doubtful loans have weaknesses characteristic of substandard
loans with the additional characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and
values, questionable. A loan classified as "loss" is considered uncollectible
and of such little value that its continuance as an asset 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, 2000, the Bank's classified loans consisted of
approximately $10,817,000 of loans classified as substandard and $3,055,000 of
loans classified as doubtful. The Bank's $10,817,000 of loans classified as
substandard consisted of approximately $8,470,000 of performing and accruing
loans and approximately $2,347,000 of non-accrual loans. The $3,055,000 of loans
classified as doubtful were all non-accrual loans.
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, 2000, reflected an
amount which, in Management's judgement, was adequate to provide for known and
inherent loan losses. In evaluating the adequacy of the reserve, Management
gives consideration to the composition of the loan portfolio, the performance of
loans in the portfolio, evaluations of loan collateral, prior loss experience,
current economic conditions and the prospects or worth of respective borrowers
or guarantors. In addition, the Federal Reserve Bank and Department of Financial
Institutions, as an integral part of the examination process, periodically
review the Bank's allowance for possible loan and lease losses. They may require
the Bank to recognize additions to the allowance based upon their judgment of
the information available at the time of examination. The Bank was most recently
examined by the Department of Financial Institutions as of December 31, 1998.
The reserve for loan and lease losses at March 31, 2000, was $6,182,000
or 1.74% 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.
Page 10
<PAGE> 11
Notes to Condensed Consolidated Financial Statements (continued)
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, 2000 December 31, 1999
-------------- -----------------
(dollars in thousands)
<S> <C> <C>
Allowance for Loan Losses
Balance, Beginning of period $ 6,102 $ 5,576
Charge-Offs
Commercial, financial and agricultural (242) (112)
Real estate - construction -- --
Real estate - mortgage -- (45)
Consumer Loans (5) (39)
Lease Financing -- --
Other -- --
------- -------
Total Charge-Offs (247) (196)
------- -------
Recoveries
Commercial, financial and agricultural 10 44
Real estate - construction -- --
Real estate - mortgage 60 188
Consumer loans 7 5
Lease Financing -- --
Other -- --
------- -------
Total Recoveries 77 237
------- -------
Net Recoveries (Charge-Offs) (170) 41
Provision Charged to Operations 250 485
------- -------
Balance, End of period $ 6,182 $ 6,102
======= =======
Net Charge-Offs During the Period to Average Loans
Outstanding During the Period Ended 0.05% (0.01)%
======= =======
Allowance for Loan Losses to Total Loans 1.74% 1.87%
======= =======
</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.
Page 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, 2000:
<TABLE>
<CAPTION>
Market Value
(Dollars in Thousands)
--------------------------------
Estimated Net Interest
Simulated Rate Changes Income Sensitivity Assets Liabilities
---------------------- ---------------------- -------- -----------
<S> <C> <C> <C>
+200 basis points -8.89% $461,184 $436,118
-200 basis points 6.97% $500,181 $437,321
</TABLE>
Page 12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Our principal operating subsidiary, Foothill Independent Bank, which is
a California state chartered bank (the "Bank"), accounts for substantially all
of our revenues and income. Accordingly, the following discussion focuses
primarily on its operations and financial condition.
RESULTS OF OPERATIONS
OVERVIEW. During the first quarter of 2000, we generated net earnings
of $1,602,000, which represented an increase of $94,000, or 6%, over net
earnings in the first quarter of 1999. That increase was due primarily to an
increase in net interest income. Net earnings for the three months ended March
31, 2000 represents an annualized return on average assets of 1.37% and an
annualized return on average equity of 13.47%, compared to 1.30% and 12.46%,
respectively, for the same period of 1999.
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 $613,000, or 9.3% in the
three month period ended March 31, 2000 as compared to the same period of 1999,
primarily as a result of a $867,000, or 10.0%, increase in interest income that
was partially offset by an increase of $254,000, or 11.9%, in interest expense.
The increase in interest income was attributable primarily to increases
in the volume of outstanding loans and, to a lesser extent, increases in
interest charged on loans in response to increases in market rates of interest.
The increase in interest expense was due primarily to increases in the volume of
time certificates of deposits ("time deposits"), including those in
denominations of $100,000 or more ("TCD's"), on which the Bank pays its highest
rates of interest.
RATE SENSITIVITY, MARKET RISK AND NET INTEREST MARGINS.
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 (i) our assets, between loans, on the one hand, on which we are able to
obtain higher rates of interest, and investment securities, federal funds sold
and funds held in interest-bearing deposits with other financial institutions,
on the other hand, on which yields are generally lower; (ii) variable and fixed
rate loans in our 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 time deposits cannot be
implemented until they mature, at which time a bank can seek their renewal at
lower rates of interest or allow such deposits to be withdrawn in order to
reduce interest expense.
