-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HtUThZodXR4qPFQydZIrywoOZnsxjFXb1mmtLgxo84yQLMNeqAgGEXD+IYnuxd20 Bn6xaDzKFxQ91roBR7gLXA== 0001095811-00-001410.txt : 20000515 0001095811-00-001410.hdr.sgml : 20000515 ACCESSION NUMBER: 0001095811-00-001410 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOTHILL INDEPENDENT BANCORP CENTRAL INDEX KEY: 0000718903 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953815805 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11337 FILM NUMBER: 628454 BUSINESS ADDRESS: STREET 1: 510 S GRAND AVE CITY: GLENDORA STATE: CA ZIP: 91741 BUSINESS PHONE: 9095999351 MAIL ADDRESS: STREET 1: 510 S. GRAND AVENUE CITY: GLENDORA STATE: CA ZIP: 91741 10-Q 1 FORM 10-Q QUARTERLY PERIOD ENDED MARCH 31,2000. 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 2 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands)
March 31, December 31, 2000 1999 ---------- ------------ 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 ========= =========
See accompanying notes to financial statements Page 2 3 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands)
Three Months Ended March 31, -------------------- 2000 1999 ------ ------ 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 ====== ======
See accompanying notes to financial statements Page 3 4 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (dollars in thousands)
Accumulated Number of Additional Other Shares Capital Paid-In Comprehensive Retained Comprehensive Outstanding Stock Capital Income Earnings Income Total ----------- ------- ---------- ------------- -------- ------------- ------- BALANCE - January 1, 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 ========= ======= ==== ======= ===== =======
See accompanying notes to financial statements Page 4 5 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands) THREE MONTHS ENDED MARCH 31, 2000 AND 1999
2000 1999 --------- --------- 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 ========= =========
See accompanying notes to financial statements Page 5 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
2000 1999 ------- ------- 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 ======= =======
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 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):
Three Months Ended March 31, --------------------------------------------- 2000 1999 ------------------- ------------------- Income Shares Income Shares ------ ------ ------ ------ 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 ====== ===== ====== =====
Page 7 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 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.
March 31, 2000 December 31, 1999 -------------- ----------------- (dollars in thousands) 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 ===== =====
- ------------- (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 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 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.
March 31, 2000 December 31, 1999 -------------- ----------------- (dollars in thousands) 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% ======= =======
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 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:
Market Value (Dollars in Thousands) -------------------------------- Estimated Net Interest Simulated Rate Changes Income Sensitivity Assets Liabilities ---------------------- ---------------------- -------- ----------- +200 basis points -8.89% $461,184 $436,118 -200 basis points 6.97% $500,181 $437,321
Page 12 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 Page 13 14 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 Page 14 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. Page 15 16 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 Page 16 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. Page 17 18 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. Page 18 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 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 20 INDEX TO EXHIBITS EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - ------- ----------- ------------- 27* Financial Data Schedule E-1 EX-27 2 FINANCIAL DATA SCHEDULE
9 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. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 28,867 5,575 13,300 0 62,671 5,169 5,102 353,261 (6,182) 483,724 430,521 4,953 3,424 0 0 0 36,441 8,385 483,724 8,385 927 171 9,544 60 2,380 7,164 250 0 5,404 2,540 2,540 0 0 1,602 0.28 0.26 2.24 5,403 0 1,774 0 6,102 247 77 6,182 6,182 0 0
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