NET INTEREST MARGIN. We attempt to reduce our exposure to market risks
associated with interest rate fluctuations and, thereby, at least to maintain
and, if possible, to increase, our net interest margin or spread by seeking (i)
to attract and maintain a significant volume of demand and savings deposits that
are not as sensitive to interest rate fluctuations as are TCD's and other time
deposits, and (ii) to match opportunities to "reprice" earning
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assets, particularly loans, in response to changes in market rates of interest
which require or cause repricing of deposits. During the prior two years we
allowed TCDs and other time deposits to "run off" in order to improve our net
interest margins. Late last year we initiated new loan programs and, primarily
to fund the resulting increases in loan volume, we increased the volume of TCDs
and other time deposits by offering higher rates of interest on such deposits.
At the same time, however, we continued to actively seek additional demand and
savings deposits. As a result, notwithstanding the increases in TCDs and other
time deposits, at March 31, 2000 demand, savings and money market deposits
represented 76% and time deposits, including TCDs, represented 24%, of average
total deposits. This compares to 79% and 21%, respectively, at December 31,
1999, and 77% and 23%, respectively, at March 31, 1999.
The Bank's net interest margin (i.e., tax-adjusted net interest income
stated as a percentage of average interest-earning assets) increased in the
quarter ended March 31, 2000 to 6.81% from 6.28% for the same period of 1999,
largely due to the increase in interest and fees on loans, which more than
offset the increases in interest expense resulting from the increases in
outstanding time deposits. Additionally, our net interest margin continues to
exceed the average net interest margin for California-based, publicly traded
banks and bank holding companies with assets ranging from $250-to-$750 million
(the "Peer Group Banks").
The ability to maintain our net interest margin is not entirely within
our control because the interest rates we are able to charge on loans and the
interest rates we must offer to maintain and attract deposits are affected by
national monetary policies established and implemented by the Federal Reserve
Board and by competitive conditions in our service areas. In addition, the
effect on a bank's net interest 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. During 2000, the Federal Reserve Board has indicated
that it intends to increase interest rates as a means of curtailing inflation.
As a result, we expect the costs of deposits will increase during the second
quarter and possibly during subsequent periods of 2000, which could result in
reductions in our net interest margin, which we currently believe, however,
would be modest.
MARKET RISK. Market risk is the risk of loss to future earnings, to
fair values of assets or to future cash flows that may result from changes in
the price or value of a financial instrument. The value of a financial
instrument may change as a result of changes in interest rate and other market
conditions. Market risk is attributed to all market risk sensitive financial
instruments, including loan and investment securities, deposits and borrowings.
We do not engage in trading activities or participate in foreign currency
transactions for our own account. Accordingly, our exposure to market risk is
primarily a function of our asset and liability management activities and of
changes in market rates of interest that can cause or require increases in the
rates we pay on deposits that may take effect more rapidly or may be greater
than the increases in the interest rates we are able to charge on loans and the
yields that we can realize on our investments. The extent of that market risk,
depends on a number of variables, including the sensitivity to changes in market
interest rates and the maturities of our interest earning assets and our
deposits. See "Rate Sensitivity" above.
We use a dynamic simulation model to forecast the anticipated impact of
changes in market interest rates on our net interest income. That model is used
to assist management in evaluating, and in determining and adjusting strategies
designed to reduce, our exposure to these market risks, which may include, for
example, changing the mix of earning assets or interest-bearing deposits. See
Note 8 to our Condensed Consolidated Financial Statements contained in Part I of
this Report for further information with respect to that dynamic simulation
model that, based on certain assumptions, attempts to quantify the impact that
simulated upward and downward interest rate changes would have on our net
interest income.
PROVISION FOR LOAN AND LEASE LOSSES. We follow the practice of
maintaining a reserve for possible losses on loans and leases that occur from
time to time as an incidental part of the banking business. 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
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<PAGE> 15
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.
Additions to the Loan Loss Reserve are made through a charge against income
referred to as the "provision for loan and lease losses." We made provisions for
potential loan and lease losses of $250,000 for the first quarter of 2000, as
compared to $156,000 for the corresponding quarter of 1999, and, at March 31,
2000, the Loan Loss Reserve was approximately $6,182,000 or 1.74% of total loans
and leases outstanding, compared to approximately $5,723,000 or 1.84% of total
loans and leases outstanding at March 31, 1999. Net loan charge-offs for the
three months ended March 31, 2000 aggregated $170,000, representing five
hundredths of one percent (0.05%) of average loans and leases outstanding, as
compared to net loan charge-offs for the same period in 1999 of $9,000, which
represented three one-thousandths of one percent (0.003%) of average loans and
leases outstanding. See Note 7 to our Condensed Consolidated Financial
Statements contained in Part I of this Report for further information with
respect to an analysis of the Bank's loan and lease loss experience for the
first quarter of 2000 compared to the same period in 1999.
OTHER INCOME. Other income decreased by $59,000 or 5.4%, in the
three-month period ended March 31, 2000, compared to the same period of 1999,
due primarily to decreases in transaction fees and service charges collected on
deposits and other banking transactions, and to a lesser extent, a one-time gain
on the sale of SBA loans in the first quarter of 1999 that was not realized in
the first quarter of 2000.
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
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").
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, it has been our policy to provide a much higher level of
personal service to our customers than the level of services that are provided
by many of our competitors. As a result, our net interest margin has usually
exceeded the average net interest margin of the Peer Group Banks and more than
offset the adverse effects that the higher costs of providing such services
would otherwise have had on Foothill's profitability.
Non-interest expense was approximately $296,000, or 5.8%, higher in the
three-month period ended March 31, 2000, compared to same period of 1999,
primarily due to an increase in salary and benefit expenses, which was partially
offset by decreases in furniture and equipment expense and other expense. Even
though non-interest expense increased in the first quarter of 2000 compared to
1999, we were able to improve our efficiency ratio (that is, basically, the
ratio of non-interest expense to the sum of our net interest income and other
income) to 65.9% for the three-month period ended March 31, 2000 from 66.9% for
the same period of 1999.
INCOME TAXES. Income taxes increased by approximately $71,000 or 8.2%
during the three-month period ended March 31, 2000 compared to the same period
of 1999, primarily as a result of the increase in pre-tax income.
FINANCIAL CONDITION
Our total assets increased during the three months ended March 31, 2000
by $25,042,000 or 5.5%, when compared to total assets at December 31, 1999.
Average assets at March 31, 2000 were $1,898,000, or 0.4%, higher than total
average assets at December 31, 1999. As mentioned above, in the latter part of
1999 we implemented programs designed to attract additional time deposits,
including TCDs, while continuing programs to increase non-interest bearing
checking and lower cost savings and money market deposits. At March 31, 2000,
the volume of demand and savings deposits at the Bank was $17,130,000, or 5.6%,
higher than at December 31, 1999, while the volume of time deposits, including
TCDs, was $16,121,000, or 17.9%, higher than at December 31, 1999. However,
during that period the percentage of total deposits represented by time deposits
increased only to 24.6% at March 31, 2000 from 22.6% at December 31, 1999.
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LIQUIDITY MANAGEMENT. Liquidity management policies attempt to achieve
a matching of sources and uses of funds in order to enable us to fund our
customers' requirements for loans and for deposit withdrawals. In conformity
with those policies, we maintain a number of short-term sources of funds to meet
periodic increases in loan demand and deposit withdrawals and maturities. At
March 31, 2000, the principal sources of liquidity consisted of $28,867,000 of
cash and demand balances due from other banks; $13,300,000 in Federal funds
sold; and $10,000,000 in an overnight repurchase agreement, which, together,
totaled $52,167,000, as compared to $27,862,000 at December 31, 1999. Other
sources of liquidity include $62,671,000 in securities available-for-sale, of
which approximately $16,015,000 mature within one year; and $2,575,000 in
interest bearing deposits at other financial institutions, which mature in 6
months or less. We also have established facilities enabling us to borrow up to
$10,100,000 of Federal funds from other banks and we have an unused $10,920,000
line of credit with the Federal Home Loan Bank. During the third quarter of 1999
we also received approval from the Federal Reserve Bank of San Francisco to
establish an account that will also allow us to borrow at their discount window
should the need arise. Additionally, substantially all of our installment loans
and leases, the amount of which aggregated $7,784,000 at March 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.
CAPITAL RESOURCES. The increases in earnings achieved since January 1,
1997 caused our capital ratios to increase in relation to regulatory capital
requirements. However, those increases in capital also caused our return on
average equity to remain relatively fixed despite the increases in earnings. As
a result, in 1998, our 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 March 31, 2000, we purchased a total of 709,721
shares of common stock for an aggregate price of approximately $8,818,000. In
addition, in March 1999, the Board declared a $.25 per share cash dividend that
was paid on April 15, 1999 to shareholders of record as of April 5, 1999 and, in
September of 1999 the Board adopted a new cash dividend policy which provides
for the Company to pay quarterly cash dividends of $.08 per share. The third
such quarterly cash dividend was declared in April 2000, and will be paid on May
3, 2000 to shareholders of record as of April 17, 2000.
In has been and continues to be the objective of our Board of Directors
to retain earnings to meet capital requirements under applicable government
regulations and to support our growth. As a result, the Board may change the
amount or frequency of cash dividends to the extent that it deems necessary or
appropriate to achieve these objectives. For example the retention of earnings
in previous years enabled the Bank to fund the opening of four new banking
offices and extend the Bank's market areas, all of which have contributed to our
increased profitability and the maintenance of our capital adequacy ratios well
above regulatory requirements.
We continue to evaluate and explore opportunities to expand our market
into areas such as eastern Los Angeles County, western San Bernardino County,
north Orange County and northern Riverside County, all of which are contiguous
to our existing markets. We believe that the mergers and consolidations of a
number of independent banks that have occurred since 1997 have created
opportunities for us to increase our market share in those areas. We took
advantage of those opportunities within our existing market areas in 1998 and
1999, during which we established a substantial number of new customer
relationships and increased the volume of our demand, savings and money market
deposit balances obtained largely from customers of the merged banks who we
disaffected by the quality of services they were receiving. We believe that
there are still expansion and growth opportunities that we will seek to take
advantage of in 2000.
At March 31, 2000, the Bank's Tier 1 leverage ratio and Tier 1
risk-based capital ratio were 9.51% and 11.49%, respectively, which were in
excess of minimum bank regulatory requirements. Our consolidated Tier 1
risk-based capital ratio was 11.63%. The risk-based capital ratio is determined
by weighting our assets in accordance with certain risk factors and, the higher
the risk profile of the assets, the greater is the amount of capital that is
required to maintain an adequate risk-based capital ratio, which generally is at
least 8%. The Tier 1 capital and Tier 1 risk-based capital ratios of the Bank
compare favorably with those of the Peer Group Banks.
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, 2000, we recorded a valuation reserve for
unrealized losses on such securities aggregating approximately $853,000. A
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<PAGE> 17
substantial 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
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 which, in turn,
could result in increases in loan losses and require increases in reserves for
possible loan losses, thereby adversely affecting earnings; and (iii) lead to
reductions in real property values that, due to our reliance on real property to
secure many of our loans, could make it more difficult for us to prevent losses
from being incurred on non-performing loans through the sale of such real
properties.
POSSIBLE ADVERSE CHANGES IN NATIONAL ECONOMIC CONDITIONS AND FRB
MONETARY POLICIES. Changes in national economic conditions, such as increases in
inflation or declines in economic output often prompt changes in Federal Reserve
Board monetary policies that could increase the cost of funds to us 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 or the establishment of new banking offices. If we do acquire any other
banks or open any additional banking offices we are likely to incur additional
operating costs that may adversely affect our operating results, at least on an
interim basis, until any acquired bank is integrated into our operations or the
new banking offices are able to achieve profitability.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date of this Quarterly Report, or to make predictions based
solely on historical financial performance.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed the following Reports on Form 8-K: (i) A Report
dated March 30, 2000 to report, under Item 5, the purchase of 430,729
shares of common stock from Basswood Financial Partners, LP and
certain of its affiliates; and (ii) a Report dated February 15, 2000
to report the adoption of bylaw amendments establishing a director
nominating procedure and establishing procedures by which
shareholders can make proposals for action at shareholder meetings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 10, 2000 FOOTHILL INDEPENDENT BANCORP
By: /s/ CAROL ANN GRAF
Carol Ann Graf
Senior Vice President and Chief
Financial Officer and Assistant Secretary
S-1
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
27* Financial Data Schedule
E-1
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF MARCH 31, 2000 AND THE STATEMENT OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 2000, 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 28,867
<INT-BEARING-DEPOSITS> 5,575
<FED-FUNDS-SOLD> 13,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,671
<INVESTMENTS-CARRYING> 5,169
<INVESTMENTS-MARKET> 5,102
<LOANS> 353,261
<ALLOWANCE> (6,182)
<TOTAL-ASSETS> 483,724
<DEPOSITS> 430,521
<SHORT-TERM> 4,953
<LIABILITIES-OTHER> 3,424
<LONG-TERM> 0
0
0
<COMMON> 36,441
<OTHER-SE> 8,385
<TOTAL-LIABILITIES-AND-EQUITY> 483,724
<INTEREST-LOAN> 8,385
<INTEREST-INVEST> 927
<INTEREST-OTHER> 171
<INTEREST-TOTAL> 9,544
<INTEREST-DEPOSIT> 60
<INTEREST-EXPENSE> 2,380
<INTEREST-INCOME-NET> 7,164
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,404
<INCOME-PRETAX> 2,540
<INCOME-PRE-EXTRAORDINARY> 2,540
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,602
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 2.24
<LOANS-NON> 5,403
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,774
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,102
<CHARGE-OFFS> 247
<RECOVERIES> 77
<ALLOWANCE-CLOSE> 6,182
<ALLOWANCE-DOMESTIC> 6,182
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
